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ANNUAL REPORT
[GRAPHIC OMITTED]
Special Equities
Fund
OCTOBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-----------------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
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
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
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:
The stock market in 1997 has been anything but dull. Investors have been treated
to record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances amid relatively
little volatility, the market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
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A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.
- --------------------------------------------------------------------------------
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY MICHAEL P. DICARLO, PORTFOLIO MANAGER
John Hancock
Special Equities Fund
Small-company stocks vault ahead of their
larger brethren in a major comeback
Small-company stocks staged a spectacular rebound in the second half of the
Fund's fiscal year, moving from market laggards in the first half to leaders by
the end of October. When the Fund's fiscal year began last November, the market
spotlight was on the large, blue-chip names that drew investors away from the
small-cap world with their combination of healthy, growing and predictable
earnings. But after dominating the market for a good year, the larger names
paused in the spring amid fears that their valuation levels were too lofty,
given the prospect of slowing earnings. What's more, the strong dollar was
starting to have an impact on large, multinational companies whose overseas
earnings were being bruised in the conversion back to U.S. dollars. As a result,
investors finally turned their attention back to small stocks, whose valuations
were compelling after being out of favor for so long.
The shift in leadership was a stark one, coming at the exact midpoint of
the Fund's fiscal year. In the first six months, the Dow Jones Industrial
Average rose by more than 17%, while the Russell 2000 Index, a broad measure of
small-company stock performance, advanced less than 2%. In the second six months
between April 30 and October 31, however, the tables turned. The Dow rose 7%
while the Russell 2000 returned 27%, placing the Russell 2000 Index ahead of the
Dow for 12-month performance ending October 31, 1997. Small-caps' rise was
almost straight up until late October, when they were stricken with the same
"Asian flu" that sent all major U.S. indexes and markets worldwide crashing
briefly in the last week of October.
"...investors finally turned their attention back to small stocks..."
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A 2" x 3" photo of Michael DiCarlo at bottom right. Caption reads: "Michael
DiCarlo, Portfolio Manager."
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3
<PAGE>
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John Hancock Funds - Special Equities Fund
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Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) America Online 6.2% 2) EVI 5.7% 3) Elan 5.4%
4) Chancellor Media 4.3% 5) Outdoor Systems 4.1%. A footnote below reads "As a
percentage of net assets on October 31, 1997."
- --------------------------------------------------------------------------------
Performance review
The Fund's performance mirrored the small-cap turnaround, with second half
results falling right in line with its peer group. But the Fund's strong rebound
was not enough to overcome its lag in the first half. As we discussed in the
semiannual report, the Fund has a unique set of investment criteria -- companies
with at least 25% top and bottom line growth, the ability to self-finance, a
leadership position in their industry and management focused on shareholder
value. This narrows our universe to the fastest-growing small companies, exactly
the group that was hardest hit in the first half of the period, most notably in
the technology sector that we favor. It was what held us back against the funds
in our peer group, many of which have lower growth targets for their stocks.
Even though the result was a more modest 12-month performance, which we regret,
it doesn't deter us from our strategy. We intend to stick with an investment
discipline that we know works, and we believe that in the "up" cycles, we will
continue to more than make up for our periods of underperformance. It's the best
argument we know for keeping a longer-term perspective when investing in the
more volatile small-stock world. For the year ended October 31, 1997, John
Hancock Special Equities Fund Class A, Class B and Class C shares posted total
returns of 7.30%, 6.51% and 7.83%, respectively, at net asset value. That
compared to the 26.45% return of the average small-company growth fund,
according to Lipper Analytical Services, Inc.1 Please see pages six and seven
for longer-term performance information.
Second half: weeding the portfolio
We did very little to the portfolio in the first half of the year, when the
market was unwilling to recognize the value of most small stocks. But as the
rally picked up steam, so did our activity. We sold more than 30 stocks over the
last six months that we felt represented "opportunity costs" to the Fund, since
they weren't responding to the small-cap turnaround. Among the group was a
long-standing top holding, Cascade Communications, whose stock failed to make
headway even after a takeover by Ascend Communications. Another disappointment
that we sold was retailer and perennial holding Tommy Hilfiger, whose stock fell
24% during the year not because of any fundamental change, but rather because
the market believes the Tommy engine has run for so long that it has to run out
of steam soon. We've done well with this stock in the past, but felt there were
better opportunities elsewhere now.
One new addition was Medallion Financial, which owns most of the taxi-top
advertising in New York City and is growing that business in other major cities.
More importantly, the
"We sold more than 30 stocks over the last six months that we felt represented
'opportunity costs'..."
- --------------------------------------------------------------------------------
Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers. The first listing is Chancellor
Media followed by an up arrow and the phrase "Successful merger." The second
listing is CUC followed by an up arrow and the phrase "Stock rebounds after
announced business alliance." The third listing is Tommy Hilfiger followed by a
down arrow and the phrase "Negative investor sentiment. " Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."
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4
<PAGE>
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John Hancock Funds - Special Equities Fund
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Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended October 31, 1997." The chart is
scaled in increments of 10% from bottom to top, with 30% at the top and 0% at
the bottom. Within the chart there are four solid bars. The first represents the
7.30% total return for the John Hancock Special Equities Fund: Class A. The
second represents the 6.51% total return for John Hancock Special Equities Fund:
Class B. The third represents the 7.83% total return for John Hancock Special
Equities Fund: Class C. The fourth represents the 26.45% total return for the
average small-company growth fund. A footnote below reads: "Total returns for
John Hancock Special Equities Fund are at net asset value with all distributions
reinvested. The average small-company growth fund is tracked by Lipper
Analytical Services. (1) See the following two pages for historical performance
information."
- --------------------------------------------------------------------------------
Total returns for John Hancock Special Equities Fund are at net asset value with
all distributions reinvested. The average small-company growth fund is tracked
by Lipper Analytical Services, Inc.(1) See the following two pages for
historical performance information.
company is in the specialty finance business, providing financing for taxicab
medallions, which are generally required to operate taxis. Given the limited
supply and intense demand, the company has never experienced a default,
regardless of the economic environment. Another we like is document storage
company Pierce Leahy, which, along with another Fund holding Iron Mountain, is
becoming a dominant player in this consolidating industry. In 1998, Pierce Leahy
is expected to grow earnings at 200%.
Performers: old favorites, top holdings
Our top holding and long-standing favorite, America Online (AOL), had a stellar
year, with its stock rising by 183%. AOL has become the on-line engine for the
mass market, the McDonald's of the on-line industry, as reflected by its
continuing subscriber growth. Earnings are expected to double in 1998, as AOL
continues to surprise the market by creating strategic alliances with companies
that want to use its service to sell their products. In the energy sector, the
stock of EVI (formerly Energy Ventures), an oil field equipment manufacturer and
supplier and number two Fund holding, has risen almost 200% in the year as the
company continues to benefit from good acquisitions and strong demand. Finally,
Chancellor Media Corp.'s stock rose by more than 100% during the year, following
a merger with Evergreen Media.
Outlook
In our view, there's a triple crown environment for small-company stocks now.
First, interest rates are low and possibly going lower, which is the most
important element for small-company success. Second, liquidity has returned to
the small-cap universe, as investors look for faster growth, given the
forecasted earnings slowdowns among the larger names. Turmoil in Asia could also
further impact the fortunes of the larger multinational companies. Finally, even
with their recent advances, small-cap stock valuations remain at rock bottom
levels. Consider that the average company in the portfolio is predicting 1998
earnings growth of 48%, while the average price-earnings multiple (a measure of
how much you're paying for earnings power) is currently 24 times earnings, or
half the average growth rate. In our 10 years of managing this Fund, we have
rarely been able to buy stocks for just half their growth rate. That means
there's opportunity to pick up great companies at attractive prices for the
longer term, as well as room for further gains.
"...there's a triple crown environment for small-company stocks now."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
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John Hancock Funds - Special Equities Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Special 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, 1997
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
Cumulative Total Returns (1.92%) 164.93% 357.67%
Average Annual Total Returns (1.92%) 21.51% 16.43%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (3/1/93)
---- --------
Cumulative Total Returns (2.53%) 118.41%
Average Annual Total Returns (2.53%) 18.58%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (9/1/93)
---- --------
Cumulative Total Returns 3.71% 91.15%
Average Annual Total Returns 3.71% 17.21%
6
<PAGE>
================================================================================
John Hancock Funds - Special Equities Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Special 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 Standard & Poor's 500 Stock Index and the Russell 2000 Index.
The Standard & Poor's 500 Stock Index is an unmanaged index of 500 widely traded
common stocks commonly used to measure stock market performance. The Russell
2000 Index is an unmanaged, small-cap index that is comprised of 2,000 U.S.
stocks. In addition, the Fund is compared to the Russell 2000 Growth Index -- an
unmanaged index containing Russell 2000 Index stocks with a greater-than-average
growth orientation. For future reports, the Adviser has chosen to remove the
Standard & Poor's 500 Stock Index, but will continue to compare the Fund's
performance to the broad-based Russell 2000 Index as well as the Russell 2000
Growth Index, which more closely represents the investment strategy of the Fund.
- --------------------------------------------------------------------------------
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 five lines. The first line represents the value of the Special
Equities Fund, before sales charge, and is equal to $67,683 as of October 31,
1997. 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 $64,299 as of October 31, 1997. The third line
represents the Standard & Poor's 500 Stock Index and is equal to $48,661 as of
October 31, 1997. The fourth line represents the Russell 2000 Index and is equal
to $43,755 as of October 31, 1997. The fifth line represents the Russell 2000
Growth Index and is equal to $37,395 as of October 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 five lines. The first line represents the value of the Standard &
Poor's 500 Stock Index and is equal to $23,115 as of October 31, 1997. The
second line represents the value of the Special Equities Fund, before sales
charge, and is equal to $21,170 as of October 31, 1997. The third 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 $20,970 as
of October 31, 1997. The fourth line represents the Russell 2000 Index and is
equal to $20, 931 as of October 31, 1997. The fifth line represents the Russell
2000 Growth Index and is equal to $17,426 as of October 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 four lines. The first line represents the value of the Standard &
Poor's 500 Stock Index and is equal to $21,795 as of October 31, 1997. The
second line represents the value of the Russell 2000 Growth Index and is equal
to $19,462 as of October 31, 1997. The third line represents the value of the
Russell 2000 Index and is equal to $18,758 as of October 31, 1997. The fourth
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
$18,383 as of October 31, 1997.
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7
<PAGE>
==============================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 October 31, 1997. 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, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks
Unaffiliated Issuers (cost - $1,157,868,275) .......... $1,756,997,826
Affiliated Issuers - Note D (cost - $43,074,376) ...... 74,812,000
Joint repurchase agreement (cost - $56,551,000) ......... 56,551,000
Corporate savings account ............................... 1,651
-------------
1,888,362,477
Receivable for investments sold .......................... 7,145,654
Receivable for shares sold ............................... 1,664,809
Dividends receivable ..................................... 84,000
Interest receivable ...................................... 9,497
Other assets ............................................. 35,000
-------------
Total Assets ........................... 1,897,301,437
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ........................ 30,493,348
Payable for shares repurchased ........................... 1,303,557
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................. 2,044,477
Accounts payable and accrued expenses .................... 164,381
-------------
Total Liabilities ...................... 34,005,763
-----------------------------------------------------------
Net Assets:
Capital paid-in .......................................... 1,244,689,380
Accumulated net realized loss on investments ............. (12,225,234)
Net unrealized appreciation of investments ............... 630,872,689
Accumulated net investment loss .......................... (41,161)
-------------
Net Assets ............................. $1,863,295,674
===========================================================
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 - $807,370,512 / 30,670,272 ...................... $26.32
=============================================================================
Class B - $951,448,727 / 37,285,894 ...................... $25.52
=============================================================================
Class C - $104,476,435 / 3,890,206 ....................... $26.86
=============================================================================
Maximum Offering Price Per Share*
Class A - ($26.32 x 105.26%) ............................. $27.71
=============================================================================
* 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, 1997
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................. $4,054,067
Dividends ................................................. 589,491
-------------
4,643,558
-------------
Expenses:
Investment management fee - Note B ....................... 15,145,304
Distribution and services fee - Note B
Class A ................................................ 2,590,432
Class B ................................................ 9,308,693
Transfer agent fee - Note B .............................. 5,302,584
Custodian fee ............................................ 350,145
Financial services fee - Note B .......................... 345,059
Trustees' fees ........................................... 146,857
Registration and filing fees ............................. 131,003
Printing ................................................. 83,565
Miscellaneous ............................................ 77,439
Auditing fee ............................................. 43,000
Legal fees ............................................... 20,627
-------------
Total Expenses .......................... 33,544,708
-----------------------------------------------------------
Net Investment Loss ..................... (28,901,150)
-----------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold (including
$62,267,318 gain and $24,436,298 loss on sales
of investments of affiliated issuers) ................... 14,736,245
Change in net unrealized appreciation/depreciation
of investments ........................................... 150,858,729
-------------
Net Realized and Unrealized
Gain on Investments ..................... 165,594,974
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............... $136,693,824
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Equities Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss .................................................... ($19,766,007) ($28,901,150)
Net realized gain (loss) on investments sold ........................... (26,961,479) 14,736,245
Change in net unrealized appreciation/depreciation of investments....... 172,240,308 150,858,729
-------------- --------------
Net Increase in Net Assets Resulting from Operations ................. 125,512,822 136,693,824
-------------- --------------
Distributions to Shareholders:
Distributions from net realized gain on investments sold
Class A - ($0.4639 and none per share, respectively) ................. (12,437,928) --
Class B - ($0.4639 and none per share, respectively) ................. (10,571,390) --
Class C - ($0.4639 and none per share, respectively) ................. (460,613) --
-------------- --------------
Total Distributions to Shareholders .................................. (23,469,931) --
-------------- --------------
From Fund Share Transactions - Net:* ...................................... 869,850,284 (269,581,490)
-------------- --------------
Net Assets:
Beginning of period .................................................... 1,024,290,165 1,996,183,340
-------------- --------------
End of period (including accumulated net investment loss
of $27,561 and $41,161, respectively) ................................ $1,996,183,340 $1,863,295,674
============== ==============
</TABLE>
*Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ................................. 110,082,015 $2,718,486,461 159,331,596 $3,736,259,803
Shares issued to shareholders in reinvestment
of distributions ............................ 501,217 11,643,438 -- --
------------ -------------- ------------ --------------
110,583,232 2,730,129,899 159,331,596 3,736,259,803
Less shares repurchased ..................... (96,032,453) (2,383,787,239) (168,292,664) (3,969,808,409)
------------ -------------- ------------ --------------
Net increase (decrease) ..................... 14,550,779 $346,342,660 (8,961,068) ($233,548,606)
============ ============== ============ ==============
CLASS B
Shares sold ................................. 38,613,360 $943,635,698 26,806,305 $621,229,331
Shares issued to shareholders in reinvestment
of distributions ............................ 390,193 8,908,829 -- --
------------ -------------- ------------ --------------
39,003,553 952,544,527 26,806,305 621,229,331
Less shares repurchased ..................... (19,953,916) (482,735,858) (29,432,594) (686,306,670)
------------ -------------- ------------ --------------
Net increase (decrease) ..................... 19,049,637 $469,808,669 (2,626,289) ($65,077,339)
============ ============== ============ ==============
CLASS C
Shares sold ................................. 2,184,875 $55,912,531 1,863,540 $45,155,315
Shares issued to shareholders in reinvestment
of distributions ............................ 19,658 461,946 -- --
------------ -------------- ------------ --------------
2,204,533 56,374,477 1,863,540 45,155,315
Less shares repurchased ..................... (106,800) (2,675,522) (682,739) (16,110,860)
------------ -------------- ------------ --------------
Net increase ................................ 2,097,733 $53,698,955 1,180,801 $29,044,455
============ ============== ============ ==============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Equities Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <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
-------- -------- -------- -------- --------
Net Investment Loss(1) ................................... (0.20) (0.21) (0.18) (0.22) (0.29)
Net Realized and Unrealized Gain on Investments .......... 5.43 0.19 6.22 3.06 2.08
-------- -------- -------- -------- --------
Total from Investment Operations ....................... 5.23 (0.02) 6.04 2.84 1.79
-------- -------- -------- -------- --------
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
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2) ............ 47.83% (0.12%) 37.49% 12.96% 7.30%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $296,793 $310,625 $555,655 $972,312 $807,371
Ratio of Expenses to Average Net Assets .................. 1.84% 1.62% 1.48% 1.42% 1.43%
Ratio of Net Investment Loss to Average Net Assets ....... (1.49%) (1.40%) (0.97%) (0.89%) (1.18%)
Portfolio Turnover Rate .................................. 33% 66% 82% 59% 41%
Average Broker Commission Rate(3) ........................ N/A N/A N/A $0.0677 $0.0649
CLASS B(4)
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $12.30 $16.08 $15.97 $21.81 $23.96
-------- -------- -------- -------- --------
Net Investment Loss(1) ................................... (0.18) (0.30) (0.31) (0.40) (0.46)
Net Realized and Unrealized Gain on Investments .......... 3.96 0.19 6.15 3.01 2.02
-------- -------- -------- -------- --------
Total from Investment Operations ....................... 3.78 (0.11) 5.84 2.61 1.56
-------- -------- -------- -------- --------
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
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2) ............ 30.73%(6) (0.68%) 36.57% 12.09% 6.51%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $158,281 $191,979 $454,934 $956,374 $951,449
Ratio of Expenses to Average Net Assets .................. 2.34%(7) 2.25% 2.20% 2.16% 2.19%
Ratio of Net Investment Loss to Average Net Assets ....... (2.03%)(7) (2.02%) (1.69%) (1.65%) (1.95%)
Portfolio Turnover Rate .................................. 33% 66% 82% 59% 41%
Average Broker Commission Rate(3) ........................ N/A N/A N/A $0.0677 $0.0649
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Equities Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS C(5)
Per Share Operating Performance
Net Asset Value, Beginning of Period ................... $14.90 $16.14 $16.20 $22.40 $24.91
-------- -------- -------- -------- --------
Net Investment Loss(1) ................................. (0.03) (0.13) (0.09) (0.14) (0.18)
Net Realized and Unrealized Gain on Investments ........ 1.27 0.19 6.29 3.11 2.13
-------- -------- -------- -------- --------
Total from Investment Operations ..................... 1.24 0.06 6.20 2.97 1.95
-------- -------- -------- -------- --------
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
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2) .......... 8.32%(6) 0.37% 38.27% 13.40% 7.83%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............... $2,838 $7,123 $13,701 $67,498 $104,476
Ratio of Expenses to Average Net Assets ................ 1.45%(7) 1.11% 1.01% 1.03% 0.97%
Ratio of Net Investment Loss to Average Net Assets ..... (1.35%)(7) (0.89%) (0.50%) (0.54%) (0.73%)
Portfolio Turnover Rate ................................ 33% 66% 82% 59% 41%
Average Broker Commission Rate(3) ...................... N/A N/A N/A $0.0677 $0.0649
</TABLE>
(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) Per portfolio share traded. Required for fiscal years that began
September 1, 1995 or later.
(4) Class B shares commenced operations on March 1, 1993.
(5) Class C shares commenced operations on September 1, 1993.
(6) Not annualized.
(7) 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.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Equities Fund
Schedule of Investments
October 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Special Equities Fund on October 31, 1997. 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 (6.87%)
CKS Group, Inc.* ................................ 500,000 $18,125,000
Outdoor Systems, Inc.* .......................... 2,475,000 76,106,250
Universal Outdoor Holdings, Inc.* ............... 801,500 33,863,375
------------
128,094,625
------------
Aerospace (0.96%)
AAR Corp. ....................................... 500,000 17,906,250
------------
Broker Services (0.83%)
Hambrecht & Quist Group* ........................ 490,000 15,435,000
------------
Business Services - Misc (6.71%)
CBT Group PLC, American Depositary
Receipts (ADR) (Ireland)* ..................... 790,000 60,632,500
FPA Medical Management, Inc.* ................... 750,000 18,093,750
Iron Mountain, Inc.* ............................ 500,000 19,218,750
Mac-Gray Corp.* ................................. 14,400 212,400
Pierce Leahy Corp. .............................. 527,800 14,778,400
U.S. Rentals, Inc.* ............................ 500,000 12,187,500
------------
125,123,300
------------
Computers (19.81%)
Adaptec, Inc.* .................................. 1,500,000 72,656,250
America Online, Inc.* ........................... 1,500,000 115,500,000
Avant! Corp. * .................................. 600,000 15,750,000
Electronics for Imaging, Inc.* .................. 1,500,000 70,125,000
Harbinger Corp.* ................................ 750,000 22,312,500
IMNET Systems, Inc. ............................. 500,000 9,125,000
Overland Data, Inc.* ............................ 450,000 2,981,250
Wang Laboratories, Inc.* ........................ 1,500,000 34,687,500
Wind River Systems* ............................ 675,000 25,903,125
------------
369,040,625
------------
Electronics (10.12%)
DSP Communications, Inc.* ....................... 2,302,000 $42,587,000
EXCEL Communications, Inc.* ..................... 455,700 10,765,912
Firearms Training Systems, Inc.* ................ 900,000 5,850,000
International Manufacturing
Services, Inc.* ............................... 286,900 3,120,038
Linear Technology Corp. ......................... 400,000 25,150,000
Metromedia Fiber Network, Inc. (Class A)* ....... 70,600 1,694,400
Pericom Semiconductor Corp* ..................... 88,300 805,737
Silicon Valley Group, Inc.* ..................... 1,000,000 28,750,000
Uniphase Corp.* ................................. 652,500 43,799,062
Vitesse Semiconductor Corp.* .................... 600,000 26,025,000
------------
188,547,149
------------
Finance (1.83%)
Medallion Financial Corp. ....................... 565,300 11,871,300
Pre-Paid Legal Services, Inc.* .................. 733,800 22,197,450
------------
34,068,750
------------
Food (0.04%)
American Italian Pasta Co. (Class A)* ........... 31,500 661,500
------------
Leisure (2.28%)
Family Golf Centers, Inc.* ...................... 500,900 13,399,075
N2K Inc.* ....................................... 13,700 360,481
Premier Parks, Inc.* ............................ 616,700 24,668,000
Silverleaf Resorts, Inc.* ....................... 156,100 3,395,175
Trendwest Resorts Inc. * ........................ 32,500 743,438
------------
42,566,169
------------
Machinery (0.05%)
Innovative Valve Technologies, Inc.* ............ 53,200 931,000
------------
Media (5.38%)
Chancellor Media Corp.* ......................... 1,444,640 79,274,620
Jacor Communications, Inc.* ..................... 500,000 20,937,500
------------
100,212,120
------------
Medical (23.11%)
AmeriPath, Inc.* ................................ 41,400 683,100
Andrx Corp.* .................................... 500,000 19,250,000
CareMatrix Corp.* ............................... 500,000 13,625,000
Dura Pharmaceuticals, Inc.* ..................... 1,500,000 72,562,500
Elan Corp., PLC (ADR) (Ireland)* ............... 2,000,000 99,750,000
Gulf South Medical Supply, Inc.* ................ 650,000 21,450,000
Hologic, Inc.* .................................. 600,000 15,375,000
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Equities Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Medical (continued)
i-STAT Corp.* ................................ 570,000 $11,471,250
Jones Medical Industries, Inc. ............... 1,000,000 30,125,000
Medicis Pharmaceutical Corp. (Class A) * ..... 650,000 31,281,250
Mentor Corp. ................................. 1,000,000 36,437,500
NovaCare, Inc.* .............................. 1,000,000 13,062,500
PhyMatrix Corp.* ............................. 1,150,000 16,962,500
Universal Health Services, Inc. (Class B)* ... 972,400 42,846,375
Wesley Jessen VisionCare, Inc.* .............. 195,100 5,706,675
------------
430,588,650
------------
Oil & Gas (7.00%)
Chesapeake Energy Corp.* ..................... 46,300 454,319
EVI, Inc.* ................................... 1,651,000 105,973,562
Hvide Marine, Inc. (Class A)* ................ 700,000 23,100,000
TransCoastal Marine Services, Inc.* .......... 38,700 962,663
------------
130,490,544
------------
Retail (9.79%)
CUC International, Inc. * .................... 2,500,000 73,750,000
Guitar Center Inc.* ......................... 300,000 6,525,000
MSC Industrial Direct Co., Inc. (Class A)* ... 560,000 23,310,000
Seattle Filmworks, Inc.* ..................... 675,000 6,750,000
Starbucks Corp.* ............................. 1,750,000 57,750,000
United Auto Group, Inc.* ..................... 687,700 14,011,888
White Cap Industries, Inc.* .................. 20,300 385,700
------------
182,482,588
------------
Telecommunications (2.98%)
MRV Communications, Inc.* .................... 600,000 17,550,000
Premiere Technologies, Inc.* ................. 823,600 28,002,400
Yurie Systems, Inc.* ......................... 326,900 9,909,156
------------
55,461,556
------------
Textile (0.55%)
Guess ?, Inc.* ............................... 1,200,000 10,200,000
------------
TOTAL COMMON STOCK
(Cost $1,200,942,651) (98.31%) 1,831,809,826
--------- --------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.04%)
Investment in a joint repurchase
agreement transaction with
Aubrey G. Lanston & Co. -
Dated 10-31-97, Due
11-03-97 (Secured by U.S.
Treasury Notes, 5.00% thru
9.25% Due 02-28-98
thru 04-30-02) - Note A ......... 5.68% $56,551 $56,551,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ................ 1,651
--------------
TOTAL SHORT-TERM INVESTMENTS ....... (3.04%) 56,552,651
-------- --------------
TOTAL INVESTMENTS ................ (101.35%) $1,888,362,477
======== ==============
*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.
13
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Equities Fund
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. 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,
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 carryforward expires 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
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Equities Fund
redemption requests that otherwise might require the untimely disposition of
securities. These agreements enable the Fund to participate with other Funds
managed by the Advisor in an unsecured line of credit with banks which permit
borrowings up to $600 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 of 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, 1997.
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 year ended October
31,1997 net sales charges received with regard to sales of Class A shares
amounted to $3,592,665. Out of this amount, $560,137 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$2,448,195 was paid as sales commissions to unrelated broker-dealers and
$584,333 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker
Anthony") and Sutro & Co., ("Sutro"), all of which are broker-dealers. The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company
("JHMLICo"), is the indirect sole shareholder of Distributors and was the
indirect sole shareholder until November 29, 1996 of John Hancock Freedom
Securities Corporation and its subsidiaries which include Tucker Anthony and
Sutro.
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 year ended October 31, 1997, contingent
deferred sales charges paid to JH Funds amounted to $4,168,513.
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 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 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, 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 com-
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Equities Fund
pensation 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, 1997, 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 year
ended October 31, 1997, aggregated $741,681,962 and $973,305,812, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended October 31, 1997.
The cost of investments owned at October 31, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $1,257,493,651. Gross
unrealized appreciation and depreciation of investments aggregated $701,801,141
and $70,933,966, respectively, resulting in net unrealized appreciation of
$630,867,175.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net investment loss of $28,887,550 and a
decrease in capital paid-in of $28,887,550. This represents the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1997. 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 net
investment loss. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
16
<PAGE>
================================================================================
John Hancock Funds - Special Equities Fund
NOTE E -
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 October
31, 1997 is set forth below.
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITIONS
BEGINNING -----------------------------------------------------------
SHARE SHARE SHARE
AFFILIATE AMOUNT AMOUNT COST AMOUNT COST
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
America Online, Inc. .......................... 2,000,000 - $ - 500,000 $8,428,671
Apollo Group, Inc. (Class A) .................. 1,474,000 - - 1,474,000 37,383,314
Chesapeake Energy Corp. ....................... 2,000,000 - - 1,953,700 30,257,118
DSP Communications, Inc. ...................... 1,600,000 702,000 7,311,784 - -
Dura Pharmaceuticals, Inc. .................... 800,000 700,000 29,396,205 - -
Elan Corp., PLC (ADR) ......................... 2,000,000 - - - -
EVI, Inc.
(formerly Energy Ventures, Inc.) ............ 750,000 75,500 3,780,025 - -
Evergreen Media Corp. (Class A) ............... 1,077,000 - - 1,077,000(4) 31,437,123
Harbinger Corp. ............................... 500,000 - - - -
Hvide Marine, Inc. (Class A) .................. 700,000 - - - -
IMNET Systems, Inc. ........................... - 500,000 15,418,102 - -
i-Stat Corp. .................................. 570,000 - - - -
Iron Mountain, Inc. ........................... 500,000 - - - -
Medic Computer Systems, Inc. .................. 645,000 - - 645,000 18,959,299
PMT Services, Inc. ............................ 1,200,000 - - 1,200,000 7,786,883
PETsMart, Inc. ................................ 1,940,000 - - 1,940,000 26,169,061
Rainforest Cafe, Inc. ......................... 557,000 - - 557,000 14,294,860
Technology Solutions Co. ...................... 574,250 - - 574,250 11,420,569
Transaction Systems Architects,
Inc. (Class A) .............................. 1,000,000 - - 1,000,000 13,205,954
Uniphase Corp. ................................ 444,000 208,500 13,458,731 - -
United Auto Group, Inc. ....................... 487,700 200,000 4,809,377 - -
Universal Health Services, Inc.
(Class B) ................................... 972,400 - - - -
Viasoft, Inc. ................................. 460,000 80,500 3,582,213 540,500 26,901,547
Wind River Systems ............................ 450,000 - - - -
------------ ------------
$73,976,412 $226,244,399
============ ============
<CAPTION>
ENDING
SHARE REALIZED DIVIDEND ENDING
AFFILIATE AMOUNT GAIN (LOSS) INCOME VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
America Online, Inc. .............................. 1,500,000(1) $24,494,179 $ - $ -
Apollo Group, Inc. (Class A) ...................... - (123,243) - -
Chesapeake Energy Corp. ........................... 46,300(1,2) (10,435,393) - -
DSP Communications, Inc. .......................... 2,302,000(3) - - 42,587,000
Dura Pharmaceuticals, Inc. ........................ 1,500,000(1) - - -
Elan Corp., PLC (ADR) ............................. 2,000,000(1) - - -
EVI, Inc.
(formerly Energy Ventures, Inc.) ................ 825,500(1) - - -
Evergreen Media Corp. (Class A) ................... - - - -
Harbinger Corp. ................................... 750,000(5,1) - - -
Hvide Marine, Inc. (Class A) ...................... 700,000 - - 23,100,000
IMNET Systems, Inc. ............................... 500,000 - - 9,125,000
i-Stat Corp. ...................................... 570,000(1) - - -
Iron Mountain, Inc. ............................... 500,000(1) - - -
Medic Computer Systems, Inc. ...................... - 3,014,959 - -
PMT Services, Inc. ................................ - 11,027,391 - -
PETsMart, Inc. .................................... - (2,182,207) - -
Rainforest Cafe, Inc. ............................. - (1,724,279) - -
Technology Solutions Co. .......................... - 911,306 - -
Transaction Systems Architects,
Inc. (Class A) .................................. - 22,819,483 - -
Uniphase Corp. .................................... 652,500(1) - - -
United Auto Group, Inc. ........................... 687,700(1) - - -
Universal Health Services, Inc.
(Class B) ....................................... 972,400(1) - - -
Viasoft, Inc. ..................................... - (9,971,176) - -
Wind River Systems ................................ 675,000(6,1) - - -
------------ ---- -----------
$37,831,020 $ - $74,812,000
============ ==== ===========
</TABLE>
(1) As of October 31, 1997, no longer an affiliated issuer.
(2) Reflects two-for-one stock split as of January 2, 1997.
(3) Reflects two-for-one stock split as of December 3, 1996.
(4) Merged with Chancellor Media Corp. effective September 8, 1997.
(5) Reflects three-for-two stock split as of February 3, 1997.
(6) Reflects three-for-two stock split as of March 11, 1997.
17
<PAGE>
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John Hancock Funds - Special Equities Fund
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, 1997, 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, 1997, by correspondence with the custodian and brokers, and other
appropriate auditing procedures when 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, 1997, 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, 1997
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John Hancock Funds - Special Equities Fund
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[LOGO] JOHN HANCOCK FUNDS -------------------
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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
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 1800A 10/97
12/97
