SEMIANNUAL REPORT
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[GRAPHIC OMITTED]
Independence
Equity Fund
JUNE 30, 1998
[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 and Chief Operating Officer
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
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year wondering
what the market would do for an encore in 1998. The answer through the end of
June was more of the same. But tremors from Asia have also sparked increased
volatility, as corporate earnings and the U.S. economy have shown signs of
slowing. What's more, a good part of the market's advance has come from just a
small group of the largest companies in the major stock market indexes.
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
The move ahead has been so narrow that some observers believe that most
stocks have actually been in a bear market this year. The bond market had its
pockets of volatility as well, although U.S. Treasury bonds benefited from their
safe-haven status.
While we don't make a practice of opining on what the market will do next, we
believe that after such a long run up, it would be wise for investors to set
more realistic expectations. Over the long term, the market's historical results
have been more in the 10% per year range, which is still a solid result,
considering it has been produced despite wars, depressions and other social
upheavals along the way.
In addition to adjusting, or at least re-examining, expectations, now could
also be a good time to review with your investment professional how your assets
are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping you keep
your feet on the ground as you pursue your dreams.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY PAUL MCMANUS FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Equity Fund
Stocks surge in the first half of 1998
--------------------------------------
The stock market started out the year on a strong note, as investors' concerns
about the volatile Asian markets receded into the background. Other positive
influences included a U.S. economy that grew more strongly than expected, stable
interest rates, and continued mild inflation. The combination of these factors
enabled the Dow Jones Industrial Average and the Standard & Poor's 500 Stock
Index to post a steady stream of record highs from early February through the
first week of May.
The last two months of the period proved to be more challenging. Asian
financial markets had once again become shaky, and U.S. companies with exposure
to Asia began to report disappointing earnings. Between mid-May and mid-June,
U.S. stocks, as measured by the Dow Jones Industrial Average, declined about 7%,
while the S&P 500 retreated roughly 5%. However, continued good news about the
economy -- including several upward revisions in gross domestic product growth
for the first quarter -- led stocks to rally once more, with the S&P 500 again
reaching new highs near the end of June.
The Fund was boosted by strong stock selection and by the fact that the S&P
500 outperformed the Dow Jones Industrial Average during the first half of the
year, as the two indexes recorded respective gains of 17.71% and 14.13%,
including reinvested dividends. Although investors still favored
large-capitalization stocks, the better relative performance by the S&P 500
indicated some broadening of
[A 3 3/4" x 2 1/4" photo at bottom of page of fund management team members.
Caption below reads "Independence Equity Fund management team members (l-r):
Paul McManus, Jane Shigley, Jeff Saef, David Canavan and Coreen Kraysler."]
"The Fund was boosted by strong stock selection..."
3
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John Hancock Funds - Independence Equity Fund
"In the technology area, we focused on software companies..."
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TOP FIVE COMMON
STOCK HOLDINGS
1. Procter & Gamble 3.3%
2. Microsoft 3.0%
3. General Electric 2.7%
4. United Technologies 2.7%
5. Home Depot 2.2%
As a percentage of net assets on June 30, 1998
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investor preferences that benefited the Fund's diversified holdings.
For the six months ended June 30, 1998, John Hancock Independence Equity
Fund's Class A and Class B shares posted total returns of 18.93% and 18.49%,
respectively, at net asset value. Class C shares, which were introduced on May
1, 1998, returned 1.40% from inception through June 30. Keep in mind that your
net asset value return will be different from this performance if you were not
invested in the Fund for the entire period and did not reinvest all
distributions. The returns of the Fund's Class A and Class B shares compared
favorably with both our S&P benchmark and the 12.11% return recorded by the
average growth and income fund over the same period, according to Lipper
Analytical Services, Inc.1 Longer-term performance information can be found on
pages six and seven.
Drugs, software, specialty retailing
The Fund's objectives of growth and income continued to be well served by its
disciplined investment strategy, combining in-depth fundamental analysis with
computer modeling to identify companies with improving earnings prospects and
inexpensive stock prices. A number of the companies that met those criteria in
the first half of 1998 were pharmaceutical firms, such as Pfizer, Bristol-Myers
Squibb and Schering-Plough. Drug companies benefited from healthy pipelines of
new products, the ability to bring products to market faster than ever, and
relaxed regulations that permitted more aggressive advertising.
In the technology area, we focused on software companies, a number of which
were able to maintain good market position and pricing power despite the intense
competition characteristic of the industry. Two holdings that contributed
positively to performance, Microsoft and Computer Associates International, were
good examples of this. On the other hand, we avoided semiconductor and other
computer hardware companies that might be hurt by sluggish demand as a result of
the Asian crisis.
As the problems in Asia continued to unfold, investors increasingly turned
their attention toward stocks that minimized overseas exposure. Specialty
retailers like Home Depot and Lowe's Companies, which derive the bulk of their
revenues from domestic business, benefited from this trend and helped the Fund's
performance. Finally, many stocks in the financial sector performed well, buoyed
by the generally favorable economic environment and further industry
consolidation. Perhaps the best example of this latter trend was the recently
announced "mega-merger" of Travelers and Citicorp, both of which did well for
the Fund.
- ----------
Scorecard
- ----------
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INVESTMENT RECENT PERFORMANCE ... AND WHAT'S BEHIND THE NUMBERS
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Lucent Technologies ^ Telephone company system upgrades spark sales
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General Electric ^ Consistent earnings growth; highly regarded management
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Intel v Hurt by slow PC sales; increasing low-end competition
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See "Schedule of Investments." Investment holdings are subject to change.
4
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John Hancock Funds - Independence Equity Fund
[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the six months ended June 30, 1998". The
chart is scaled in increments of 5% with 0% at the bottom and 20% at the top.
The first bar represents the 18.93% total return for John Hancock Independence
Equity Fund Class A. The second bar represents the 18.49% total return for John
Hancock Independence Equity Fund Class B. The third bar represents the 1.40%*
total return for John Hancock Independence Equity Fund Class C and the fourth
bar represents the 12.11% total return for the average growth and income fund. A
note below the chart 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." The footnote
below reads "From inception May 1, 1998 to June 30, 1998."]
Energy and paper products disappointing
On the negative side, although we underweighted the Fund in the energy sector
relative to the S&P 500, performance was still hurt by our investments in such
stocks as Anadarko Petroleum, Mobil, and Arco, and we sold them during the
period. The explanation for this was straightforward: energy prices were
extremely weak, with crude oil dipping below $12 a barrel near the end of June.
The paper and forest products industry also suffered from weak commodity prices,
including those of pulp, paper, bleachboard, and lumber. Our interest in the
sector was limited to high-grade paper companies such as Fort James, which
performed well relative to other stocks in the industry but was disappointing on
an absolute basis.
Regulatory uncertainty clouded the outlook for many companies in the
telecommunications sector. AT&T was a prime example. The company's recently
announced merger with cable television giant TCI better positioned AT&T to enter
the local telephone service market, but it was unclear how quickly regulators
would allow the company to implement such plans. That and other uncertainties
about the merger resulted in a lukewarm reception to the planned union between
the two companies, and AT&T stock weakened as a result.
Outlook
We believe that the stock market can do reasonably well if the economy continues
to grow and interest rates and inflation stay roughly at current levels. In the
second quarter we began to see companies with Asian exposure reporting
lower-than-expected earnings. We expect to see more of this in the third
quarter, and we therefore believe that it's still too early to buy companies
with significant Asian exposure.
However, sectors that did well in the first half of the year -- for example,
health care, financial services, specialty retailing, and segments of the
technology industry -- should continue that trend into the second half. One
additional area that bears close watching is the energy sector. If, as we
suspect, the weakness in energy prices is a temporary phenomenon, energy stocks
could start to look attractive. Furthermore, as the third quarter progresses,
the technology stocks that have been hurt most by the developments in Asia could
stage a recovery.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
"...sectors that did well in the first half of the year... should continue that
trend into the second half."
5
<PAGE>
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John Hancock Funds - Independence Equity Fund
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A LOOK AT PERFORMANCE
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The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Independence Equity Fund. Total return
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). Class C performance
includes a contingent deferred sales charge of 1% (declining to 0% after one
year).
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 June 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (6/10/91)
------- ------- ---------
Cumulative Total Returns 25.77% 154.09% 226.77%
Average Annual Total Returns(1) 25.77% 20.50% 18.27%
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CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (9/7/95)
------ --------
Cumulative Total Returns 26.50% 94.93%
Average Annual Total Returns(1) 26.50% 26.77%
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CLASS C
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
INCEPTION
(5/1/98)
---------
Cumulative Total Return 0.40%
Average Annual Total Return 0.40%(2)
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% (of the Fund's average daily net asset
value) for Class A and Class B shares, respectively. Prior to September 1,
1995, and the creation of Class B shares, the limitation of expenses was
0.70% of the Fund's daily net asset value. Without the limitation of
expenses, the average annualized total returns for the five-year period
and since inception for Class A shares would have been 20.22% and 17.52%,
respectively; the average annualized total return since inception for
Class B shares would have been 26.33%.
(2) Not annualized.
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.
Assuming all distributions were reinvested, a $10,000 investment in the Fund's
Class C shares at inception on May 1, 1998, would be worth $10,140 without sales
charge and $10,040 with maximum sales charge on June 30, 1998. For comparison,
the same $10,000 investment in the Standard & Poor's 500 Stock Index would be
worth $10,227.
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 $34,694 as of June 30, 1998. 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
$34,397 as of June 30, 1998. The third line represents the Independence Equity
Fund, after sales charge, and is equal to $32,677 as of June 30, 1998.
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 $21,324 as of June 30, 1998. 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 $19,793 as of June 30, 1998. The third line represents the value of the
Independence Equity Fund, after sales charge, and is equal to $19,493 as of June
30, 1998.
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 June 30, 1998. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $299,904,147) ........................ $362,425,277
Joint repurchase agreement (cost - $11,197,000) ............ 11,197,000
Corporate savings account .................................. 2,754
-------------
373,625,031
Receivable for investments sold ............................. 738,669
Receivable for shares sold .................................. 597,942
Dividends and interest receivable ........................... 492,348
Other assets ................................................ 4,576
-------------
Total Assets .............................. 375,458,566
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ........................... 137,416
Payable for shares repurchased .............................. 25,320
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 312,897
Accounts payable and accrued expenses ....................... 17,687
-------------
Total Liabilities ......................... 493,320
-----------------------------------------------------------
Net Assets:
Capital paid-in ............................................. 293,693,215
Accumulated net realized gain on investments ................ 19,076,611
Net unrealized appreciation of investments .................. 62,521,650
Distributions in excess of net investment income ............ (326,230)
-------------
Net Assets ................................ $374,965,246
===========================================================
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 - $146,605,104 / 5,151,052 .......................... $28.46
=============================================================================
Class B - $226,443,427 / 8,029,065 .......................... $28.20
=============================================================================
Class C** - $1,916,715 / 67,961 ............................. $28.20
=============================================================================
Maximum Offering Price Per Share*
Class A - ($28.46 x 105.26%) ................................ $29.96
=============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
** Class C shares commenced operations on May 1, 1998.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $14,035) ..... $2,149,930
Interest .................................................... 182,643
------------
2,332,573
------------
Expenses:
Investment management fee - Note B ....................... 1,110,809
Distribution and service fee - Note B
Class A ................................................ 178,773
Class B ................................................ 883,486
Class C ................................................ 1,683
Transfer agent fee - Note B .............................. 351,690
Registration and filing fees ............................. 37,389
Custodian fee ............................................ 35,801
Financial services fee - Note B .......................... 26,171
Auditing fee ............................................. 10,166
Printing ................................................. 9,723
Trustees' fees ........................................... 7,005
Miscellaneous ............................................ 2,560
Legal fees ............................................... 1,328
------------
Total Expenses ............................ 2,656,584
-----------------------------------------------------------
Net Investment Loss ....................... (324,011)
-----------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold ....................... 18,025,409
Change in net unrealized appreciation/depreciation
of investments ............................................. 30,752,839
------------
Net Realized and Unrealized
Gain on Investments ....................... 48,778,248
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................. $48,454,237
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ...................................... $53,056 ($324,011)
Net realized gain on investments sold ............................. 11,206,508 18,025,409
Change in net unrealized appreciation/depreciation of investments.. 25,810,786 30,752,839
------------ ------------
Net Increase in Net Assets Resulting from Operations ............ 37,070,350 48,454,237
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.0427 and none per share, respectively) ............ (99,081) --
Class B - ($0.0127 and none per share, respectively) ............ (41,909) --
Distributions from net realized gain on investments sold
Class A - ($1.0977 and none per share, respectively) ............ (4,040,583) --
Class B - ($1.0977 and none per share, respectively) ............ (5,860,104) --
------------ ------------
Total Distributions to Shareholders ............................. (10,041,677) --
------------ ------------
From Fund Share Transactions - Net:* ................................. 126,639,255 99,368,506
------------ ------------
Net Assets:
Beginning of period ............................................... 73,474,575 227,142,503
------------ ------------
End of period (including distributions in excess of net investment
income of $2,219 and $326,230, respectively) .................... $227,142,503 $374,965,246
============ ============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1998
DECEMBER 31, 1997 (UNAUDITED)
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 2,917,766 $65,492,230 1,878,720 $50,142,424
Shares issued to shareholders in reinvestment of
distributions .............................................. 159,427 3,773,395 -- --
------------ ------------ ------------ ------------
3,077,193 69,265,625 1,878,720 50,142,424
Less shares repurchased ...................................... (821,416) (18,986,208) (580,674) (15,522,061)
------------ ------------ ------------ ------------
Net increase ................................................. 2,255,777 $50,279,417 1,298,046 $34,620,363
============ ============ ============ ============
CLASS B
Shares sold .................................................. 4,007,681 $87,926,902 2,971,062 $79,210,421
Shares issued to shareholders in reinvestment of
distributions .............................................. 219,752 5,188,064 -- --
------------ ------------ ------------ ------------
4,227,433 93,114,966 2,971,062 79,210,421
Less shares repurchased ...................................... (743,753) (16,755,128) (612,815) (16,325,483)
------------ ------------ ------------ ------------
Net increase ................................................. 3,483,680 $76,359,838 2,358,247 $62,884,938
============ ============ ============ ============
CLASS C**
Shares sold .................................................. -- -- 67,961 $1,863,205
------------ ------------ ------------ ------------
Net increase ................................................. -- -- 67,961 $1,863,205
============ ============ ============ ============
</TABLE>
** Class C shares commenced operations on May 1, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<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:
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<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------
1993 1994 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .......... $10.98 $12.16 $12.68 $14.41
------- ------- ------- -------
Net Investment Income ......................... 0.22 0.28(2) 0.32(2) 0.20(2)
Net Realized and Unrealized Gain on
Investments ................................. 1.25 0.52 1.77 3.88
------- ------- ------- -------
Total from Investment Operations .......... 1.47 0.80 2.09 4.08
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ........ (0.23) (0.23) (0.28) (0.22)
Distributions from Net Realized Gain on
Investments Sold .......................... (0.06) (0.05) (0.08) (0.29)
------- ------- ------- -------
Total Distributions ....................... (0.29) (0.28) (0.36) (0.51)
------- ------- ------- -------
Net Asset Value, End of Period ................ $12.16 $12.68 $14.41 $17.98
======= ======= ======= =======
Total Investment Return
at Net Asset Value(3) ....................... 13.58% 6.60% 16.98% 29.12%
Total Adjusted Investment Return
at Net Asset Value(3,4) ..................... 11.40% 6.15% 16.94% 28.47%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...... $12,488 $66,612 $101,418 $14,878
Ratio of Expenses to Average Net Assets ....... 0.76% 0.70% 0.70% 0.94%
Ratio of Adjusted Expenses to
Average Net Assets(5) ....................... 2.94% 1.15% 0.74% 1.59%
Ratio of Net Investment Income to
Average Net Assets .......................... 2.36% 2.20% 2.43% 1.55%
Ratio of Adjusted Net Investment Income to
Average Net Assets(5) ....................... 0.18% 1.75% 2.39% 0.90%
Portfolio Turnover Rate ....................... 53% 43% 71% 157%
Fee Reduction Per Share ....................... $0.20 $0.06(2) $0.005(2) $0.08(2)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
JUNE 1, 1996 TO YEAR ENDED JUNE 30, 1998
DECEMBER 31, 1996(8) DECEMBER 31, 1997 (UNAUDITED)
-------------------- ----------------- -----------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .......... $17.98 $19.42 $23.93
------- ------- -------
Net Investment Income ......................... 0.13(2) 0.10(2) 0.03(2)
Net Realized and Unrealized Gain on
Investments ................................. 1.72 5.55 4.50
------- ------- -------
Total from Investment Operations .......... 1.85 5.65 4.53
------- ------- -------
Less Distributions:
Dividends from Net Investment Income ........ (0.14) (0.04) --
Distributions from Net Realized Gain on
Investments Sold .......................... (0.27) (1.10) --
------- ------- -------
Total Distributions ....................... (0.41) (1.14) --
------- ------- -------
Net Asset Value, End of Period ................ $19.42 $23.93 $28.46
======= ======= =======
Total Investment Return
at Net Asset Value(3) ....................... 10.33%(6) 29.19% 18.93%(6)
Total Adjusted Investment Return
at Net Asset Value(3,4) ..................... 10.08%(6) 29.17% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...... $31,013 $92,204 $146,605
Ratio of Expenses to Average Net Assets ....... 1.30%(7) 1.42% 1.37%(7)
Ratio of Adjusted Expenses to
Average Net Assets(5) ....................... 1.73%(7) 1.44% --
Ratio of Net Investment Income to
Average Net Assets .......................... 1.16%(7) 0.45% 0.20%(7)
Ratio of Adjusted Net Investment Income to
Average Net Assets(5) ....................... 0.73%(7) 0.43% --
Portfolio Turnover Rate ....................... 35% 62% 31%
Fee Reduction Per Share ....................... $0.05(2) $0.00(2,9) --
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
distributions and total investment return of the Fund. It shows how the Fund's
net asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD ENDED JUNE 1, 1996 TO
MAY 31, 1996(1) DECEMBER 31, 1996(8)
---------------- --------------------
<S> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................................. $15.25 $17.96
------- -------
Net Investment Income (Loss)(2) ....................................... 0.09 0.05
Net Realized and Unrealized Gain on Investments ....................... 2.71 1.72
------- -------
Total from Investment Operations .................................. 2.80 1.77
------- -------
Less Distributions:
Dividends from Net Investment Income ................................ (0.09) (0.05)
Distributions from Net Realized Gain on Investments Sold ............ -- (0.27)
------- -------
Total Distributions ............................................... (0.09) (0.32)
------- -------
Net Asset Value, End of Period ........................................ $17.96 $19.41
======= =======
Total Investment Return at Net Asset Value(3) ......................... 18.46%(6) 9.83%(6)
Total Adjusted Investment Return at Net Asset Value(3,4) .............. 17.59%(6) 9.58%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............................. $15,125 $42,461
Ratio of Expenses to Average Net Assets ............................... 2.00%(7) 2.00%(7)
Ratio of Adjusted Expenses to Average Net Assets(5) ................... 3.21%(7) 2.43%(7)
Ratio of Net Investment Income (Loss) to Average Net Assets ........... 0.78%(7) 0.45%(7)
Ratio of Adjusted Net Investment Income (Loss) to Average Net
Assets(5) ........................................................... (0.43%)(7) 0.02%(7)
Portfolio Turnover Rate ............................................... 157% 35%
Fee Reduction Per Share(2) ............................................ $0.13 $0.05
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- -----------
<S> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................................. $19.41 $23.80
------- -------
Net Investment Income (Loss)(2) ....................................... (0.06) (0.07)
Net Realized and Unrealized Gain on Investments ....................... 5.56 4.47
------- -------
Total from Investment Operations .................................. 5.50 4.40
------- -------
Less Distributions:
Dividends from Net Investment Income ................................ (0.01) --
Distributions from Net Realized Gain on Investments Sold ............ (1.10) --
------- -------
Total Distributions ............................................... (1.11) --
------- -------
Net Asset Value, End of Period ........................................ $23.80 $28.20
======= =======
Total Investment Return at Net Asset Value(3) ......................... 28.39% 18.49%(6)
Total Adjusted Investment Return at Net Asset Value(3,4) .............. 28.37% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............................. $134,939 $226,443
Ratio of Expenses to Average Net Assets ............................... 2.12% 2.07%(7)
Ratio of Adjusted Expenses to Average Net Assets(5) ................... 2.14% --
Ratio of Net Investment Income (Loss) to Average Net Assets ........... (0.25%) (0.50%)(7)
Ratio of Adjusted Net Investment Income (Loss) to Average Net
Assets(5) ........................................................... (0.27%) --
Portfolio Turnover Rate ............................................... 62% 31%
Fee Reduction Per Share(2) ............................................ $0.00(9) --
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS)
TO JUNE 30, 1998
(UNAUDITED)
-----------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................... $27.81
-------
Net Investment Loss(2) ..................................... (0.01)
Net Realized and Unrealized Gain on Investments ............ 0.40
-------
Total from Investment Operations ....................... 0.39
-------
Net Asset Value, End of Period ............................. $28.20
=======
Total Investment Return at Net Asset Value(3) .............. 1.40%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $1,917
Ratio of Expenses to Average Net Assets .................... 2.07%(7)
Ratio of Net Investment Loss to Average Net Assets ......... (0.40%)(7)
Portfolio Turnover Rate .................................... 31%
(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) Effective December 31, 1996, the fiscal year end changed from May 31 to
December 31.
(9) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Independence Equity Fund on June 30, 1998. 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 (3.38%)
Northrop Grumman Corp. ........................ 7,400 $763,125
Precision Castparts Corp. ..................... 30,200 1,611,925
United Technologies Corp. ..................... 111,300 10,295,250
-----------
12,670,300
-----------
Automobile/Trucks (1.83%)
Chrysler Corp. ................................ 38,800 2,187,350
Ford Motor Co. ................................ 35,200 2,076,800
Lear Corp.* ................................... 33,700 1,729,231
Ryder System, Inc. ............................ 27,000 852,188
-----------
6,845,569
-----------
Banks - United States (8.61%)
Banc One Corp. ................................ 24,100 1,345,081
BankAmerica Corp. ............................. 50,000 4,321,875
Bankers Trust New York Corp. .................. 17,800 2,065,912
Citicorp ...................................... 32,800 4,895,400
Comerica, Inc. ................................ 71,300 4,723,625
First Union Corp. ............................. 124,700 7,263,775
NationsBank Corp. ............................. 21,000 1,606,500
Norwest Corp. ................................. 130,900 4,892,388
State Street Corp. ............................ 16,700 1,160,650
-----------
32,275,206
-----------
Beverages (1.94%)
PepsiCo, Inc. ................................. 177,000 7,290,188
-----------
Building (0.44%)
Masco Corp. ................................... 27,500 1,663,750
-----------
Chemicals (2.25%)
Air Products & Chemicals, Inc. ................ 140,200 5,608,000
Millennium Chemicals, Inc. .................... 31,600 1,070,450
Morton International, Inc. .................... 31,200 780,000
Solutia, Inc. ................................. 34,100 978,244
-----------
8,436,694
-----------
Computers (7.17%)
Autodesk, Inc. ................................ 44,000 $1,699,500
Cadence Design Systems, Inc.* ................. 30,200 943,750
Cisco Systems, Inc.* .......................... 43,800 4,032,338
Computer Associates International, Inc. ....... 33,800 1,878,012
Dell Computer Corp.* .......................... 5,000 464,062
Hewlett-Packard Co. ........................... 33,400 1,999,825
International Business Machines Corp. ......... 20,600 2,365,138
Microsoft Corp.* .............................. 104,200 11,292,675
Oracle Corp.* ................................. 24,200 594,412
Parametric Technology Corp.* .................. 27,000 732,375
Sun Microsystems, Inc.* ....................... 20,000 868,750
-----------
26,870,837
-----------
Cosmetics & Personal Care (1.17%)
Avon Products, Inc. ........................... 16,800 1,302,000
Dial Corp. (The) .............................. 95,100 2,466,656
Revlon, Inc. (Class A) * ...................... 11,800 606,225
-----------
4,374,881
-----------
Diversified Operations (2.23%)
National Service Industries, Inc. ............. 13,500 686,812
Textron, Inc. ................................. 35,800 2,566,412
Tyco International Ltd. ....................... 81,000 5,103,000
-----------
8,356,224
-----------
Electronics (5.05%)
General Electric Co. .......................... 113,200 10,301,200
Honeywell, Inc. ............................... 39,400 3,292,362
Intel Corp. ................................... 58,600 4,343,725
Linear Technology Corp. ....................... 16,300 983,094
-----------
18,920,381
-----------
Finance (2.07%)
American Express Co. .......................... 5,300 604,200
Associates First Capital Corp. (Class A) ...... 22,125 1,700,859
MBNA Corp. .................................... 44,250 1,460,250
Morgan Stanley, Dean Witter, Discover & Co. ... 43,600 3,983,950
-----------
7,749,259
-----------
Food (1.37%)
ConAgra, Inc. ................................. 40,600 1,286,512
Heinz (H.J.) Co. .............................. 37,300 2,093,462
Quaker Oats Co. ............................... 32,000 1,758,000
-----------
5,137,974
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Instruments - Scientific (0.45%)
Perkin-Elmer Corp. .............................. 26,900 $1,672,844
-----------
Insurance (9.43%)
Allstate Corp. (The) ............................ 47,300 4,330,906
American International Group, Inc. .............. 30,400 4,438,400
Equitable Companies., Inc. (The) ................ 20,700 1,551,206
General Re Corp. ................................ 19,800 5,019,300
Hartford Financial Services Group, Inc. (The) ... 41,700 4,769,438
Marsh & McLennan Companies., Inc. ............... 91,050 5,502,834
Travelers Group, Inc. ........................... 122,700 7,438,688
Travelers Property Casualty Corp. (Class A) ..... 53,600 2,298,100
-----------
35,348,872
-----------
Machinery (0.62%)
Cooper Industries, Inc. ......................... 13,000 714,188
Ingersoll-Rand Co. .............................. 36,800 1,621,500
-----------
2,335,688
-----------
Media (0.51%)
Viacom, Inc. (Class B)* ......................... 32,900 1,916,425
-----------
Medical (11.82%)
Abbott Laboratories ............................. 61,400 2,509,725
Allegiance Corp. ................................ 14,600 748,250
Becton, Dickinson & Co. ......................... 9,400 729,675
Bristol-Myers Squibb Co. ........................ 52,800 6,068,700
Cardinal Health, Inc. ........................... 55,500 5,203,125
Glaxo Wellcome PLC American Depositary
Receipts (ADR) (United Kingdom) ............... 16,600 992,888
Guidant Corp. ................................... 38,200 2,724,138
Health Management Associates, Inc.
(Class A)* ................................... 32,400 1,083,375
HEALTHSOUTH Corp.* .............................. 104,800 2,796,850
Johnson & Johnson ............................... 42,800 3,156,500
Merck & Co., Inc. ............................... 36,600 4,895,250
Pfizer, Inc. .................................... 38,500 4,184,469
Schering-Plough Corp. ........................... 26,900 2,464,712
Tenet Healthcare Corp.* ......................... 30,000 937,500
United Healthcare Corp. ......................... 11,100 704,850
Universal Health Services, Inc. (Class B)* ...... 27,100 1,581,962
Warner-Lambert Co. .............................. 24,300 1,685,812
Wellpoint Health Networks, Inc.* ................ 25,200 1,864,800
-----------
44,332,581
-----------
Mortgage Banking (1.77%)
Fannie Mae ...................................... 109,500 6,652,125
-----------
Office (3.31%)
Avery Dennison Corp. ............................ 52,400 2,816,500
Pitney Bowes, Inc. .............................. 80,300 3,864,438
Office (continued)
Xerox Corp. ..................................... 56,500 $5,741,812
-----------
12,422,750
-----------
Oil & Gas (5.43%)
Baker Hughes, Inc. .............................. 17,000 587,562
British Petroleum Co. PLC (ADR)
(United Kingdom) .............................. 46,600 4,112,450
Dresser Industries, Inc. ........................ 67,200 2,961,000
El Paso Natural Gas Co. ......................... 28,000 1,071,000
Exxon Corp. ..................................... 25,500 1,818,469
Halliburton Co. ................................. 31,000 1,381,438
Phillips Petroleum Co. .......................... 62,200 2,997,262
Schlumberger, Ltd. .............................. 22,900 1,564,356
Sun Co., Inc. ................................... 41,700 1,618,481
USX - Marathon Group ............................ 65,900 2,261,194
----------
20,373,212
----------
Paper & Paper Products (0.61%)
Abitibi-Consolidated, Inc. (Canada) ............. 39,400 504,812
Fort James Corp. ................................ 39,900 1,775,550
----------
2,280,362
----------
Pollution Control (0.83%)
USA Waste Services, Inc.* ....................... 63,400 3,130,375
----------
Retail (3.80%)
Home Depot, Inc. (The) .......................... 100,650 8,360,241
Lowe's Companies., Inc. ......................... 81,400 3,301,788
Staples, Inc.* .................................. 18,025 521,598
TJX Companies., Inc. ............................ 38,800 936,050
Wal-Mart Stores, Inc. ........................... 18,700 1,136,025
----------
14,255,702
----------
Rubber - Tires & Misc (1.20%)
Goodyear Tire & Rubber Co. (The) ................ 69,900 4,504,181
----------
Soap & Cleaning Preparations (3.35%)
Procter & Gamble Co. (The) ...................... 137,800 12,548,413
----------
Telecommunications (4.80%)
AT&T Corp. ...................................... 83,700 4,781,363
Bell Atlantic Corp. ............................. 85,600 3,905,500
Lucent Technologies, Inc. ....................... 87,800 7,303,863
Northern Telecom Ltd. (Canada) .................. 35,400 2,008,950
----------
17,999,676
----------
Textile (1.36%)
Liz Claiborne, Inc. ............................. 23,000 1,201,750
Tommy Hilfiger Corp.* ........................... 19,800 1,237,500
Warnaco Group, Inc. (Class A) .................. 62,500 2,652,344
----------
5,091,594
----------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Tobacco (0.70%)
Philip Morris Companies, Inc. ........... 67,100 $2,642,063
------------
Transport (3.60%)
AMR Corp.* .............................. 28,400 2,364,300
Burlington Northern Santa Fe Corp. ...... 39,800 3,907,863
Delta Air Lines, Inc. ................... 6,400 827,200
Norfolk Southern Corp. .................. 38,100 1,135,856
Northwest Airlines Corp. (Class A)* ..... 28,500 1,099,031
Southwest Airlines Co. .................. 71,800 2,127,075
UAL Corp.* .............................. 26,100 2,035,800
------------
13,497,125
------------
Utilities (5.55%)
Baltimore Gas & Electric Co. ............ 51,900 1,612,144
BellSouth Corp. ......................... 12,000 805,500
Consolidated Natural Gas Co. ............ 32,600 1,919,325
Florida Progress Corp. .................. 100,300 4,124,838
FPL Group, Inc. ......................... 60,400 3,805,200
GTE Corp. ............................... 112,500 6,257,813
Houston Industries, Inc. ................ 22,200 685,425
Montana Power Co. ....................... 18,500 642,875
New Century Energies, Inc. .............. 21,500 976,906
------------
20,830,026
------------
TOTAL COMMON STOCKS
(Cost $299,904,147) (96.65%) 362,425,277
------ ------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- -------- ------------ -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.99%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities USA,
Inc. - Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Bond,
9.125% due 05-15-18, and U.S.
Treasury Notes, 5.00% thru 8.75%
due 12-31-98 thru 04-30-03)
- Note A................................. 5.75% $11,197 $11,197,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ...................... 2,754
------------
TOTAL SHORT-TERM INVESTMENTS .......... (2.99%) 11,199,754
-------- ------------
TOTAL INVESTMENTS .......... (99.64%) 373,625,031
-------- ------------
OTHER ASSETS AND LIABILITIES, NET .......... (0.36%) 1,340,215
-------- ------------
TOTAL NET ASSETS .......... (100.00%) $374,965,246
======== ============
* Non-income producing security.
The percentage shown for each investment category is the total of that category
as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Independence Equity Fund
(UNAUDITED)
NOTE A -
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust"), is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of 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, Class B and Class C shares. The Trustees
authorized the issuance of Class C shares effective May 1, 1998. 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,
Inc., 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 its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment securities
is recorded on the ex-dividend date or, in the case of some foreign securities,
on the date thereafter when the Fund is made aware of the dividend. Interest
income on investment securities is recorded on the accrual basis. Foreign income
may be subject to foreign withholding taxes, which are accrued as applicable.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, 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
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Independence Equity Fund
expense and the relative sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 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
rates ranging from 0.070% to 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 period ended June 30, 1998.
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.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended June 30,
1998, JH Funds received net sales of $584,739 with regard to sales of Class A
shares. Out of this amount, $93,686 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $265,991 was
paid as sales commissions to unrelated broker-dealers, and $225,062 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 period ended June 30,1998, the contingent deferred
sales charges received by JH Funds amounted to $154,200.
Class C shares which are redeemed within one year of purchase will be subject
to a CDSC at a rate of 1.00% 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 related to providing distribution
related services to the Fund in connection with the sale of Class C shares. For
the period ended June 30, 1998, there were no contingent deferred sales charges
paid to JH Funds.
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, Class B and Class C pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses, at an annual rate not exceed 0.30%
of Class A average daily net assets and 1.00% of Class B and Class C 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
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Independence Equity Fund
the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), a wholly owned subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period 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/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 June 30, 1998, the Fund's investments to cover the deferred
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 period
ended June 30, 1998, aggregated $180,211,246 and $92,354,589, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30, 1998.
The cost of investments owned at June 30,1998 (excluding the corporate
savings account) for federal income tax purposes was $311,102,416. Gross
unrealized appreciation and depreciation of investments aggregated $66,681,540
and $4,161,679, respectively, resulting in net unrealized appreciation of
$62,519,861.
19
<PAGE>
================================================================================
[LOGO] John Hancock Funds --------------
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101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
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INTERNET: www.jhancock.com/funds Permit No. 75
--------------
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Independence Equity Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 250SA 6/98
8/98
<PAGE>
SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Special
Value Fund
JUNE 30, 1998
<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 and Chief Operating Officer
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
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year wondering
what the market would do for an encore in 1998. The answer through the end of
June was more of the same. But tremors from Asia have also sparked increased
volatility, as corporate earnings and the U.S. economy have shown signs of
slowing. What's more, a good part of the market's advance has come from just a
small group of the largest companies in the major stock market indexes.
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
The move ahead has been so narrow that some observers believe that most
stocks have actually been in a bear market this year. The bond market had its
pockets of volatility as well, although U.S. Treasury bonds benefited from their
safe-haven status.
While we don't make a practice of opining on what the market will do next, we
believe that after such a long run up, it would be wise for investors to set
more realistic expectations. Over the long term, the market's historical results
have been more in the 10% per year range, which is still a solid result,
considering it has been produced despite wars, depressions and other social
upheavals along the way.
In addition to adjusting, or at least re-examining, expectations, now could
also be a good time to review with your investment professional how your assets
are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping you keep
your feet on the ground as you pursue your dreams.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY TIMOTHY KEEFE, CFA, PORTFOLIO MANAGER
John Hancock
Special Value Fund
Small-company stocks give up gains in volatile market
-----------------------------------------------------
The U.S. stock market galloped to new highs in the first quarter of 1998, fueled
by falling interest rates, low inflation, nearly full employment and a healthy
economy. Asia's financial problems seemed distant and investors grew more
optimistic, boosting both small-company and large-company stock prices. With the
market at all-time highs, there was little room for companies to disappoint
investors. But weaker-than-expected earnings announcements began to trickle in
during April and May, causing choppiness in the market. Small-company stocks
sustained the biggest losses, amid fears that these less-seasoned companies
would not be able to weather the storm. Investors fled small-company stocks that
are often harder to trade, moving back into large-company stocks with
predictable earnings growth. Returns reflected the market's split personality.
The Standard & Poor's 500 Stock Index -- a measure of broad market performance
- -- climbed 17.71% for the first six months of the year. By comparison, the
Russell 2000 Stock Index -- a benchmark for small-company stocks -- returned
only 5.27% for the same period.
Performance review
Despite a strong start, John Hancock Special Value Fund turned in disappointing
results. For the six months ended June 30, 1998, the Fund's Class A and Class B
shares posted total returns of 2.69% and 2.29%, respectively, at net asset
value. The Fund's Class C shares, which were introduced on May 1, 1998 in a
difficult market environment, lost some ground, returning -6.72% at net asset
value from inception through the end of June. Keep in mind that your
[A 3 3/4" x 2 1/4" photo at bottom of page of fund management team members.
Caption below reads "Fund management team members (l - r): Tim Keefe, Tim
Quinlisk and Lisa Welch."]
"Several of our stock selections hurt short-term performance."
3
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
"...increased volatility often translates into more good buying
opportunities..."
- --------------------------------------------------------------------------------
TOP FIVE STOCK HOLDINGS
1. Commonwealth Telephone 3.5%
2. Salomon, Inc. - FSA 3.5%
3. Triton Energy 3.5%
4. AmerUs Life Holdings 2.7%
5. Oak Industries 2.7%
As a percentage of net assets on June 30, 1998
- --------------------------------------------------------------------------------
net asset value return will be different from this performance if you were not
invested in the Fund for the entire period and did not reinvest all
distributions.
Given the Fund's focus on small-cap stocks, it was recently moved at our
request out of Lipper Analytical Services, Inc.'s group of growth and income
funds, many of which have more of a large-cap focus. The Fund is now in Lipper's
more appropriate peer group of small-cap funds, which returned 6.45% for the
period.(1) For longer-term performance information, please see pages six and
seven.
Several of our stock selections hurt short-term performance. Emerging-market
fears and the rapid drop in oil prices temporarily hurt the stock price of
Triton Energy, an exploration and production company with two major discovery
fields in emerging-market countries. The stock of AmerUs Life Holdings, another
top investment, was flat in the midst of a rising market, as weak pricing
plagued the insurance industry. We also had smaller stakes in several other
stocks whose prices dropped sharply for unforeseen reasons. DENTSPLY
International, a leader worldwide in dental products, and Respironics, a maker
of respiratory devices, both were hurt by changes in insurance reimbursement
schedules. Although these stocks failed to meet our expectations during the
period, we still believe they have strong long-term prospects for appreciation.
Finance results mixed
Our largest sector weighting was finance, where we focused on both sub-prime
mortgage lenders and insurers. Subprime lenders are mortgage companies that
specialize in making loans to individuals who may not fully meet standard credit
requirements. Last year, we bought leaders in this high-growth industry,
including ContiFinancial, FIRSTPLUS Financial Group and The Money Store. All did
well in the first quarter, as interest rates fell, new business picked up and
two major takeovers focused attention on the sector. In the second quarter,
however, most of the stocks gave up their gains as interest rates came down
faster than anticipated and prepayments increased. The Money Store, which was
acquired by First Union during the period, was the one exception, returning 62%
for the six-month period.
Soft pricing in the insurance sector led to some good buying opportunities.
We capitalized on this situation by buying more shares of strong companies like
Reinsurance Group of America, the premier insurer of insurance companies. The
preferred stock of Financial Security Assurance Holding (Salomon, Inc.-FSA), our
second largest holding, continued to deliver strong returns. This insurer of
municipal bonds again benefited from falling interest rates and the growing
number of
- ----------
Scorecard
- ----------
- --------------------------------------------------------------------------------
INVESTMENT RECENT PERFORMANCE ... AND WHAT'S BEHIND THE NUMBERS
- --------------------------------------------------------------------------------
The Money Store ^ Acquired by First Union
- --------------------------------------------------------------------------------
Triton Energy v Emerging market fears, falling oil prices
- --------------------------------------------------------------------------------
Respironics v Changes in insurance reimbursement schedules
- --------------------------------------------------------------------------------
See "Schedule of Investments." Investment holdings are subject to change.
4
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the six months ended June 30, 1998". The
chart is scaled in increments of 2% with -8% at the bottom and 8% at the top.
The first bar represents the 2.69% total return for John Hancock Special Value
Fund Class A. The second bar represents the 2.29% total return for John Hancock
Special Value Fund Class B. The third bar represents the -6.72%* total return
for John Hancock Special Value Fund Class C and the fourth bar represents the
6.45% total return for the average small cap fund. A note below the chart reads
"Total returns for John Hancock Special Value Fund are at net asset value with
all distributions reinvested. The average small cap fund is tracked by Lipper
Analytical Services, Inc. (1). See the following two pages for historical
performance information." The footnote below reads "From inception May 1, 1998
to June 30, 1998."]
municipal bonds coming to the market insured.
Buys and sells
We continued to follow a disciplined value strategy, buying the stock of strong
companies at prices not reflective of their true worth, with the expectation of
holding them for long-term appreciation. During the period, we purchased shares
of Commonwealth Telephone Enterprises, now our number one holding. Commonwealth
is a local telephone company that operates in the Eastern Pennsylvania area,
servicing mainly rural areas. We like the business because it's very stable,
generates lots of free cash flow and has a shareholder-friendly management team.
It also has multiple opportunities to enhance shareholder returns through cost
cutting and the addition of incremental services at low costs. Conversely, we
sold our stake in Daniel Industries, an oil company that had been our fifth
largest holding at the start of the period. With oil prices dropping, we decided
to sell at a reasonable price, rather than riding the stock down and waiting for
oil prices to come back.
Opportunities ahead
Most likely the stock market's volatility is here to stay. We expect business
conditions to get tougher as many companies experience the full brunt of lower
exports to Asia, stiff price competition, and a strong dollar. These conditions
will make it more difficult for companies to meet earnings expectations. And
with current valuations -- stock prices compared to earnings and other measures
- -- at such high levels, investors aren't going to wait around after an earnings
disappointment. We've seen recently how quickly they can punish a single stock,
bringing down other names at the same time. The silver lining is that increased
volatility often translates into more good buying opportunities for us.
Unfortunately, we can't tell when investor sentiment will again favor
small-company stocks, which dramatically outperformed large caps for a brief
period in 1997. We expect small caps to take off again; we just can't predict
when. What's important is being invested when the turn comes. It's too late to
start chasing small-company stocks on the way up. We're confident that the great
values available in the small-cap market today will eventually deliver handsome
returns for long-term investors.
- --------------------------------------------------------------------------------
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.
"We expect small caps to take off again; we just can't predict when."
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). Class C performance
includes a contingent deferred sales charge of 1% (declining to 0% after one
year).
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 June 30, 1998
SINCE
ONE INCEPTION
YEAR (1/3/94)
------ --------
Cumulative Total Returns 5.47% 78.87%
Average Annual Total Returns(1) 5.47% 13.83%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
ONE INCEPTION
YEAR (1/3/94)
------ --------
Cumulative Total Returns 5.16% 80.13%
Average Annual Total Returns(1) 5.16% 14.01%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended June 30, 1998
SINCE
INCEPTION
(5/1/98)
---------
Cumulative Total Return (7.65%)
Average Annual Total Return(1) (7.65%)(2)
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 4.89% and 12.40%,
respectively. The average annualized total returns for the one-year period
and the since inception for Class B shares would have been 4.58% and
12.58%, respectively. The total return since inception for Class C shares
would have been (7.74%).
(2) Not annualized.
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 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 to measure stock
market performance, and the Russell 2000 Index, an unmanaged small-cap index
composed of 2,000 U.S. stocks. For future reports, the Adviser has chosen to
remove the Standard & Poor's 500 Stock Index, but will continue to compare the
Fund's performance to the Russell 2000 Index, which more closely represents the
investment strategy of the Fund.
Assuming all distributions were reinvested, a $10,000 investment in the Fund's
Class C shares at inception on May 1, 1998, would be worth $9,328 without sales
charge and $9,235 with maximum sales charge on June 30, 1998. For comparison,
the same $10,000 investment in the Standard & Poor's 500 Stock Index and the
Russell 2000 Index would be worth $10,227 and $9,481, respectively.
Special Value Fund
Class A shares
Line chart with the heading Special Value Fund: Class A, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are four lines. The first line represents the value of the Standard & Poor's 500
Stock Index and is equal to $26,893 as of June 30, 1998. The second line
represents the value of the Russell 2000 Index and is equal to $18,862 as of
June 30, 1998. The third 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 $18,828 as of June 30, 1998. The fourth line represents
the value of the hypothetical $10,000 investment made in the Special Value Fund
after sales charge, and is equal to $17,887 as of June 30, 1998.
Special Value Fund
Class B shares
Line chart with the heading Special Value Fund: Class B, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are four lines. The first line represents the value of the Standard & Poor's 500
Stock Index and is equal to $26,893 as of June 30, 1998. The second line
represents the value of the Russell 2000 Index and is equal to $18,862 as of
June 30, 1998. The third 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 $18,213 as of June 30, 1998. The fourth line represents
the value of the hypothetical $10,000 investment made in the Special Value Fund
after sales charge, and is equal to $18,013 as of June 30, 1998.
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 June 30, 1998. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $56,253,034) .......................... $62,516,630
Preferred stocks (cost - $3,565,183) ........................ 3,886,250
Joint repurchase agreement (cost - $2,263,000) .............. 2,263,000
Corporate savings account ................................... 497
------------
68,666,377
Receivable for investments sold .............................. 95,297
Receivable for shares sold ................................... 36,447
Dividends receivable ......................................... 47,205
Interest receivable .......................................... 550
Receivable from John Hancock Advisers, Inc.
and affiliates - Note B ..................................... 16,486
Deferred organization expense - Note A ....................... 11,564
Other assets ................................................. 1,412
------------
Total Assets ............................... 68,875,338
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ............................ 1,043,330
Payable for shares repurchased ............................... 38,678
Accounts payable and accrued expenses ........................ 8,263
------------
Total Liabilities .......................... 1,090,271
-----------------------------------------------------------
Net Assets:
Capital paid-in .............................................. 59,463,538
Accumulated net realized gain on investments and
foreign currency transactions ............................... 1,771,212
Net unrealized appreciation of investments ................... 6,584,771
Distributions in excess of net investment income ............. (34,454)
------------
Net Assets ................................. $67,785,067
===========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $26,306,690/2,088,627 .............................. $12.60
=============================================================================
Class B - $41,361,368/3,310,586 .............................. $12.49
=============================================================================
Class C** - $117,009/9,365 ................................... $12.49
=============================================================================
Maximum Offering Price Per Share*
Class A - ($12.60 x 105.26%) ................................. $13.26
=============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
** Class C shares commenced operations on May 1, 1998.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $1,413) ...... $338,579
Interest .................................................... 84,933
-----------
423,512
-----------
Expenses:
Investment management fee - Note B ....................... 225,727
Distribution and service fee - Note B
Class A ................................................ 37,139
Class B ................................................ 198,560
Class C ................................................ 109
Transfer agent fee - Note B .............................. 92,152
Registration and filing fees ............................. 28,092
Custodian fee ............................................ 21,784
Organization expense - Note A ............................ 11,188
Printing ................................................. 6,549
Auditing fee ............................................. 6,447
Financial services fee - Note B .......................... 5,698
Trustees' fees ........................................... 1,736
Miscellaneous ............................................ 1,004
Legal fees ............................................... 527
-----------
Total Expenses ............................ 636,712
-----------------------------------------------------------
Less Expense Reductions
- Note B .................................. (179,601)
-----------------------------------------------------------
Net Expenses .............................. 457,111
-----------------------------------------------------------
Net Investment Loss ....................... (33,599)
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold ....................... 1,802,596
Net realized gain on foreign currency transactions .......... 3,002
Change in net unrealized appreciation/depreciation
of investments ............................................. (568,074)
-----------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions ............. 1,237,524
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................. $1,203,925
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) .......................................... $18,984 ($33,599)
Net realized gain on investments sold and foreign currency
transactions ........................................................ 2,743,265 1,805,598
Change in net unrealized appreciation/depreciation of investments ..... 5,495,186 (568,074)
------------ ------------
Net Increase in Net Assets Resulting from Operations ................ 8,257,435 1,203,925
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.0321 and none per share, respectively) ................ (45,691) --
Distributions from net realized gain on investments sold
Class A - ($0.6043 and none per share, respectively) ................ (969,735) --
Class B - ($0.6043 and none per share, respectively) ................ (1,638,314) --
------------ ------------
Total Distributions to Shareholders ................................. (2,653,740) --
------------ ------------
From Fund Share Transactions -- Net* ..................................... 12,440,562 10,587,119
------------ ------------
Net Assets:
Beginning of period ................................................... 37,949,766 55,994,023
------------ ------------
End of period (including distributions in excess of net investment
income of $855 and $34,454, respectively) ........................... $55,994,023 $67,785,067
============ ============
</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
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1998
DECEMBER 31, 1997 (UNAUDITED)
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 912,881 $11,525,980 679,745 $8,747,102
Shares issued to shareholders in reinvestment of distributions 80,006 955,849 -- --
------------ ------------ ------------ ------------
992,887 12,481,829 679,745 8,747,102
Less shares repurchased ...................................... (820,449) (9,680,373) (300,046) (3,881,717)
------------ ------------ ------------ ------------
Net increase ................................................. 172,438 $2,801,456 379,699 $4,865,385
============ ============ ============ ============
CLASS B
Shares sold .................................................. 1,324,877 $16,869,969 848,722 $10,845,169
Shares issued to shareholders in reinvestment of
distributions ............................................. 116,538 1,394,961 -- --
------------ ------------ ------------ ------------
1,441,415 18,264,930 848,722 10,845,169
Less shares repurchased ...................................... (714,300) (8,625,824) (407,537) (5,244,026)
------------ ------------ ------------ ------------
Net increase ................................................. 727,115 $9,639,106 441,185 $5,601,143
============ ============ ============ ============
CLASS C**
Shares sold .................................................. -- -- 9,365 $120,591
------------ ------------ ------------ ------------
Net increase ................................................. -- -- 9,365 $120,591
============ ============ ============ ============
</TABLE>
** Class C shares commenced operations on May 1, 1998
SEE NOTES TO FINANCIAL STATEMENTS.
10
<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, SIX MONTHS ENDED
-------------------------------------------------- JUNE 30, 1998
1994(1) 1995 1996 1997 (UNAUDITED)
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................... $8.50 $8.99 $10.39 $10.32 $12.27
-------- -------- -------- -------- --------
Net Investment Income(2) .................................. 0.18 0.21 0.14 0.06 0.02
Net Realized and Unrealized Gain on Investments ........... 0.48 1.60 1.17 2.52 0.31
-------- -------- -------- -------- --------
Total from Investment Operations ...................... 0.66 1.81 1.31 2.58 0.33
-------- -------- -------- -------- --------
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 $12.60
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3) ........... 7.81%(4) 20.26% 12.91% 25.25% 2.69%(4)
Total Adjusted Investment Return at Net
Asset Value(3,5) ...................................... 7.30%(4) 19.39% 12.20% 24.65% 2.41%(4)
Ratios and supplemental data
Net Assets, End of Period (000s omitted) .................. $4,420 $12,845 $15,853 $20,961 $26,307
Ratio of Expenses to Average Net Assets ................... 0.99%(7) 0.98% 0.99% 0.99% 0.99%(7)
Ratio of Adjusted Expenses to Average Net Assets(6) ....... 4.98%(7) 1.85% 1.70% 1.59% 1.55%(7)
Ratio of Net Investment Income to Average Net Assets ...... 2.10%(7) 2.04% 1.31% 0.47% 0.33%(7)
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets(6) ................................... (1.89%)(7) 1.17% 0.60% (0.13%) (0.23%)(7)
Portfolio Turnover Rate ................................... 0.3% 9% 72% 140% 28%
Fee Reduction Per Share(2) ................................ $0.34 $0.09 $0.08 $0.07 $0.04
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
distributions and total investment return of the Fund. It shows how the Fund's
net asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------------- JUNE 30, 1998
1994(1) 1995 1996 1997 (UNAUDITED)
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................ $8.50 $9.00 $10.38 $10.31 $12.21
------- ------- ------- ------- -------
Net Investment Income (Loss)(2) ............................. 0.13 0.12 0.07 (0.03) (0.02)
Net Realized and Unrealized Gain on Investments ............. 0.48 1.59 1.17 2.53 0.30
------- ------- ------- ------- -------
Total from Investment Operations ........................ 0.61 1.71 1.24 2.50 0.28
------- ------- ------- ------- -------
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 $12.49
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value(3) ............. 7.15%(4) 19.11% 12.14% 24.41% 2.29%(4)
Total Adjusted Investment Return at Net Asset
Value(3,5) .............................................. 6.64%(4) 18.24% 11.43% 23.81% 2.01%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................... $3,296 $16,994 $22,097 $35,033 $41,361
Ratio of Expenses to Average Net Assets ..................... 1.72%(7) 1.73% 1.69% 1.69% 1.69%(7)
Ratio of Adjusted Expenses to Average Net Assets(6) ......... 5.71%(7) 2.60% 2.40% 2.29% 2.25%(7)
Ratio of Net Investment Income (Loss) to Average Net
Assets .................................................... 1.53%(7) 1.21% 0.62% (0.24%) (0.37%)(7)
Ratio of Adjusted Net Investment Income (Loss) to Average
Net Assets(6) ............................................. (2.46%)(7) 0.34% (0.09%) (0.84%) (0.93%)(7)
Portfolio Turnover Rate ..................................... 0.3% 9% 72% 140% 28%
Fee Reduction Per Share(2) .................................. $0.34 $0.09 $0.08 $0.07 $0.04
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD
FROM MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS) TO
JUNE 30, 1998
(UNAUDITED)
-----------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period ......................... $13.39
-------
Net Investment Loss(2) ....................................... (0.01)
Net Realized and Unrealized Loss on Investments .............. (0.89)
-------
Total from Investment Operations ......................... (0.90)
-------
Net Asset Value, End of Period ............................... $12.49
=======
Total Investment Return at Net Asset Value(3) .............. (6.72%)(4)
Total Adjusted Investment Return at Net Asset Value(3,5) ... (6.81%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................... $117
Ratio of Expenses to Average Net Assets ...................... 1.69%(7)
Ratio of Adjusted Expenses to Average Net Assets(6) .......... 2.25%(7)
Ratio of Net Investment Loss to Average Net Assets ........... (0.31%)(7)
Ratio of Adjusted Net Investment Loss to Average Net
Assets(6) .................................................. (0.87%)(7)
Portfolio Turnover Rate ...................................... 28%
Fee Reduction Per Share(2) ................................... $0.01
(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.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
Schedule of Investments
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Special Value Fund on June 30, 1998. 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 (0.61%)
Princeton Video Image, Inc.* .................. 90,000 $416,250
----------
Aerospace (1.05%)
AAR Corp. ..................................... 24,000 709,500
----------
Agricultural Operations (2.33%)
Tejon Ranch Co. ............................... 60,500 1,580,562
----------
Banks - United States (2.51%)
First Union Corp. ............................. 29,255 1,704,104
----------
Building (3.23%)
Coachmen Industries, Inc. ..................... 37,000 966,625
Hussmann International, Inc. .................. 65,700 1,219,556
----------
2,186,181
----------
Chemicals (1.21%)
Millennium Chemicals, Inc. .................... 6,285 212,904
Sybron Chemicals, Inc.* ....................... 18,900 604,800
----------
817,704
----------
Computers (10.19%)
Advanced Digital Information Corp.* ........... 15,000 213,750
Award Software International, Inc.* ........... 20,000 217,500
BARRA, Inc.* .................................. 50,000 1,225,000
Creative Technology Ltd. (Singapore)* ......... 52,400 648,450
Data General Corp. * .......................... 86,600 1,293,587
DocuCorp International, Inc.* ................. 900 5,906
FDP Corp. ..................................... 25,000 293,750
Interplay Entertainment Corp.* ................ 32,000 184,000
OAO Technology Solutions, Inc.* ............... 900 4,500
Pathways Group, Inc. (The)* ................... 88,000 1,683,000
Quantum Corp. * ............................... 40,000 830,000
Symix Systems, Inc.* .......................... 15,000 309,375
----------
6,908,818
----------
Consumer Products Misc. (3.88%)
Gibson Greetings, Inc.* ....................... 50,900 1,272,500
Russ Berrie & Co., Inc. ....................... 54,300 1,357,500
----------
2,630,000
----------
Diversified Operations (2.03%)
Viad Corp. .................................... 49,500 1,373,625
----------
Electronics (6.02%)
Artesyn Technologies, Inc.* ................... 80,000 1,280,000
DII Group, Inc.* .............................. 26,400 450,450
Oak Industries, Inc.* ......................... 51,000 1,804,125
Sanmina Corp. ................................. 12,596 546,351
----------
4,080,926
----------
Energy (2.89%)
CalEnergy Co., Inc* ........................... 11,500 345,719
Calpine Corp.* ................................ 80,000 1,615,000
----------
1,960,719
----------
Finance (10.63%)
AMRESCO, Inc.* ................................ 10,200 297,075
ContiFinancial Corp.* ......................... 42,300 978,188
Core Cap, Inc. (r) ............................ 22,200 444,000
Eaton Vance Corp. ............................. 30,000 1,389,375
FIRSTPLUS Financial Group, Inc.* .............. 27,000 972,000
GreenPoint Financial Corp. .................... 20,000 752,500
Heller Financial, Inc.* ....................... 2,350 70,500
PIMCO Advisors Holdings L.P. .................. 30,000 1,023,750
Safeguard Scientifics, Inc.* .................. 30,600 1,275,637
----------
7,203,025
----------
Food (0.54%)
Morrison Health Care, Inc. .................... 19,333 367,327
----------
Instruments - Scientific (1.81%)
Millipore Corp. ............................... 45,000 1,226,250
----------
Insurance (12.00%)
Allmerica Financial Corp. ..................... 18,500 1,202,500
AmerUs Life Holdings, Inc. (Class A) .......... 56,481 1,828,572
CMAC Investment Corp. ......................... 24,000 1,476,000
Executive Risk, Inc. .......................... 200 14,750
HCC Insurance Holdings, Inc. .................. 30,200 664,400
Reinsurance Group of America, Inc. ............ 30,000 1,773,750
20th Century Industries ....................... 41,000 1,176,188
----------
8,136,160
----------
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Leasing Companies (1.48%)
Mitcham Industries, Inc.* ................... 85,800 $1,002,788
-----------
Leisure (1.92%)
Equity Marketing, Inc.* ..................... 23,900 504,888
Galileo International, Inc. ................. 14,100 635,381
Hilton Hotels Corp. ......................... 5,600 159,600
-----------
1,299,869
-----------
Linen Supply & Related (1.39%)
Angelica Corp. .............................. 45,000 945,000
-----------
Media (2.34%)
Central Newspapers, Inc. (Class A) .......... 5,200 362,700
Holdingmaatschappij De Telegraaf
(Netherlands) ............................. 18,000 433,580
MediaOne Group, Inc. * ...................... 18,000 790,875
-----------
1,587,155
-----------
Medical (4.57%)
DENTSPLY International, Inc. ................ 35,000 875,000
Respironics, Inc.* .......................... 60,000 933,750
Shire Pharmaceuticals Group PLC
(United Kingdom)* ......................... 183,000 1,288,503
-----------
3,097,253
-----------
Oil & Gas (4.73%)
Key Energy Group, Inc.* ..................... 25,000 328,125
Parker Drilling Co.* ........................ 74,200 524,038
Triton Energy Ltd.* ......................... 65,900 2,351,806
-----------
3,203,969
-----------
Retail (5.24%)
Darden Restaurants, Inc. .................... 21,600 342,900
Dominick's Supermarkets, Inc.* .............. 33,000 1,470,563
Ruddick Corp. ............................... 80,000 1,450,000
SED International Holdings, Inc.* ........... 35,300 286,813
-----------
3,550,276
-----------
Telecommunications (7.40%)
Cable Design Technologies* .................. 13,500 278,438
Commonwealth Telephone Enterprises,
Inc.* ..................................... 90,000 2,373,750
EIS International, Inc.* .................... 100,000 537,500
RCN Corp.* .................................. 47,000 910,625
360(degree)Communications Co.* .............. 28,600 915,200
-----------
5,015,513
-----------
Transport (2.23%)
Northwest Airlines Corp. (Class A)* ......... 2,500 96,406
Teekay Shipping Corp. ....................... 26,000 651,625
Wisconsin Central Transportation Corp.* ..... 35,000 $765,625
-----------
1,513,656
-----------
TOTAL COMMON STOCKS
(Cost $56,253,034) (92.23%) 62,516,630
------- -----------
PREFERRED STOCKS
Broker Services (3.49%)
Salomon, Inc. 7.625%, Ser FSA ............... 50,000 2,368,750
-----------
Finance (0.82%)
Core Cap, Inc. 10%, Ser A/1 (r) ............. 22,200 555,000
-----------
Tobacco (1.42%)
DECS Trust, 8.50% ........................... 70,000 962,500
-----------
TOTAL PREFERRED STOCKS
(Cost $3,565,183) (5.73%) 3,886,250
------- -----------
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.34%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities USA,
Inc. - Dated 06-30-98, due 07-01-98
(Secured by U.S. Treasury Bond,
9.125% due 05-15-18, and U.S.
Treasury Notes, 5.00% thru 8.75%
due 12-31-98 thru 04-30-03)
- Note A............................. 5.750% $2,263 2,263,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ................... 497
------------
TOTAL SHORT-TERM INVESTMENTS (3.34%) 2,263,497
------- ------------
TOTAL INVESTMENTS (101.30%) 68,666,377
------- ------------
OTHER ASSETS AND LIABILITIES, NET (1.30%) (881,310)
------- ------------
TOTAL NET ASSETS (100.00%) $67,785,067
======= ============
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
NOTES TO THE SCHEDULE OF INVESTMENTS
* Non-income producing security.
(r) The securities listed below are direct placements and are 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 these restricted securities is as
follows:
<TABLE>
<CAPTION>
MARKET VALUE
AS A PERCENTAGE MARKET VALUE
ACQUISITION ACQUISITION OF FUND'S AS OF
DATE COST NET ASSETS JUNE 30, 1998
------ ------ -------------- -------------
<S> <C> <C> <C> <C>
Core Cap, Inc. (Common) 10-31-97 $444,000 0.66% $444,000
Core Cap, Inc. (Preferred) 10-31-97 555,000 0.82 555,000
-------- ----- --------
$999,000 1.48% $999,000
======== ===== ========
</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.
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Value Fund
(UNAUDITED)
NOTE A -
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series: John Hancock Special Value Fund (the "Fund"), and John Hancock
Independence Equity Fund. 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, Class B and Class C shares. The Trustees
authorized the issuance of Class C shares effective May 1, 1998. 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,
Inc., 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,
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Value Fund
taking into consideration, among other things, the nature and type of expense
and the relative sizes of the funds.
ORGANIZATION EXPENSE Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged to the Fund's operations
ratably over a five-year period that began with the commencement of investment
operations of the Fund.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 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
rates ranging from 0.070% to 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 period ended June 30, 1998.
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 $179,601 for the period ended June 30, 1998. The Adviser reserves
the right to terminate this limitation in the future.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended June 30,
1998, net sales charges received with regard to sales of Class A shares amounted
to $103,503. Out of this amount, $16,831 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $58,326 was paid
as sales commissions to unrelated broker-dealers and $28,346 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
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Value Fund
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 related to providing distribution related services to the
Fund in connection with the sale of Class B shares. For the period ended June
30, 1998, contingent deferred sales charges paid to JH Funds amounted to
$34,191.
Class C shares which are redeemed within one year of purchase will be subject
to a CDSC at a rate of 1.00% 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 related to providing distribution related services to the
Fund in connection with the sale of Class C shares. For the period ended June
30, 1998, there were no contingent deferred sales charges.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A, Class B and Class C 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 and Class C
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 period 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 June 30, 1998, 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 period
ended June 30, 1998, aggregated $32,755,604 and $17,154,432, respectively. There
were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30, 1998.
The cost of investments owned at June 30, 1998 (including the joint
repurchase agreement), for federal income tax purposes was $62,120,957. Gross
unrealized appreciation and depreciation of investments aggregated $11,299,334
and $4,754,411, respectively, resulting in net unrealized appreciation of
$6,544,923.
19
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[LOGO] John Hancock Funds --------------
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1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
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This report is for the information of shareholders of the John Hancock
Special Value Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 370SA 6/98
8/98
