John Hancock Funds
SPECIAL
VALUE FUND
ANNUAL REPORT
OCTOBER 31, 1998
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
Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term
is a roller coaster. That is because, while long-term history suggests
the market's general direction is up, its swings over the short term can
be dramatic and, at times, violent. This year, the market has given us
several stark examples of this phenomenon. From the new highs set in
mid-July, the major indices plunged by 19% through the end of August. It
was the worst such fall since 1990. For the first time in a number of
years, some bonds and bond mutual funds outperformed stocks and stock
mutual funds. Seeking safety in a world of global economic
uncertainties, investors everywhere converged on U.S. Treasury bonds and
pushed their yields to historic lows.
Then in early October, the market staged a remarkable rebound that was
sparked by the Federal Reserve's two cuts in interest rates. The major
indices regained all their previously lost ground and the S&P 500 Stock
Index ended October actually up by 15% year-to-date.
Investors have been understandably shaken by these dramatic twists and
turns, but we are pleased to report that most individual investors did
not panic, and we hope that means they've taken our words to heart. Over
the long term, markets do not move up or down in a straight line. That's
why after watching the market charge ahead almost uninterrupted for so
many years, we have been striking a more cautionary stance in this space
over the last several months.
Analysts are still pondering the implications of global turmoil and the
potential for slower U.S. economic and corporate earnings growth. While
we don't make a practice of opining on what the market will do next, we
continue to believe 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.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain
times, it becomes even harder to remember to "stay the course" and stick
to your long-term investment plan. But this remains the essential tenet
of successful investing. Now could also be a good time to review your
asset allocation with your investment professional, keeping in mind that
the last six months' divergence in performance of stocks and high-
quality bonds is a perfect example of why all your eggs shouldn't be in
one basket.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1-1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.
BY TIMOTHY E. KEEFE, CFA, PORTFOLIO MANAGER
John Hancock
Special Value Fund
Small-company stock debacle ends, comeback begins
A 3" x 2" photo at bottom right side of page of John Hancock Special
Value Fund's management team. Caption below reads "Fund management team
members (l-r): "Tim Keefe, Tim Quinlisk and Lisa Welch."
Shareholders recently voted to move John Hancock Special Value Fund
from the growth and income prospectus to the growth prospectus. This
decision shifted the Fund's fiscal year end from December 31 to October
31. What follows is a discussion of the Fund's performance and strategy
during the 12 months ended October 31, 1998.
Once again, small-company stocks have taken investors on a wild ride. A
year ago, Asia's financial troubles undermined investor confidence in
emerging markets worldwide. As fears grew that these problems would
eventually hurt U.S. stocks, investors began seeking safety. Many left
small-company stocks for large-company names with predictable earnings
growth. Volatility increased throughout the spring and into the summer,
as corporate earnings growth slowed and Asia's problems dragged on. With
news during the summer of Russia's financial woes, the stock market
began to head south. From mid-July through early October, the Standard &
Poor's 500 Stock Index lost 22% of its value, while the Russell 2000
Index -- a benchmark for small-company stocks -- tumbled 34%. The
Federal Reserve's decision to cut short-term interest rates in late
September and again in mid-October finally reversed the market's
downward trend. As investors returned to small-company stocks, the
Russell 2000 rebounded an astounding 22% during the last three weeks of
October.
"...small-
company
stocks
have taken
investors on
a wild ride."
Performance review
Despite this late rally, most small-company stocks -- regardless of
their growth prospects -- posted disappointing results for the year
ended October 31, 1998. While the S&P 500 -- which focuses on the stocks
of larger companies -- managed to advance 21.99% for the 12 months, the
Russell 2000 Index lost ground, returning -11.63%. Over the same period,
the average small-cap fund returned -13.76%, according to Lipper
Analytical Services, Inc.1 John Hancock Special Value Fund's Class A and
Class B shares turned in -15.00% and -15.54% returns, respectively, at
net asset value. The Fund's Class C shares, which were introduced on May
1, 1998, returned -20.01% at net asset value from inception through the
end of October. Keep in mind that your net asset value return will
differ from these performance figures if you were not invested in the
Fund for the entire period and did not reinvest all distributions.
Historical performance information can be found on pages six and seven.
Table at top left hand column entitled "Top Five Common Stock Holdings." The
first listing is Nielsen Media Research 7.8%, the second is Data General
Corp. 5.2%, the third is Commonwealth Telephone Enterprises 4.8%, the fourth
is Executive Risk 4.5% and the fifth is Calpine Corp. 4.2%. A note below the
table reads "As a percentage of net assets on October 31, 1998."
"...we bought
or added to
our shares
of great
companies
that were
selling at
attractive
prices."
Many of the Fund's stock selections fell in tandem with the market, but
some took even harder hits. We had a sizable stake in subprime lenders --
-- mortgage companies like ContiFinancial, which we sold, and FIRSTPLUS
Financial Group that specialize in making loans to individuals who may
not fully meet standard credit requirements. Their stock prices and
earnings suffered as falling interest rates prompted homeowners to
prepay their mortgages and refinance at lower rates. We also had
problems in the oil sector, particularly with Triton Energy -- an
exploration and production company with fields in emerging markets. Weak
oil prices and Asian concerns hurt the company, which was for sale in
the midst of the small-cap drubbing. We held on, believing that the
company has good prospects and assets worth more than the current stock
price reflects.
Table at bottom of left hand column entitled "Scorecard". The header for
the left column is "Investment process" and the header for the right column
is "Recent Performance...and What's Behind the Numbers". The first listing
is Nielsen Media Research followed by an up arrow with the phrase "Monopoly
position in high-return business." The second listing is Triton Energy
followed by a down arrow with the phrase "Asian fears, weak oil prices." The
third listing is FIRSTPLUS Financial Group followed by a down arrow with the
phrase "Falling interest rates, higher costs." A note below the table reads
"See 'Schedule of Investments.' Investment holdings are subject to change."
During the market rout, several other stocks also hurt relative
performance. Low interest rates slowed earnings at AmerUs Life Holdings,
a life insurance company with a significant fixed-annuity business. And
Oak Industries, along with telecommunications and cable equipment
providers, got hammered despite its strong prospects. Finally, card
company Gibson Greetings took a big tumble during the third quarter as
investors overreacted to news of temporary manufacturing problems.
Upgrades to portfolio
Our strategy over the period, especially since June, was to take
advantage of the devastation in small-company stocks to upgrade the
portfolio. We sold some names whose growth prospects were not as strong
as we would have liked. And we bought or added to our shares of great
companies that were selling at attractive prices. Our new purchases
included Nielsen Media Research, now our largest investment. We like
Nielsen, which specializes in television research, because it dominates
what is a high-return business. It also has a history of high earnings,
strong cash flows, and management with a sizable ownership stake. We
began buying the stock in early July, following a spinoff from its
parent company that depressed Nielsen's price. Between the time we were
building our stake and October 31, the stock rose 30%. During the market
downturn, we were also able to buy shares of Executive Risk, which
provides directors and officers insurance. The company has a great
management team with a high ownership interest that has historically
delivered good returns. As investors overreacted over the summer to
potential liability issues related to the year 2000, the stock price
sank. We began buying in late August, shortly before the stock hit
bottom. Since then it has climbed 11%.
Bar chart at top of left hand column with heading "Fund Performance". Under
the heading is a note that reads "For the year ended October 31, 1998." The
chart is scaled in increments of 5% with -25% at the bottom and 0% at the
top. The first bar represents the -15.00% total return for John Hancock
Special Value Fund Class A. The second bar represents the -15.54% total
return for John Hancock Special Value Fund Class B. The third bar represents
the -20.01% total return for John Hancock Special Value Fund Class C*. The
fourth bar represents the -13.76% 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. See the
following two pages for historical performance information. A footnote below
the chart reads "From inception May 1, 1998 through October 31, 1998."
Among the investments we added to were Data General and Millipore. Data
General is a hardware company that has invested heavily to develop the
next generation of data storage devices. This spending temporarily hurt
the company's earnings and stock price. We used the opportunity to build
our position, believing that there's a huge market for the new product.
The stock has since climbed 36%. We also increased our stake in
Millipore, a leader in micro-filtration products, as earnings slowed due
to weakness in the micro-electronics industry. The company's prospects
remain strong, however, with roughly 70% of revenues coming from other
markets. We expect the stock price to come back as investors recognize
Millipore's valuable franchise.
Reasons for optimism
Going forward, we're cautiously optimistic. While the market will most
likely remain volatile, we believe small-company stocks have hit bottom.
Moreover, we expect the rally to continue, given how compelling these
stocks are relative to large-company names. Historically, small-company
stocks have had higher earnings growth rates than large-company stocks.
Even after the October rally, their valuations -- stock prices compared
to earnings and other measures -- are well below historical norms and
cheaper than large-company stocks. In addition, small-company stock
prices already reflect the possibility of an economic slowdown. That
means if we do have a slowdown, we believe these stocks should do okay.
If the economy continues to grow at a healthy pace, they'll do even better.
Whatever happens, our strategy will be the same. We'll continue to look
for strong businesses with attractive valuations that we can invest in for
the long term.
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
believe
small-
company
stocks
have hit
bottom."
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 (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 September 30, 1998
SINCE
ONE INCEPTION
YEAR (1/3/94)
-------- --------
Cumulative Total Returns (28.98%) 40.49%
Average Annual Total Returns(1) (28.98%) 7.44%
CLASS B
For the period ended September 30, 1998
SINCE
ONE INCEPTION
YEAR (1/3/94)
-------- --------
Cumulative Total Returns (29.36%) 40.90%
Average Annual Total Returns(1) (29.36%) 7.50%
CLASS C
For the period ended September 30, 1998
SINCE
INCEPTION
(5/1/98)
--------
Cumulative Total Return (27.54%)
Average Annual Total Return(1) (27.54%)(2)
Notes to Performance
(1) Since its inception in 1994, the Adviser has voluntarily undertaken
to limit the Fund's expenses, including the management fee (but not
including the transfer agent fee and the 12b-1 fee), to the extent
required to prevent expenses from exceeding 0.40% of the Fund's net
asset value. This was done in order to reduce costs borne by a
limited shareholder base while the Fund was still in its infancy.
Without the limitation of expenses, the average annual total returns
for the one-year period and since inception for Class A shares would
have been (29.58%) and 6.05%, respectively. The average annual total
returns for the one-year period and the since inception for Class B
shares would have been (29.96%) and 6.11%, respectively. The average
annual total returns since inception for Class C shares would have
been (27.79%). Today, total net assets exceed $50 million. As a
result, effective March 1, 1999, the Adviser will remove the subsidy
on all share classes of the Special Value Fund.
(2) Not annualized.
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 Russell 2000 Index, which is an
unmanaged small-cap index composed of 2,000 U.S. stocks. Past
performance is not indicative of future results.
Line chart with the heading Special Value Fund Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines. The first line represents the value of the
hypothetical $10,000 investment made in the Special Equities Fund on January
3, 1994, before sales charge, and is equal to $16,167 as of October 31, 1998.
The second line represents the value of the Russell 2000 Index and is equal
to 15,676 as of October 31, 1998. The third line represents the value of the
same hypothetical investment made in the Special Value Fund, after sales
charge, and is equal to $15,354 as of October 31, 1998.
Line chart with the heading Special Value Fund Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines. The first line represents the Russell 2000
Index and is equal to $15,676 as of October 31, 1998. The second line
represents the value of the hypothetical $10,000 investment made in the
Special Value Fund on January 1, 1994, before sales charge, and is equal to
$15,617 as of October 31, 1998. The third line represents the value of the
same investment made in the Special Value Fund, after sales charge, and is
equal to $15,417 as of October 31, 1998.
Line chart with the heading Special Value Fund Class C, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines. The first line represents the
Value of the hypothetical $10,000 investment made in the Special Value Fund
on May 1, 1998, before sales charge, and is equal to $7,999 as of October 31,
1998. The second line represents the value of the same hypothetical
investment made in the Special Value Fund, after sales charge, and is equal
to $7,880 as of October 31, 1998. The third line represents the Russell 2000
Index and is equal to $7,880 as of October 31, 1998.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 1998
- ----------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $52,497,164) $49,948,689
Preferred stocks (cost - $1,911,433) 2,509,540
Joint repurchase agreement (cost - $1,211,000) 1,211,000
Corporate savings account 331
------------
53,669,560
Receivable for shares sold 50,116
Dividends receivable 31,497
Interest receivable 366
Receivable from John Hancock Advisers, Inc. - Note B 32,530
Deferred organization expense - Note A 3,962
Other assets 1,412
------------
Total Assets 53,789,443
- ----------------------------------------------------------------------
Liabilities:
Payable for investments purchased 164,550
Payable for shares repurchased 4,393
Accounts payable and accrued expenses 33,093
------------
Total Liabilities 202,036
- ----------------------------------------------------------------------
Net Assets:
Capital paid-in 55,111,574
Accumulated net realized gain on investments and
foreign currency transactions 427,030
Net unrealized depreciation of investments (1,950,260)
Accumulated net investment loss (937)
------------
Net Assets $53,587,407
======================================================================
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 - $22,528,272/2,081,374 $10.82
======================================================================
Class B - $30,637,149/2,860,298 $10.71
======================================================================
Class C* - $421,986/39,398 $10.71
======================================================================
Maximum Offering Price Per Share**
Class A - ($10.82 x 105.26%) $11.39
======================================================================
* 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 Assets and Liabilities is the Fund's balance sheet and
shows the value of what the Fund owns, is due and owes on October 31,
1998. You'll also find the net asset value and the maximum offering
price per share as of that date.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Operations
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1998 TO
1997 OCTOBER 31, 1998(1)
------------ -------------------
<S> <C> <C>
Investment Income:
Dividends (net of foreign withholding tax of $4,357 and $1,554, respectively) $515,479 $540,968
Interest 127,132 98,649
------------ ------------
642,611 639,617
------------ ------------
Expenses:
Investment management fee - Note B 308,999 355,721
Distribution and service fee - Note B
Class A 52,844 60,034
Class B 265,281 307,140
Class C -- 918
Transfer agent fee - Note B 128,930 157,627
Custodian fee 45,089 37,548
Registration and filing fees 26,433 61,326
Organization expense - Note A 22,561 18,790
Auditing fee 12,300 13,059
Printing 11,171 13,220
Financial services fee - Note B 7,999 8,374
Trustees' fees 3,026 3,129
Miscellaneous 1,661 2,158
Legal fees 505 624
------------ ------------
Total Expenses 886,799 1,039,668
- ------------------------------------------------------------------------------------------------------------------
Less Expense Reductions - Note B (263,172) (310,516)
- ------------------------------------------------------------------------------------------------------------------
Net Expenses 623,627 729,152
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 18,984 (89,535)
- ------------------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold 2,743,998 852,402
Net realized gain (loss) on foreign currency transactions (733) 3,002
Change in net unrealized appreciation/depreciation of investments 5,495,186 (9,103,105)
------------ ------------
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency Transactions 8,238,451 (8,247,701)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $8,257,435 ($8,337,236)
============ ============
(1) Effective October 31, 1998, the fiscal year end changed from December 31 to October 31.
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 both periods stated.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1998 TO
------------------------------------ OCTOBER 31, 1998(1)
1996 1997 --------------------
------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) $312,838 $18,984 ($89,535)
Net realized gain on investments sold and foreign currency
transactions 4,332,628 2,743,265 855,404
Change in net unrealized appreciation/depreciation of investments (652,765) 5,495,186 (9,103,105)
------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 3,992,701 8,257,435 (8,337,236)
------------ ------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.1419, $0.0321 and none per share,
respectively) (190,450) (45,691) --
Class B - ($0.0658, none and none per share, respectively) (122,533) -- --
Distributions from net realized gain on investments sold
Class A - ($1.2413, $0.6043 and none per share,
respectively) (1,697,467) (969,735) --
Class B - ($1.2413, $0.6043 and none per share,
respectively) (2,382,887) (1,638,314) --
------------ ------------ ------------
Total Distributions to Shareholders (4,393,337) (2,653,740) --
------------ ------------ ------------
From Fund Share Transactions - Net: * 8,511,666 12,440,562 5,930,620
------------ ------------ ------------
Net Assets:
Beginning of period 29,838,736 37,949,766 55,994,023
------------ ------------ ------------
End of period (including distributions in excess of net
investment income of $521 and $855 and accumulated net
investment loss of $937, respectively) $37,949,766 $55,994,023 $53,587,407
============ ============ ============
* Analysis of Fund Share Transactions:
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1998 TO
----------------------------------------------------------- OCTOBER 31, 1998(1)
1996 1997 -----------------------
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold 949,766 $10,398,879 912,881 $11,525,980 982,861 $12,094,429
Shares reinvested 175,933 1,796,295 80,006 955,849 -- --
------------ ------------ ------------ ------------ ------------ -------------
1,125,699 12,195,174 992,887 12,481,829 982,861 12,094,429
Less shares repurchased (825,851) (8,997,914) (820,449) (9,680,373) (610,415) (7,195,525)
------------ ------------ ------------ ------------ ------------ -------------
Net increase 299,848 $3,197,260 172,438 $2,801,456 372,446 $4,898,904
============ ============ ============ ============ ============ =============
CLASS B
Shares sold 716,837 $7,786,094 1,324,877 $16,869,969 1,152,839 $14,077,224
Shares reinvested 206,399 2,101,655 116,538 1,394,961 -- --
------------ ------------ ------------ ------------ ------------ -------------
923,236 9,887,749 1,441,415 18,264,930 1,152,839 14,077,224
Less shares repurchased (417,470) (4,573,343) (714,300) (8,625,824) (1,161,942) (13,479,970)
------------ ------------ ------------ ------------ ------------ -------------
Net increase (decrease) 505,766 $5,314,406 727,115 $9,639,106 (9,103) $597,254
============ ============ ============ ============ ============ =============
CLASS C**
Shares sold -- -- -- -- 39,476 $435,230
Less shares repurchased -- -- -- -- (78) (768)
------------ ------------ ------------ ------------ ------------ -------------
Net increase -- -- -- -- 39,398 $434,462
============ ============ ============ ============ ============ =============
** Class C shares commenced operations on May 1, 1998.
(1) Effective October 31, 1998, the fiscal year end changed from December 31 to October 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the
previous period. The difference reflects earnings less expenses, any investment 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 three periods, along
with the corresponding dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
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:
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------------------------------------- JANUARY 1, 1998 TO
1994(1) 1995 1996 1997 OCTOBER 31, 1998(8)
---------- ---------- ---------- ---------- ----------------------
<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 (Loss)
on Investments 0.48 1.60 1.17 2.52 (1.47)
------------ ------------ ------------ ------------ ------------
Total from Investment Operations 0.66 1.81 1.31 2.58 (1.45)
------------ ------------ ------------ ------------ ------------
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 $10.82
============ ============ ============ ============ ============
Total Investment Return at Net Asset
Value (3) 7.81%(4) 20.26% 12.91% 25.25% (11.82%)(4)
Total Adjusted Investment Return at Net
Asset Value (3,5) 7.30%(4) 19.39% 12.20% 24.65% (12.33%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $4,420 $12,845 $15,853 $20,961 $22,528
Ratio of Expenses to Average Net Assets 0.99%(7) 0.98% 0.99% 0.99% 1.01%(7)
Ratio of Adjusted Expenses to Average
Net Assets (6) 4.98%(7) 1.85% 1.70% 1.59% 1.62%(7)
Ratio of Net Investment Income to Average
Net Assets 2.10%(7) 2.04% 1.31% 0.47% 0.25%(7)
Ratio of Adjusted Net Investment Income
(Loss) to Average Net Assets (6) (1.89%)(7) 1.17% 0.60% (0.13%) (0.36%)(7)
Portfolio Turnover Rate 0.3% 9% 72% 140% 69%
Fee Reduction Per Share (2) $0.34 $0.09 $0.08 $0.07 $0.06
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) (0.04)
Net Realized and Unrealized Gain (Loss)
on Investments 0.48 1.59 1.17 2.53 (1.46)
------------ ------------ ------------ ------------ ------------
Total from Investment Operations 0.61 1.71 1.24 2.50 (1.50)
------------ ------------ ------------ ------------ ------------
Less Distributions:
Dividends from Net Investment Income (0.11) (0.12) (0.07) -- --
Distributions from Net Realized Gain
on Investments Sold -- (0.21) (1.24) (0.60) --
------------ ------------ ------------ ------------ ------------
Total Distributions (0.11) (0.33) (1.31) (0.60) --
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period $9.00 $10.38 $10.31 $12.21 $10.71
============ ============ ============ ============ ============
Total Investment Return at Net Asset
Value(3) 7.15%(4) 19.11% 12.14% 24.41% (12.29%)(4)
Total Adjusted Investment Return at Net
Asset Value(3,5) 6.64%(4) 18.24% 11.43% 23.81% (12.80%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $3,296 $16,994 $22,097 $35,033 $30,637
Ratio of Expenses to Average Net Assets 1.72%(7) 1.73% 1.69% 1.69% 1.71%(7)
Ratio of Adjusted Expenses to Average
Net Assets(6) 5.71%(7) 2.60% 2.40% 2.29% 2.32%(7)
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.53%(7) 1.21% 0.62% (0.24%) (0.45%)(7)
Ratio of Adjusted Net Investment Income
(Loss) to Average Net Assets(6) (2.46%)(7) 0.34% (0.09%) (0.84%) (1.06%)(7)
Portfolio Turnover Rate 0.3% 9% 72% 140% 69%
Fee Reduction Per Share(2) $0.34 $0.09 $0.08 $0.07 $0.06
See notes to financial statements.
<CAPTION>
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------------------------
PERIOD
FROM MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1998
-----------------
<S> <C>
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period $13.39
------------
Net Investment Loss(2) (0.03)
Net Realized and Unrealized Loss on Investments (2.65)
------------
Total from Investment Operations (2.68)
------------
Net Asset Value, End of Period $10.71
============
Total Investment Return at Net Asset Value(3) (20.01%)(4)
Total Adjusted Investment Return at Net Asset Value(3,5) (20.32%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $422
Ratio of Expenses to Average Net Assets 1.71%(7)
Ratio of Adjusted Expenses to Average Net Assets(6) 2.32%(7)
Ratio of Net Investment Loss to Average Net Assets (0.54%)(7)
Ratio of Adjusted Net Investment Loss to Average Net Assets(6) (1.15%)(7)
Portfolio Turnover Rate 69%
Fee Reduction Per Share(2) $0.04
(1) Class A and Class B shares commenced operations on January 3, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration expense reductions by the Adviser during
the periods shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
(8) Effective October 31, 1998, the fiscal period end changed from December 31 to October 31.
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.
</TABLE>
Schedule of Investments
October 31, 1998
- ------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Special Value Fund on October 31, 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
Aerospace (0.35%)
AAR Corp. 8,000 $185,000
------------
Agricultural Operations (1.93%)
Tejon Ranch Co. 44,000 1,034,000
------------
Building (2.11%)
Coachmen Industries, Inc. 11,300 261,312
Hussmann International, Inc. 55,700 866,831
------------
1,128,143
------------
Business Services - Misc. (7.76%)
Nielsen Media Research 293,233 4,160,248
------------
Chemicals (0.88%)
Millennium Chemicals, Inc. 6,285 153,197
Sybron Chemicals, Inc.* 18,900 316,575
------------
469,772
------------
Computers (16.29%)
BARRA, Inc.* 50,000 1,318,750
Creative Technology Ltd. (Singapore)* 52,400 736,875
Data General Corp. * 165,300 2,810,100
Etec Systems, Inc.* 20,200 684,275
FDP Corp. 25,000 221,875
Interplay Entertainment Corp.* 32,000 56,000
Pathways Group, Inc. (The)* 85,000 1,349,375
Phoenix Technologies Ltd.* 85,750 600,250
Quantum Corp.* 40,000 700,000
Symix Systems, Inc.* 13,000 253,500
------------
8,731,000
------------
Consumer Products Misc. (2.90%)
Gibson Greetings, Inc.* 45,900 479,081
Russ Berrie & Co., Inc. 54,300 1,072,425
------------
1,551,506
------------
Diversified Operations (2.53%)
Viad Corp. 49,500 1,358,156
------------
Electronics (7.00%)
ATMI, Inc.* 13,300 182,875
Amphenol Corp. (Class A)* 24,300 815,569
Artesyn Technologies, Inc.* 70,000 1,010,625
Oak Industries, Inc.* 45,800 1,239,462
Photronics, Inc.* 23,000 501,687
------------
3,750,218
------------
Energy (4.15%)
Calpine Corp.* 100,000 2,225,000
------------
Finance (6.24%)
AMRESCO, Inc.* 27,200 188,700
Core Cap, Inc. (r) 22,200 253,080
Eaton Vance Corp. 66,000 1,476,750
FIRSTPLUS Financial Group, Inc.* 63,000 279,563
GreenPoint Financial Corp. 20,000 656,250
Safeguard Scientifics, Inc.* 18,300 490,669
------------
3,345,012
------------
Instruments - Scientific (2.67%)
Millipore Corp. 58,000 1,428,250
------------
Insurance (11.62%)
Allmerica Financial Corp. 9,800 490,000
AmerUs Life Holdings, Inc. (Class A) 33,481 807,729
CMAC Investment Corp. 30,000 1,256,250
Executive Risk, Inc. 50,400 2,394,000
Financial Security Assurance Holdings
Ltd. 8,200 408,462
HCC Insurance Holdings, Inc. 30,200 541,712
Reinsurance Group of America, Inc. 6,000 330,750
------------
6,228,903
------------
Leasing Companies (1.12%)
Mitcham Industries, Inc.* 85,800 600,600
------------
Leisure (1.61%)
Equity Marketing, Inc.* 23,900 215,100
Galileo International, Inc. 14,100 534,919
Hilton Hotels Corp. 5,600 112,350
------------
862,369
------------
Machinery (0.89%)
SPX Corp. 8,800 $479,050
------------
Media (0.85%)
Holdingmaatschappij De Telegraaf
(Netherlands) 18,000 454,896
------------
Medical (5.25%)
DENTSPLY International, Inc. 22,600 581,950
Respironics, Inc.* 60,000 926,250
Shire Pharmaceuticals Group Plc
(United Kingdom)* 183,000 1,305,559
------------
2,813,759
------------
Oil & Gas (2.48%)
Key Energy Group, Inc.* 25,000 248,437
Parker Drilling Co.* 74,200 366,363
Triton Energy Ltd.* 65,900 716,663
------------
1,331,463
------------
Retail (5.65%)
DIMON, Inc. 70,000 905,625
Richfood Holdings, Inc. 32,000 568,000
Ruddick Corp. 80,000 1,555,000
------------
3,028,625
------------
Telecommunications (7.31%)
Cable Design Technologies* 13,500 222,750
Commonwealth Telephone Enterprises,
Inc.* 105,000 2,572,500
MediaOne Group, Inc. * 8,600 363,888
RCN Corp.* 47,000 756,409
------------
3,915,547
------------
Transport (1.62%)
Northwest Airlines Corp. (Class A)* 2,500 65,547
Wisconsin Central Transportation Corp.* 53,000 801,625
------------
867,172
------------
TOTAL COMMON STOCKS
(Cost $52,497,164) (93.21%) 49,948,689
------------ ------------
PREFERRED STOCKS
Broker Services (3.82%)
Salomon, Inc. 7.625%, Ser FSA 50,000 2,050,000
------------
Finance (0.86%)
Core Cap, Inc. 10%, Ser A/I (r) 22,200 459,540
------------
TOTAL PREFERRED STOCKS
(Cost $1,911,433) (4.68%) 2,509,540
------------ ------------
INTEREST PAR VALUE MARKET
RATE (000s OMITTED) VALUE
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.26%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 10-30-98, due 11-02-98
(Secured by U.S. Treasury Bond,
7.125%, due 02-15-23 and
U.S. Treasury Notes, 6.250%,
due 01-31-02 thru 02-28-02)
- -- Note A 5.38% $1,211 $1,211,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.35% 331
------------
TOTAL SHORT-TERM INVESTMENTS (2.26%) 1,211,331
------------ ------------
TOTAL INVESTMENTS (100.15%) 53,669,560
------------ ------------
OTHER ASSETS AND LIABILITIES, NET (0.15%) (82,153)
------------ ------------
TOTAL NET ASSETS (100.00%) $53,587,407
============ ============
* Non-income producing security.
Parenthetical disclosure of a foreign country in the security
description represents country of foreign issuer however, security is
U.S. dollar denominated.
(r) The securities listed below are direct placement securities 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:
MARKET VALUE
AS A PERCENTAGE MARKET VALUE
ACQUISITION ACQUISITION OF FUNDS AS OF
DATE COST NET ASSETS OCTOBER 31, 1998
---- ---- ---------- -----------------
Core Cap,
Inc. (Common) 10-31-97 $444,000 0.47% $253,080
Core Cap,
Inc.
(Preferred) 10-31-97 555,000 0.86 459,540
------------ ------ ------------
$999,000 1.33% $712,620
============ ====== ============
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.
NOTES TO FINANCIAL STATEMENTS
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. On May 29, 1998, The Board of Trustees voted to
change the Fund's fiscal period end from December 31 to October 31. This
change was effective October 31, 1998. On September 16, 1998, the
shareholders voted to approve an agreement and plan of reorganization
providing for the reorganization of the Fund from a series of John
Hancock Capital Series into a series of John Hancock Investment Trust
II, and to amend the Fund's investment objective to eliminate the
reference to income as a secondary consideration. These changes are
effective November 1, 1998.
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 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, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Fund is made aware
of the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding
taxes, which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid by
the Fund with respect to each class of shares will be calculated in the
same manner, at the same time and will be in the same amount, except for
the effect of expenses that may be applied differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution and service fees, if any, are
calculated daily at the class level based on the appropriate net assets
of each class and the specific expense rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual fund. Expenses which are not readily
identifiable to a specific fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative sizes of the funds.
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 lines of credit, is allocated among the participating
funds. The Fund had no borrowing activity for the period ended October
31, 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 $310,516 for the period ended October
31, 1998. The Adviser plans to terminate this limitation effective March
1, 1999.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended
October 31, 1998, net sales charges received with regard to sales of
Class A shares amounted to $152,381. Out of this amount, $24,870 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $87,129 was paid as sales commissions to
unrelated broker-dealers and $40,382 was paid as sales commissions to
sales personnel of John Hancock Distributors, Inc. ("Distributors"), a
related broker-dealer. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company ("JHMLICo") is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended October 31, 1998, contingent
deferred sales charges paid to JH Funds amounted to $124,623.
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 October 31, 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 and service costs. Up to a maximum of 0.25%
of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the
Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
JHMLICo. The Fund pays 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 directors and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. 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 October 31, 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 October 31, 1998, aggregated $51,507,508 and
$40,365,762, respectively. There were no purchases or sales of
obligations of the U.S. government and its agencies during the period
ended October 31, 1998.
The cost of investments owned at October 31, 1998 (excluding the
corporate savings account) for federal income tax purposes was
$55,817,323. Gross unrealized appreciation and depreciation of
investments aggregated $7,337,552 and $9,485,646, respectively,
resulting in net unrealized depreciation of $2,148,094.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the period ended October 31, 1998, the Fund has reclassified
amounts to reflect a decrease in accumulated net realized gain on
investments of $393,988, a decrease in accumulated net investment loss
of $89,453 and an increase in capital paid-in of $304,535. This
represents the amount necessary to report these balances on a tax basis,
excluding certain temporary differences, as of October 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 and organizational costs 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
(loss) per share in the financial highlights excludes these adjustments.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Capital Series,
John Hancock Special Value Fund
We have audited the accompanying statement of assets and liabilities of
John Hancock Special Value Fund (the "Fund"), one of the portfolios
constituting John Hancock Capital Series, including the schedule of
investments, as of October 31, 1998, and the related statement of
operations for the period from January 1, 1998 to October 31, 1998, and
for the year ended December 31, 1997, the statement of changes in net
assets, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of October 31,
1998, by correspondence with the custodian and brokers, and other
appropriate auditing procedures where replies from brokers were not
received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock Special Value Fund portfolio of
John Hancock Capital Series at October 31, 1998, the results of its
operations for the period from January 1, 1998 to October 31, 1998, and
for the year ended December 31, 1997, and the changes in its net assets,
and the financial highlights for each of the periods indicated therein,
in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Boston, Massachusetts
December 11, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund for the period ended
October 31, 1998.
The Fund has designated distributions to shareholders of $390,769 as
capital gain dividends.
SHAREHOLDER MEETING (UNAUDITED)
On September 16, 1998, a special meeting of John Hancock Special Value
Fund was held.
The shareholders approved an Agreement and Plan of Reorganization for
the Fund. The shareholder votes were 2,459,209 FOR, 60,224 AGAINST and
216,838 ABSTAINING.
The shareholders approved a proposal to amend the Fund's investment
objective to eliminate the reference to income as a secondary
consideration. The shareholder votes were 2,442,288 FOR, 81,992 AGAINST
and 211,991 ABSTAINING.
The shareholders approved a proposal to amend or eliminate two of the
Fund's fundamental investment restrictions on pledging assets and Issuer
Diversification. The shareholder votes were 2,296,223 FOR, 125,391
AGAINST and 314,657 ABSTAINING.
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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.
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3700A 10/98
12/98