ANNUAL REPORT
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[GRAPHIC OMITTED]
Financial
Industries Fund
OCTOBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
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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*
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
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
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
===============================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 second paragraph.
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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
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BY JAMES K. SCHMIDT, CFA, AND THOMAS FINUCANE,
CO-PORTFOLIO MANAGERS
John Hancock Financial
Industries Fund
Financial stocks among the leaders in a strong market;
earnings fundamentals on track, despite recent jitters
The last 12 months were rewarding for stock investors, albeit occasionally
nerve-wracking. The markets brought their 1996 winning streak into the beginning
of 1997, but saw their progress slowed by inflationary concerns and rising
interest rates in March and April. After a mild sell-off, stocks resumed their
upward trajectories in the spring and summer, as investors basked in the warm
sunshine of a benign economic expansion that drove corporate earnings higher and
eased inflationary concerns. The market stayed on this positive track until very
recently, when trepidations over the slowdown in Asia spooked investors in the
U.S. markets. Despite recent softness, the Standard & Poor's 500 Stock Index, a
commonly used gauge for the broader stock market, returned 32.10% for the last
12 months, including reinvested dividends.
Over the same period, financial stocks outperformed the broader market.
For the 12 months ended October 31, 1997, John Hancock Financial Industries
Fund's Class A shares posted a total return of 37.19%, compared to the 41.27%
result for the average financial services fund, according to Lipper Analytical
Services, Inc.1 The Fund's Class B shares began on January 14, 1997, and from
inception through October 31, 1997 returned 24.06%. Please see
"...financial stocks
outperformed the broader market."
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A 2 1/4" x 3 3/4" photo of the portfolio management team at bottom right hand
corner. Caption reads: "Jim Schmidt (l) and Tom Finucane (r), Co-Portfolio
managers."
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3
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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) General RE Corp. 2.0%; 2)
Chase Manhattan Corp. 1.9%; 3) Associates First Capita; Corp. 1.8%; 4) Salomon,
Inc. 1.8%; 5) American Express Corp. 1.8%. A footnote below states " As a
percentage of net assets on October 31, 1997."
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pages seven and eight for longer-term performance information. The Fund
outperformed its peers in the second half of the fiscal year, but our result for
the year was slightly below average due to a lag in the first half of the
period. As we discussed in the semiannual report dated April 30, the Fund was
held back early on due to temporarily high cash balances while the Fund
multiplied in size at the beginning of the year.
Leaders and laggards
Leading the pack over the last year have been the brokerage stocks, propelled by
buoyant markets and continued merger activity. As noted in our semiannual
report, the Federal Reserve's newly relaxed rules governing bank securities
powers engendered a spate of takeover activity. The Morgan Stanley-Dean Witter,
Alex Brown-Bankers Trust and Montgomery-NationsBank deals are all indirectly or
directly born from this regulatory change. We also expect additional
acquisitions of regional brokerage houses, perhaps involving Fund holdings, by
commercial banks in the not-too-distant future. Also climbing to new highs this
year were the stocks of asset managers, driven by strong markets and robust
mutual fund sales. Bank and insurance stocks have also posted healthy returns in
response to in-line earnings and continued consolidation activity.
The weakest performing stocks in the Fund have been the financial
processing companies and the sub-prime mortgage lenders. In the case of the
former group, aggressive pricing by the industry leader, First Data, squeezed
the margins (and stock prices) of everyone else. We believe profits will improve
as competition exits the arena and other entrants are acquired. In the case of
the sub-prime mortgage firms, the market has painted all companies with the same
(red) brush, not differentiating for quality of loan portfolios or revenue
recognition policies. Unlike the sub-prime auto lenders who lend against
depreciating and mobile assets, the mortgage group advances against collateral
whose value is relatively predictable. In fact, average home prices are rising
in all states except Hawaii. We believe that the companies we own are capable of
managing their higher risk borrowers and are compensated for the risk with
sufficiently high spreads on their loans. We would be happier to see the
accounting standards of the industry change so that less reported income was
derived from the present value of future spreads.
There has been a significant increase in the volatility of stock markets
around the world recently due to weak currencies of emerging economies in the
Pacific Rim. A handful of our companies, namely HSBC Holdings, CitiCorp and
Chase Manhattan have material interests in these countries. We believe these
banks will not
"Leading the pack over the last
year have been the
brokerage stocks..."
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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 Salomon, Inc.
followed by an up arrow and the phrase "Merges with Travelers/Smith Barney." The
second listing is Royal Bank of Canada followed by an up arrow and the phrase
"North Anerica's fourth largest bank gains market recognition of its value." The
third listing is CapMAC Holdings followed by a down arrow and the phrase "Poor
results in financial gurantee business." A footnote below states "See "Schedule
of Investments." Investment holdings are subject to change."
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4
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John Hancock Funds - Financial Industries Fund
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Bar chart with heading "Fund Performance" at top of right hand column. Under the
heading is the footnote "Forthe year ended October 31, 1997." The chart is
scaled in increments of 10% from top to bottom with 50% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
37.19% total return for John Hancock Financial Industries Fund: Class A. The
second represents the 24.06% total return for John Hancock Financial industries
Fund: Class B. The third represents the 41.27% total return for the Average
financial services 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)". See pages seven and eight for historical performance
information.
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* For Class B shares, return is from inception January 14, 1997 through October
31, 1997.
Total returns for John Hancock Financial Industries Fund are at net asset value
with all distributions reinvested. The average financial services fund is
tracked by Lipper Analytical Services, Inc.(1) See pages seven and eight for
historical performance information.
*For Class B shares, return is from inception January 14, 1997 through October
31, 1997.
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suffer inordinate credit losses, but only a diminution in revenues as volumes
contract. The stock market has already accounted for these potential losses
several times over.
Earnings still on an uptrend
In 1997, earnings results for most of the financial stocks have exceeded
expectations. Current macro-economic conditions are ideal for financial
equities: moderate growth, low inflation and stable interest rates. In this
environment, the companies reported 12% to 14% year-over-year earnings growth.
Securities brokers have turned in exceptionally strong results as trading volume
and equity and debt offerings have exploded. Across the spectrum of financial
firms, loan/asset quality is excellent, margins remain adequate, managements'
attention to overhead levels and efficiency is paramount and stock buybacks
counter excess capital build-up. The concerns over rising consumer credit costs
have abated, due to lower levels of charge-offs and delinquencies reported since
the second quarter. As long as the macro-economic stars remain in proper
alignment, our 1998 earnings models call for 10% earnings increases over 1997.
We expect that the majority of the publicly traded securities brokers and
asset managers will be acquired by other financial firms within the next three
years. However, shares of these companies are trading at multiples of book
values and future earnings that largely reflect their potential value in an
acquisition. Less expensive companies with more predictable earnings that are
also likely to be in the path of merger activity can be found among domestic and
foreign banks, life insurance companies, and real estate investment trusts
(REITS).
The consolidation beat goes on
So far this year, 11 of the Fund's holdings announced their intent to be
acquired. These deals have been spread across several industry combinations,
including banks buying thrifts (CCB Financial/American Federal Bank); banks
buying brokers (Bankers Trust/Alex Brown) and life insurers buying each other
(ING/Equitable of Iowa). We expect the consolidation among and across the
various financial services industries to continue and perhaps accelerate in the
future. An important catalyst would be the reform or repeal of the
Glass-Steagall Act. This depression-era law, widely regarded by economists and
academicians to be an anachronism, makes it impossible for industrial companies,
banks, and insurers to combine with each other, and imposes restrictions on
affiliations between commercial banks and investment banks. A bill to
substantially liberalize the Act was passed by the House Banking Committee this
summer, but it still faces considerable hurdles before the full
"...earnings results for most of the financial stocks have exceeded
expectations."
5
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John Hancock Funds - Financial Industries Fund
House and subsequently the Senate. We think enactment of such a bill is
inevitable, but perhaps sill a few years away.
In the meantime, companies are already busy exploiting recent regulatory
changes. As we noted earlier, the Fed has increased the amount of revenue a bank
can realize from securities underwriting, clearing a path for several
bank/broker mergers. We think future commercial bank acquisitions of brokerage
firms will move away from being driven by underwriting capability and toward
distribution. In particular, we think that regional banks will have an interest
in regional brokers that serve the same geographic area. The Controller of the
Currency has clarified rules allowing banks to sell insurance; this is a minor
business at best for most banks now, but we think it has enormous potential.
Mergers between banks and insurers, however, are on hold until Glass-Steagall
reform is realized. Nevertheless, mergers among insurance companies are picking
up in pace. We expect a large number of deals among the nation's 1,700 life
insurance companies. This industry has been experiencing slow growth and needs
to consolidate to achieve greater efficiencies.
We are particularly excited about consolidation possibilities resulting
from the European Monetary Union (EMU), which is scheduled for 1999. While the
financial institutions in western Europe are very concentrated within each
country, they are fragmented when the continent is viewed as a whole. It is
still too early to tell if the cultural and regulatory obstacles that have
inhibited the formation of trans-European financial entities in the past will
evaporate under the EMU.
Portfolio strategy and outlook
Following in the footsteps of the John Hancock Regional Bank Fund, but taking a
broader path, John Hancock Financial Industries Fund invests in relatively
inexpensive financial stocks that have solid earnings fundamentals and may be in
the path of consolidation. The Fund is diversified across financial industries
as follows as a percent of net assets: banks and thrifts, 25% (including foreign
banks at 8%;) insurance, 23%; finance, 15%; brokers, 9%; REITs, 9%; asset
managers, 4%; other, 3%; and cash, 12%. Our investment process has us choose
attractive segments, and then stocks within that group, that fit our valuation
and "endgame" criteria. While our relative weightings among sub-segments have
not changed radically over the last six months, we have changed some individual
stocks within the sub-segments, as we selectively rotate in and out of names
based on relative valuation and price performance.
Our outlook for financial stocks remains bright. All the elements that
make these stocks compelling are still in place. Economic conditions are near
perfect, with sustained growth in a backdrop of low inflation and interest
rates. What's more, the regulatory climate bodes well for cross-industry
consolidations for years to come.
"...the regulatory climate bodes well for cross-industry consolidations..."
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This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
Sector investing is subject to different, and sometimes greater, risks than the
market as a whole.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
6
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John Hancock Funds - Financial Industries Fund
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A LOOK AT PERFORMANCE
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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
measures the change in value of an investment from the beginning to the end of a
period, assuming all the distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).
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 for risks associated with industry segment investing before you
invest or send money.
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CLASS A
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For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (3/14/96)
---- ---------
Cumulative Total Returns 37.79% 74.10%
Average Annual Total Returns (1) 37.79% 43.07%
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CLASS B
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For the period ended September 30, 1997
SINCE
INCEPTION
(1/14/97)
---------
Cumulative Total Returns 22.82%
Average Annual Total Returns (1) 22.82%(2)
Notes to Performance
(1) The Adviser had agreed to limit the Fund's expenses to 0.90% of the Fund's
average daily net assets, including the management fee (but not including
a 12b-1 fee or other class specific expenses). Without the limitations of
expenses, the average annual total return for the one year and since
inception periods would have been 37.44% and 40.45%, respectively, for
Class A shares and 22.57% since inception for Class B shares.
(2) Not annualized.
7
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John Hancock Funds - Financial Industries Fund
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Financial Industries 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. The Standard &
Poor's 500 Stock Index is an unmanaged index that includes 500 widely traded
common stocks and is a commonly used measure of stock market performance. Past
performance is not indicative of future results.
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 first line represents the value of the Financial
Industries Fund, before sales charge, and is equal to $17,802 as of October 31,
1997. The second line represents the value of the Financial Industries Fund,
after sales charge, and is equal to $16,912 as of October 31, 1997. The third
line represents the value of a $10,000 hypothetical investment in the Standard &
Poor's 500 Stock Index on March 14, 1996, and is equal to $14,762 as of October
31, 1997.
Line chart with the heading Financial Industries Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of a $10,000
hypothetical investment in the Standard & Poor's 500 Stock Index on January 14,
1997, and is equal to $12,531 as of October 31, 1997. The second line represents
the value of the Financial Industries Fund, before sales charge, and is equal to
$12,406 as of October 31, 1997. The third line represents the value of the
Financial Industries Fund, after sales charge, and is equal to $11,906 as of
October 31, 1997.
8
<PAGE>
==============================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, 1997. You'll
also find the net asset value for each share as of that date.
Statement of Assets and Liabilities
October 31, 1997
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Assets:
Investments at value - Note C:
Common stocks (cost - $1,348,838,180) .................... $1,510,077,913
Joint repurchase agreement (cost - $165,045,000) ......... 165,045,000
Short-term investments (cost - $49,763,157) .............. 49,741,992
Corporate savings account ................................ 9,572
--------------
1,724,874,477
Receivable for investments sold ........................... 2,209,308
Receivable for shares sold ................................ 24,193,222
Receivable for forward foreign currency
contracts purchased - Note A ............................. 196
Dividends receivable ...................................... 1,992,238
Interest receivable ....................................... 483,999
Foreign tax receivable .................................... 28,089
Deferred organization expense - Note A .................... 17,149
--------------
Total Assets ............................ 1,753,798,678
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Liabilities:
Payable for investments purchased ......................... 25,432,754
Payable for shares repurchased ............................ 631,460
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................. 1,539,483
Accounts payable and accrued expenses ..................... 550,470
--------------
Total Liabilities ....................... 28,154,167
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Net Assets:
Capital paid-in ........................................... 1,559,388,659
Accumulated net realized gain on investments .............. 1,530,386
Net unrealized appreciation of investments ................ 161,209,674
Undistributed net investment income ....................... 3,515,792
--------------
Net Assets .............................. $1,725,644,511
============================================================
Net Asset Value Per Share:
(Based on net asset value and shares of
beneficial interest outstanding -
unlimited number of shares authorized
with no par value)
Class A - $416,698,103/29,215,418 ......................... $14.26
==============================================================================
Class B - $1,308,946,408/92,292,702 ....................... $14.18
==============================================================================
Maximum Offering Price Per Share*
Class A -($14.26 x 105.26%) ............................... $15.01
==============================================================================
* 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
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Investment Income:
Dividends (net of foreign withholding taxes of $169,504) .... $10,396,565
Interest .................................................... 3,686,872
--------------
14,083,437
--------------
Expenses:
Investment management fee - Note B ......................... 4,842,498
Distribution and service fee - Note B
Class A .................................................. 446,824
Class B .................................................. 4,633,923
Transfer agent fee - Note B ................................ 1,363,906
Registration and filing fees ............................... 604,857
Custodian fee .............................................. 171,818
Financial services fee - Note B ............................ 110,155
Printing ................................................... 35,598
Auditing fee ............................................... 23,500
Miscellaneous .............................................. 11,708
Legal fees ................................................. 6,674
Trustees' fees ............................................. 6,247
Organization expense - Note A .............................. 5,092
--------------
Total Expenses ............................ 12,262,800
-----------------------------------------------------------
Less expense reductions -
Note B .................................... (1,671,056)
------------------------------------------------------------
Net Expenses .............................. 10,591,744
-----------------------------------------------------------
Net Investment Income ..................... 3,491,693
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold ....................... 1,530,386
Net realized gain on foreign currency transactions .......... 24,664
Change in net unrealized appreciation/depreciation
of investments ............................................. 161,090,182
Change in net unrealized appreciation/depreciation
of foreign currency transactions ........................... (8,894)
--------------
Net Realized and Unrealized
Gain on Investments ....................... 162,636,338
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................. $166,128,031
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SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................................. $1,763 $3,491,693
Net realized gain on investments sold and foreign currency transactions 53,536 1,555,050
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions ....................................... 128,386 161,081,288
----------- ---------------
Net Increase in Net Assets Resulting from Operations ................ 183,685 166,128,031
----------- ---------------
Distributions to Shareholders:
Dividends from net investment income
Class A ** - (none and $0.0283 per share, respectively) ............. -- (2,341)
Distributions from net realized gain on investments sold
Class A ** - (none and $0.6466 per share, respectively) ............. -- (53,523)
----------- ---------------
Total Distributions to Shareholders ................................. -- (55,864)
----------- ---------------
From Fund Share Transactions - Net:* ..................................... 211,607 1,558,677,052
Net Assets:
Beginning of period ................................................... 500,000 895,292
----------- ---------------
End of period (including undistributed net investment income
of $1,776 and $3,515,792, respectively) ............................. $895,292 $1,725,644,511
=========== ===============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1997
----------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
CLASS A **
Initial investment by John Hancock Advisers, Inc. ............ 58,824 $500,000 -- $ --
Shares sold .................................................. 31,545 301,830 31,103,168 400,561,297
Shares issued to shareholders in reinvestment of distributions -- -- 1,495 16,558
------ -------- ---------- ------------
90,369 801,830 31,104,663 400,577,855
Less shares repurchased ...................................... (9,232) (90,223) (1,970,382) (25,782,509)
------ -------- ---------- ------------
Net increase ................................................. 81,137 $711,607 29,134,281 $374,795,346
====== ======== ========== ============
CLASS B ***
Shares sold ..................................................... 94,841,897 $1,217,437,825
Less shares repurchased ......................................... (2,549,195) (33,556,119)
---------- --------------
Net increase .................................................... 92,292,702 $1,183,881,706
========== ==============
</TABLE>
**Class A shares commenced operations on March 14, 1996.
***Class B shares commenced operations on January 14, 1997.
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency gains and losses,
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.
10
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==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries 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:
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<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
OCTOBER 31, 1996(1) OCTOBER 31, 1997
------------------- ----------------
<S> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................... $8.50 $11.03
------- --------
Net Investment Income (2) .............................................. 0.02 0.14
Net Realized and Unrealized Gain on Investments ........................ 2.51 3.77
------- --------
Total from Investment Operations ...................................... 2.53 3.91
------- --------
Distributions to Shareholders:
Dividends from Net Investment Income ................................... - (0.03)
Distributions from Net Realized Gains on Investments Sold .............. - (0.65)
------- --------
Total Distributions ................................................... - (0.68)
------- --------
Net Asset Value, End of Period ......................................... $11.03 $14.26
======= ========
Total Investment Return at Net Asset Value (3) ......................... 29.76%(7) 37.19%
Total Adjusted Investment Return at Net Asset Value (3,4) .............. 26.04%(7) 36.92%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $895 $416,698
Ratio of Expenses to Average Net Assets ................................ 1.20%(8) 1.20%
Ratio of Adjusted Expenses to Average Net Assets (5) ................... 7.07%(8) 1.47%
Ratio of Net Investment Income to Average Net Assets ................... 0.37%(8) 1.10%
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (5) (5.50%)(8) 0.83%
Portfolio Turnover Rate ................................................ 31% 6%
Average Brokerage Commission Rate (6) .................................. $0.0649 $0.0661
Fee Reduction Per Share (2) ............................................ $0.38 $0.03
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indi cated: 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 rela tionships 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 - Financial Industries Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER31, 1997 (1)
-------------------
<S> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................ $11.43
--------
Net Investment Income (2) ....................................... 0.04
Net Realized and Unrealized Gain on Investments ................. 2.71
--------
Total from Investment Operations ................................ 2.75
--------
Net Asset Value, End of Period .................................. $14.18
========
Total Investment Return at Net Asset Value (3) .................. 24.06%(7)
Total Adjusted Investment Return at Net Asset Value (3,4) ....... 23.85%(7)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $1,308,946
Ratio of Expenses to Average Net Assets ......................... 1.90%(8)
Ratio of Adjusted Expenses to Average Net Assets (5) ............ 2.17%(8)
Ratio of Net Investment Income to Average Net Assets ............ 0.40%(8)
Ratio of Adjusted Net Investment Income to Average Net Assets (5) 0.13%(8)
Portfolio Turnover Rate ......................................... 6%
Average Brokerage Commission Rate (6) ........................... $0.0661
Fee Reduction Per Share (2) ..................................... $0.03
</TABLE>
(1) Class A and Class B commenced operations on March 14, 1996 and January 14,
1997, respectively.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation which does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Per portfolio share traded.
(7) Not annualized.
(8) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
Schedule of Investments
October 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Financial Industries Fund on October 31, 1997. It's divided into two main
categories: common stocks and unit; 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.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS AND UNIT
Banks - Foreign (7.92%)
ABN Amro Holding NV, American
Depositary Receipt, ADR (Netherlands) ......... 312,000 $6,220,500
Allied Irish Banks PLC, ADR (Ireland) ........... 233,000 11,853,875
Australia & New Zealand Banking Group
Ltd., ADR (Australia) ......................... 140,000 4,882,500
Banco Bilbao Vizcaya, S.A. ADR (Spain) .......... 340,000 8,925,000
Bank of Scotland (United Kingdom) ............... 865,509 7,195,149
HSBC Holdings, PLC (United Kingdom) ............. 230,000 5,399,618
ING Groep N.V. ADR (Netherlands) ................ 203,400 8,466,525
National Westminster Bank, PLC
(United Kingdom) .............................. 800,000 11,496,800
Royal Bank of Canada (Canada) ................... 538,100 28,889,244
Royal Bank of Scotland Group, PLC
(United Kingdom) .............................. 525,000 5,563,950
Societe Generale (France) ....................... 75,000 10,293,533
Svenska Handelsbanken (Class A)
(Sweden)* ..................................... 275,000 8,708,288
Toronto-Dominion Bank (Canada) ................. 515,200 18,804,800
------------
136,699,782
------------
Banks - Midwest (2.59%)
BancFirst Ohio Corp. ............................ 71,900 3,091,700
Community First Bankshares, Inc. ................ 130,000 6,207,500
Star Banc Corp. ................................. 340,000 16,681,250
TCF Financial Corp. ............................. 329,138 18,719,724
------------
44,700,174
------------
Banks - Money Center (4.90%)
Bankers Trust New York Corp. .................... 232,600 27,446,800
Chase Manhattan Corp. ........................... 283,400 32,697,275
Citicorp ........................................ 194,500 24,324,656
------------
84,468,731
------------
Banks - Northeast (1.92%)
FNB Rochester Corp. ............................. 36,750 666,094
State Street Corp. .............................. 380,000 21,185,000
U.S. Trust Corp. ................................ 162,500 9,506,250
Vermont Financial Services Corp. ................ 70,500 1,841,813
------------
33,199,157
------------
Banks - Southeast (1.40%)
CCB Financial Corp. ............................. 96,008 8,736,683
First Tennessee National Corp. .................. 268,700 15,483,837
------------
24,220,520
------------
Banks - Southwest (0.58%)
Bank United Corp. (Class A) ..................... 170,000 7,140,000
Southwest Bancorp. of Texas, Inc.* .............. 93,900 2,817,000
------------
9,957,000
------------
Banks - Super Regional (4.55%)
Banc One Corp. .................................. 420,148 21,900,215
BankBoston Corp. ................................ 334,300 27,099,194
Norwest Corp. ................................... 920,000 29,497,500
------------
78,496,909
------------
Banks - West (1.38%)
City National Corp. ............................. 333,287 10,019,444
Greater Bay Bancorp ............................. 97,733 4,495,718
SJNB Financial Corp. ............................ 52,000 2,080,000
West Coast Bancorp .............................. 66,125 1,950,688
Westamerica Bancorp ............................. 60,357 5,311,416
------------
23,857,266
------------
Broker Services (9.48%)
Edwards (A.G.), Inc. ............................ 729,500 23,936,719
EVEREN Capital Corp. ............................ 269,500 10,173,625
Interra Financial, Inc. ......................... 175,100 9,652,387
Interstate/Johnson Lane, Inc. ................... 116,600 3,148,200
Legg Mason, Inc. ................................ 324,400 15,915,875
Lehman Brothers Holdings, Inc. .................. 372,200 17,516,662
McDonald & Co., Investments ..................... 384,200 9,388,887
Morgan Keegan, Inc. ............................. 250,650 4,449,038
Morgan Stanley, Dean Witter,
Discover & Co. ............................... 603,100 29,551,900
Raymond James Financial, Inc. ................... 283,700 8,511,000
Salomon, Inc. ................................... 402,800 31,292,525
------------
163,536,818
------------
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Business Services (0.96%)
Coinstar, Inc.* ................................. 55,000 $553,438
First Data Corp. ................................ 469,400 13,641,937
First USA Paymentech, Inc.* ..................... 69,500 1,224,937
National Processsing, Inc.* ..................... 105,500 1,074,781
------------
16,495,093
------------
Computer (1.84%)
BISYS Group, Inc. (The)* ........................ 267,800 8,335,275
E*TRADE Group, Inc.* ............................ 121,000 3,735,875
Fiserv, Inc.* ................................... 438,200 19,609,450
------------
31,680,600
------------
Finance - Consumer Loans (8.54%)
Aames Financial Corp. ........................... 140,325 2,052,253
Advanta Corp. (Class A) ......................... 19,250 625,625
American Express Co. ............................ 394,200 30,747,600
Associates First Capital Corp. (Class A) ........ 501,000 31,876,125
Capital One Financial Corp. ..................... 143,400 6,542,625
ContiFinancial Corp.* ........................... 188,300 5,354,781
Delta Financial Corp.* .......................... 158,300 2,888,975
First Alliance Corp. (Class A)* ................. 75,000 2,475,000
FIRSTPLUS Financial Group, Inc.* ................ 66,200 3,641,000
Household International, Inc. ................... 254,000 28,765,500
Imperial Credit Industries, Inc.* ............... 200,800 5,045,100
MBNA Corp. ...................................... 394,750 10,386,859
New Century Financial Corp.* .................... 67,000 1,072,000
Providian Financial Corp. ....................... 230,000 8,510,000
United Companies Financial Corp. ................ 293,500 7,429,219
------------
147,412,662
------------
Finance - Investment Management (3.99%)
Amvescap PLC, ADR (United Kingdom) .............. 286,600 18,843,950
Franklin Resources, Inc. ........................ 223,600 20,096,050
Investors Group, Inc. (Canada) ................. 40,000 1,199,456
Kansas City Southern Industries, Inc. ........... 95,000 2,897,500
Liberty Financial Cos., Inc. .................... 85,000 4,420,000
Price (T. Rowe) Associates, Inc. ................ 324,000 21,465,000
------------
68,921,956
------------
Finance - Savings & Loan (1.26%)
First Federal Bancshares
of Arkansas, Inc. ............................. 112,500 2,418,750
InterWest Bancorp, Inc. ......................... 109,300 4,180,725
PALFED, Inc. .................................... 66,800 1,670,000
Washington Mutual, Inc. ......................... 196,500 13,447,969
------------
21,717,444
------------
Finance - SBIC & Commercial (1.29%)
Financial Federal Corp.* ......................... 114,600 2,177,400
Newcourt Credit Group, Inc. (Canada) ............. 261,000 9,086,063
Resource America, Inc. (Class A) ................. 84,000 4,431,000
Sirrom Capital Corp. ............................. 113,200 5,702,450
Willis Lease Finance Corp.* ...................... 49,500 897,188
------------
22,294,101
------------
Insurance - Accident & Health (1.40%)
Penncorp Financial Group, Inc. ................... 200,000 6,512,500
Provident Cos., Inc. ............................. 527,900 17,618,663
------------
24,131,163
------------
Insurance - Brokers (1.18%)
Marsh & McLennan Cos., Inc. ...................... 286,200 20,320,200
------------
Insurance - Life (4.40%)
AmerUs Life Holdings, Inc. (Class A) ............. 202,100 6,277,731
AmVestors Financial Corp. ........................ 437,500 8,804,687
ARM Financial Group, Inc. (Class A) .............. 113,500 2,454,437
Equitable of Iowa Cos ............................ 189,000 12,651,187
Hartford Life, Inc. (Class A) .................... 185,900 6,866,681
Liberty Corp. .................................... 300,000 12,843,750
Nationwide Financial Services, Inc.
(Class A) ...................................... 389,000 11,840,187
Presidential Life Corp. .......................... 410,000 8,148,750
Protective Life Corp. ............................ 115,000 6,080,625
------------
75,968,035
------------
Insurance - Multi Line (2.33%)
CapMAC Holdings Inc. ............................. 317,500 9,525,000
Enhance Financial Services Group, Inc. ........... 167,000 8,819,687
MBIA, Inc. ....................................... 340,000 20,315,000
Royal & Sun Alliance Insurance Group, PLC
(United Kingdom)* .............................. 155,000 1,493,224
------------
40,152,911
------------
Insurance - Property & Casualty (13.28%)
Ace, Ltd. (Bermuda) .............................. 213,750 19,865,391
Aetna, Inc. ...................................... 193,500 13,750,594
Allmerica Financial Corp. ........................ 491,000 23,015,625
Cincinnati Financial Corp. ....................... 308,500 27,957,812
Frontier Insurance Group, Inc. ................... 151,000 5,086,812
General Re Corp. ................................. 170,775 33,674,695
Penn-America Group, Inc. ......................... 131,400 2,422,688
PMI Group, Inc. .................................. 231,400 13,985,237
Progressive Corp. ................................ 269,100 28,053,675
SAFECO Corp. ..................................... 73,500 3,500,438
St. Paul Cos., Inc. .............................. 304,200 24,316,988
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Insurance - Property & Casualty (continued)
Summit Holdings Southeast, Inc.* ............. 94,800 $1,706,400
Travelers Property Casualty Corp.
(Class A) .................................. 487,400 17,607,325
Trenwick Group, Inc. ......................... 329,000 11,473,875
Unionamerica Holdings PLC, ADR
(United Kingdom) ........................... 39,400 783,075
USF&G Corp. .................................. 100,000 2,025,000
------------
229,225,630
------------
Mortgage & Real Estate Services (3.17%)
Countrywide Credit Industries, Inc. .......... 460,000 15,783,750
Fannie Mae ................................... 615,000 29,789,062
HomeSide, Inc.* .............................. 343,000 9,196,687
------------
54,769,499
------------
REIT - Equity Trust (8.31%) Apartment
Investment & Management Co.
(Class A) .................................. 170,600 6,045,637
Arden Realty Group, Inc. ..................... 250,000 7,625,000
Beacon Properties Corp. ...................... 304,500 12,827,062
Boston Properties, Inc. ...................... 166,000 5,312,000
Brandywine Realty Trust ...................... 157,500 3,691,406
Cali Realty Corp. ............................ 205,300 8,314,650
Colonial Properties Trust .................... 235,000 6,668,125
Equity Residential Properties Trust .......... 251,000 12,675,500
Excel Realty Trust, Inc. ..................... 224,000 6,748,000
Glenborough Realty Trust, Inc. ............... 251,800 6,452,375
Innkeepers USA Trust ......................... 215,000 3,587,812
Patriot American Hospitality, Inc. ........... 195,671 6,457,143
Prentiss Properties Trust .................... 318,000 8,725,125
Price REIT, Inc. ............................. 125,000 4,921,875
Reckson Associates Realty Corp. .............. 505,000 13,224,688
SL Green Realty Corp. ........................ 111,500 2,794,469
Spieker Properties, Inc. ..................... 469,500 18,369,188
Starwood Lodging Trust ....................... 94,300 5,640,319
Storage Trust Realty ......................... 50,000 1,278,125
Tower Realty Trust, Inc.* .................... 78,000 1,969,500
------------
143,327,999
------------
REIT - Mortgage Trust (0.83%)
CRIIMI MAE, Inc. ............................. 125,000 1,984,375
Hanover Capital Mortgage Holdings, Inc.* ..... 137,600 2,425,200
IMH Commercial Holdings, Inc. ................ 100,000 1,800,000
Imperial Credit Commercial Mortgage
Investment Corp.* .......................... 55,000 907,500
Ocwen Asset Investment Corp. ................. 362,500 7,204,688
------------
14,321,763
------------
UNIT (0.01%)
Finance - Services Misc
CoreCap, Inc. (r) ............................ 4,500 202,500
------------
TOTAL COMMON STOCKS AND UNIT
(Cost $1,348,838,180) (87.51%) 1,510,077,913
-------- -------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED)
- ------------------- ---- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (9.57%)
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 ..................................... 5.680% $165,045 165,045,000
-----------
Short-Term Notes (2.88%)
American General Finance Corp.,
Due 01-15-98 ................................. 8.250 1,000 1,002,030
Associates Corp. of North America,
Due 11-01-97 ................................. 7.750 1,000 1,001,240
Barnett Bank,
Due 11-21-97 ................................. 5.530 10,000 9,969,278
Chrysler Financial Corp.,
Due 01-20-98 ................................. 8.400 4,250 4,271,123
Chrysler Financial Corp.,
Due 06-23-98 ................................. 6.300 300 300,741
Countrywide Home Loan,
Due 11-07-97 ................................. 5.550 10,000 9,990,750
Federal National Mortage
Association, Due 02-10-98 .................... 8.650 4,970 5,006,480
Federal National Mortage
Association, Due 04-15-98 .................... 6.020 905 906,982
Ford Motor Credit Co.,
Due 12-01-97 ................................. 7.125 3,000 3,006,750
General Motors Acceptance Corp.,
Due 01-05-98 ................................. 5.500 3,000 2,997,870
GTE Corp.,
Due 11-19-97 ................................. 5.620 6,000 5,983,140
International Business Machines
Corp., Due 11-01-97 .......................... 6.375 1,700 1,700,051
International Lease Finance Corp.,
Due 02-13-98 ................................. 5.870 600 599,808
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
Short-Term Notes (continued)
Norwest Corp.,
Due 11-15-97 7.700% $2,000 $2,005,280
Pepsico Inc.,
Due 1-15-98 6.125 1,000 1,000,470
--------------
TOTAL SHORT-TERM NOTES
(Cost $49,763,157) 49,741,992
--------------
Corporate Saving Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%...................... 9,572
--------------
TOTAL SHORT-TERM INVESTMENTS (12.45%) 214,796,564
--------- --------------
TOTAL INVESTMENTS (99.96%) $1,724,874,477
========= ==============
* Non-Income producing security.
(r) The security listed below is a direct placement security and is restricted
as to resale. The Fund has limited rights to registration under the
Securities Act of 1933 with respect to restricted securities (not
including Rule 144A securities). In certain circumstances the Fund may
bear a portion of the cost of such registrations; otherwise, such costs
would be borne by the issuer. Additional information on this restricted
security is as follows:
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE AT
ACQUISITION ACQUISITION OF FUND'S OCTOBER 31,
DATE COST NET ASSETS 1997
----------- ----------- ---------- ----------
CoreCap, Inc......... 10-31-97 $202,500 0.01% $202,500
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.
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust II (the "Trust") (formerly Freedom Investment
Trust) is an open-end management investment company, registered under the
Investment Company Act of 1940. The Trust consists of three series: John Hancock
Financial Industries Fund (the "Fund"), John Hancock Regional Bank Fund and John
Hancock Disciplined Growth Fund. The other two 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. On January 14, 1997, Class B shares of beneficial interest were sold to
commence class activity .
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 identifies the dividend. Interest income on
investment securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the relative net assets of the
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
respective classes. Distribution and service fees, if any, are calculated daily
at the class level based on the appropriate net assets of each class and the
specific expense rate (s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not identifiable to a specific fund are
allocated in such a manner as deemed equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
funds.
ORGANIZATION 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.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the 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.
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 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 the offset by the currency amount of the underlying
transaction.
Open foreign currency forward contracts bought at October 31, 1997, were
as follows:
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
PRINCIPAL AMOUNT
COVERED BY EXPIRATION UNREALIZED
CURRENCY CONTRACT MONTH APPRECIATION
- -------- -------- ----- ------------
British Pound
Sterling 327,246 NOV 97 $196
=====
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest 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 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, 1997, 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 counterparties 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 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) 0.80% of the
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==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
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.
The Adviser had agreed to limit Fund expenses, including the management
fee (but not including the 12b-1 fee and any other class specific expenses), to
0.90% of the Fund's daily net assets. Accordingly, the reduction in expenses
amounted to $1,671,056 for the year ended October 31, 1997. Effective November
1, 1997, the Adviser terminated this expense limit.
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 $12,457,549. Out of this amount, $1,938,173 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$9,888,170 was paid as sales commissions to unrelated broker-dealers and
$631,206 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"),Tucker Anthony Incorporated ("Tucker
Anthony") and Sutro & Co., Inc. ("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% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with sale of Class B shares. For the year ended October 31, 1997,
contingent deferred sales charges received by JH Funds amounted to $600,520.
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 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 Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser, and/or its affiliates, as
well as Trustees of the Fund. 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 year ended October 31, 1997, aggregated
20
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
$1,406,456,301, and $59,920,035, 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 short-term
investments) for federal income tax purposes was $1,565,780,652. Gross
unrealized appreciation and depreciation of investments aggregated $192,450,126
and $33,356,301, respectively, resulting in net unrealized appreciation of
$159,093,825.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of $24,664
and an increase in accumulated net investment income of $24,664. 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 certain
differences 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.
21
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================================================================================
John Hancock Funds - Financial Industries Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
John Hancock Financial Industries Fund and the Trustees
of John Hancock Investment Trust II
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") (a series of John Hancock Investment Trust II), at October 31,
1997, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, 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 audits. We conducted our
audits 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
audits, which included confirmation of securities owned at October 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where investments purchased were not yet received by the custodian,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 15, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended October 31,
1997.
With respect to the dividends paid for the fiscal year ended October 31,
1997, 100% qualified for the dividends received deduction.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV
in January 1998. This will reflect the total of all distributions which are
taxable for the calendar year 1997.
22
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======================================NOTES=====================================
John Hancock Funds - Financial Industries Fund
23
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================================================================================
[LOGO] JOHN HANCOCK FUNDS -------------------
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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.
[RECYCLE LOGO] Printed on Recycled Paper 7000A 10/97
12/97
