John Hancock Funds
SPECIAL EQUITIES
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 02116-5072
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 02116-5072
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 LAURA ALLEN, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND
BERNICE BEHAR, CFA, AND ANURAG PANDIT, CFA, PORTFOLIO MANAGERS
John Hancock
Special Equities Fund
Global uncertainty trounces small-cap market; late-period rally holds
promise
A 3" x 2" photo at bottom right side of page of John Hancock Special Equities
Fund's management team. Caption below reads "Fund management team members
(l-r): Anurag Pandit, Bernice Behar and Laura Allen."
On July 1, 1998, an investment team led by Laura Allen, CFA, assumed
management responsibility of John Hancock Special Equities Fund. Prior
to joining John Hancock Funds in early 1998, Ms. Allen, a senior vice
president, spent 17 years as an analyst and portfolio manager at
Wellington Management Company.
The last 12 months represented an extremely difficult period for small-
company stocks, capping a record five years of underperformance compared
to their large-company counterparts. For almost the entire past fiscal
year, share prices of small companies suffered from the ongoing global
economic turmoil that began in July 1997 with the first wave of Asian
currency devaluations. As a result, investors became more risk averse
and favored the relative safety and liquidity of shares of larger, more
well-known companies. The worst turn, however, came this summer, when
Russia's economic collapse led a second wave of currency devaluations in
emerging markets and, ultimately, a few prominent hedge fund debacles,
that sent stocks of all sizes plummeting, including the previously
immune large caps. Investor sentiment changed dramatically amid
heightened fears that a global financial crisis would precipitate an
imminent profit, if not economic, recession in the U.S. Many investors
sought shelter from the tsunami in the safety of U.S. Treasury bonds,
resulting in a plunge in U.S. long-term interest rates to historically
low levels. Small companies -- despite their compelling valuations,
stronger earnings projections and largely domestic focus -- fell faster
and harder than other segments of the market. Small-cap growth stocks
that the Fund targets were particularly hard hit. The Russell 2000
Growth Index, a proxy for our style, plummeted 22% in the three month
period from June 30 to September 30, one of the worst declines in the
20-year history of this index.
"Small
companies...
fell faster
and harder
than other
segments..."
Table at top left hand column entitled "Top Five Common Stock Holdings". The
first listing is Elan Corp. 2.9%, the second is Premier Parks 2.9%, the third
Wind River Systems 2.2%, the fourth is Vitesse Semiconductor 2.1%, and the
fifth is Metromedia Fiber Network 2.1%. A note below the table reads "As a
percentage of net assets on October 31, 1998."
"...the Fund's
restructuring
is now
virtually
complete..."
In early October, however, the tide of investor sentiment turned again,
as the market rebounded after the Federal Reserve signaled its intent to
restore global financial stability by lowering interest rates twice in
three weeks. This time, small caps led the advance through the close of
the fiscal year. After reaching a 27-month low on October 8, the
Russell 2000 Index -- a broader benchmark for small-cap performance --
began one of its more remarkable recoveries, rising 22% over the next
three weeks. This final push was nowhere near enough to close the wide
gap between large- and small-company stock performance, however. For the
year ended October 31, 1998, the Standard & Poor's 500 Stock Index still
managed to advance by 22% despite the volatility, while the Russell 2000
Index lost ground, returning -12%.
Restructuring and performance review
As we communicated to you several months ago, the Fund experienced a
change in portfolio managers on July 1 aimed at improving investment
performance. Our team's first step was to scrutinize the Fund's holdings
to ensure that each one met our selection criteria. These include
companies with strong and accelerating revenue and earnings growth,
dominant market share and proven management. As a result of this
analysis, we eliminated a number of holdings that either did not meet
this criteria, or in which we lacked sufficient confidence in the
earnings outlook. In their place, we added several higher-quality small
companies (under $1 billion in market capitalization) that were selling
at unusually attractive prices, thanks to the plunge in the small-cap
sector. Examples included Duane Reade, a regional drugstore chain;
Novellus Systems, a semiconductor equipment manufacturer; and energy
services company Core Laboratories.
Over the past several months, it was a challenge to restructure the Fund
in the midst of the small cap market's decline. Our goal was to position
the Fund in a carefully chosen list of small-sized companies in which we
have confidence in the long-term earnings outlook. In the short term,
however, several of the stocks we had targeted to sell were punished for
reporting lower-than-expected earnings. In addition, the Fund's
overweighted positions in the retail and media sectors that we inherited
also held back investment results, especially in the summer and early
fall when these groups fell sharply on worries about future consumer and
corporate spending.
For the year ended October 31, 1998, John Hancock Special Equities
Fund's Class A, Class B and Class Y shares posted total returns of
- -23.21%, -23.79% and -22.90%, respectively, at net asset value. The
Fund's performance fell behind the -13.76% return of the average small-
cap fund, according to Lipper Analytical Services, Inc.,(1) and the
- -15.86% return of the Russell 2000 Growth Index. Keep in mind that your
net asset value return will be different from the Fund's stated
performance if you were not invested in the Fund for the entire period
and did not reinvest all distributions. See pages seven and eight for
historical performance information.
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 -23.21% Total return for John Hancock
Special Equities Fund Class A. The second bar represents the -23.79% total
return for John Hancock Special Equities Fund Class B. The third bar
represents the -22.90% total return for John Hancock Special Equities Fund
Class Y* and 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 Equities Fund are at net asset value with all distributions
reinvested. The average small-cap fund is tracked by Lipper Analytical
Services, Inc. See pages seven and eight for historical performance
information. A footnote below the chart reads "On June 1, 1998, Class C
shares were renamed Class Y shares."
The good news is that the Fund's restructuring is now virtually
complete, and we believe we have positioned the Fund to perform
competitively versus its peer group. As we mentioned, small caps have
staged an impressive rebound in the past month, and we have been
encouraged by the Fund's near-term performance, boosted in part by some
of our more recent additions.
Investment philosophy and choices
The Fund continues to seek capital appreciation by investing in
aggressively growing small companies. Our rigorous fundamental analysis
applies not only to our aforementioned selection criteria, but equally
importantly to our sell discipline. It requires us to trim or eliminate
holdings that show deteriorating fundamentals or whose stock price has
risen enough to change the risk/reward balance. The Fund's focus will
remain solidly on small companies. To stay true to this goal, we
continued to reduce the Fund's average market capitalization, which
ended the year at half its level of six months earlier.
While we build the portfolio company-by-company, we continue to find
strong earnings growth potential within the broad technology sector.
Specifically, we have focused on software companies such as Aspect
Development and information services outsourcer Whittman-Hart. We also
continued to emphasize retail companies that can gain market share in a
more difficult economic environment, such as 99 Cents Only Stores. In
the health-care sector, we own several later-stage biotechnology
companies including Alkermes and Gilead Sciences that we believe have
strong new product potential.
"The Fund's
focus will
remain
solidly
on small
companies."
Going forward
We are encouraged about the prospects for the equity market and in
particular for small-cap stocks. Over the past year, investors
experienced an enormous amount of volatility, and we believe price
action will most likely remain fairly erratic as long as concerns
persist about how emerging-market turmoil will impact future economic
and corporate earnings growth. That said, an environment of declining
interest rates and minimal inflation still provides a solid underpinning
for stock prices.
Only time will tell whether this latest move in small caps is the start
of a prolonged rise. As investors, we often need to look beyond the
daily headlines and focus on the longer-term outlook. The dramatic
underperformance of small-cap companies relative to big caps presents
investors with an unusual opportunity. We strongly believe that small-
cap stocks are poised to make headway versus their larger brethren.
Despite their recent gains, the small-cap sector continues to sell at a
discount to the large-company universe using forward-year price-earnings
ratios, even though we expect the majority of companies in the Fund to
grow well in excess of large companies. This is a highly unusual
circumstance, as historically small-cap stocks have traded at a handsome
premium to large-cap stocks, and it is a compelling combination that
investors have begun to recognize. Although we know history is no
guarantee of future results, the last time small caps sold at a discount
to big caps was in late 1990, at which point small caps went on to
generate outsized returns relative to big caps over a period that lasted
close to three years.
"...the
small-cap
sector
continues
to sell at
a discount
to the large-
company
universe..."
Looking ahead, we will continue to focus our efforts on strong
fundamental company analysis, which we believe to be essential,
especially in a more challenging investment climate. Over time, stock
prices move with earnings growth, and our experience has been that
remaining patient and consistent with a disciplined investment
philosophy will be rewarded with superior returns.
This commentary reflects the views of the portfolio managers through the
end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested
dividends and do not take into account sales charges. Actual load-
adjusted performance is lower.
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 Equities 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%. Prior to January 1992, different sales charges were
in effect for Class A shares and are not reflected in the performance
information. Class B performance reflects a maximum contingent deferred
sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future
results. Keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may
be worth more or less than their original cost, depending on when you
sell them. Please read your prospectus carefully before you invest or
send money.
CLASS A
For the period ended September 30, 1998
ONE FIVE TEN
YEAR YEARS YEARS
-------- -------- --------
Cumulative Total Returns (32.81%) 19.09% 307.98%
Average Annual Total Returns (32.81%) 3.56% 15.10%
CLASS B
For the period ended September 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (3/1/93)
-------- -------- --------
Cumulative Total Returns (33.32%) 19.05% 53.71%
Average Annual Total Returns (33.32%) 3.55% 8.00%
CLASS Y
For the period ended September 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (9/1/93)
-------- -------- --------
Cumulative Total Returns (28.97%) 28.37% 35.78%
Average Annual Total Returns (28.97%) 5.12% 6.21%
*Effective June 1, 1998, Class C shares were renamed Class Y shares.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Special Equities 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 and the Russell
2000 Growth Index. The Russell 2000 Index is an unmanaged, small-cap
index that is comprised of 2,000 U.S. stocks. The Russell 2000 Growth
Index is an unmanaged index containing those Russell 2000 Index stocks
with a greater-than-average growth orientation. Past performance is not
indicative of future results.
Line chart with the heading Special Equities Fund Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are four lines. The first line represents the value of the
hypothetical $10,000 investment made in the Special Equities Fund on October
31, 1988, before sales charge, and is equal to $45,701 as of October 31,
1998. The second line represents the value of the same investment made in
the Special Equities Fund, after sales charge, and is equal to $43,393 as of
October 31, 1998. The third line represents the Russell 2000 Index and is
equal to $30,316 as of October 31, 1998. The fourth line represents the
Russell 2000 Growth Index and is equal to $25,567 as of October 31, 1998.
Line chart with the heading Special Equities Fund Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are four lines. The first line represents the Russell 2000
Index and is equal to $18,452 as of October 31, 1998. The second line
represents the Russell 2000 Growth Index and is equal to $16,388 as of
October 31, 1998. The third line represents the value of the hypothetical
$10,000 investment made in the Special Equities Fund on march 1, 1993, before
sales charge, and is equal to $16,134 as of October 31, 1998. The fourth
line represents the value of the same hypothetical investment made in the
Special Equities Fund, after sales charge, and is equal to $16,034 as of
October 31, 1998.
Line chart with the heading Special Equities Fund Class Y*, 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 $16,536 as of October 31, 1998. The
second line represents the Russell 2000 Growth Index and is equal to $14,674
as of October 31, 1998. The third line represents the value of the
hypothetical $10,000 investment made in the Special Equities Fund on
September 1, 1993, before sales charge, and is equal to $14,174 as of October
31, 1998.
*Effective June 1, 1998, Class C shares were renamed Class Y shares.
FINANCIAL STATEMENTS
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.
Statement of Assets and Liabilities
October 31, 1998
- --------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $755,950,154) $867,314,222
Joint repurchase agreement (cost - $98,127,000) 98,127,000
Corporate savings account 1,226
------------
965,442,448
Receivable for investments sold 3,435,911
Receivable for shares sold 4,302,631
Interest receivable 29,435
Other assets 69,193
------------
Total Assets 973,279,618
- --------------------------------------------------------------------
Liabilities:
Payable for investments purchased 15,142,332
Payable for shares repurchased 2,308,396
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 525,781
Accounts payable and accrued expenses 121,841
------------
Total Liabilities 18,098,350
- --------------------------------------------------------------------
Net Assets:
Capital paid-in 829,509,827
Accumulated net realized gain on investments 14,349,964
Net unrealized appreciation of investments 111,369,582
Accumulated net investment loss (48,105)
------------
Net Assets $955,181,268
====================================================================
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 - $453,919,263/22,455,977 $20.21
====================================================================
Class B - $460,971,346/23,700,698 $19.45
====================================================================
Class Y*- $40,290,659/1,945,113 $20.71
====================================================================
Maximum Offering Price Per Share**
Class A - ($20.21 x 105.26%) $21.27
====================================================================
* Effective June 1, 1998, Class C shares were renamed Class Y shares.
** 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 October 31, 1998
- --------------------------------------------------------------------
Investment Income:
Interest $3,858,152
Dividends 779,237
------------
4,637,389
------------
Expenses:
Investment management fee - Note B 11,915,601
Distribution and service fee - Note B
Class A 1,950,043
Class B 7,440,347
Transfer agent fee - Note B 3,827,167
Custodian fee 268,655
Financial services fee - Note B 248,703
Printing 158,162
Trustees' fees 101,681
Registration and filing fees 67,542
Auditing fee 47,611
Miscellaneous 25,490
Legal fees 17,500
------------
Total Expenses 26,068,502
- --------------------------------------------------------------------
Net Investment Loss (21,431,113)
- --------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold 249,345,263
Change in net unrealized appreciation/depreciation
of investments (519,503,107)
------------
Net Realized and Unrealized
Loss on Investments (270,157,844)
- --------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ($291,588,957)
====================================================================
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ($28,901,150) ($21,431,113)
Net realized gain on investments sold 14,736,245 249,345,263
Change in net unrealized appreciation/depreciation of investments 150,858,729 (519,503,107)
--------------- ---------------
Net Increase (Decrease) in Net Assets Resulting from Operations 136,693,824 (291,588,957)
--------------- ---------------
From Fund Share Transactions - Net:* (269,581,490) (616,525,449)
--------------- ---------------
Net Assets:
Beginning of period 1,996,183,340 1,863,295,674
--------------- ---------------
End of period (including accumulated net investment loss
of $41,161 and $48,105, respectively) $1,863,295,674 $955,181,268
=============== ===============
*Analysis of Fund Share Transactions:
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1997 1998
-------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 159,331,596 $3,736,259,803 100,661,197 $2,413,669,605
Less shares repurchased (168,292,664) (3,969,808,409) (108,875,492) (2,650,476,277)
--------------- --------------- --------------- ---------------
Net decrease (8,961,068) ($233,548,606) (8,214,295) ($236,806,672)
=============== =============== =============== ===============
CLASS B
Shares sold 26,806,305 $621,229,331 3,960,429 $95,092,203
Less shares repurchased (29,432,594) (686,306,670) (17,545,625) (422,907,651)
--------------- --------------- --------------- ---------------
Net decrease (2,626,289) ($65,077,339) (13,585,196) ($327,815,448)
=============== =============== =============== ===============
CLASS Y(1)
Shares sold 1,863,540 $45,155,315 875,735 $23,077,653
Less shares repurchased (682,739) (16,110,860) (2,820,828) (74,980,982)
--------------- --------------- --------------- ---------------
Net increase (decrease) 1,180,801 $29,044,455 (1,945,093) ($51,903,329)
=============== =============== =============== ===============
(1) Effective June 1, 1998, Class C shares were renamed Class Y shares.
See notes to financial statements.
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.
</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 OCTOBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $16.13 $16.11 $22.15 $24.53 $26.32
------------ ------------ ------------ ------------ ------------
Net Investment Loss(1) (0.21) (0.18) (0.22) (0.29) (0.27)
Net Realized and Unrealized Gain (Loss) on Investments 0.19 6.22 3.06 2.08 (5.84)
------------ ------------ ------------ ------------ ------------
Total from Investment Operations (0.02) 6.04 2.84 1.79 (6.11)
------------ ------------ ------------ ------------ ------------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold -- -- (0.46) -- --
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period $16.11 $22.15 $24.53 $26.32 $20.21
============ ============ ============ ============ ============
Total Investment Return at Net Asset Value(2) (0.12%) 37.49% 12.96% 7.30% (23.21%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $310,625 $555,655 $972,312 $807,371 $453,919
Ratio of Expenses to Average Net Assets 1.62% 1.48% 1.42% 1.43% 1.41%
Ratio of Net Investment Loss to Average Net Assets (1.40%) (0.97%) (0.89%) (1.18%) (1.09%)
Portfolio Turnover Rate 66% 82% 59% 41% 107%
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $16.08 $15.97 $21.81 $23.96 $25.52
------------ ------------ ------------ ------------ ------------
Net Investment Loss(1) (0.30) (0.31) (0.40) (0.46) (0.45)
Net Realized and Unrealized Gain (Loss) on Investments 0.19 6.15 3.01 2.02 (5.62)
------------ ------------ ------------ ------------ ------------
Total from Investment Operations (0.11) 5.84 2.61 1.56 (6.07)
------------ ------------ ------------ ------------ ------------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold -- -- (0.46) -- --
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period $15.97 $21.81 $23.96 $25.52 $19.45
============ ============ ============ ============ ============
Total Investment Return at Net Asset Value(2) (0.68%) 36.57% 12.09% 6.51% (23.79%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $191,979 $454,934 $956,374 $951,449 $460,971
Ratio of Expenses to Average Net Assets 2.25% 2.20% 2.16% 2.19% 2.16%
Ratio of Net Investment Loss to Average Net Assets (2.02%) (1.69%) (1.65%) (1.95%) (1.84%)
Portfolio Turnover Rate 66% 82% 59% 41% 107%
See notes to financial statements.
<CAPTION>
Financial Highlights (continued)
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CLASS Y (3)
Per Share Operating Performance
Net Asset Value, Beginning of Period $16.14 $16.20 $22.40 $24.91 $26.86
------------ ------------ ------------ ------------ ------------
Net Investment Loss(1) (0.13) (0.09) (0.14) (0.18) (0.17)
Net Realized and Unrealized Gain (Loss) on Investments 0.19 6.29 3.11 2.13 (5.98)
------------ ------------ ------------ ------------ ------------
Total from Investment Operations 0.06 6.20 2.97 1.95 (6.15)
------------ ------------ ------------ ------------ ------------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold -- -- (0.46) -- --
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period $16.20 $22.40 $24.91 $26.86 $20.71
============ ============ ============ ============ ============
Total Investment Return at Net Asset Value(2) 0.37% 38.27% 13.40% 7.83% (22.90%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $7,123 $13,701 $67,498 $104,476 $40,291
Ratio of Expenses to Average Net Assets 1.11% 1.01% 1.03% 0.97% 0.97%
Ratio of Net Investment Loss to Average Net Assets (0.89%) (0.50%) (0.54%) (0.73%) (0.66%)
Portfolio Turnover Rate 66% 82% 59% 41% 107%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales charge.
(3) Effective June 1, 1998, Class C shares were renamed Class Y shares.
The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net
investment income, gains (losses), dividends and total investment return of the Fund. It shows how the Fund's net asset value
for a share has changed since the end of the previous period. Additionally, important relationships between some items
presented in the financial statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
Schedule of Investments
October 31, 1998
- ----------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities
owned by the Special Equities Fund on October 31, 1998. It's divided
into two main categories: common stocks and short-term investments.
The stocks are further broken down by industry groups. Short-term
investments, which represents the Fund's "cash" position are listed
last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS
Advertising (1.62%)
Outdoor Systems, Inc.* 700,000 $15,443,750
-------------
Broker Services (0.48%)
Raymond James Financial, Inc. 200,000 4,587,500
-------------
Business Services - Misc. (9.89%)
Boron, LePore & Associates, Inc.* 26,100 704,700
Charles River Associates, Inc.* 224,500 5,612,500
First Consulting Group, Inc.* 450,000 7,396,875
INSpire Insurance Solutions, Inc.* 540,000 13,500,000
Interim Services, Inc. * 590,000 12,537,500
Mac-Gray Corp.* 98,700 987,000
META Group, Inc. * 550,000 13,200,000
Metzler Group, Inc. (The)* 400,000 16,800,000
On Assignment, Inc.* 270,000 9,180,000
Pre-Paid Legal Services, Inc.* 350,000 8,378,125
Profit Recovery Group International, Inc.
(The)* 200,000 6,137,500
-------------
94,434,200
-------------
Computers (20.77%)
Acxiom Corporation* 360,000 9,045,000
America Online, Inc.* 120,000 15,247,500
AnswerThink Consulting Group, Inc.* 475,000 9,173,437
Aspect Development, Inc.* 500,000 15,796,900
BARRA, Inc.* 400,000 10,550,000
CBT Group Plc, American Depositary
Receipt (ADR) (Ireland)* 400,000 4,775,000
Concentric Network Corp. * 500,000 12,125,000
Dendrite International, Inc.* 307,200 6,336,000
E*TRADE Group, Inc.* 550,000 9,900,000
EarthLink Network, Inc.* 325,000 12,512,500
Exodus Communications, Inc.* 151,500 4,810,125
HNC Software, Inc.* 330,000 11,096,250
IDX Systems Corp.* 175,000 7,415,625
PSINet, Inc.* 125,000 1,804,687
RealNetworks, Inc.* 300,000 10,106,250
Verio, Inc.* 430,000 5,966,250
VeriSign, Inc.* 340,000 10,433,750
Visio Corp.* 350,000 9,318,750
Whittman-Hart, Inc.* 550,000 10,931,250
Wind River Systems, Inc.* 480,000 21,030,000
-------------
198,374,274
-------------
Electronics (7.10%)
ATMI, Inc.* 341,200 4,691,500
DuPont Photomasks, Inc.* 161,200 5,843,500
Level One Communications, Inc.* 200,000 5,262,500
Novellus Systems, Inc.* 250,000 9,703,125
PMC-Sierra, Inc.* (Canada) 250,000 11,218,750
Uniphase Corp.* 220,000 10,890,000
Vitesse Semiconductor Corp.* 625,000 20,156,250
-------------
67,765,625
-------------
Finance (3.13%)
AmeriCredit Corp.* 550,000 7,356,250
Financial Federal Corp. 500,000 11,656,250
Medallion Financial Corp. 615,300 10,921,575
-------------
29,934,075
-------------
Food (1.44%)
American Italian Pasta Co. (Class A)* 600,000 13,800,000
-------------
Insurance (1.64%)
Capital Re Corp. 400,000 7,325,000
Executive Risk, Inc. 175,000 8,312,500
-------------
15,637,500
-------------
Leisure (6.58%)
Cinar Films, Inc. (Class B) (Canada)* 700,000 14,787,500
Family Golf Centers, Inc.* 501,350 10,559,684
Premier Parks, Inc. 1,233,400 27,366,062
Steiner Leisure Ltd.* 249,700 6,086,438
Travel Services International, Inc.* 200,000 4,050,000
-------------
62,849,684
-------------
Linen Supply & Related (1.20%)
G & K Services, Inc. (Class A) 250,000 11,437,500
-------------
Machinery (1.39%)
Applied Power, Inc. (Class A) 156,600 4,316,287
Hanover Compressor Co.* 355,000 8,963,750
-------------
13,280,037
-------------
Media (2.79%)
Chancellor Media Corp.* 500,000 19,187,500
Cox Radio, Inc. (Class A)* 200,000 7,487,500
-------------
26,675,000
-------------
Medical (15.12%)
Alkermes, Inc.* 300,000 5,850,000
CareMatrix Corp.* 500,000 12,312,500
Elan Corp., Plc (ADR) (Ireland)* 400,000 28,025,000
Gilead Sciences, Inc.* 190,000 5,391,250
Hanger Orthopedic Group, Inc.* 480,000 9,480,000
Human Genome Sciences, Inc.* 240,000 8,310,000
IDEC Pharmaceuticals Corp.* 170,000 5,078,750
Incyte Pharmaceuticals, Inc.* 135,000 4,117,500
Ocular Sciences, Inc.* 378,900 9,519,863
PAREXEL International Corp.* 185,000 4,081,563
Province Healthcare Co.* 205,200 5,360,850
Renal Care Group, Inc.* 425,000 12,378,125
Res-Care, Inc.* 380,000 8,407,500
Universal Health Services, Inc. (Class B) 380,000 19,498,750
Ventana Medical Systems, Inc.* 356,200 6,589,700
-------------
144,401,351
-------------
Oil & Gas (3.07%)
Core Laboratories N.V. (Netherlands)* 385,000 8,686,563
Dril-Quip, Inc.* 350,000 7,350,000
Newfield Exploration Co.* 300,000 7,293,750
Stone Energy Corp.* 187,600 6,026,650
-------------
29,356,963
-------------
Printing - Commercial (0.84%)
Consolidated Graphics, Inc.* 170,000 8,064,375
-------------
Real Estate Operations (0.92%)
Central Parking Corp. 210,000 8,806,875
-------------
Retail (8.81%)
99 Cents Only Stores* 280,000 12,950,000
Abercrombie & Fitch Co. (Class A)* 200,000 7,937,500
Dominick's Supermarkets, Inc.* 272,000 13,277,000
Duane Reade, Inc.* 300,000 11,587,500
Hibbett Sporting Goods, Inc.* 250,000 6,765,625
Linens 'n Things, Inc.* 200,000 6,187,500
Stage Stores, Inc.* 419,000 5,551,750
Trans World Entertainment Corp.* 577,200 11,904,750
Whole Foods Market, Inc.* 200,000 8,012,500
-------------
84,174,125
-------------
Telecommunications (3.28%)
Metromedia Fiber Network, Inc.
(Class A)* 527,200 $19,967,700
NEXTLINK Communications, Inc.
(Class A)* 209,400 5,365,875
OmniAmerica, Inc.* 300,000 5,962,500
-------------
31,296,075
-------------
Transport (0.73%)
MotivePower Industries, Inc. 275,000 6,995,313
-------------
TOTAL COMMON STOCKS
(Cost $755,950,154) (90.80%) 867,314,222
-------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (10.27%)
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 2-15-23, and U.S.
Treasury Notes, 6.250%, due
01-31-02 thru 2-28-02) --
Note A 5.38% $98,127 98,127,000
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.35% 1,226
-------------
TOTAL SHORT-TERM INVESTMENTS (10.27%) 98,128,226
------------- -------------
TOTAL INVESTMENTS (101.07%) 965,442,448
------------- -------------
OTHER ASSETS AND LIABILITIES, NET (1.07%) (10,261,180)
------------- -------------
TOTAL NET ASSETS (100.00%) $955,181,268
============= =============
*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.
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 Special Equities Fund (the "Fund") is a diversified open-
end management investment company registered under the Investment
Company Act of 1940. The investment objective of the Fund is to seek
growth of capital by investing in a diversified portfolio of equity
securities consisting primarily of small-capitalization companies and
companies in situations offering unusual or non-recurring opportunities.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A, Class B and Class Y shares.
Effective June 1, 1998, Class C shares were renamed Class Y shares.
Effective December 8, 1998, the Board of Trustees have authorized the
issuance of new Class C shares in 1999. 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 transaction. Aggregate cash balances are invested in one or
more large 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 distributable 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. Interest income on
investment securities is recorded on the accrual basis.
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.
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 a rate
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 October 31, 1998.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.85% of the
first $250,000,000 of the Fund's average daily net asset value and
(b) 0.80% of the Fund's average daily net asset value in excess
of $250,000,000.
DiCarlo, Forbes and St. Pierre Advisors, LLC ("DFS") served as
subadviser to the Fund pursuant to a subadvisory agreement with the Fund
and the Adviser. The Adviser, not the Fund, paid all subadvisory fees.
The Adviser paid DFS an annual fee of 0.25% of the average daily net
assets of the Fund. DFS was terminated as subadviser to the Fund.
DFS' service as subadviser to the Fund has ended.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended
October 31, 1998 net sales charges received with regard to sales of
Class A shares amounted to $1,050,785. Out of this amount, $137,920 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $609,561 was paid as sales commissions to
unrelated broker-dealers and $303,304 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 5.00% of the lesser of the current market value at
the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses for providing distribution
related services to the Fund in connection with the sale of Class B
shares. For the year ended October 31, 1998, contingent deferred sales
charges paid to JH Funds amounted to $5,532,949.
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 and Class B pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Accordingly, the Fund will make
payments to JH Funds for distribution and service expenses, at an annual
rate not to exceed 0.30% of Class A average daily net assets and 1.00%
of Class B average daily net assets, to reimburse JH Funds for its
distribution and service costs. Up to a maximum of 0.25% of such
payments may be service fees as defined by the amended Rules of Fair
Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's
12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
JHMLICo. Class A and Class B shares pay transfer agent fees based on the
number of shareholder accounts and certain out-of-pocket expenses. Class
Y shares pay a monthly transfer agent fee equivalent to 0.10% of the
average daily net assets of the Class Y shares of the Fund.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the
year was at an annual rate of less than 0.02% of the average net assets
of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its
affiliates, as well as trustees of the Fund. Effective July 1, 1998, Mr.
DiCarlo resigned as trustee 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 $5,514.
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 October 31, 1998, aggregated $1,494,228,475 and
$2,188,474,806, respectively. There were no purchases or sales of
obligations of the U.S. government and its agencies during the year
ended October 31, 1998.
The cost of investments owned at October 31, 1998 (excluding the
corporate savings account) for federal income tax purposes was
$857,250,395. Gross unrealized appreciation and depreciation of
investments aggregated $175,136,551 and $66,945,724, respectively,
resulting in net unrealized appreciation of $108,190,827.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1998, the Fund has reclassified
amounts to reflect a decrease in accumulated net realized gain on
investments of $222,770,065, a decrease in accumulated net investment
loss of $21,424,169 and an increase in capital paid-in of $201,345,896.
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 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.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Special Equities Fund
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the John Hancock Special
Equities Fund (the "Fund"), as of October 31, 1998, and the related
statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended. 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. Our procedures included
confirmation of securities owned as of October 31, 1998, by
correspondence with the custodian and brokers, or 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 Equities Fund at October
31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, 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 taxable distributions of the Fund during
its fiscal year ended October 31, 1998.
The Fund has designated $222,774,452 as a capital gain dividend.
NOTES
John Hancock Funds - Special Equities Fund
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1800A 10/98
12/98
