John Hancock Funds
Special Equities
Fund
SEMIANNUAL REPORT
APRIL 30, 1998
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Michael P. DiCarlo
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President and Chief Operating Officer
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116-5072
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
SUB-INVESTMENT ADVISER
DFS Advisors LLC
75 State Street
Boston, Massachusetts 02109
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to third paragraph.]
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock
market returns averaging 15% or so each year. In the past three years,
the stock market has treated us to a record run, producing annual
returns in excess of 20%.
After such a long and remarkable performance, many began this year
wondering what the market would do for an encore in 1998. The answer
so far has been more of the same. This achievement continues to
bolster many investors' convictions that the market will produce these
results forever, or, in the worst case, that market declines will
always be short-lived. While the economy remains solid and the
environment favorable, history and reason tell us it's a highly
unlikely scenario.
This doesn't mean we know what the market will do next, or that it's
riding for a fall. But after such a run, even in this "new era" of
strong economic growth with low inflation, we believe it would be wise
for investors to set more realistic expectations. As we've said
before, markets do indeed move in two directions, even though we've
seen "up" much more than "down" recently. Over the long term, the
market's historical results have been more in the 10% per year range,
which is still a solid result, considering it has been produced
despite wars, depressions and other social upheavals along the way.
In addition to adjusting, or at least re-examining, expectations, now
could also be a good time to review with your investment professional
how your assets are diversified, perhaps with an eye toward a more
conservative approach. Stocks, especially with their outsized gains of
the last three years, might have grown to represent a larger piece of
your portfolio than you had originally intended, given your
objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping
you keep your feet on the ground as you pursue your dreams.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 2" x 3" photo at bottom right of page of fund portfolio manager Michael P.
DiCarlo. Caption reads "Michael P. DiCarlo, Portfolio Manager".]
BY MICHAEL P. DICARLO, PORTFOLIO MANAGER
John Hancock
Special Equities Fund
Small-stock rally cut short by Asian turmoil; large stocks still lead
the way
The stock market kept moving ahead over the last six months, ignoring
earnings disappointments and fears of fallout from Asia's woes. Strong
economic growth and low interest rates helped keep the market on its
record three-year path as it rose to new heights yet again, producing
better results in six months than it has historically provided in an
average year. The broad market as measured by the Standard & Poor's
500 Stock Index advanced by 22% in the period. Small-company stocks,
however, struggled in vain to keep up with their larger counterparts.
As the period began last November, financial turmoil in Asia had just
whipsawed small stocks. Concerns about Asia's impact on worldwide
growth caused investors to flee the more volatile small-cap arena in
droves and seek shelter in the larger, more liquid and secure blue-
chip names. It marked the end of a strong six-month small-cap rally
and further solidified the trend of the last several years in which
large-company stocks have been the place to be.
The market for small-cap stocks was extremely punishing to companies
that missed earnings targets. Several mergers among brokerage firms
that formerly tracked and made a market in small stocks compounded the
problem. This shrinkage of the small-cap market caused trading
difficulties in some stocks, constraining liquidity. The net effect
for small stocks: underperformance and increased volatility. Small-cap
growth funds that are particularly aggressive, like Special Equities,
took the brunt of the blow, suffering more than their small-cap value
counterparts, especially early in the period.
"Small-
company
stocks...
struggled
in vain to
keep up
with their
larger
counterparts."
[Chart at the top of left hand column with the heading "Top Five Common Stock
Holdings". The chart lists five holdings: 1.) Chancellor Media 4.6%; 2.)
Elan 3.7%; 3.) Uniphase 3.6%; 4.) Outdoor Systems 3.3% and 5.) EVI 3.3%. A
note below the chart reads "As a percentage of net assets on April 30,
1998".]
The Fund remained in the doldrums during the period. For the six
months ended April 30, 1998, the Fund's Class A and Class B shares
posted total returns of 3.34% and 2.90%, respectively, at net asset
value. Class C shares, which have been renamed Class Y shares to
conform to industry standards, returned 3.54% at net asset value
during the period. Keep in mind that your net asset value return will
be different from this performance if you were not invested in the
Fund for the entire period and did not reinvest all distributions. The
Fund's results lagged its benchmarks and peers, falling short of the
11.88% return of the broad-based Russell 2000 Index, the 9.95% return
of the Russell 2000 Growth Index, which measures the performance of
faster-growing small companies, and the 11.04% return of the average
small-cap fund, according to Lipper Analytical Services, Inc.1 Longer-
term performance information can be found on pages seven and eight.
Underperformance explained
As most shareholders know, the Fund has a long history of delivering
competitive returns. The Fund's Class A shares posted an average
annual return of 19.75% for the 10-year period ended April 30, 1998,
besting 91% of the small-cap funds in Lipper's universe. However, it's
been a different story over the last two years, with lagging returns
and increased volatility. This has been a tremendous disappointment we
humbly acknowledge. In this report we will identify why we think this
happened and what is being done to try to return the Fund to its
history as an outperformer.
[Table at bottom of left hand column entitled "Scorecard". The header for
the left column is "Investment" and the header for the right column is
"Recent Performance...and What's Behind the Numbers". The first listing is
Dura Pharmaceuticals followed by a down arrow with the phrase "Slowdown in
sales". The second listing is AOL followed by an up arrow and the phrase
"Dominant Internet position; strong subscriber growth". The third listing is
Cendant followed by a down arrow and the phrase "News of accounting
irregularities punishes stock". A note below the table reads "See "Schedule
of Investments." Investment holdings are subject to change."]
Issue 1: Poor performance of some of our largest holdings. A number of
the Fund's largest holdings have experienced significant difficulties
recently. Cendant, an acquisition-driven conglomerate, was hammered
after the discovery of accounting irregularities at a firm it merged
with. Graham-Field Health, a medical product and services company, ran
into unanticipated problems around a recent acquisition. Health-care
company Dura Pharmaceuticals got hit by a slowdown in sales. We sold
all three of these stocks since, despite some compelling fundamentals,
we believe it will take time for each to work out its issues.
Issue 2: Over-reliance on company fundamentals. On the face of it,
this sounds like twisted logic since strict attention to fundamentals
usually rewards investors. But what has become clear to us is that in
today's hyper-volatile small-cap market, fundamentals don't always
carry the day. Sometimes stocks go down because no one wants to own
them, even if the companies are doing well. For many years, we have
been successful following our four basic investment criteria: revenue
and profit growth of at least 25% per year, the ability to self-
finance growth, domination in a marketplace or niche and management
that is committed to enhancing shareholder value. We are still
sticking to these criteria but in retrospect, we would have benefited
from pulling the trigger sooner on some stocks. Over the long term,
the evidence suggests that stock prices follow earnings. We continue
to believe this, but we won't be as quick to underestimate the market
realities that sometimes send stocks lower.
[Bar chart at top of left hand column with the heading "Fund Performance".
Under the heading is a note that reads "For the six months ended April 30,
1998". The chart is scaled in increments of 5% with 15% at the top and 0% at
the bottom. The first bar represents the 3.34% total return for John Hancock
Special Equities Fund Class A. The second bar represents the 2.90% total
return for John Hancock Special Equities Fund Class B. The third bar
represents the 3.54% total return for John Hancock Special Equities Class Y*
and the fourth bar represents the 11.04% 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. (1). See pages seven and eight for historical performance
information." A footnote below the note reads "*Formerly Class C. Change
effective June 1, 1998."]
Issue 3: Over-concentration in top names. One result of sticking too
long with some stocks was a decrease in portfolio turnover. With
turnover decreased, we weren't refreshing the Fund with new stocks
quickly enough. As a result, the Fund's top 10 holdings grew to be too
large a portion of its overall assets. Historically, the top 10 stocks
command about 35% of the Fund's net assets; last year that figure had
gotten as high as 50%. What's more, the average number of shares we
held in a company grew higher than our historical level, which also
exacerbated the Fund's volatility.
To rectify the situation, we began last year and continued during this
period to sell a significant amount of our largest holdings and
larger-cap companies, including Cendant and long-standing favorite
America Online. AOL has been a stalwart performer for the Fund over
the years since we bought it as a fledgling online service company at
its initial public offering. But it has grown so big that we
significantly pared it back.
Issue 4: Too few stocks. In recognition of the increased volatility
for the small-cap market as a whole, and to broaden the Fund's
exposure to the small-cap universe, we increased the number of Fund
holdings from 71 six months ago to 90 by the end of April. Eventually,
we intend to reach a target level of approximately 100 names. We
believe this extra level of diversification will give us new
opportunities and help dampen some of the Fund's recent swings. An
example of a new addition we like a lot is Internet music retailer
CDnow, which combines a strong, seasoned management team with a good
business plan that taps into the broad universe of e-commerce.
"...we
continue to
maintain our
positive, but
cautious,
outlook."
Overall, the actions we have taken have already started to have the
desired effect. By the end of the period, the Fund had fresher names,
its top 10 holdings as a percentage of total net assets were back
within the historical range, and the average number of shares we hold
per company had also declined.
Outlook
We believe that the Fund is now better positioned to benefit from any
subsequent small-cap stock rallies, given our revitalized sell
discipline and a broader representation of small-company stocks in the
portfolio. We will keep working hard to bring the Fund back to its
longer-term level of top performance.
As for small-company stocks, we continue to maintain our positive but
cautious outlook. With low interest rates and a strong economy still
in force, the environment remains good. After being out of favor for
so long, despite periodic rallies, small-stock valuations as a group
are still very compelling, as we have said many times before. We would
love to be able to tell you that it's finally time for small stocks
again, as it was in the first half of the 90s. But while the broad
stock market continues its advance, it also remains punishing in
pockets, and no one knows for sure when that will change. With fears
of a market correction lingering from Asia's woes, the small-cap world
could still remain turbulent in the near term. No matter what the market
does, we will keep our eyes on our target -- fast growing small-company
stocks whose stock prices reward investors for their earnings growth.
- --------------------------------------------------------------------
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.
1Figures 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 March 31, 1998
ONE FIVE TEN
YEAR YEARS YEARS
---------- ---------- ----------
Cumulative Total Returns 27.70% 108.89% 511.90%
Average Annual Total Returns 27.70% 15.87% 19.86%
CLASS B
For the period ended March 31, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (3/1/93)
--------- --------- ----------
Cumulative Total Returns 28.43% 110.56% 123.14%
Average Annual Total Returns 28.43% 16.06% 17.11%
CLASS C*
For the period ended March 31, 1998
SINCE
ONE INCEPTION
YEAR (9/1/93)
--------- ----------
Cumulative Total Returns 35.07% 95.60%
Average Annual Total Returns 35.07% 15.78%
* 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
Special Equities Fund, before sales charge, and is equal to $69,946 as of
April 30, 1998. The second line represents the value of the hypothetical
$10,000 investment made in the Special Equities Fund, after sales charge, on
October 31, 1987, and is equal to $66,449 as of April 30, 1998. The third
line represents the Russell 2000 Index and is equal to $48,952 as of April
30, 1998. The fourth line represents the Russell 2000 Growth Index and is
equal to $41,147 as of April 30, 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 value of the
Special Equities Fund, before sales charge, and is equal to $21,783 as of
April 30, 1998. The second line represents the value of the hypothetical
$10,000 investment made in the Special Equities Fund, after sales charge, on
March 1, 1993 and is equal to $21,683 as of April 30, 1998. The third line
represents the Russell 2000 Index and is equal to $21,415 as of April 30,
1998. The fourth line represents the Russell 2000 Growth Index and is equal
to $21,417 as of April 30, 1998.]
[Line chart with the heading Special Equities 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
Russell 2000 Index and is equal to $20,985 as of April 30, 1998. The second
line represents the value of the Russell 2000 Growth Index and is equal to
$19,174 as of April 30, 1998. The third line represents the value of the
hypothetical $10,000 investment made in the Special Equities Fund, before
sales charge, on September 1, 1993 and is equal to $19,033 as of April 30,
1998.]
*Effective June 1, 1998, Class C shares were renamed Class Y shares.
Financial Statements
John Hancock Funds - Special Equities Fund
The Statement of Assets and Liabilities is the Fund's balance sheet
and shows the value of what the Fund owns, is due and owes on April
30, 1998. You'll also find the net asset value and the maximum
offering price per share as of that date.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
April 30, 1998 (Unaudited)
- ----------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common stocks (cost - $1,082,503,348) $1,523,494,769
Joint repurchase agreement (cost - $73,359,000) 73,359,000
Short-term notes (cost - $53,543,742) 53,543,742
Corporate savings account 6,941
--------------
1,650,404,452
Receivable for investments sold 35,485,071
Receivable for shares sold 521,471
Interest receivable 11,222
Other assets 34,999
--------------
Total Assets 1,686,457,215
- ----------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 19,851,001
Payable for shares repurchased 2,128,259
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 1,740,045
Accounts payable and accrued expenses 96,414
--------------
Total Liabilities 23,815,719
- ----------------------------------------------------------------------------------
Net Assets:
Capital paid-in 987,799,977
Accumulated net realized gain on investments 247,061,420
Net unrealized appreciation of investments 440,996,935
Accumulated net investment loss (13,216,836)
--------------
Net Assets $1,662,641,496
==================================================================================
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 - $752,107,738 / 27,654,435 $27.20
==================================================================================
Class B - $843,491,021 / 32,115,555 $26.26
==================================================================================
Class C(1) - $67,042,737 / 2,410,941 $27.81
==================================================================================
Maximum Offering Price Per Share*
Class A - ($27.20 x 105.26%) $28.63
==================================================================================
*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.
(1) Effective June 1, 1998, Class C shares were renamed Class Y shares.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows net
gains (losses) for the period stated.
Statement of Operations
Six months ended April 30, 1998 (Unaudited)
- ----------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $1,819,055
Dividends 428,053
-------------
2,247,108
-------------
Expenses:
Investment management fee - Note B 6,991,828
Distribution and service fee - Note B
Class A 1,136,667
Class B 4,407,979
Transfer agent fee - Note B 2,368,427
Financial services fee - Note B 153,063
Custodian fee 142,094
Registration and filing fees 67,583
Printing 53,524
Trustees' fees 49,955
Auditing fee 22,817
Miscellaneous 19,108
Legal fees 9,738
-------------
Total Expenses 15,422,783
- ----------------------------------------------------------------------------------
Net Investment Loss (13,175,675)
- ----------------------------------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold 259,286,654
Change in net unrealized appreciation/depreciation
of investments (189,875,754)
-------------
Net Realized and Unrealized
Gain on Investments 69,410,900
- ----------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $56,235,225
==================================================================================
See notes to financial statements.
</TABLE>
Financial Statements
John Hancock Funds - Special Equities Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1998
OCTOBER 31, 1997 (UNAUDITED)
---------------- --------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ($28,901,150) ($13,175,675)
Net realized gain on investments sold 14,736,245 259,286,654
Change in net unrealized appreciation/depreciation of investments 150,858,729 (189,875,754)
---------------- --------------
Net Increase in Net Assets Resulting from Operations 136,693,824 56,235,225
---------------- --------------
From Fund Share Transactions - Net: * (269,581,490) (256,889,403)
---------------- --------------
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 $13,216,836, respectively) $1,863,295,674 $1,662,641,496
================ ==============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1998
OCTOBER 31, 1997 (UNAUDITED)
--------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ---------- --------------
CLASS A
Shares sold 159,331,596 $3,736,259,803 39,174,207 $1,032,036,164
Less shares repurchased (168,292,664) (3,969,808,409) (42,190,044) (1,116,153,255)
----------- -------------- ---------- --------------
Net decrease (8,961,068) ($233,548,606) (3,015,837) ($84,117,091)
=========== ============== ========== ==============
CLASS B
Shares sold 26,806,305 $621,229,331 2,344,831 $59,228,623
Less shares repurchased (29,432,594) (686,306,670) (7,515,170) (190,814,834)
----------- -------------- ---------- --------------
Net decrease (2,626,289) ($65,077,339) (5,170,339) ($131,586,211)
=========== ============== ========== ==============
CLASS C(1)
Shares sold 1,863,540 $45,155,315 768,044 $20,623,145
Less shares repurchased (682,739) (16,110,860) (2,247,309) (61,809,246)
----------- -------------- ---------- --------------
Net increase (decrease) 1,180,801 $29,044,455 (1,479,265) ($41,186,101)
=========== ============== ========== ==============
(1) Effective June 1, 1998, Class C shares were renamed Class Y shares.
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous
period. The difference reflects earnings less expenses, any investment gains and losses, distributions paid to shareholders,
and any increase or decrease in money shareholders invested in the Fund. The footnote illustrates the number of Fund shares
sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value.
See notes to financial statements.
</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:
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
-------------------------------------------------------------------- 1998
1993 1994 1995 1996 1997 (UNAUDITED)
--------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.99 $16.13 $16.11 $22.15 $24.53 $26.32
-------- -------- -------- -------- -------- --------
Net Investment Loss(1) (0.20) (0.21) (0.18) (0.22) (0.29) (0.15)
Net Realized and Unrealized Gain
on Investments 5.43 0.19 6.22 3.06 2.08 1.03
-------- -------- -------- -------- -------- --------
Total from Investment Operations 5.23 (0.02) 6.04 2.84 1.79 0.88
-------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from Net Realized Gain on
Investments Sold (0.09) -- -- (0.46) -- --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $16.13 $16.11 $22.15 $24.53 $26.32 $27.20
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset
Value(2) 47.83% (0.12%) 37.49% 12.96% 7.30% 3.34%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $296,793 $310,625 $555,655 $972,312 $807,371 $752,108
Ratio of Expenses to Average Net Assets 1.84% 1.62% 1.48% 1.42% 1.43% 1.42%(6)
Ratio of Net Investment Loss to Average
Net Assets (1.49%) (1.40%) (0.97%) (0.89%) (1.18%) (1.16%)(6)
Portfolio Turnover Rate 33% 66% 82% 59% 41% 44%
CLASS B(3)
Per Share Operating Performance
Net Asset Value, Beginning of Period $12.30 $16.08 $15.97 $21.81 $23.96 $25.52
-------- -------- -------- -------- -------- --------
Net Investment Loss(1) (0.18) (0.30) (0.31) (0.40) (0.46) (0.24)
Net Realized and Unrealized Gain on
Investments 3.96 0.19 6.15 3.01 2.02 0.98
-------- -------- -------- -------- -------- --------
Total from Investment Operations 3.78 (0.11) 5.84 2.61 1.56 0.74
-------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from Net Realized Gain on
Investments Sold -- -- -- (0.46) -- --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $16.08 $15.97 $21.81 $23.96 $25.52 $26.26
======== ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value(2) 30.73%(5) (0.68%) 36.57% 12.09% 6.51% 2.90%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $158,281 $191,979 $454,934 $956,374 $951,449 $843,491
Ratio of Expenses to Average Net Assets 2.34%(6) 2.25% 2.20% 2.16% 2.19% 2.18%(6)
Ratio of Net Investment Loss to Average
Net Assets (2.03%)(6) (2.02%) (1.69%) (1.65%) (1.95%) (1.92%)(6)
Portfolio Turnover Rate 33% 66% 82% 59% 41% 44%
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
-------------------------------------------------------------------- 1998
1993 1994 1995 1996 1997 (UNAUDITED)
--------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS C(4)
Per Share Operating Performance
Net Asset Value, Beginning of Period $14.90 $16.14 $16.20 $22.40 $24.91 $26.86
--------- -------- -------- -------- -------- --------
Net Investment Loss(1) (0.03) (0.13) (0.09) (0.14) (0.18) (0.10)
Net Realized and Unrealized Gain
on Investments 1.27 0.19 6.29 3.11 2.13 1.05
--------- -------- -------- -------- -------- --------
Total from Investment Operations 1.24 0.06 6.20 2.97 1.95 0.95
--------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from Net Realized Gain
on Investments Sold -- -- -- (0.46) -- --
--------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $16.14 $16.20 $22.40 $24.91 $26.86 $27.81
========= ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value(2) 8.32%(5) 0.37% 38.27% 13.40% 7.83% 3.54%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $2,838 $7,123 $ 13,701 $ 67,498 $104,476 $ 67,043
Ratio of Expenses to Average Net Assets 1.45%(6) 1.11% 1.01% 1.03% 0.97% 0.97%(6)
Ratio of Net Investment Loss to Average
Net Assets (1.35%)(6) (0.89%) (0.50%) (0.54%) (0.73%) (0.71%)(6)
Portfolio Turnover Rate 33% 66% 82% 59% 41% 44%
(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) Class B shares commenced operations on March 1, 1993.
(4) Class C shares commenced operations on September 1, 1993. Effective June 1, 1998, Class C shares were renamed Class Y shares.
(5) Not annualized.
(6) Annualized.
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>
<TABLE>
<CAPTION>
Schedule of Investments
April 30, 1998 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Special Equities Fund on April 30, 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 represent the Fund's "cash" position, are listed last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- -------------------- ---------------- -------------
<S> <C> <C>
COMMON STOCKS
Advertising (3.34%)
Outdoor Systems, Inc.* 1,750,000 $55,562,500
-------------
Aerospace (0.75%)
Aviation Sales Co.* 350,000 12,468,750
-------------
Broker Services (2.01%)
Hambrecht & Quist Group* 1,000,000 33,437,500
-------------
Business Services - Misc (5.23%)
AHL Services, Inc.* 116,000 3,958,500
Automobile Protection Corp.* 400,000 5,400,000
Charles River Associates, Inc.* 6,700 160,800
Cornell Corrections, Inc.* 350,000 7,918,750
Correctional Services Corp.* 300,000 4,781,250
Mac-Gray Corp.* 500,000 8,250,000
Personnel Group of America, Inc.* 800,000 15,900,000
Pierce Leahy Corp. 700,000 20,212,500
Pre-Paid Legal Services, Inc.* 350,000 13,234,375
RCM Technologies, Inc.* 300,000 7,200,000
-------------
87,016,175
-------------
Chemicals (0.04%)
Schein Pharmaceutical, Inc.* 25,500 624,750
-------------
Computers (15.02%)
America Online, Inc.* 500,000 40,000,000
AXENT Technologies, Inc.* 400,000 10,500,000
CBT Group PLC American Depositary
Receipts (ADR) (Ireland)* 702,500 35,739,688
Complete Business Solutions, Inc.* 730,000 24,956,875
Datastream Systems, Inc.* 300,000 6,900,000
Fundtech Ltd.* 22,000 464,750
Harbinger Corp.* 750,000 27,281,250
IMNET Systems, Inc. 300,000 4,837,500
Infinium Software, Inc.* 400,000 7,050,000
JDA Software Group, Inc.* 185,100 9,359,119
Manhattan Associates, Inc.* 12,800 289,600
QuickResponse Services, Inc.* 300,000 14,100,000
Wang Laboratories, Inc. * 1,500,000 40,500,000
Wind River Systems* 800,000 27,700,000
-------------
249,678,782
-------------
Electronics (8.96%)
DSP Communications, Inc.* 1,500,000 25,031,250
DuPont Photomasks, Inc.* 190,900 10,356,325
Firearms Training Systems, Inc.* 900,000 7,875,000
Photronics, Inc.* 222,100 8,189,938
QLogic Corp.* 66,500 2,959,250
Uniphase Corp.* 1,105,000 59,946,250
Vitesse Semiconductor Corp.* 600,000 34,612,500
-------------
148,970,513
-------------
Finance (2.83%)
Affiliated Managers Group, Inc.* 500,000 18,562,500
Financial Federal Corp.* 500,000 11,562,500
Medallion Financial Corp. 565,300 16,888,337
-------------
47,013,337
-------------
Food (1.12%)
American Italian Pasta Co. (Class A)* 600,000 18,600,000
-------------
Lasers - Systems/Components (0.50%)
Cymer, Inc.* 375,000 8,367,188
-------------
Leisure (3.78%)
Family Golf Centers, Inc.* 500,900 21,100,412
Premier Parks, Inc.* 616,700 34,303,937
Travel Services International, Inc.* 200,000 7,375,000
-------------
62,779,349
-------------
Media (7.66%)
Chancellor Media Corp.* 1,600,000 75,900,000
Cox Radio, Inc. (Class A)* 300,000 14,512,500
Jacor Communications, Inc.* 650,000 36,968,750
-------------
127,381,250
-------------
Medical (12.29%)
Advance Paradigm, Inc.* 256,000 10,208,000
AmeriPath, Inc.* 391,400 6,409,175
CareMatrix Corp.* 500,000 13,562,500
Elan Corp., PLC (ADR) (Ireland)* 1,000,000 62,125,000
i-STAT Corp.* 570,000 7,267,500
Novoste Corp.* 400,000 9,900,000
PathoGenesis Corp.* 240,000 9,510,000
PharMerica, Inc.* 600,000 8,325,000
PhyMatrix Corp.* 1,150,000 11,571,875
ProMedCo Management Co.* 300,000 3,750,000
Province Healthcare Co.* 102,700 2,837,088
Universal Health Services, Inc. (Class B)* 872,200 50,206,012
Wesley Jessen VisionCare, Inc.* 282,500 8,722,188
-------------
204,394,338
-------------
Oil & Gas (4.34%)
EVI, Inc.* 1,019,100 54,267,075
Friede Goldman International, Inc.* 446,400 17,967,600
-------------
72,234,675
-------------
Real Estate Operations (1.99%)
Signature Resorts, Inc.* 750,000 13,406,250
Silverleaf Resorts, Inc.* 500,000 11,875,000
Trendwest Resorts, Inc. 400,000 7,800,000
-------------
33,081,250
-------------
Retail (13.20%)
Abercrombie & Fitch Co. (Class A)* 300,000 13,350,000
CDnow, Inc.* 650,000 20,800,000
Central Garden & Pet Co.* 1,000,000 34,250,000
Cheesecake Factory, Inc (The)* 635,000 16,033,750
Columbia Sportswear Co.* 7,000 148,750
Finish Line, Inc. (The)* 400,000 9,900,000
Garden Ridge Corp.* 500,000 9,562,500
Guitar Center Inc.* 500,000 14,250,000
MSC Industrial Direct Co., Inc. (Class A)* 560,000 28,490,000
Party City Corp.* 400,000 11,100,000
Starbucks Corp.* 1,000,000 48,125,000
Trans World Entertainment Corp.* 500,000 13,500,000
-------------
219,510,000
-------------
Service (0.95%)
MemberWorks, Inc.* 515,000 15,836,250
-------------
Telecommunications (6.56%)
Concentric Network Corp.* 500,000 10,812,500
Corsair Communications, Inc.* 500,000 9,250,000
e.spire Communications, Inc.* 500,000 9,500,000
Esat Telecom Group PLC (ADR) (Ireland)* 136,300 4,361,600
Innova Corp.* 400,000 6,850,000
Melita International Corp.* 400,000 5,350,000
Metromedia Fiber Network, Inc. (Class A)* 350,000 10,806,250
Premiere Technologies, Inc.* 500,000 15,937,500
STAR Telecommunications, Inc.* 1,025,000 27,739,062
Telegroup, Inc.* 500,000 7,500,000
Teligent, Inc. (Class A)* 30,000 881,250
-------------
108,988,162
-------------
Textile (0.43%)
Guess ?, Inc.* 1,200,000 7,125,000
-------------
Wire & Cable Products (0.63%)
AFC Cable Systems, Inc.* 300,000 10,425,000
-------------
TOTAL COMMON STOCKS
(Cost $1,082,503,348) (91.63%) 1,523,494,769
--------- -------------
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED)
- ------------------- -------- -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (4.41%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities
USA, Inc. - Dated 04-30-98,
Due 05-01-98 (Secured by
U.S. Treasury Bills, 4.86%
and 5.27%, Due 06-18-98
and 12-10-98, U.S. Treasury
Bonds, 6.00% thru 13.25%,
Due 05-15-14 thru 02-15-27
and U.S. Treasury Notes,
4.75% thru 9.25%, Due
07-31-98 thru 05-15-06)
- - Note A 5.50% $73,359 73,359,000
-------------
Short-Term Notes (3.22%)
American Express Credit Corp.,
due 05-14-98 5.55% $8,586 $8,568,792
Federal Home Loan Bank Disc Corp.,
due 05-08-98 5.36 15,000 14,984,367
Heller Financial, Inc.,
due 05-01-98 5.65 20,000 20,000,000
Heller Financial, Inc.,
due 05-07-98 5.65 10,000 9,990,583
-------------
TOTAL SHORT-TERM NOTES
(Cost $53,543,742) (3.22%) 53,543,742
-------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
ISSUER, DESCRIPTION VALUE
- ------------------- --------------
<S> <C>
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% $6,941
--------------
TOTAL SHORT-TERM INVESTMENTS (7.63%) 126,909,683
------------- --------------
TOTAL INVESTMENTS (99.26%) 1,650,404,452
------------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.74%) 12,237,044
------------- --------------
TOTAL NET ASSETS (100.00%) $1,662,641,496
============= ==============
* Non-income producing security.
The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the
Fund.
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 C shares.
Effective June 1, 1998, Class C shares were renamed Class Y shares.
The shares of each class represent an interest in the same portfolio
of investments of the Fund and have equal rights to voting, redemptions,
dividends and liquidation, except that certain expenses, subject to
the approval of the Trustees, may be applied differently to each class
of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of
a class which bears distribution and service expenses under terms
of a distribution plan have exclusive voting rights to that
distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are
valued on the basis of market quotations, valuations provided
by independent pricing services or at fair value as determined
in good faith in accordance with procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at
amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued
by the Securities and Exchange Commission, the Fund, along with
other registered investment companies having a management contract
with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned
subsidiary of The Berkeley Financial Group, 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's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all its taxable
income, including any net realized gain on investments, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $12,225,234 of capital
loss carryforwards available, to the extent provided by regulations,
to offset future net realized capital gains. If such carryforwards
are used by the Fund, no capital gains distribution will be made.
The carryforwards expire October 31, 2004.
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 rates ranging from 0.070% to 0.075% per annum based on the
average daily unused portion of the line of credit, is allocated among
the participating Funds. The Fund had no borrowing activity for the
period ended April 30, 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, (the "subadviser")(DFS)
serves as subadviser to the Fund pursuant to a subadvisory agreement
with the Fund and the Adviser. The Adviser, not the Fund, pays all
subadvisory fees. The Adviser pays DFS an annual fee of 0.25% of
the average daily net assets of the Fund.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the period
ended April 30, 1998 net sales charges received with regard to sales
of Class A shares amounted to $676,710. Out of this amount, $106,359
was retained and used for printing prospectuses, advertising, sales
literature and other purposes, $382,433 was paid as sales commissions
to unrelated broker-dealers and $187,918 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 CDSC are paid to JH Funds and are used
in whole or in part to defray its expenses for providing distribution
related services to the Fund in connection with the sale of Class B
shares. For the period ended April 30, 1998, contingent deferred sales
charges paid to JH Funds amounted to $2,520,100.
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 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 C shares pay a monthly transfer agent fee equivalent of 0.10% of
the average daily net assets of the Class C 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 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, Mr. Michael P.
DiCarlo and Mr. Richard S. Scipione are trustees and/or officers
of the Adviser and/or its affiliates, as well as Trustees of the
Fund. The compensation of unaffiliated Trustees is borne by the Fund.
The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds
Deferred Compensation Plan. The Fund makes investments into other
John Hancock funds, as applicable, to cover its liability for the
deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other
asset. The deferred compensation liability and the related other asset
are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized
gains or losses. At April 30, 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 then obligations
of the U.S. government and its agencies and short-term securities,
during the period ended April 30, 1998, aggregated $734,219,097 and
$1,111,872,393, respectively. There were no purchases or sales of
obligations of the U.S. government and its agencies during the period
ended April 30, 1998.
The cost of investments owned at April 30, 1998 (including the joint
repurchase agreement) for federal income tax purposes was
$1,209,406,090. Gross unrealized appreciation and depreciation of
investments aggregated $515,780,724 and $74,789,303, respectively,
resulting in net unrealized appreciation of $440,991,421.
NOTE D -
TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS
Affiliated issuers, as defined by the Investment Company Act of 1940,
are those in which the Fund's holdings of an issuer represent 5% or
more of the outstanding voting securities of the issuer. A summary
of the Fund's transactions in the securities of these issuers during
the period ended April 30, 1998 is set forth below.
<TABLE>
<CAPTION>
Acquisitions Dispositions
----------------------------------------
Beginning Ending
Share Share Share Share Realized Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount Gain (Loss) Income Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DSP Communications, Inc. 2,302,000 -- $-- 802,000 $5,793,629 1,500,000(1) $7,777,518 -- $--
Hvide Marine, Inc. (Class A) 700,000 -- -- 700,000 8,400,000 -(2) 3,711,084 -- --
IMNET Systems, Inc. 500,000 -- -- 200,000 5,948,442 300,000(1) (2,788,583) -- --
-------- ---------- ---------- -------- --------
$-- $20,142,071 $8,700,019 $-- $--
======== ========== ========== ======== ========
(1) As of April 30, 1998, no longer an affiliated issuer.
(2) As of April 30, 1998, no longer owned by Fund.
</TABLE>
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This report is for the information of shareholders of the John Hancock
Special Equities Fund. It may be used as sales literature when preceded or
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Recycled Paper."
180SA 4/98
6/98
