================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
Financial
Industries
Fund
ANNUAL REPORT
October 31, 1996
<PAGE>
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TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD 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 B. 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
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
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
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in the mutual
fund industry. At that time, Securities and Exchange Commission Chairman Arthur
Levitt called on fund companies to make their prospectuses more user-friendly.
He noted that prospectuses are often overloaded with technical detail and are
hard for most investors to understand. Many industry observers agreed, and
rightly so.
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
So it is my pleasure to let you know that after being under development for
a year, John Hancock Funds has introduced new simplified and consolidated
prospectuses. The prospectuses feature shorter, clearer language with a
streamlined design, and they incorporate several funds with similar investment
objectives into one document. They cover our income, growth, growth and income,
tax-free income, international/global and money market funds. We are gratified
at the favorable reviews that our new prospectuses have received from
shareholders, financial advisers, industry analysts and the press. We believe
they are a bold but sensible step forward. And while they are easier to read,
they still comply with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page spread
highlighting each fund's goals and investment strategy, the types of securities
it buys, its portfolio management and risk factors, all in plainer language.
Fund expenses and financial highlights are now found here, too, as is a new bar
chart that shows year-to-year volatility for each fund. Other features include a
better presentation of fund services, a new glossary of investment risks and a
discussion about how funds are organized, including a diagram showing the
connection of the various players that provide services to your Hancock fund(s).
We believe we have made a significant advancement in the drive toward better
mutual fund prospectuses. We hope you will agree because in the end, we did it
for you, our shareholders.
Sincerely,
/s/Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
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BY JAMES K. SCHMIDT, CFA PORTFOLIO MANAGER
John Hancock
Financial Industries Fund
Financial stocks lead market rally;
Fund gets off to an auspicious start
After a blockbuster performance in 1995, investors faced an uncertain
environment in early 1996. Concerns over the direction of interest rates, the
sustainability of the current economic expansion and the trend in corporate
earnings all led to weakness in the bond market and choppiness in the stock
market. But since the summer, investors have come around to embracing an outlook
of slow and stable growth, and both markets have charged upward. For the period
between March 14, 1996, when John Hancock Financial Industries Fund was
launched, and October 31, 1996, the broader market, as measured by the Standard
& Poor's 500-Stock index, returned 11.18%.
During that same period, U.S. financial services stocks outperformed the
broader market, generally led by larger-capitalization stocks such as money
center banks and also specialty finance companies. In this environment, John
Hancock Financial Industries Fund benefited even more than its peers. From its
inception on March 14, 1996 through October 31, the Fund's Class A shares posted
a total return of 29.76% at net asset value, compared to the average financial
services fund's 17.24% return for the same period, according to Lipper
Analytical Services.1
Some of the strong performance of the Fund has been due to our decision to
emphasize the rapidly growing consumer finance sector. We have participated in
several successful IPOs in this area. In addition, we have done well in two
niches within the banking sector. We own a basket of small California banks, and
two of them have been acquired at prices well in excess of our cost. We own
several savings and loans that
[A 2" x 3 1/4" photo of the portfolio management team at bottom right hand
corner. Caption reads: "James K. Schmidt (seated), and Fund management team
members: (l-r) James Boyd, Patricia Ouimet, Thomas Finucane."]
"...financial services stocks
outperformed the broader market..."
3
<PAGE>
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John Hancock Funds - Financial Industries Fund
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[A chart entitled "Top Five Common Stock Holdings" at top left hand column.
Within the chart, there are five listings; 1) Associates First Capital Corp.,
2.4%; 2) Fiserv Inc., 2.1%; 3) National Processing Inc., 2.1%; 4) Arden Realty
Group, 2.0%; 5) Starwood Lodging Trust, 2.0%. A footnote below states " As a
percentage of net assets on October 31, 1996."]
- --------------------------------------------------------------------------------
A focus on the consumer
finance sector pays off.
are plaintiffs in "goodwill" lawsuits against the U.S. Government. In July, the
Supreme Court handed down a favorable ruling that could set the stage for our
holdings to collect significant damage payments.
Investment strategy and stock selection
Our basic strategy is to seek capital appreciation by investing in financial
services companies with a positive earnings outlook that are selling at
reasonable valuations. We are particularly interested in opportunities created
by the restructuring or consolidation of an industry. In the United States, we
expect to benefit from continued merger activity among banks and savings and
loans. We also are anticipating banks' purchasing non-bank financial companies
such as securities brokers and asset managers. Overseas, we believe that
selected countries will experience consolidation in their banking systems. In
addition, we expect opportunities will be presented by privatization of major
financial institutions. Globally, there should be an increasing number of
financial transactions executed and processed on an electronic basis. As a
result, software companies and service bureaus that become leading vendors to
the financial services companies should experience explosive growth. In a world
economy characterized by moderate economic expansion, low inflation and stable
interest rates, our outlook for financial stocks is very positive.
- --------------------------------------------------------------------------------
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Investment"' the header for the right column is "Recent
performance...and what's behind the numbers." The first listing is Fiserv Inc.
followed by an up arrow and the phrase "Leading provider of bank outsourcing
services benefits from rising demand." The second listing is TransWorld Bancorp.
followed by an up arrow and the phrase "Step-up in consolidation of smaller
California banks." The third listing is E*TRADE Group followed by a down arrow
and the phrase "Stock choppy after IPO." A footnote below states "See "Schedule
of Investments." Investment holdings are subject to change."]
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- --------------------------------------------------------------------------------
[Bar chart with heading "Fund Performance" at top of right hand column. Under
the heading is the footnote "For the period March 14, 1996 through October 31,
1996." The chart is scaled in increments of 10% from top to bottom with 30% at
the top and 0% at the bottom. Within the chart, there are two solid bars. The
first represents the 29.76% total return for John Hancock Financial Industries
Fund: Class A. The second represents the 17.24% total return for the average
financial industries fund. A footnote below states "The total return for John
Hancock Financial Industries Fund is at net asset value with all dividends
reinvested. The average financial industries fund is tracked by Lipper
Analytical Services. (1)"]
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(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
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.
Sector investing is subject to different, and sometimes greater, risks than
the market as a whole.
4
<PAGE>
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A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Financial Industries Fund. Total return is a
performance measure that equals the sum of all income and capital gain
distributions, assuming reinvestment of these distributions and the change in
the price of the Fund's shares, expressed as a percentage of the Fund's net
asset value per share. Performance figures include the maximum applicable sales
charge of 5% for Class A shares. Remember that all figures represent past
performance and are no guarantee of how the Fund will perform in the future.
Also, 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 see your
prospectus for risks associated with industry segment investing.
[NOTE: The hard copy of this page didn't have any charts--only the heading for
the Cumulative total return chart]
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended September 30, 1996
LIFE
OF
FUND
----
John Hancock Financial Industries Fund: Class A(1) 20.00%(2)
Notes to Performance
(1) Class A shares commenced on March 14, 1996.
(2) Effective March 14, 1996 (commencement of operations), the Adviser has
voluntarily undertaken to limit the Fund's expenses, including the
management fee (but not including the 12b-1 fee or any other class specific
expense) to 0.90% of the Fund's daily net asset value. Without the
limitations of expenses, the average annual total return since inception
would have been 13.05%.
5
<PAGE>
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The chart on the right shows how much a $10,000 investment in the John Hancock
Financial Industries Fund would be worth on October 31, 1996, assuming you had
invested on the day shares started and have reinvested all distributions. For
comparison, we've shown the same $10,000 investment in the Standard & Poor's 500
Stock Index -- an unmanaged index that includes 500 widely traded common stocks
and is a commonly used measure of stock market performance.
- --------------------------------------------------------------------------------
[Line chart with the heading Financial Industries Fund: Class A, representing
the growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines.
The third line represents the value of the Standard & Poor's 500 Stock Index and
is equal to $11,175 as of October 31, 1996.
The second line represents the value of the hypothetical $10,000 investment made
in the Financial Industries Fund, after sales charge, on March 14, 1996, and is
equal to $12,324 as of October 31, 1996.
The first line represents the Financial Industries Fund, before sales charge,
and is equal to $12,976 as of October 31, 1996.]
- --------------------------------------------------------------------------------
6
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries 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, 1996.
You'll also find the net asset value for each share as of that date.
Statement of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $769,345) ............................. $897,731
Short-term investments (cost - $8,000) ...................... 8,000
Corporate savings account ................................... 834
--------
906,565
Receivable for shares sold .................................... 1,324
Dividends and interest receivable ............................. 666
Deferred organization expenses - Note A ....................... 22,241
--------
Total Assets ............................. 930,796
---------------------------------------------------------
Liabilities:
Payable for investments purchased ............................. 7,500
Payable to John Hancock Advisers, Inc. and
affiliates - Note B ......................................... 11,324
Accounts payable and accrued expenses ......................... 16,680
--------
Total Liabilities ........................ 35,504
=========================================================
Net Assets:
Capital paid-in ............................................... 711,607
Accumulated net realized gain on investments .................. 53,523
Net unrealized appreciation of investments .................... 128,386
Undistributed net investment income ........................... 1,776
--------
Net Assets ............................... $895,292
=========================================================
Net Asset Value Per Share:
(Based on 81,137 shares of beneficial interest
outstanding - unlimited number of shares authorized
with no par value) Class A .................................... $ 11.03
==============================================================================
Maximum Offering Price Per Share*:
($11.03 x 105.26%) ............................................ $ 11.61
==============================================================================
* 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 for the period
stated.
Statement of Operations
For the period March 14, 1996 (commencement of operations) to October 31, 1996
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $11) .......... $ 5,011
Interest ..................................................... 2,515
---------
7,526
---------
Expenses:
Investment management fee - Note B ......................... 3,842
Auditing fee ............................................... 8,530
Printing ................................................... 5,592
Custodian fee .............................................. 5,390
Registration and filing fees ............................... 4,492
Organization expense - Note A .............................. 3,239
Distribution fee - Note B .................................. 1,441
Transfer agent fee - Note B ................................ 963
Legal fees ................................................. 230
Miscellaneous .............................................. 129
Financial service fee - Note B ............................. 51
---------
Total Expenses .......................... 33,899
Less expense reductions - Note B ........ (28,136)
---------------------------------------------------------
Net Expenses ............................ 5,763
---------------------------------------------------------
Net Investment Income ................... 1,763
---------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold ........................ 53,523
Net realized gain on foreign currency transactions ........... 13
Change in net unrealized appreciation/depreciation
of investments ............................................ 128,386
---------
Net Realized and Unrealized
Gain on Investments ..................... 181,922
---------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............... $ 183,685
=========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 14, 1996
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1996
----------------
<S> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................................. $ 1,763
Net realized gain on investments sold and foreign currency transactions 53,536
Change in net unrealized appreciation/(depreciation) of investments ... 128,386
--------
Net Increase in Net Assets from Operations .......................... 183,685
--------
From Fund Share Transactions-- Net*: .................................... 211,607
--------
Net Assets:
Beginning of period ................................................... 500,000
--------
End of period (including undistributed net investment income of $1,776) $895,292
========
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MARCH 14, 1996
(COMMENCEMENT OF OPERATIONS) TO
OCTOBER 31, 1996
----------------------------------
SHARES AMOUNT
--------- ---------
<S> <C> <C>
Shares sold ................................................. 31,545 $ 301,830
Less shares repurchased ..................................... (9,232) (90,223)
--------- ---------
Net increase ................................................ 22,313 211,607
Initial Investment by John Hancock Advisers, Inc. - Note B .. 58,824 500,000
--------- ---------
Net increase and shares outstanding end of period ........... 81,137 $ 711,607
========= =========
</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, and any increase or
decrease in money shareholders invested in the Fund. The footnote illustrates
the number of Fund shares sold and repurchased during the period, along with the
corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MARCH 14, 1996
(COMMENCEMENT OF OPERATIONS) TO
OCTOBER 31, 1996
----------------------------------
<S> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 8.50(b)
---------
Net Investment Income ......................................... 0.02(d)
Net Realized and Unrealized Gain on Investments ............... 2.51
---------
Total from Investment Operations ............................ 2.53
---------
Net Asset Value, End of Period ................................ $ 11.03
=========
Total Investment Return at Net Asset Value (e) ................ 29.76%(c)
Total Adjusted Investment Return at Net Asset Value (a) (e) ... 26.04%(c)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ..................... $ 895
Ratio of Expenses to Average Net Assets ....................... 1.20%*
Ratio of Adjusted Expenses to Average Net Assets (a) .......... 7.07%*
Ratio of Net Investment Income to Average Net Assets .......... 0.37%*
Ratio of Adjusted Net Investment Loss to Average Net Assets (a) (5.50%)*
Portfolio Turnover Rate ....................................... 31%
Average Brokerage Commission Rate (f) ......................... $ 0.0649
</TABLE>
* On an annualized basis.
(a) On an unreimbursed basis.
(b) Initial price to commence operations.
(c) Not annualized.
(d) On average month end shares outstanding.
(e) Total investment return does not reflect the effect of sales charges.
(f) Per portfolio share traded.
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: the net investment income, gains
(losses), 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.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
Schedule of Investments
October 31, 1996
- --------------------------------------------------------------------------------
NUMBER OF MARKET
DESCRIPTION, ISSUER SHARES VALUE
- ------------------- ------ -----
COMMON STOCKS
Banks - Foreign (0.80%)
Bank of Scotland (United Kingdom) ...................... 509 $ 2,346
National Bank of Canada (Canada) ....................... 500 4,847
--------
7,193
--------
Banks - Midwest (3.08%)
Mercantile Bancorp ..................................... 250 12,406
Mississippi Valley Bancshares, Inc. .................... 400 15,200
--------
27,606
--------
Banks - Northeast (4.58%)
First Financial Corp. .................................. 1,000 9,250
FNB Rochester Corp.* ................................... 1,250 14,531
Vermont Financial Services Corp. ....................... 500 17,250
--------
41,031
--------
Banks - Southeast (0.92%)
American Bancshares, Inc.* ............................. 1,000 8,250
--------
Banks - Super Regional (2.62%)
Fleet Financial Group, Inc. ............................ 250 12,469
Norwest Corp. .......................................... 250 10,969
--------
23,438
--------
Banks - West (8.34%)
Cupertino National Bancorp ............................. 900 14,175
SJNB Financial Corp. ................................... 500 9,969
TransWorld Bancorp.* ................................... 1,125 17,719
United Security Bancorp.* .............................. 500 6,938
Vallicorp Holdings, Inc. ............................... 500 7,875
Ventura County National Bancorp.* ...................... 1,500 7,313
West Coast Bancorp ..................................... 625 10,625
--------
74,614
--------
Broker Services (7.49%)
E* TRADE Group, Inc.* .................................. 1,000 11,125
Edwards (A.G.), Inc. ................................... 500 14,937
EVEREN Capital Corp.* .................................. 500 9,875
Lehman Brothers Holdings, Inc. ......................... 700 17,588
Salomon, Inc. .......................................... 300 13,537
--------
67,062
--------
Business Services - Misc (5.38%)
Concord EFS, Inc.* ..................................... 200 5,800
First Data Corp. ....................................... 200 15,950
The Schedule of Investments is a complete list of all securities owned by
Financial Industries Fund on October 31, 1996. It's divided into two main
categories: common stocks and short-term investments. The common stocks are
further broken down by industry groups. Short-term investments, which represent
the Fund's "cash" position, are listed last.
NUMBER OF MARKET
DESCRIPTION, ISSUER SHARES VALUE
- ------------------- ------ -----
Business Services - Misc (continued)
First USA Paymentech, Inc.* ............................ 200 $ 7,400
National Processing, Inc.* ............................. 1,000 19,000
--------
48,150
--------
Computer - Services (5.75%)
BISYS Group, Inc. (The)* ............................... 300 11,175
CCC Information Services Group* ........................ 500 9,375
Computer Sciences Corp.* ............................... 158 11,731
Fiserv Inc.* ........................................... 500 19,187
--------
51,468
--------
Computer - Software (2.78%)
CFI Proservices, Inc.* ................................. 300 5,850
Digex Inc.* ............................................ 1,000 10,937
Intuit, Inc.* .......................................... 300 8,100
--------
24,887
--------
Finance - Consumer Loans (21.64%)
Aames Financial Corp. .................................. 250 11,156
Advanta Corp. (Class A)* ............................... 250 12,078
Associates First Capital Corp. ......................... 500 21,687
Beneficial Corp. ....................................... 200 11,700
Capital One Financial Corp. ............................ 400 12,450
Cityscape Financial Corp.* ............................. 300 7,725
ContiFinancial Corp.* .................................. 400 13,000
Dean Witter Discover & Co. ............................. 300 17,662
First USA, Inc. ........................................ 200 11,500
IMC Mortgage Co.* ...................................... 400 15,000
Imperial Credit Industries, Inc.* ...................... 800 14,500
Metris Companies, Inc.* ................................ 400 9,500
Onyx Acceptance Corp.* ................................. 800 8,200
RAC Financial Group, Inc.* ............................. 250 15,000
Southern Pacific Funding Corp.* ........................ 400 12,600
--------
193,758
--------
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
NUMBER OF MARKET
DESCRIPTION, ISSUER SHARES VALUE
- ------------------- ------ -----
Finance - Investment Management (1.87%)
Alliance Capital Management, L.P. ...................... 600 $ 16,725
--------
Finance - Savings & Loan (10.89%)
American Federal Bank .................................. 500 9,188
Cardinal Bancshares, Inc. .............................. 200 8,875
Coast Savings Financial, Inc.* ......................... 450 14,794
First Colorado Bancorp., Inc. .......................... 700 10,938
Pacific Crest Capital, Inc.* ........................... 1,500 14,625
PALFED, Inc. ........................................... 800 10,500
Pamrapo Bancorp., Inc. ................................. 500 9,938
Security First Network Bank* ........................... 800 11,600
Sterling Financial Corp.* .............................. 500 7,000
--------
97,458
--------
Finance - SBIC & Commercial (6.61%)
Financial Federal Corp.* ............................... 600 8,400
Medallion Financial Corp.* ............................. 700 10,063
Newcourt Credit Group, Inc. (Canada) ................... 500 15,510
Sirrom Capital Corp. ................................... 400 14,600
Willis Lease Finance Corp.* ............................ 1,000 10,625
--------
59,198
--------
Insurance - Brokers (1.16%)
Marsh & McLennan Cos., Inc. ............................ 100 10,413
--------
Insurance - Multi Line (2.54%)
Allamerica Financial Corp. ............................. 200 6,075
Enhance Financial Services Group, Inc. ................. 500 16,687
--------
22,762
--------
Insurance - Property & Casualty (6.81%)
Ace, Ltd. .............................................. 250 13,687
Aetna, Inc. ............................................ 200 13,375
General Re Corp. ....................................... 75 11,044
St. Paul Cos., Inc. .................................... 200 10,875
Travelers/Aetna Property Casualty Corp. (Class A) ...... 400 12,000
--------
60,981
--------
Mortgage & RE Services (0.61%)
Matrix Capital Corp.* .................................. 500 5,500
--------
Mortgage & REIT (5.19%)
Arden Realty Group, Inc.* .............................. 800 18,100
Prentiss Properties Trust* ............................. 500 10,312
Starwood Lodging Trust ................................. 400 18,000
--------
46,412
--------
Retail - Misc./Diversified (0.88%)
Ugly Duckling Corp.* ................................... 500 7,875
--------
Telecom - Services (0.33%)
RMH Teleservices, Inc.* ................................ 400 2,950
--------
TOTAL COMMON STOCK
(Cost $769,345) (100.27%) 897,731
-------- --------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S OMITTED) VALUE
- ------------------- ---- --------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.90%)
Investment in a joint repurchase
agreement transaction with
SBC Capital Markets, Inc.
Dated 10-31-96, due 11-01-96
(secured by US Treasury Bonds,
10.375% due 11-15-12,
12.00% due 8-15-13,
11.25% due 2-15-15 and
6.25% due 8-15-23) Note A.................... 5.54% $ 8 $ 8,000
--------
Corporate Savings Account (0.09%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% .......................... 834
--------
TOTAL SHORT-TERM INVESTMENTS (0.99%) 8,834
-------- --------
TOTAL INVESTMENTS (101.26%) $906,565
======== ========
* Non-Income producing security.
The percentage shown for each investment category is the total value of the
category as a percentage of the net assets of the fund.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of four series: John Hancock Financial Industries Fund (the "Fund", which
commenced operations on March 14, 1996), John Hancock Regional Bank Fund, John
Hancock Disciplined Growth Fund, and John Hancock Managed Tax-Exempt Fund. The
other three series of the Trust are reported in separate financial statements.
The investment objective of the Fund is to seek capital appreciation through
investments in financial services companies.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B 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. There were no Class B shares outstanding during the period ended October
31, 1996.
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 sources
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 or
less are valued at amortized cost, which approximates market value. All
portfolio transactions initially expressed in terms of foreign currencies have
been translated into U.S. dollars as described in "Foreign Currency Translation"
below.
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. Capital gains realized
on some foreign securities are subject to foreign taxes and are accrued, as
applicable.
FEDERAL INCOME TAXES The Fund intends to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of 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, net currency exchange gains and
losses from sales of foreign debt securities may be treated as ordinary income
even though such items are gains and losses for accounting purposes.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date, or, in the case of some foreign securities,
on the date thereafter when the Fund is made aware of the dividend. Interest
income on investment securities is recorded on the accrual basis. Foreign income
may be subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not identifiable to a specific fund are
allocated in such a manner as deemed equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
funds.
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 relative net assets of the respective classes. Distribution
and service fees are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate applicable to
each class.
ORGANIZATION EXPENSES Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged to the Fund's operations
ratably over a five year period that commenced with the investment operations of
the Fund.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues,
and expenses of the Fund. Actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in
terms of foreign currencies are translated into U.S. dollars based on London
currency exchange quotations as of 5:00 p.m., London time, on the date of any
determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/(loss) on investments are
translated at the rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities, other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward
foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the contracts are
marked-to-market daily at the applicable foreign currency exchange rates. Any
resulting unrealized gains and losses are included in the determination of the
Fund's daily net assets. The Fund records realized gains and losses at the time
the forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering into these contracts from potential
inability of counterparties to meet the terms of the contract and from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
These contracts involve market or credit risk in excess of the unrealized
gain or loss reflected in the Fund's Statement of Assets and Liabilities. The
Fund may also purchase and sell forward contracts to facilitate the settlement
of foreign currency denominated portfolio transactions, under which it intends
to take delivery of the foreign currency. Such contracts normally involve no
market risk other than that not offset by the currency amount of the underlying
transaction.
There were no open forward foreign currency contracts at October 31, 1996.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure to
the underlying instrument or hedge other Fund instruments. At the time the Fund
enters into a financial futures contract, it is required to deposit with its
custodian a
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
specified amount of cash or U.S. government securities, known as "initial
margin", equal to a certain percentage of the value of the financial futures
contract being traded. Each day, the futures contract is valued at the official
settlement price of the board of trade or U.S. commodities exchange on which it
trades. Subsequent payments, known as "variation margin", to and from the broker
are made on a daily basis as the market price of the financial futures contract
fluctuates. Daily variation margin adjustments, arising from this "mark to
market", are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At October 31, 1996, there were no open positions in financial futures
contracts.
OPTIONS Listed options are valued at the last quoted sales price on the exchange
on which they are primarily traded. Over-the-counter options are valued at the
mean between the last bid and asked prices. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund is included in the
Statement of Assets and Liabilities as an asset and corresponding liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the written option.
The Fund may use options contracts to manage its exposure to the stock
market. Writing puts and buying calls tend to increase the Fund's exposure to
the underlying instrument and buying puts and writing calls tend to decrease the
Fund's exposure to the underlying instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value reflects the maximum exposure of
the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contracts'
terms, or if the Fund is unable to offset a contract with a counterparty on a
timely basis ("liquidity risk"). Exchange-traded options have minimal credit
risk as the exchanges act as counter- parties to each transaction, and only
present liquidity risk in highly unusual market conditions. To minimize credit
risk and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended October 31,
1996.
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) 0.80% of the first $500,000,000 of the Fund's
average daily net asset value, and (b) 0.75% of the Fund's average daily net
asset value in excess of $500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess, and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are 2.5% of the first $30,000,000 of the
Fund's average daily net asset value, 2.0% of the next $70,000,000, and 1.5% of
the remaining average daily net asset value.
14
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the 12b-1 fee or any other class specific expense), to 0.90%
of the Fund's daily net assets. Accordingly, the reduction in expenses amounted
to $28,136 for the period ended October 31, 1996. The Adviser reserves the right
to terminate this limit in the future.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended October
31, 1996, net sales charges received with regard to sales of Class A shares
amounted to $43. Out of this amount, $1 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $42 was paid as
sales commissions to unrelated broker dealers.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan 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 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 these 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 Investor
Services, Corp. ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. The Fund pays transfer agent fees based on the number of
shareholder accounts and certain out-of-pocket expenses.
On August 27, 1996, the Board of Trustees approved retroactively to July 1,
1996 an agreement with the Adviser to perform necessary tax and financial
management services for the Fund. The compensation for 1996 is estimated to be
at an annual rate of 0.01875% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are directors and/or officers of the Adviser, and/or its affiliates, as
well as Trustees of the Fund. The Adviser owns 58,824 shares of beneficial
interest 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. The investment had no impact on the operations of the Fund.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
securities, during the period ended October 31, 1996, aggregated $919,453 and
$203,644, respectively. There were no purchases or sales of obligations of the
U.S. government and its agencies during the period ended October 31, 1996.
The cost of investments owned at October 31, 1996 (excluding the corporate
savings account) for federal income tax purposes was $777,345. Gross unrealized
appreciation and depreciation of investments aggregated $150,293 and $21,907,
respectively, resulting in net unrealized appreciation of $128,386.
15
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Financial Industries Fund
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the period ended October 31, 1996, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of $13 and an
increase in undistributed net investment income of $13. This represents the
amount necessary to report these balances on a tax basis, excluding certain
temporary differences, as of October 31, 1996. Additional adjustments may be
needed in subsequent reporting periods. These reclassifications, which have no
impact on the net asset value of the Fund, are primarily attributable to the
treatment of foreign currency gains and losses in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
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John Hancock Funds - Financial Industries Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
John Hancock Financial Industries Fund and
the Trustees of Freedom Investment Trust
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Financial Industries
Fund (the "Fund") (series of Freedom Investment Trust) at October 31, 1996, and
the results of its operations, the changes in its net assets and the financial
highlights for the period from March 14, 1996 (commencement of operations) to
October 31, 1996, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and the significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at October 31, 1996 by correspondence with the custodian and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received, provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
BOSTON, MASSACHUSETTS
DECEMBER 12, 1996
SHAREHOLDER MEETING (UNAUDITED)
On June 26, 1996, a special meeting of John Hancock Financial Industries Fund
was held.
The Shareholders approved an Amended and Restated Declaration of Trust. The
shareholder votes were 67,819 FOR, 0 AGAINST and 166 ABSTAINING.
The Shareholders elected the following Trustees with the votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- --- --------
Dennis S. Aronowitz ......................... 67,986 0
Edward J. Boudreau, Jr ...................... 67,819 166
Richard P. Chapman, Jr ...................... 67,986 0
William J. Cosgrove ......................... 67,986 0
Douglas M. Costle ........................... 67,986 0
Leland O. Erdahl ............................ 67,986 0
Richard A. Farrell .......................... 67,986 0
Gail D. Fosler .............................. 67,986 0
William F. Glavin ........................... 67,986 0
Anne C. Hodsdon ............................. 67,986 0
Dr. John A. Moore ........................... 67,986 0
Patti McGill Peterson ....................... 67,986 0
John W. Pratt ............................... 67,986 0
Richard S. Scipione ......................... 67,986 0
Edward J. Spellman .......................... 67,986 0
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during the fiscal period ended October
31, 1996.
The Fund has not paid any distributions of ordinary income dividends or
capital gains during the fiscal year ended October 31, 1996. It is anticipated
that there will be a distribution from sales of securities to shareholders of
record on December 23, 1996 and payable December 30, 1996. Shareholders will
receive a 1996 U.S. Treasury Department Form 1099-DIV in January 1997
representing their proportionate share.
17
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NOTES
John Hancock Funds - Financial Industries Fund
18
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NOTES
John Hancock Funds - Financial Industries Fund
19
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box sectioned in quadrants with a triangle in upper left, a circle in upper
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101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
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This report is for the information of shareholders of the John Hancock
Financial Industries Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
7000A 10/96
12/96
