ANNUAL Report
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[GRAPHIC OMITTED]
Independence Equity Fund
DECEMBER 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
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TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
SUB-INVESTMENT ADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
160 Federal Street Boston,
Massachusetts 02110
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=================================CHAIRMANS MESSAGE==============================
DEAR FELLOW SHAREHOLDERS:
Nineteen ninety-eight was a year that gave even veteran financial
market investors pause - and not a little heartburn. The stock market produced a
record fourth straight year of double-digit returns, but volatility was
breathtaking along the way. With the exception of the U.S. Treasury market, even
bonds - considered a safer alternative to stocks - went on a roller coaster
ride.
One lesson came through loud and clear this year: sticking out the
tough times paid off. After reaching new highs in mid-July, stocks plunged in
August in one of their worst sell-offs in years. The average U.S.
diversified-equity mutual fund fell 16.8% in the month of August alone. For many
mutual fund investors, it was the largest one-month loss they had ever
experienced, since the average equity fund had only had three such double-digit
monthly losses in the previous 20 years, most recently in October 1987. This
year, in a dramatic reversal of fortune, the market staged a stunning rebound in
the fourth quarter. The average U.S. diversified-equity fund made up all its
August lost ground and then some, returning 18.8% between October and December.
The result for the year: an average 14.52% return, as calculated by Lipper
Analytical Services, Inc.
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[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
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Given the dramatic swings, investors who tried to time the market's ups
and downs encountered a sharp whipsaw. We are very encouraged to report that an
overwhelming majority of mutual fund investors sat tight during this summer of
discontent; some even used the market's drop to pick up bargains. It was a clear
sign that long-term investors are willing to accept the reality of shorter-term
volatility.
As we begin 1999, volatility remains on many investors' minds. But at
this time of year, many investors' thoughts also turn to more taxing matters. In
our view, now is a perfect time to focus on how much of your hard-earned money
you are able to keep. Part of a good tax-planning strategy should involve a
review of your portfolio to ensure that you are taking advantage of all
available ways to minimize and defer your tax payments - in an effort to
maximize investment returns.
We encourage you to work with your investment professional to consider
the various options. These include focusing on tax-exempt funds, contributing
the maximum to retirement plans, establishing or adding to IRAs and funding a
variable annuity. After all, while it's every American's responsibility to pay
taxes, there's no reason to pay more than your fair share.
Sincerely,
/s/Edward J. Boudreau, Jr.
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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
Large growth stocks lead the market in a
volatile year of double-digit returns
Nineteen ninety-eight saw the stock market continue its recent pattern of upward
progress with increased volatility. In the beginning of the year, the
combination of strong growth in the U.S. economy, low inflation and low interest
rates helped calm the fears of investors who worried that the Asian financial
crisis might spread to this country. Although the economy did slow from its
torrid first-quarter pace of over 5%, growth remained robust enough to help both
the Dow Jones Industrial Average and the Standard and Poor's 500 Stock Index
notch a series of new all-time highs in the first half of the year.
In the third quarter, however, the market's advance was thwarted by a
confluence of negative events. The Asian crisis manifested itself in the form of
downwardly revised earnings estimates for most companies with Asian exposure,
while the overall pace of economic growth in the U.S. continued to slow. In
addition, Russia's abrupt devaluation of its currency and default on its foreign
debt took investors by surprise, causing distortions in the debt markets that
spilled over into the stock market. And finally, President Clinton's problems
contributed to an air of uncertainty that undermined the financial markets. The
result was a nearly 20% plunge in the S&P 500, with comparable slides in the
other averages.
In the fourth quarter, the stock market staged a strong comeback, aided
by solid economic fundamentals that included three cuts in short-term interest
rates by the Federal Reserve Board. For the calendar year 1998, the broadly
based S&P 500 posted a return of 28.58%, including reinvested dividends.
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock
Independence Equity Fund. Caption below reads "Independence Equity Fund
management team members (l-r): "Paul McManus, Jane Shigley, Jeff Saef, David
Canavan and Coreen Kraysler."]
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"Technology and telecommunications were two of the stronger sectors..."
3
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John Hancock Funds - Independence Equity Fund
"The Fund ably kept pace with the Index and well outpaced its peers."
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[Table at top left hand column entitled "Top Five Common Stock Holdings." The
first listing is General Electric 3.5%, the second is Microsoft 3.4%, the third
MCI WorldCom 2.9%, the fourth Home Depot 2.3% and the fifth United Technologies
2.2%. A note below the table reads "As a percentage of net assets on December
31, 1998."]
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Performance and strategy review
The Fund ably kept pace with the Index and well outpaced its peers. For the year
ended December 31, 1998, John Hancock Independence Equity Fund's Class A and
Class B shares recorded gains of 28.84% and 27.90%, respectively, at net asset
value. Class C shares, which were introduced on May 1, 1998, returned 9.46% from
inception through December 31, 1998. In comparison, the average growth and
income fund returned 15.61% for the year, according to Lipper Analytical
Services, Inc.1 Keep in mind that your net asset value return will differ from
the Fund's performance if you were not invested in the Fund for the entire
period and did not reinvest all distributions. Longer-term performance
information can be found on pages six and seven.
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[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Dell Computer
followed by an up arrow with the phrase "PC demand rebounds; strong online
sales." The second listing is MCI WorldCom followed by an up arrow with the
phrase "Leading-edge data transmission network." The third listing is Baker
Hughes followed by a down arrow with the phrase "Weak oil prices; lower earnings
estimates." A note below the table reads "See `Schedule of Investments.'
Investment holdings are subject to change."]
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The Fund's strategy of buying reasonably valued stocks of companies
with improving earnings proved its mettle during the most recent period of
volatility. Early in 1998, the Fund's management team took a close look at all
of the Fund's multinational holdings and revalued most of them based on the
reduced earnings we foresaw for those companies over the near term due to weak
Asian demand. This analysis led us to underweight multinational companies, which
not only boosted performance during the advancing markets of the first, second
and fourth quarters, but also helped to cushion the Fund during the
third-quarter downdraft.
Technology, telecommunications, health care
Technology and telecommunications were two of the stronger sectors for the Fund
in 1998. Healthy demand for personal computers (PCs) led to solid performances
from the stocks of PC makers Dell Computer and Compaq Computer - two of the
biggest U.S. players in personal computer manufacturing. Semiconductor companies
like Intel also benefited from strong PC demand. Intel maintained its dominant
market share in microprocessors for the high-end PC market, while making
substantial inroads into the lower end of the market by acquiring a position in
rival Micron Technology.
In telecommunications, MCI WorldCom maintained its pattern of strong
sales and earnings growth due in large part to a worldwide network allowing
state-of-the-art data transmission. Data transmission, not voice transmission,
is the fastest-growing line of business for telecommunications network
providers. Lucent Technologies, another stock that made a positive contribution
to the Fund's performance, benefited from continued growth in spending on
telecommunications equipment by the regional Bell operating companies
domestically, and by their counterparts abroad.
4
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John Hancock Funds - Independence Equity Fund
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[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended December 31, 1998." The chart
is scaled in increments of 10% with 0% at the bottom and 30% at the top. The
first bar represents the 28.84% Total return for John Hancock Independence
Equity Fund Class A. The second bar represents the 27.90% total return for John
Hancock Independence Equity Fund Class B. The third bar represents the 9.46%*
total return for John Hancock Independence Equity Fund Class C. The fourth bar
represents the 15.61% total return for 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. See the following two
pages for historical performance information. *From inception May 1, 1998 to
December 31, 1998.]
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A final sector that helped the Fund was health care, particularly drug
companies like Pfizer. The strong fundamentals that have benefited this group in
the past continued to play an important role-including healthy pipelines of new
products, favorable demographics and the ability to control pricing. Another
strong performer was Sepracor, a company that manufactures molecules that, when
attached to existing drugs, reduce their side effects.
Apparel and energy service lag
On the negative side of the ledger, apparel companies suffered because of
increased competition from Asia, as the region's depreciated currencies made it
possible for Asian companies to sell goods at cheaper prices in the U.S. Another
negative influence was excess inventory of some clothing lines that did not sell
as well as anticipated. These problems affected such holdings as Tommy Hilfiger
and The Warnaco Group, a fabric maker and licensee of certain Calvin Klein
products.
In the energy sector, the Fund's holdings were concentrated in the
energy service industry. Energy service stocks were hurt primarily by weak oil
prices. However, two announced mergers of large integrated oil companies -
pairing British Petroleum with Amoco and Mobil with Exxon - also raised the
possibility of overall lower capital spending for drilling services from
companies like Baker Hughes and Rowan Drilling. This led some analysts to cut
back their earnings estimates for stocks in the group and caused us to sell our
stakes in Baker Hughes and Rowan Drilling.
Outlook
We look for the economy to continue to slow further, although not enough to
bring on a recession. Our 1999 forecast calls for approximately 2% to 2.5%
growth in gross domestic product, with inflation and interest rates remaining
low. The sectors that have done well in the past few years should, in our
opinion, continue to lead the stock market modestly higher-technology,
telecommunications, health care and financial services. Most importantly,
however, we will continue to apply our strategy of buying stocks representing
good value, where the underlying companies are showing improving earnings
trends. Our dual focus on both value and growth has proven its worth in a
variety of market environments, and we look for that trend to continue as 1999
unfolds.
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This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
"Our dual focus on both value and growth has proven its worth..."
5
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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 the 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.
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CLASS A
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For the period ended December 31, 1998
SINCE
One Five INCEPTION
Year Years (6/10/91)
------- ------- --------
Cumulative Total Returns 22.40% 157.36% 253.90%
Average Annual Total Returns(1) 22.40% 20.81% 18.20%
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CLASS B
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For the period ended December 31, 1998
SINCE
One INCEPTION
Year (9/7/95)
------- -------
Cumulative Total Returns 22.90% 110.66%
Average Annual Total Returns(1) 22.90% 25.20%
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CLASS C
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For the period ended December 31, 1998
SINCE
INCEPTION
(5/1/98)
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Cumulative Total Return 8.46%
Average Annual Total Return(2) 8.46%
Notes to Performance
(1) From September 1, 1995 through February 28, 1997, the Adviser
limited the Fund's expenses to 1.30% and 2.00% for Class A and Class B
shares, respectively, of the Fund's average daily net asset value.
Prior to September 1, 1995, and the creation of Class B shares, the
limitation of expenses was 0.70% of the Fund's average daily net asset
value. Without the limitation of expenses, the average annualized
returns for the five-year period and since inception for Class A shares
would have been 20.18% and 17.49%, respectively. Without the limitation
of expenses the average annualized return since inception for Class B
shares would have been 24.86%.
(2) Not annualized.
6
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John Hancock Funds - Independence Equity Fund
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Line chart with the heading John Hancock 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
Standard & Poor's 500 Stock Index and is equal to $37,942 as of December 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock Independence Equity Fund, before sales
charge, on June 10, 1991, and is equal to $37,266 as of December 31, 1998. The
third line represents the same hypothetical investment made in the John Hancock
Independence Equity Fund, after sales charge, and is equal to $35,390 as of
December 31, 1998.
Line chart with the heading John Hancock 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
Standard & Poor's 500 Stock Index and is equal to $23,320 as of December 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock Independence Equity Fund on September 7,
1995, before sales charge, and is equal to $21,366 as of December 31, 1998. The
third line represents the same hypothetical investment made in the John Hancock
Independence Equity Fund, after sales charge, and is equal to $21,066 as of
December 31, 1998.
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7
<PAGE>
================================FINANCIAL STATEMENTS============================
John Hancock Funds - Independence Equity Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on December 31, 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
December 31, 1998
- -----------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $434,975,899) ......................... $547,425,741
Joint repurchase agreement (cost - $13,673,000) ............. 13,673,000
Corporate savings account ................................... 4,741
-----------
561,103,482
Receivable for shares sold ................................... 1,281,355
Dividends and interest receivable ............................ 616,134
Other assets ................................................. 4,576
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Total Assets .......................... 563,005,547
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Liabilities:
Payable for investments purchased ............................ 7,430,043
Payable for shares repurchased ............................... 119,551
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ..................................... 435,865
Accounts payable and accrued expenses ........................ 112,295
-----------
Total Liabilities ..................... 8,097,754
-------------------------------------------------------
Net Assets:
Capital paid-in .............................................. 443,145,503
Accumulated net realized loss on investments ................. (685,073)
Net unrealized appreciation of investments ................... 112,450,362
Accumulated net investment loss .............................. (2,999)
-----------
Net Assets ............................ $554,907,793
=======================================================
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 -- $200,962,277/6,667,612............................. $30.14
===============================================================================
Class B - $347,044,854/11,664,006 ............................ $29.75
===============================================================================
Class C* - $6,900,662/231,933 ................................ $29.75
===============================================================================
Maximum Offering Price Per Share**
Class A - ($30.14 x 105.26%) ................................. $31.73
===============================================================================
* Class C shares commenced operations on May 1, 1998.
** On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended December 31, 1998
- -----------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $24,182) $5,203,661
Interest ..................................................... 494,814
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5,698,475
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Expenses:
Investment management fee - Note B ........................... 2,732,174
Distribution and service fee - Note B
Class A ..................................................... 422,431
Class B ..................................................... 2,212,195
Class C ..................................................... 22,601
Transfer agent fee - Note B .................................. 883,032
Registration and filing fees ................................. 144,096
Custodian fee ................................................ 80,512
Financial services fee - Note B .............................. 57,322
Auditing fee ................................................. 20,500
Printing ..................................................... 31,897
Trustees' fees ............................................... 14,746
Miscellaneous ................................................ 9,149
Legal fees ................................................... 3,330
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Total Expenses ........................... 6,633,985
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Net Investment Loss ...................... (935,510)
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Realized and Unrealized Gain on Investments:
Net realized gain on investments sold......................... 13,181,577
Change in net unrealized appreciation/depreciation
of investments............................................... 80,681,551
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Net Realized and Unrealized
Gain on Investments....................... 93,863,128
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Net Increase in Net Assets
Resulting from Operations................. $92,927,618
==========================================================
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>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998
------------ -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss)......................................... $53,056 ($935,510)
Net realized gain on investments sold................................ 11,206,508 13,181,577
Change in net unrealized appreciation/depreciation of investments.... 25,810,786 80,681,551
------------ -----------
Net Increase in Net Assets Resulting from Operations............... 37,070,350 92,927,618
------------ -----------
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 $0.6487 per share, respectively)............ (4,040,583) (4,150,187)
Class B - ($1.0977 and $0.6487 per share, respectively)............ (5,860,104) (7,112,432)
Class C** - (none and $0.6487 per share, respectively)............. - (133,363)
------------ -----------
Total Distributions to Shareholders................................ (10,041,677) (11,395,982)
------------ -----------
From Fund Share Transactions - Net:*.................................. 126,639,255 246,233,654
------------ -----------
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 accumulated net investment
loss of $2,999, respectively)........................................ $227,142,503 $554,907,793
============ ============
</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)
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* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1998
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 2,917,766 $65,492,230 4,979,980 $134,932,213
Shares issued to shareholders in
reinvestment of distributions................................. 159,427 3,773,395 135,084 3,819,908
--------- ----------- --------- ------------
3,077,193 69,265,625 5,115,064 138,752,121
Less shares repurchased ...................................... (821,416) (18,986,208) (2,300,458) (61,680,952)
--------- ----------- --------- ------------
Net increase ................................................. 2,255,777 $50,279,417 2,814,606 $77,071,169
========= =========== ========= ============
CLASS B
Shares sold .................................................. 4,007,681 $87,926,902 7,856,988 $211,689,398
Shares issued to shareholders in
reinvestment of distributions................................. 219,752 5,188,064 216,410 6,044,436
--------- ----------- --------- ------------
4,227,433 93,114,966 8,073,398 217,733,834
Less shares repurchased ...................................... (743,753) (16,755,128) (2,080,210) (54,856,608)
--------- ----------- --------- ------------
Net increase ................................................. 3,483,680 $76,359,838 5,993,188 $162,877,226
========= =========== ========= ============
CLASS C**
Shares sold .................................................. -- -- 246,963 $6,687,807
Shares issued to shareholders in
reinvestment of distributions................................. -- -- 2,753 76,896
--------- ----------- --------- ------------
-- -- 249,716 6,764,703
Less shares repurchased ...................................... -- -- (17,783) (479,444)
--------- ----------- --------- ------------
Net increase ................................................. -- -- 231,933 $6,285,259
========= =========== ========= ============
</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, PERIOD FROM YEAR ENDED DECEMBER 31,
----------------------- JUNE 1, 1996 -----------------------
TO DECEMBER 31,
1994 1995 1996 1996(8) 1997 1998
---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................. $12.16 $12.68 $14.41 $17.98 $19.42 $23.93
------ ------ ------ ------ ------ ------
Net Investment Income(2) ......................................... 0.28 0.32 0.20 0.13 0.10 0.05
Net Realized and Unrealized Gain on Investments .................. 0.52 1.77 3.88 1.72 5.55 6.81
------ ------ ------ ------ ------ ------
Total from Investment Operations ............................... 0.80 2.09 4.08 1.85 5.65 6.86
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment Income ............................. (0.23) (0.28) (0.22) (0.14) (0.04) --
Distributions from Net Realized Gain on
Investments Sold ............................................... (0.05) (0.08) (0.29) (0.27) (1.10) (0.65)
------ ------ ------ ------ ------ ------
Total Distributions ............................................ (0.28) (0.36) (0.51) (0.41) (1.14) (0.65)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period .................................... $12.68 $14.41 $17.98 $19.42 $23.93 $30.14
====== ====== ====== ====== ====== ======
Total Investment Return at Net Asset Value(3)................... 6.60% 16.98% 29.12% 10.33%(6) 29.19% 28.84%
Total Adjusted Investment Return at Net Asset Value(3,4) ....... 6.15% 16.94% 28.47% 10.08%(6) 29.17% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)......................... $66,612 $101,418 $14,878 $31,013 $92,204 $200,962
Ratio of Expenses to Average Net Assets........................... 0.70% 0.70% 0.94% 1.30%(7) 1.42% 1.39%
Ratio of Adjusted Expenses to Average Net Assets(5)............. 1.15% 0.74% 1.59% 1.73%(7) 1.44% --
Ratio of Net Investment Income to Average Net Assets............. 2.20% 2.43% 1.55% 1.16%(7) 0.45% 0.17%
Ratio of Adjusted Net Investment Income to Average Net Assets(5) 1.75% 2.39% 0.90% 0.73%(7) 0.43% --
Portfolio Turnover Rate........................................... 43% 71% 157% 35% 62% 50%
Fee Reduction Per Share........................................... $0.06(2) $0.005(2) $0.08(2) $0.05(2) -- (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)
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<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1996 TO YEAR ENDED DECEMBER 31,
PERIOD ENDED DECEMBER 31, -----------------------
MAY 31, 1996(1) 1996(8) 1997 1998
--------------- ---------------- ------- --------
<S> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................................... $15.25 $17.96 $19.41 $23.80
-------- --------- ---------- ---------
Net Investment Income (Loss)(2) ............................................ 0.09 0.05 (0.06) (0.14)
Net Realized and Unrealized Gain on Investments ............................ 2.71 1.72 5.56 6.74
-------- --------- ---------- ---------
Total from Investment Operations ....................................... 2.80 1.77 5.50 6.60
-------- --------- ---------- ---------
Less Distributions:
Dividends from Net Investment Income ..................................... (0.09) (0.05) (0.01) --
Distributions from Net Realized Gain on Investments Sold ................. -- (0.27) (1.10) (0.65)
-------- --------- ---------- ---------
Total Distributions .................................................... (0.09) (0.32) (1.11) (0.65)
-------- --------- ---------- ---------
Net Asset Value, End of Period .............................................. $17.96 $19.41 $23.80 $29.75
======== ========= ========== ==========
Total Investment Return at Net Asset Value(3) ............................... 18.46%(6) 9.83%(6) 28.39% 27.90%
Total Adjusted Investment Return at Net Asset Value(3,4) .................... 17.59%(6) 9.58%(6) 28.37% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................................... $15,125 $42,461 $134,939 $347,045
Ratio of Expenses to Average Net Assets .................................... 2.00%(7) 2.00%(7) 2.12% 2.09%
Ratio of Adjusted Expenses to Average Net Assets(5) ........................ 3.21%(7) 2.43%(7) 2.14% --
Ratio of Net Investment Income (Loss) to Average Net Assets ................ 0.78%(7) 0.45%(7) (0.25%) (0.53%)
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets(5)..... (0.43%)(7) 0.02%(7) (0.27%) --
Portfolio Turnover Rate .................................................... 157% 35% 62% 50%
Fee Reduction Per Share(2) ................................................. $0.13 $0.05 -- (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 DECEMBER 31, 1998
--------------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period............................. $27.81
----------
Net Investment Loss(2)........................................... (0.09)
Net Realized and Unrealized Gain on Investments.................. 2.68
----------
Total from Investment Operations............................. 2.59
----------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold...... (0.65)
----------
Net Asset Value, End of Period................................... $29.75
==========
Total Investment Return at Net Asset Value(3).................... 9.46%(6)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)......................... $6,901
Ratio of Expenses to Average Net Assets.......................... 2.12%(7)
Ratio of Net Investment Loss to Average Net Assets............... (0.53%)(7)
Portfolio Turnover Rate.......................................... 50%
(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
December 31, 1998
The Schedule of Investments is a complete list of all securities owned by the
Independence Equity Fund on December 31, 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 (2.76%)
Lockheed Martin Corp. ................ 37,800 $3,203,550
United Technologies Corp. ............ 111,300 12,103,875
----------
15,307,425
----------
Automobile/Trucks (2.01%)
Ford Motor Co. ....................... 133,800 7,852,387
Lear Corp.* .......................... 33,700 1,297,450
Meritor Automotive, Inc. ............. 60,800 1,288,200
Ryder System, Inc. ................... 27,000 702,000
----------
11,140,037
----------
Banks - United States (6.25%)
Bank One Corp. ....................... 24,100 1,230,606
BankAmerica Corp. .................... 149,080 8,963,435
Comerica, Inc. ....................... 71,300 4,861,769
First Union Corp. .................... 105,000 6,385,313
State Street Corp. ................... 16,700 1,161,694
Wells Fargo Co. ...................... 301,900 12,057,131
----------
34,659,948
----------
Beverages (1.37%)
PepsiCo, Inc. ........................ 185,200 7,581,625
----------
Building (0.28%)
Masco Corp. .......................... 55,000 1,581,250
----------
Chemicals (1.45%)
Air Products & Chemicals, Inc......... 140,200 5,608,000
Solutia, Inc. ........................ 110,000 2,461,250
----------
8,069,250
----------
Computers (11.04%)
Cadence Design Systems, Inc.* ........ 133,800 3,980,550
Cisco Systems, Inc.* ................. 60,750 5,638,359
Compaq Computer Corp. ................ 244,400 10,249,525
Computer Associates International, Inc. 89,500 3,814,937
Dell Computer Corp.* ................. 83,600 6,118,475
First Data Corp. ..................... 82,600 2,617,387
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Computers (continued)
International Business Machines Corp. 47,900 $8,849,525
Microsoft Corp.* ..................... 135,400 18,778,287
Sun Microsystems, Inc.* .............. 14,300 1,224,437
----------
61,271,482
----------
Cosmetics & Personal Care (1.25%)
Avon Products, Inc. .................. 94,900 4,199,325
Dial Corp. (The) ..................... 95,100 2,746,012
----------
6,945,337
----------
Diversified Operations (2.27%)
Textron, Inc. ........................ 35,800 2,718,562
Tyco International, Ltd. ............. 130,900 9,874,769
----------
12,593,331
----------
Electronics (6.23%)
General Electric Co. ................. 190,400 19,432,700
Honeywell, Inc. ...................... 80,800 6,085,250
Intel Corp. .......................... 76,500 9,070,031
----------
34,587,981
----------
Finance (3.04%)
Associates First Capital Corp. (Class A) 44,250 1,875,094
Citigroup, Inc. ...................... 215,000 10,642,500
MBNA Corp. ........................... 47,200 1,177,050
Morgan Stanley, Dean Witter, Discover
& Co. ............................... 44,500 3,159,500
----------
16,854,144
----------
Food (1.66%)
Bestfoods .......................... 58,100 3,093,825
Heinz (H.J.) Co. ................... 74,400 4,212,900
Quaker Oats Co. ..................... 32,000 1,904,000
----------
9,210,725
----------
Insurance (5.86%)
Allstate Corp. (The) ................ 121,200 4,681,350
American International Group, Inc. .. 45,600 4,406,100
CIGNA Corp. ......................... 61,300 4,739,256
Equitable Cos., Inc. (The) .......... 16,900 978,087
Hartford Financial Services Group, Inc.
(The)............................... 83,400 4,576,575
Hartford Life, Inc. (Class A)........ 54,800 3,192,100
Marsh & McLennan Cos., Inc. ......... 142,150 8,306,891
Travelers Property Casualty Corp. (Class A) 53,600 1,661,600
----------
32,541,959
----------
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
===========================FINANCIAL STATEMENTS=================================
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Machinery (0.87%)
Ingersoll-Rand Co. ................. 102,900 $4,829,869
----------
Media (1.17%)
Viacom, Inc. (Class B)* ........... 87,400 6,467,600
----------
Medical (13.86%)
Abbott Laboratories ................ 61,400 3,008,600
Amgen, Inc.* ....................... 83,800 8,762,337
Becton, Dickinson & Co. ............ 18,800 802,525
Bristol-Myers Squibb Co. ........... 49,100 6,570,194
Cardinal Health, Inc. .............. 127,750 9,693,031
Glaxo Wellcome PLC, American Depositary
Receipts (ADR) (United Kingdom)... 16,600 1,153,700
Guidant Corp. ...................... 45,400 5,005,350
Health Management Associates, Inc.
(Class A)* ........................ 137,300 2,969,112
HEALTHSOUTH Corp.* ................. 389,300 6,009,819
Johnson & Johnson .................. 20,000 1,677,500
Lincare Holdings, Inc.* ............ 44,400 1,800,975
McKesson HBOC, Inc. ................ 53,200 4,206,125
Merck & Co., Inc. .................. 33,600 4,962,300
Mylan Laboratories, Inc. ........... 111,700 3,518,550
Pfizer, Inc. ....................... 38,800 4,866,975
Schering-Plough Corp. .............. 53,800 2,972,450
Sepracor, Inc. * ................... 14,300 1,260,187
Universal Health Services, Inc. (Class B)* 27,100 1,405,812
Warner-Lambert Co. ................ 31,600 2,375,925
Wellpoint Health Networks, Inc.* ... 44,900 3,906,300
----------
76,927,767
----------
Mortgage Banking (1.46%)
Fannie Mae ......................... 109,500 8,103,000
----------
Office (1.17%)
Avery Dennison Corp. ............... 27,000 1,216,687
Pitney Bowes, Inc. ................ 80,300 5,304,819
----------
6,521,506
----------
Oil & Gas (2.44%)
British Petroleum Co. PLC (ADR)
(United Kingdom)................... 30,200 2,869,000
Exxon Corp. ........................ 25,500 1,864,688
Halliburton Co. ................... 71,600 2,121,150
Phillips Petroleum Co. ............. 20,300 865,288
Schlumberger, Ltd. ................. 45,200 2,084,850
Sunoco, Inc. ....................... 41,700 1,503,806
USX - Marathon Group ............... 73,700 2,220,213
----------
13,528,995
----------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Paper & Paper Products (0.82%)
Fort James Corp. ................... 42,200 $1,688,000
Smurfit-Stone Container Corp.* ..... 182,800 2,890,525
----------
4,578,525
----------
Retail (6.12%)
Albertson's, Inc. .................. 25,100 1,598,556
Home Depot, Inc. (The).............. 204,000 12,482,250
Lowe's Cos., Inc. .................. 190,900 9,771,694
Tandy Corp. ........................ 52,100 2,145,869
TJX Cos., Inc. .................... 62,300 1,806,700
Wal-Mart Stores, Inc. .............. 75,400 6,140,388
----------
33,945,457
----------
Soap & Cleaning Preparations (1.70%)
Colgate-Palmolive Co. .............. 40,200 3,733,575
Procter & Gamble Co. (The).......... 62,200 5,679,638
----------
9,413,213
----------
Telecommunications (8.48%)
AT&T Corp. ......................... 113,000 8,503,250
Bell Atlantic Corp. ................ 53,800 2,851,400
Lucent Technologies, Inc. .......... 82,600 9,086,000
MCI WorldCom, Inc.* ................ 226,600 16,258,550
Northern Telecom, Ltd. (Canada)..... 120,600 6,045,075
Tellabs, Inc.* ..................... 50,500 3,462,406
U S WEST, Inc. ..................... 13,100 846,588
----------
47,053,269
----------
Textile (0.40%)
Tommy Hilfiger Corp.*............... 20,400 1,224,000
Warnaco Group, Inc. (The) (Class A). 40,300 1,017,575
----------
2,241,575
----------
Tobacco (1.75%)
Philip Morris Cos., Inc. ........... 127,800 6,837,300
UST, Inc. .......................... 82,400 2,873,700
----------
9,711,000
----------
Transport (2.34%)
AMR Corp.* ......................... 28,400 1,686,250
Burlington Northern Santa Fe Corp. . 119,400 4,029,750
Delta Air Lines, Inc. .............. 36,200 1,882,400
Kansas City Southern Industries, Inc. 45,600 2,242,950
Southwest Airlines Co. ............. 30,800 691,075
UAL Corp.* ........................ 26,100 1,557,844
US Airways Group, Inc.* ............ 17,100 889,200
----------
12,979,469
----------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
===========================FINANCIAL STATEMENTS=================================
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (9.96%)
Ameritech Corp. .................... 119,700 $7,585,988
Baltimore Gas & Electric Co. ....... 51,900 1,602,413
BellSouth Corp. .................... 141,000 7,032,375
Consolidated Natural Gas Co. ....... 107,400 5,799,600
El Paso Energy Corp. ............... 45,000 1,566,563
Florida Progress Corp. ............. 240,700 10,786,369
FPL Group, Inc. .................... 60,400 3,722,150
GTE Corp. ......................... 114,100 7,416,500
Houston Industries, Inc. ........... 60,400 1,940,350
Montana Power Co. ................. 18,500 1,046,406
New Century Energies, Inc. ......... 50,200 2,447,250
PECO Energy Co. ................... 103,300 4,299,863
----------
55,245,827
----------
Waste Disposal Service & Equipment (0.64%)
Waste Management, Inc. ............. 75,800 3,534,175
----------
TOTAL COMMON STOCKS
(Cost $434,975,899) (98.65%) 547,425,741
--------------- -------------
INTEREST PAR VALUE
RATE (000s OMITTED)
------------ --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.47%)
Investment in a joint repurchase
agreement transaction with
SBC Warburg, Inc. - Dated 12-31-98,
due 01-04-99 (Secured by U.S.
Treasury Bonds, 6.25% thru 9.125%
due 05-15-18 thru 08-15-23)
- Note A.................... 4.75% $13,673 13,673,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.00%............... 4,741
----------
TOTAL SHORT-TERM INVESTMENTS (2.47%) 13,677,741
--------- -------------
TOTAL INVESTMENTS (101.12%) 561,103,482
--------- -------------
OTHER ASSETS AND LIABILITIES, NET (1.12%) (6,195,689)
--------- -------------
TOTAL NET ASSETS (100.00%) $554,907,793
========= =============
* Non-income producing security.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Fund - Independence Equity Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of one portfolio: John Hancock Independence Equity Fund (the "Fund"). 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 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
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 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.
17
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Fund - Independence Equity Fund
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 permits 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 year ended December 31, 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 year ended
December 31, 1998, JH Funds received net sales of $1,365,233 with regard to
sales of Class A shares. Out of this amount, $189,710 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$741,535 was paid as sales commissions to unrelated broker-dealers and $433,988
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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 related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended December 31,1998,
the contingent deferred sales charges received by JH Funds amounted to $375,543.
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 year
ended December 31,1998, the contingent deferred sales charges received by JH
Funds amounted to $1,446.
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 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 and service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances.
18
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Fund - Independence Equity Fund
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 year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are trustees and officers of the Adviser and its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At December 31, 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 year
ended December 31, 1998, aggregated $405,894,694 and $178,122,451, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended December 31, 1998.
The cost of investments owned at December 31,1998 (excluding the
corporate savings account) for federal income tax purposes was $449,264,107.
Gross unrealized appreciation and depreciation of investments aggregated
$124,618,691 and $12,784,057, respectively, resulting in net unrealized
appreciation of $111,834,634.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended December 31, 1998, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of
$3,521,870, a decrease in accumulated net investment loss of $934,730 and an
increase in capital paid-in of $2,587,140. This represents the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of December 31, 1998. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to the treatment of
net operating losses in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting principles,
and the Fund's use of the tax accounting practice known as equalization. The
calculation of net investment income per share in the financial highlights
excludes these adjustments.
19
<PAGE>
================================================================================
John Hancock Funds - Independence Equity Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Independence Equity Fund
and the Trustees of John Hancock Capital Series
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Independence Equity
Fund (the "Fund") (a series of John Hancock Capital Series) at December 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1998.
The Fund designated a distribution to shareholders of $14,637,212 as a
long-term capital gain dividend. These amounts were reported on the 1998 U.S.
Treasury Department Form 1099-DIV.
With respect to the ordinary dividends paid by the Fund for the fiscal
year ended December 31, 1998, 38.08% of the dividends qualify for the corporate
dividends received deduction.
20
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John Hancock Funds - Independence Equity Fund
21
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John Hancock Funds - Independence Equity Fund
22
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John Hancock Funds - Independence Equity Fund
23
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================================================================================
[LOGO] JOHN HANCOCK FUNDS -----------------
A Global Investment Management Firm Bulk Rate
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101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
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
Independence Equity Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 2500A 12/98
2/99
