ANNUAL REPORT
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[GRAPHIC OMITTED]
Financial
Industries Fund
OCTOBER 31, 1998
[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 and
Chief Operating Officer
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
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
PRICEWATERHOUSECOOPERS LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
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===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term is a
roller coaster. That is because, while long-term history suggests the market's
general direction is up, its swings over the short term can be dramatic and, at
times, violent. This year, the market has given us several stark examples of
this phenomenon. From the new highs set in mid-July, the major indices plunged
by 19% through the end of August. It was the worst such fall since 1990. For the
first time in a number of years, some bonds and bond mutual funds outperformed
stocks and stock mutual funds. Seeking safety in a world of global economic
uncertainties, investors everywhere converged on U.S. Treasury bonds and pushed
their yields to historic lows.
Then in early October, the market staged a remarkable rebound that was sparked
by the Federal Reserve's two cuts in interest rates. The major indices regained
all their previously lost ground and the S&P 500 Stock Index ended October
actually up by 15% year-to-date.
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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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Investors have been understandably shaken by these dramatic twists and turns,
but we are pleased to report that most individual investors did not panic, and
we hope that means they've taken our words to heart. Over the long term, markets
do not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering the implications of global turmoil and the
potential for slower U.S. economic and corporate earnings growth. While we don't
make a practice of opining on what the market will do next, we continue to
believe it would be wise for investors to set more realistic expectations. Over
the long term, the market's historical results have been more in the 10% per
year range, which is still a solid result, considering it has been produced
despite wars, depressions and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the last six months' divergence in
performance of stocks and high-quality bonds is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY JAMES K. SCHMIDT, CFA, MANAGEMENT TEAM LEADER AND
THOMAS FINUCANE AND THOMAS GOGGINS,
PORTFOLIO MANAGERS
John Hancock
Financial Industries Fund
Market volatility increases with global strife; financial stocks lag
Volatility was the watchword of the last 12 months, as the stock market reacted
to growing global economic uncertainty. At first, the market moved mostly higher
from the start of the Fund's fiscal year last November, reaching a record peak
in July before a new wave of emerging-market currency troubles brought stocks
back down to earth. Financial stocks, which have led the market's advance over
the last several years, fell behind in 1998 as fears grew that the U.S. economy
would slow. The biggest culprit was escalating overseas turmoil, marked by
currency devaluations and slowing Asian and Latin American economies. The
troubles peaked in August with Russia's debt default and currency devaluation.
Stock markets around the world fell in response, and investors in droves sought
the safety of Treasury bonds. Especially hurt were the large money-center banks
and investment brokerage firms that had lending and trading exposure to emerging
markets. The ensuing failure of several prominent hedge funds compounded the
problems. By the end of the summer, the entire financial sector had been
tainted, including regional banks, savings and loans and retail brokerage firms,
all of which had no direct overseas exposure. In October, however, the market
turned up again after the
"Financial stocks... fell behind in 1998 as fears grew that the U.S. economy
would slow."
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Financial
Industries Fund. Caption below reads "Fund management team members. Standing
(l-r): "Jay McKelvey, Tom Goggins and Tom Finucane. Seated (l-r): Lisa Welch,
Jim Schmidt and Patricia Ouimet."]
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3
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John Hancock Funds - Financial Industries Fund
"The banking and insurance areas account for approximately 55% of the Fund's net
assets."
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[Table at top left hand column entitled "Top Five Common Stock Holdings." The
first listing is Fannie Mae 2.6%, the second is Progressive Corp. 2.4%, the
third Citigroup 2.2%, the fourth Norwest Corp. 2.0% and the fifth General Re
Corp. 1.9%. A note below the table reads "As a percentage of net assets on
October 31, 1998."]
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Federal Reserve cut short-term interest rates twice in order to avert a
recession. Even with the rebound, financial stocks wound up lagging the overall
market. For the year ended October 31, 1998, the broad market, as measured by
the Standard & Poor's 500 Stock Index managed to post a gain of 22% despite the
volatility. In the same period, the Standard & Poor's Financial Index, a proxy
for the financial services sector's performance, returned 9.7%.
Performance and strategy review
For the year ended October 31, 1998, John Hancock Financial Industries Fund's
Class A and Class B shares posted total returns of 4.66% and 3.95%,
respectively, at net asset value. That compared to the 6.26% return of the
average financial services fund, according to Lipper Analytical Services, Inc.1
Keep in mind that your net asset value return will be different from the Fund's
stated performance if you were not invested in the Fund for the entire period
and did not reinvest all distributions. Historical performance information can
be found on pages seven and eight.
The Fund invests across the broad range of financial services sub-sectors,
targeting companies with both solid fundamentals and the potential to benefit
from the consolidation that we expect in the industry. Since the beginning of
1998, nine of our holdings, predominantly insurers and securities brokers, have
announced agreements to be acquired.
The banking and insurance areas account for approximately 55% of the Fund's
net assets. We are especially interested in regional banks with between $10
billion and $30 billion in assets, because we believe that merger activity will
be most intense in this size range over the next several years. Our regional
banks have generally had good earnings results, with a median gain of 11% in
operating earnings over the first nine months of 1998. Given these results and
the relatively low risk profile of most of these banks, as they have no loans to
Russia or the Pacific Rim nations, it is disappointing to us that almost all of
their stocks have lagged the market return this year. This has resulted in an
unusually attractive price-earnings ratio, which is only 65% of that of the
market.
Insurance mixed; REITs lag
Our insurance holdings produced varied results. During the summer we scored huge
gains with our holdings in General Re Corp., which was purchased by Warren
Buffet's Berkshire Hathaway, Inc., and SunAmerica, which merged with American
International Group. However, our financial guarantor companies were sidetracked
by the offshore turmoil, and property and casualty companies, as always exposed
to the
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[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Progressive
Corp. followed by an up arrow with the phrase "Outstanding earnings in a
somewhat stagnant industry." The second listing is Allied Irish Banks followed
by an up arrow with the phrase "Rapid growth in Irish economy fuels profit
gains." The third listing is Equity Office Properties followed by a down arrow
with the phrase " `REIT' disease hits stock, despite favorable office markets."
A note below the table reads "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 at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended October 31, 1998." The chart is
scaled in increments of 1% with 0% at the bottom and 7% at the top. The first
bar represents the 4.66% Total return for John Hancock Financial Industries Fund
Class A. The second bar represents the 3.95% total return for John Hancock
Financial Industries Fund Class B. The third bar represents the 6.26% total
return for Average financial services fund. A note below the chart reads "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. See pages seven and eight for historical
performance information."]
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randomness of nature, suffered unusually high catastrophe losses while
continuing to experience pricing pressures. One exception was auto insurer
Progressive Corp., whose stock rose on a strong third-quarter earnings report.
As a specialized auto underwriter, Progressive has more pricing flexibility than
most insurers.
Real estate investment trusts (REITs) have had a disappointing year. We felt
that the income from real estate, particularly office space, would rise
substantially this year due to tight conditions in the rental market. While this
has indeed happened, the stocks of REITs have not performed nearly as well as
the underlying assets. We feel the managers of many REITs have proven to be more
knowledgeable about real estate than about representing shareholder interests in
a public company. As shareholders, we need to pressure them more to use excess
capital to repurchase stock rather than pursuing un-economic property
acquisitions.
Deregulation update
We believe that it is inevitable that financial reform legislation will
eventually be enacted in the U.S. to allow cross-ownership between banks,
insurance underwriters and securities brokers. This will help financial stocks
generally by promoting consolidation between these various sectors. A landmark
bill designated H.R. 10 passed the House of Representatives and the Senate
Banking Committee this year, but Congress recessed before it could be brought
successfully to a vote on the Senate floor. Although we expect the legislation
to be reintroduced next year, its outlook is clouded by the unexpected defeat of
Senate Banking Committee Chairman Alfonse D'Amato in the November elections.
While the new Chairman, Phil Gramm, favors reform, we don't know the exact form
of legislation he will propose and how broad its appeal will be.
Europe holdings grow
Throughout the year, we added to our position in European banks. We think that
they will benefit from the introduction, in January of 1999, of a common
currency (the euro) among the 11 member nations in the European Monetary Union.
We believe that, like interstate banking deregulation in the U.S., the euro will
serve as a major catalyst for consolidation and creation of pan-European banks.
Because the European banks are years behind their U.S. counterparts in terms of
realizing the benefits of restructuring, the opportunity for gains in the future
is commensurately greater.
We are fortunate that in our quest for solid European investments we are able
to take advantage of a strategic alliance that we have formed
"Throughout the year, we added to our position in European banks."
5
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John Hancock Funds - Financial Industries Fund
"...there are a number of reasons for having a positive outlook."
with Credit Agricole -- France's largest bank which is also among the ten
largest banks in the world -- and its investment advisory arm, Indocam
International Investment Services. Through this relationship, which includes
regular visits and weekly conference calls, we are able to tap the research and
expertise of on-Continent multilingual economists and banking analysts. In fact,
by the end of October, nearly 10% of the Fund's net assets were invested in
European financial institutions, with emphasis on Germany, Ireland, the U.K. and
the Netherlands.
A look ahead
Despite the more modest returns of financial stocks this year, there are a
number of reasons for having a positive outlook. In our view, the Federal
Reserve's latest moves -- lowering interest rates and easing the money supply --
will help the United States and the rest of the developed world to maintain
economic growth in 1999. Our stocks should also benefit from low levels of
valuation and from earnings growth that will in most cases exceed the low single
digit growth we are expecting for the S&P 500 companies. We eventually expect
financial reform legislation, resulting in a host of new opportunities for
mergers and acquisitions as well as improved efficiency. We feel that the
benefits from restructuring in the U.S., as well as in Europe, will work in our
favor for years to come.
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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.
International investing involves special risks such as political, economic and
currency risks and differences in acounting standards and financial reporting.
Sector investing is subject to 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 fromthe beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. 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, 1998
SINCE
ONE INCEPTION
YEAR (3/14/96)
---------- -----------
Cumulative Total Returns (10.32%) 64.26%
Average Annual Total Returns(1) (10.32%) 21.50%
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CLASS B
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For the period ended September 30, 1998
SINCE
ONE INCEPTION
YEAR (1/14/97)
---------- -----------
Cumulative Total Returns (10.92%) 15.84%
Average Annual Total Returns(1) (10.92%) 8.98%
Notes to Performance
(1) Prior to November 1, 1997, the Adviser had agreed to limit the Fund's
expenses to 0.90% for Class A and Class B shares of the Fund's average net
asset value, including the management fee (but not including a 12b-1 fee).
Without the limitation of expenses, the average annualized returns for the
one-year period and since inception for Class A shares would have been
(10.34%) and 19.94%, respectively. The average annualized returns for the
one-year period and since inception for Class B shares would have been
(10.94%) and 8.86%, respectively.
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 John Hancock 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 hypothetical $10,000 investment made in the John Hancock Financial
Industries Fund on March 14, 1996, before sales charge, and is equal to $18,630
as of October 31, 1998. The second line represents the Standard & Poor's Stock
Index and is equal to $18,011 as of October 31, 1998. The third line represents
the value of the same hypothetical investment made in the John Hancock Financial
Industries Fund, after sales charge, and is equal to $17,693 as of October 31,
1998.
Line chart with the heading John Hancock 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
Standard & Poor's 500 Stock Index and is equal to $15,289 as of October 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock International Fund on January 14, 1997,
before sales charge, and is equal to $12,896 as of October 31, 1998. The third
line represents the value of the same hypothetical investment made in the John
Hancock Financial Industries Fund, after sales charge, and is equal to $12,496
as of October 31, 1998.
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8
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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, 1998. You'll
also find the net asset value for each share as of that date.
Statement of Assets and Liabilities
October 31, 1998
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Assets:
Investments at value - Note C:
Common stocks (cost - $3,200,991,141) ................. $3,202,968,868
Preferred stocks (cost - $1,500,499) ................... 1,791,450
Joint repurchase agreement (cost - $81,838,000) ........ 81,838,000
Short-term notes (cost - $187,338,378) ................. 187,139,858
Corporate savings account .............................. 691
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3,473,738,867
Foreign cash, at value (cost $657,226) ................. 657,857
Receivable for investments sold ......................... 5,614,367
Receivable for shares sold .............................. 5,322,681
Dividends receivable .................................... 5,056,997
Interest receivable ..................................... 3,189,842
Foreign tax receivable .................................. 238,713
Deferred organization expenses - Note A ................. 12,127
Other assets ............................................ 6,882
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Total Assets .......................... 3,493,838,333
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Liabilities:
Payable for investments purchased ....................... 22,869,220
Payable for shares repurchased .......................... 2,290,410
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................ 3,140,248
Accounts payable and accrued expenses ................... 935,457
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Total Liabilities ..................... 29,235,335
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Net Assets:
Capital paid-in ......................................... 3,463,245,239
Accumulated net realized loss on investments and
foreign currency transactions .......................... (14,119,364)
Net unrealized appreciation of investments and
foreign currency transactions .......................... 2,088,080
Undistributed net investment income ..................... 13,389,043
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Net Assets ............................ $3,464,602,998
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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 - $861,582,065 / 58,205,016 ..................... $14.80
=============================================================================
Class B - $2,603,020,933 / 177,077,650 .................. $14.70
=============================================================================
Maximum Offering Price Per Share*
Class A - ($14.80 x 105.26%) ............................ $15.58
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* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended October 31, 1998
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Investment Income:
Dividends (net of foreign withholding taxes
of $947,938) ........................................... $55,342,635
Interest ................................................ 17,433,116
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72,775,751
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Expenses:
Investment management fee - Note B ..................... 24,120,423
Distribution and service fee - Note B
Class A .............................................. 2,608,289
Class B .............................................. 23,132,935
Transfer agent fee - Note B ............................ 7,257,012
Registration and filing fees ........................... 921,187
Custodian fee .......................................... 566,050
Financial services fee - Note B ........................ 521,376
Printing ............................................... 203,084
Miscellaneous .......................................... 152,071
Trustees' fees ......................................... 133,707
Legal fees ............................................. 34,368
Auditing fee ........................................... 27,998
Organization expenses - Note A ......................... 5,022
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Total Expenses ........................ 59,683,522
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Net Investment Income ................. 13,092,229
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Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized loss on investments sold ................... (9,435,813)
Net realized loss on foreign currency transactions ...... (612,054)
Change in net unrealized appreciation/depreciation
of investments ......................................... (159,148,411)
Change in net unrealized appreciation/depreciation of
foreign currency transactions .......................... 26,817
---------------
Net Realized and Unrealized
Loss on Investments and
Foreign Currency Transactions ......... (169,169,461)
-----------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ............. ($156,077,232)
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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>
YEAR ENDED OCTOBER 31,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................................................. $3,491,693 $13,092,229
Net realized gain (loss) on investments sold and foreign
currency transactions ............................................................... 1,555,050 (10,047,867)
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ....................................... 161,081,288 (159,121,594)
--------------- ---------------
Net Increase (Decrease) in Net Assets Resulting from
Operations ........................................................................ 166,128,031 (156,077,232)
--------------- ---------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.0283 and $0.1117 per share, respectively) ............................. (2,341) (3,725,901)
Class B** - (none and $0.0250 per share, respectively) .............................. -- (2,632,181)
Distributions from net realized gain on investments sold
Class A - ($0.6466 and $0.0166 per share, respectively) ............................. (53,523) (552,197)
Class B** - (none and $0.0166 per share, respectively) .............................. -- (1,743,894)
--------------- ---------------
Total Distributions to Shareholders ................................................. (55,864) (8,654,173)
--------------- ---------------
From Fund Share Transactions - Net:* ..................................................... 1,558,677,052 1,903,689,892
--------------- ---------------
Net Assets:
Beginning of period ................................................................... 895,292 1,725,644,511
--------------- ---------------
End of period (including undistributed net investment income
of $3,515,792 and $13,389,043, respectively) ........................................ $1,725,644,511 $3,464,602,998
=============== ===============
</TABLE>
*Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1997 1998
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ...................................... 31,103,168 $400,561,297 55,765,091 $897,314,850
Shares reinvested ................................ 1,495 16,558 212,459 3,216,372
--------------- --------------- --------------- ---------------
31,104,663 400,577,855 55,977,550 900,531,222
Less shares repurchased .......................... (1,970,382) (25,782,509) (26,987,952) (385,136,154)
--------------- --------------- --------------- ---------------
Net increase ..................................... 29,134,281 $374,795,346 28,989,598 $515,395,068
=============== =============== =============== ===============
CLASS B**
Shares sold ...................................... 94,841,897 $1,217,437,825 107,496,787 $1,727,338,249
Shares reinvested ................................ -- -- 161,856 2,448,654
--------------- --------------- --------------- ---------------
94,841,897 1,217,437,825 107,658,643 1,729,786,903
Less shares repurchased .......................... (2,549,195) (33,556,119) (22,873,695) (341,492,079)
--------------- --------------- --------------- ---------------
Net increase ..................................... 92,292,702 $1,183,881,706 84,784,948 $1,388,294,824
=============== =============== =============== ===============
</TABLE>
** 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,
distributions paid to shareholders and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last two periods, along with
the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
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>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
CLASS A(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period ................................... $8.50 $11.03 $14.26
---------- ---------- ----------
Net Investment Income (2) .............................................. 0.02 0.14 0.15
Net Realized and Unrealized Gain on Investments ........................ 2.51 3.77 0.52(8)
---------- ---------- ----------
Total from Investment Operations ...................................... 2.53 3.91 0.67
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ................................... -- (0.03) (0.11)
Distributions from Net Realized Gains on Investments Sold .............. -- (0.65) (0.02)
---------- ---------- ----------
Total Distributions ................................................... -- (0.68) (0.13)
---------- ---------- ----------
Net Asset Value, End of Period ......................................... $11.03 $14.26 $14.80
========== ========== ==========
Total Investment Return at Net Asset Value (3) ......................... 29.76%(6) 37.19% 4.66%
Total Adjusted Investment Return at Net Asset Value (3,4) .............. 26.04%(6) 36.92% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $895 $416,698 $861,582
Ratio of Expenses to Average Net Assets ................................ 1.20%(7) 1.20% 1.37%
Ratio of Adjusted Expenses to Average Net Assets (5) ................... 7.07%(7) 1.47% --
Ratio of Net Investment Income to Average Net Assets ................... 0.37%(7) 1.10% 0.92%
Ratio of Adjusted Net Investment Income (Loss) to Average
Net Assets (5) ....................................................... (5.50%)(7) 0.83% --
Portfolio Turnover Rate ................................................ 31% 6% 30%
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), distributions 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>
YEAR ENDED OCTOBER 31,
-----------------------------
1997 1998
----------- -----------
<S> <C> <C>
CLASS B(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................ $11.43 $14.18
----------- -----------
Net Investment Income (2) ....................................... 0.04 0.03
Net Realized and Unrealized Gain on Investments ................. 2.71 0.54(8)
----------- -----------
Total from Investment Operations ............................... 2.75 0.57
----------- -----------
Less Distributions:
Dividends from Net Investment Income ............................ -- (0.03)
Distributions from Net Realized Gains on Investments Sold ....... -- (0.02)
----------- -----------
Total Distributions ............................................ -- (0.05)
----------- -----------
Net Asset Value, End of Period .................................. $14.18 $14.70
=========== ===========
Total Investment Return at Net Asset Value (3) .................. 24.06%(6) 3.95%
Total Adjusted Investment Return at Net Asset Value (3,4) ....... 23.85%(6) --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................ $1,308,946 $2,603,021
Ratio of Expenses to Average Net Assets ......................... 1.90%(7) 2.07%
Ratio of Adjusted Expenses to Average Net Assets (5) ............ 2.17%(7) --
Ratio of Net Investment Income to Average Net Assets ............ 0.40%(7) 0.22%
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) ................................................ 0.13%(7) --
Portfolio Turnover Rate ......................................... 6% 30%
Fee Reduction Per Share (2) ..................................... $0.03 --
</TABLE>
(1) Class A and Class B shares 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) Not annualized.
(7) Annualized.
(8) Amount shown for a share outstanding does not correspond with aggregate
net gain (loss) on investments for the period ended, due to the timing of
sales and repurchases of the Fund shares in relation to fluctuating market
values of the investments of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
Schedule of Investments
October 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Financial Industries Fund on October 31, 1998. It's divided into three main
categories: common stocks, preferred stocks and short-term investments. The
common and preferred 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
Banks - Foreign (8.60%)
Abbey National PLC (United Kingdom) .... 230,000 $4,475,800
ABN Amro Holding NV, American
Depositary Receipts (ADR)
(Netherlands) ....................... 246,975 4,738,833
Allied Irish Banks PLC, (ADR) (Ireland) 417,450 36,239,878
Anglo Irish Bank Corp., PLC (Ireland) .. 535,000 1,299,141
Australia & New Zealand Banking Group
Ltd. (ADR) (Australia) .............. 165,000 4,702,500
Banco Bilbao Vizcaya, S.A. (ADR)
(Spain) ............................. 550,000 7,631,250
Bank of Scotland (United Kingdom) ...... 1,540,509 16,743,484
Bayerische Vereinsbank AG (Germany) ... 315,000 25,010,906
Banca Popolare di Brescia (Italy) ...... 550,000 12,959,320
Corporacion Bancaria de Espana S.A
(ADR) (Spain) ....................... 450,200 19,696,250
Dresdner Bank AG (Germany) ............ 170,000 6,620,667
HSBC Holdings, PLC (United Kingdom) .... 285,000 6,491,132
ING Groep NV (ADR) (Netherlands) ....... 767,573 37,898,917
Lloyds TSB Group, PLC (United Kingdom) . 100,000 1,235,090
Merita PLC (Finland) .................. 420,000 2,250,696
National Westminster Bank, PLC
(United Kingdom) .................... 1,135,000 19,178,890
Nordbanken Holding AB (Sweden) ......... 395,000 2,364,905
Royal Bank of Canada (Canada) .......... 669,900 30,815,400
Royal Bank of Scotland Group, PLC
(United Kingdom) .................... 785,000 10,411,926
Societe Generale (France) .............. 96,000 12,697,786
Svenska Handelsbanken (Sweden) ......... 425,000 17,860,413
Toronto-Dominion Bank (Canada) ......... 555,200 16,656,000
--------------
297,979,184
--------------
Banks - Midwest (2.80%)
BancFirst Ohio Corp. ................... 133,800 $3,980,550
Community First Bankshares, Inc. ....... 426,000 8,466,750
Firstar Corp. .......................... 56,000 3,178,000
Star Banc Corp. ........................ 759,900 57,467,438
TCF Financial Corp. .................... 1,014,276 23,898,878
--------------
96,991,616
--------------
Banks - Money Center (4.33%)
Bankers Trust New York Corp. ........... 384,600 24,157,687
Chase Manhattan Corp. .................. 886,100 50,341,556
Citigroup, Inc. ........................ 1,609,371 75,741,023
--------------
150,240,266
--------------
Banks - Northeast (1.89%)
FNB Rochester Corp. .................... 34,250 588,672
State Street Corp. ..................... 646,500 40,325,438
U.S. Trust Corp. ....................... 366,200 23,322,363
Vermont Financial Services Corp. ....... 60,500 1,368,813
--------------
65,605,286
--------------
Banks - Southeast (1.47%)
CCB Financial Corp. .................... 403,314 21,224,399
First Tennessee National Corp. ......... 655,400 20,767,987
Regions Financial Corp. ................ 240,260 8,889,620
--------------
50,882,006
--------------
Banks - Southwest (0.38%)
Bank United Corp. (Class A) ............ 216,300 8,618,214
Southwest Bancorp. of Texas, Inc.* ..... 290,000 4,440,625
--------------
13,058,839
--------------
Banks - Super Regional (7.30%)
BankAmerica Corp. ...................... 449,300 25,806,669
BankBoston Corp. ....................... 986,600 36,319,212
Bank One Corp. ......................... 956,262 46,737,305
First Union Corp. ...................... 178,998 10,381,884
KeyCorp ................................ 1,053,775 31,942,555
National City Corp. .................... 525,000 33,764,063
Norwest Corp. .......................... 1,824,500 67,848,594
--------------
252,800,282
--------------
Banks - West (1.01%)
City National Corp. .................... 482,287 16,488,187
Greater Bay Bancorp .................... 111,966 3,582,912
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Banks - West (continued)
SJNB Financial Corp. ................... 55,000 $1,478,125
West Coast Bancorp ..................... 125,056 2,297,899
Westamerica Bancorp .................... 339,571 11,290,736
--------------
35,137,859
--------------
Broker Services (6.39%)
Dain Rauscher Corp. .................... 352,300 11,978,200
Edwards (A.G.), Inc. ................... 1,340,000 46,313,750
EVEREN Capital Corp. ................... 780,400 15,900,650
Freedom Securities Corp. ............... 270,000 3,678,750
Interstate/Johnson Lane, Inc. .......... 107,300 3,286,062
Legg Mason, Inc. ....................... 1,403,800 37,288,438
Lehman Brothers Holdings, Inc. ......... 202,200 7,670,962
Merrill Lynch & Co., Inc. .............. 155,000 9,183,750
Morgan Keegan, Inc. .................... 436,650 8,132,606
Morgan Stanley Dean Witter & Co. ....... 882,600 57,148,350
Paine Webber Group, Inc. ............... 130,000 4,346,875
Ragen Mackenzie Group, Inc.* ........... 110,000 1,320,000
Raymond James Financial, Inc. .......... 658,550 15,105,491
--------------
221,353,884
--------------
Business Services (0.76%)
First Data Corp. ....................... 994,400 26,351,600
--------------
Computer - Services (2.48%)
BISYS Group, Inc. (The)* ............... 598,700 26,193,125
E*TRADE Group, Inc.* ................... 180,000 3,240,000
Fiserv, Inc.* .......................... 1,214,050 56,453,325
--------------
85,886,450
--------------
Finance - Consumer Loans (6.75%)
American Express Co. ................... 680,650 60,152,444
AmeriCredit Corp.* ..................... 750,000 10,031,250
AMRESCO, Inc.* ......................... 627,500 4,353,281
Associates First Capital Corp.
(Class A) ............................ 863,000 60,841,500
Capital One Financial Corp. ............ 54,900 5,586,075
Household International, Inc. .......... 1,708,984 62,484,728
MBNA Corp. ............................. 986,063 22,494,551
Providian Financial Corp. .............. 100,000 7,937,500
--------------
233,881,329
--------------
Finance - Investment Management (4.36%)
Amvescap, PLC (ADR) (United Kingdom) ... 685,000 25,088,125
Conning Corp. .......................... 185,000 2,728,750
Federated Investors, Inc. (Class B)* ... 567,500 10,179,531
Franklin Resources, Inc. ............... 852,200 32,223,812
Investors Group, Inc. (Canada) ......... 475,000 6,785,897
John Nuveen Co. (The) (Class A) ........ 150,800 5,259,150
Kansas City Southern Industries, Inc. .. 200,000 7,725,000
Liberty Financial Cos., Inc. ........... 234,500 5,891,812
Price (T. Rowe) Associates, Inc. ....... 1,190,900 42,351,381
Waddell & Reed Financial, Inc.
(Class A) ............................ 612,200 12,817,938
--------------
151,051,396
--------------
Finance - Savings & Loan (0.69%)
Astoria Financial Corp. ................ 20,000 860,000
InterWest Bancorp., Inc. ............... 148,700 3,949,844
Washington Mutual, Inc. ................ 507,750 19,008,891
--------------
23,818,735
--------------
Finance - SBIC & Commercial (1.36%)
CIT Group, Inc. (The) (Class A) ........ 654,500 17,876,031
Comdisco, Inc. ......................... 155,000 2,392,812
Financial Federal Corp.* ............... 109,600 2,555,050
FINOVA Group, Inc. (The) ............... 253,000 12,333,750
Heller Financial, Inc.* ................ 497,500 11,940,000
--------------
47,097,643
--------------
Insurance - Accident & Health (0.83%)
Provident Cos., Inc. ................... 987,500 28,699,219
--------------
Insurance - Brokers (1.30%)
Marsh & McLennan Cos., Inc. ............ 809,800 44,943,900
--------------
Insurance - Diversified (2.15%)
Aetna, Inc. ............................ 310,000 23,133,750
Equitable Cos., Inc. (The) ............. 465,000 22,785,000
Transamerica Corp. ..................... 275,000 28,600,000
--------------
74,518,750
--------------
Insurance - Life (4.36%)
AmerUs Life Holdings, Inc. (Class A) ... 651,612 15,720,139
ARM Financial Group, Inc. (Class A) .... 158,000 3,031,625
Hartford Life, Inc. (Class A) .......... 165,850 7,670,562
Liberty Corp. .......................... 360,000 14,940,000
Lincoln National Corp. ................. 20,000 1,517,500
Nationwide Financial Services, Inc.
(Class A) ........................... 420,000 17,430,000
Presidential Life Corp. ................ 389,000 7,050,625
Protective Life Corp. .................. 570,300 21,136,744
Reinsurance Group of America, Inc. ..... 200,400 11,047,050
ReliaStar Financial Corp. .............. 70,000 3,066,875
SunAmerica, Inc. ....................... 390,000 27,495,000
Torchmark Corp. ........................ 483,000 21,131,250
--------------
151,237,370
--------------
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Insurance - Multi Line (4.37%)
Allianz AG (Germany) ................... 117,000 $40,126,145
Allmerica Financial Corp. .............. 697,650 34,882,500
Enhance Financial Services Group, Inc... 587,700 14,435,381
MBIA, Inc. ............................. 982,799 60,073,589
Royal & Sun Alliance Insurance Group,
PLC (United Kingdom) ................ 191,000 1,749,675
--------------
151,267,290
--------------
Insurance - Property & Casualty (14.48%)
Ace, Ltd. (Bermuda) .................... 1,358,750 46,027,656
Chartwell Re Corp. ..................... 208,000 5,174,000
Chubb Corp. (The) ...................... 884,000 54,366,000
Cincinnati Financial Corp. ............. 1,052,000 39,252,750
CNA Surety Corp. ....................... 443,500 6,236,719
EXEL Ltd. (Class A) (Bermuda) .......... 373,116 28,520,054
Frontier Insurance Group, Inc. ......... 134,550 2,194,847
General Re Corp. ....................... 307,475 67,548,414
Hartford Financial Services Group, Inc.
(The) ............................... 986,000 52,381,250
Horace Mann Educators Corp. ............ 318,600 9,119,925
Penn-America Group, Inc. ............... 22,625 213,523
PMI Group, Inc. (The) .................. 488,400 24,633,675
Progressive Corp. ...................... 553,600 81,517,600
SAFECO Corp. ........................... 227,000 9,831,938
St. Paul Cos., Inc. .................... 1,308,326 43,338,299
Travelers Property Casualty Corp.
(Class A) ........................... 1,017,400 31,221,463
--------------
501,578,113
--------------
Leasing Companies (0.15%)
LINC Capital, Inc.* .................... 86,250 614,531
Newcourt Credit Group, Inc. (Canada) ... 119,000 3,912,125
Willis Lease Finance Corp.* ............ 46,000 776,250
--------------
5,302,906
--------------
Mortgage & Real Estate Services (3.71%)
Countrywide Credit Industries, Inc. .... 890,000 38,436,875
Fannie Mae ............................. 1,271,450 90,034,553
--------------
128,471,428
--------------
Real Estate Investment Trust (1.53%)
Alexandria Real Estate Equities, Inc. .. 125,000 3,335,937
Highwoods Properties, Inc. ............. 285,000 7,962,187
Home Properties of New York, Inc. ...... 133,000 3,574,375
Kimco Realty Corp. ..................... 185,000 7,365,312
New Plan Excel Realty Trust ............ 375,600 8,544,900
Merry Land Properties, Inc.* ........... 1,000 4,875
Realty Income Corp. .................... 75,000 1,870,312
Simon Property Group ................... 673,700 20,168,894
Vornado Operating, Inc.* ............... 20,250 126,563
--------------
52,953,355
--------------
REIT - Equity Trust (9.00%)
Apartment Investment & Management
Co. (Class A) ....................... 362,900 12,678,819
Arden Realty, Inc. ..................... 518,000 11,201,750
Berkshire Realty Co., Inc. ............. 250,000 2,250,000
Boston Properties, Inc. ................ 746,000 21,261,000
Brandywine Realty Trust ................ 659,700 11,792,137
Colonial Properties Trust .............. 360,000 9,900,000
Corporate Office Properties Trust, Inc.. 304,300 2,320,287
Crescent Real Estate Equities Co. ...... 28,000 701,750
Equity Office Properties Trust ......... 879,281 21,102,744
Equity Residential Properties Trust .... 558,900 23,473,800
Essex Property Trust, Inc. ............. 245,000 7,686,875
General Growth Properties, Inc. ........ 651,000 23,151,187
Glenborough Realty Trust, Inc. ......... 516,800 11,078,900
LaSalle Hotel Properties* .............. 155,000 1,801,875
Liberty Property Trust ................. 20,000 460,000
Macerich Co. (The) ..................... 282,100 7,775,381
Mack-Cali Realty Corp. ................. 545,300 16,154,512
Patriot American Hospitality, Inc. ..... 862,670 7,656,196
Prentiss Properties Trust .............. 571,700 11,791,312
Prime Group Realty Trust ............... 245,000 3,935,312
Reckson Associates Realty Corp. ........ 979,800 22,229,212
SL Green Realty Corp. .................. 402,500 7,622,344
Spieker Properties, Inc. ............... 713,000 24,598,500
Starwood Hotels & Resorts .............. 759,300 21,497,681
Storage Trust Realty ................... 334,400 7,503,100
Tower Realty Trust, Inc. ............... 323,000 6,540,750
Vornado Realty Trust ................... 405,000 13,643,438
--------------
311,808,862
--------------
REIT - Mortgage Trust (0.00%)
Core Cap, Inc. (Class A)* (r) .......... 4,500 51,300
--------------
TOTAL COMMON STOCKS
(Cost $3,200,991,141) (92.45%) 3,202,968,868
------- --------------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
PREFERRED STOCKS
REIT - Mortgage Trust (0.05%)
Core Cap, Inc. Ser A/I, 10.00% (r) .... 4,500 $93,150
Kimco Realty Corp., Ser D, 7.50% ....... 66,600 1,698,300
-------------
1,791,450
-------------
TOTAL PREFERRED STOCKS
(Cost $1,500,499) (0.05% 1,791,450
------- -------------
INTEREST PAR VALUE
RATE (000s OMITTED)
--------- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.36%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 10-30-98, due 11-02-98
(Secured by U.S. Treasury Bond,
7.125%, due 02-15-23 and
U.S. Treasury Notes, 6.25%,
due 01-31-02 thru 02-28-02)
-- Note A...................... 5.380% $81,838 81,838,000
------------
Short-Term Notes (5.40%)
BankBoston,
Due 11-15-98.................. 5.650 15,000 15,000,000
Beneficial Corp.,
Due 11-17-98.................. 8.090 8,250 8,347,845
CIT Group Holdings, Inc.,
Due 12-28-98.................. 5.875 5,350 5,353,585
Ford Motor Credit Co.,
Due 12-15-98.................. 5.625 5,275 5,274,042
Ford Motor Credit Co.,
Due 05-17-99.................. 7.900 5,500 5,576,670
Federal Home Loan Bank,
Due 01-29-99 #................ 5.030 10,000 9,930,000
Federal Home Loan Bank,
Due 03-02-99.................. 5.610 20,000 20,046,800
Federal National Mortgage
Association, Due 05-05-99..... 5.630 23,500 23,569,795
General Motors Acceptance Corp.,
Due 12-07-98.................. 6.000 1,250 1,251,382
General Motors Acceptance Corp.,
Due 12-14-98.................. 5.950 10,000 10,013,700
General Motors Acceptance Corp.,
Due 01-15-99.................. 8.500 7,100 7,139,689
General Motors Acceptance Corp.,
Due 05-24-99.................. 6.400 2,500 2,516,025
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---------- -------------- --------
International Business Machines,
Due 04-01-99.................. 5.143%** 50,000 49,976,500
Morgan (J.P.) & Co., Inc.,
Due 11-15-98.................. 7.625 10,000 10,151,100
Philip Morris Cos., Inc.,
Due 02-15-99.................. 7.375 2,850 2,862,625
Southern California Edison Co.,
Due 04-15-99.................. 7.500 5,000 5,051,550
Weyerhaeuser Co.,
Due 04-12-99.................. 8.840 5,000 5,078,550
--------------
TOTAL SHORT-TERM NOTES
(Cost $187,338,378) (5.40%) 187,139,858
------- --------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.35%............ 691
--------------
TOTAL SHORT-TERM INVESTMENTS (7.76%) 268,978,549
------- --------------
TOTAL INVESTMENTS (100.26%) 3,473,738,867
------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.26%) (9,135,869)
------- --------------
TOTAL NET ASSETS (100.00%) $3,464,602,998
======= ==============
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
NOTES TO SCHEDULE OF INVESTMENTS
* Non-income producing security.
** Floating rate note, interest rate shown as of October 31, 1998.
# Call date.
(r) The securities listed below are direct placement securities and are
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 these restricted securities
is as follows:
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE AT
ACQUISITION ACQUISITION OF FUND'S OCTOBER 31,
DATE COST NET ASSETS 1998
----------- ----------- ---------- -----------
Core Cap, Inc.
Common Stock......... 10-31-97 $90,000 0.00% $51,300
Preferred Stock...... 10-31-97 112,500 0.00 93,150
---- --------
TOTAL 0.00% $144,450
==== ========
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.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Financial Industries Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Financial Industries Fund invests primarily in equity securities of issuers
in the financial sector in the United States and abroad. The concentration of
investments by industry category for individual securities held by the Fund is
shown in the schedule of investments.
In addition, concentration of investments can be aggregated by various
countries. The table below shows the percentage of the Fund's investments at
October 31, 1998 assigned to the various country categories.
MARKET VALUE
AS A PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ------------------
Australia............................................. 0.14%
Bermuda............................................... 2.15
Canada................................................ 1.68
Finland............................................... 0.07
France................................................ 0.37
Germany............................................... 2.07
Ireland............................................... 1.08
Italy................................................. 0.37
Netherlands........................................... 1.23
Spain................................................. 0.79
Sweden................................................ 0.58
United Kingdom........................................ 2.47
United States......................................... 87.26
------
TOTAL INVESTMENTS 100.26%
======
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Investment Trust II (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust consists of two series: John Hancock Financial Industries Fund (the
"Fund") and John Hancock Regional Bank Fund. The other series of the Trust is
reported in separate financial statements. The investment objective of the Fund
is to seek capital appreciation.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. Effective December 8, 1998,
the Board of Trustees have authorized the issuance of Class C shares in 1999.
The shares of each class represent an interest in the same portfolio of
investments of the Fund and have equal rights to voting, redemptions, dividends
and liquidation, except that certain expenses, subject to the approval of the
Trustees, may be applied differently to each class of shares in accordance with
current regulations of the Securities and Exchange Commission and the Internal
Revenue Service. Shareholders of a class which bears distribution and service
expenses under terms of a distribution plan have exclusive voting rights to that
distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing 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."
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement transaction. Aggregate
cash balances are invested in one or more large repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis. Capital gains realized
on some foreign securities are subject to foreign taxes and are accrued, as
applicable.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $2,259,735 of a capital loss
carryforward available, to the extent provided by regulations, to offset future
net realized capital gains. If such carryforward is used by the Fund, no capital
gain distributions will be made. The carryforward expires October 31, 2006.
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 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.
19
<PAGE>
==========================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 size 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 Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 million,
collectively. Interest is charged to each fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the lines of credit, is allocated among the participating funds. The
Fund had no borrowing activity for the year ended October 31, 1998.
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 if they are offset by the currency amount of the underlying
transaction.
There were no open forward foreign currency exchange contracts at October 31,
1998.
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
20
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
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, 1998, 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 ("credit risk"), 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 and liquidity risks in over-the-counter options 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,
1998.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.80% 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.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended October
31, 1998, net sales charges received with regard to sales of Class A shares
amounted to $18,521,423. Out of this amount, $2,713,902 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$14,251,197 was paid as sales commissions to unrelated broker-dealers and
$1,556,324 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), a related broker-dealer. The Adviser's
indirect parent, John Hancock Mutual Life Insurance Company ("JHMLICo"), is the
21
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Financial Industries Fund
indirect sole shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from 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, 1998,
contingent deferred sales charges received by JH Funds amounted to $6,538,260.
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 Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are directors 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, 1998, aggregated $2,697,955,730
and $835,600,982, respectively. There were no purchases or sales of obligations
of the U.S. government and its agencies during the year ended October 31, 1998.
The cost of investments owned at October 31, 1998 (including short-term
investments) for federal income tax purposes was $3,487,240,463. Gross
unrealized appreciation and depreciation of investments aggregated $301,557,225
and $315,059,512, respectively, resulting in net unrealized depreciation of
$13,502,287.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1998, the Fund has reclassified amounts to
reflect an increase in accumulated net realized loss on investments of
$3,305,792, an increase in undistributed net investment income of $3,139,104 and
an increase in capital paid-in of $166,688. This represents the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1998. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to the treatment of
passive foreign investment companies, real estate investment trusts (REITs) and
net realized loss on foreign currency transactions 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.
22
<PAGE>
================================================================================
John Hancock Funds - Financial Industries Fund
REPORT OF INDEPENDENT ACCOUNTANTS
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,
1998, 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
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,
1998.
100% of the distributions qualify for the dividends received deduction
available to corporations.
The Fund has designated distributions to shareholders of $41,459 as capital
gain dividends.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the total of all distributions which are taxable
for the calendar year 1998.
23
<PAGE>
================================================================================
----------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
- --------------------------------------------------------------------------------
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 10/98
12/98
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm." A recycled logo in lower left hand corner
with caption "Printed on Recycled Paper."]
<PAGE>
ANNUAL REPORT
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[GRAPHIC OMITTED]
Regional
Bank Fund
OCTOBER 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-----------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE
DOUGLAS M. COSTLE
LELAND O. ERDAHL
RICHARD A. FARRELL
GAIL D. FOSLER
WILLIAM F. GLAVIN
ANNE C. HODSDON
DR. JOHN A. MOORE
PATTI MCGILL PETERSON
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President and Chief Operating Officer
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
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
PRICEWATERHOUSECOOPERS LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
-----------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term is a
roller coaster. That is because, while long-term history suggests the market's
general direction is up, its swings over the short term can be dramatic and, at
times, violent. This year, the market has given us several stark examples of
this phenomenon. From the new highs set in mid-July, the major indices plunged
by 19% through the end of August. It was the worst such fall since 1990. For the
first time in a number of years, some bonds and bond mutual funds outperformed
stocks and stock mutual funds. Seeking safety in a world of global economic
uncertainties, investors everywhere converged on U.S. Treasury bonds and pushed
their yields to historic lows.
Then in early October, the market staged a remarkable rebound that was
sparked by the Federal Reserve's two cuts in interest rates. The major indices
regained all their previously lost ground and the S&P 500 Stock Index ended
October actually up by 15% year-to-date.
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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.]
- --------------------------------------------------------------------------------
Investors have been understandably shaken by these dramatic twists and turns,
but we are pleased to report that most individual investors did not panic, and
we hope that means they've taken our words to heart. Over the long term, markets
do not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering the implications of global turmoil and the
potential for slower U.S. economic and corporate earnings growth. While we don't
make a practice of opining on what the market will do next, we continue to
believe it would be wise for investors to set more realistic expectations. Over
the long term, the market's historical results have been more in the 10% per
year range, which is still a solid result, considering it has been produced
despite wars, depressions and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the last six months' divergence in
performance of stocks and high-quality bonds is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER AND
THOMAS FINUCANE AND THOMAS GOGGINS, PORTFOLIO MANAGERS
John Hancock
Regional Bank Fund
Financial stocks lag the market in a year of volatility
Since late 1997, U.S. financial markets have been on a wild ride. For the year
ended October 31, 1998, the Standard & Poor's 500 Stock Index produced a total
return of 22%. However, there was enormous volatility within the year. After
cruising up over 28% from November through July, the market hit a large pocket
of turbulence and dropped much of this gain in a few short weeks. Overseas
traumas, a slowdown in the U.S. economy and questions about the ultimate driver
of stocks, corporate profits, all hit at once. Throughout this period, there was
an extraordinary tendency for larger companies to outperform smaller ones, as
evidenced by the small-company Russell 2000 Index's decline in the same year of
12%. During the last month of the period, stocks gained back their lost ground
due to a surprise interest rate cut by the Federal Reserve Board and generally
favorable earnings reports.
Performance review
Over the last 12 months, bank stocks in general and the John Hancock Regional
Bank Fund in particular have lagged behind the advance in the S&P 500. The
Fund's Class A and Class B shares returned 5.33% and 4.62%, respectively, at net
asset value, for the year ended October 31, 1998. That compared to the 6.26%
return of the average financial services fund, according to Lipper Analytical
Services, Inc.1 Keep in mind that your net asset value return will be different
"Overseas traumas, a slowdown in the U.S. economy and questions about...
corporate profits..."
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Regional
Bank Fund. Caption below reads "Fund management team members (l-r): "Jay
McKelvey, Tom Goggins and Tom Finucane. Sitting (l-r): Lisa Welch, Jim Schmidt
and Patricia Ouimet."]
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3
<PAGE>
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John Hancock Funds - Regional Bank Fund
"...1998 will still be remembered as the year of the blockbuster merger."
- --------------------------------------------------------------------------------
[Table at top left hand column entitled "Top Five Common Stock Holdings." The
first listing is First Union Corp. 4.7%, the second is Bank One Corp. 4.2%, the
third BankAmerica Corp. 4.1%, the fourth Washington Mutual, Inc. 2.7% and the
fifth National City Corp. 2.7%. A note below the table reads "As a percentage of
net assets on October 31, 1998."]
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from the Fund's performance if you were not invested in the Fund for the entire
period and did not reinvest all distributions. Please see pages seven and eight
for historical performance information.
The Fund's significant weighting in small- and mid-capitalization banks and
thrifts contributed to our shortfall, as these stocks, which exhibited stellar
returns in 1997, have not kept up with other financial stocks in 1998. This is
partly due to the "small stock effect" (as exemplified by the Russell 2000
return discussed above) which has taken its toll among smaller issues in almost
all industries. It is also due to the fact that many regional banks advanced in
late 1997 to what, in retrospect, seems to have been an overvalued price level.
The late summer sell-off in these stocks has brought them once again to
attractive levels of valuation. The recent decline in bank stocks was also
triggered by economic turmoil in the Far East and Russia, which sent share
prices tumbling indiscriminately, including many regional banks with no exposure
to overseas lending.
Consolidation ebbs and flows
Although recent market volatility has impacted deal flow, 1998 will still be
remembered as the year of the blockbuster merger. In the space of three weeks in
April, NationsBank/BankAmerica, Bank One/First Chicago and Travelers/Citicorp
all announced mergers. The first two transactions brought coast-to-coast,
national banking franchises closer to reality; the latter deal endeavors beyond
current regulations by merging a bank with an insurance company, portending what
many financial services companies will look like within a decade.
In the first ten months of 1998, thirty of the Fund's holdings announced
mergers. Yet in recent months, the number of deals has abated, in line with the
sell-off in bank stocks. In times of market volatility, it is much harder for
buyer and seller to set an agreeable exchange ratio. We believe that the
uncertainty created by fluctuations in the market has caused a postponement of
several merger discussions. Nevertheless, some of the Fund's important regional
franchises were scooped up in the last six months for hefty premiums, including
Firstar (by Star Bank) and Crestar Financial (by SunTrust). We believe bank
consolidation will wax and wane with the vagaries of the market, but the
enduring reason for mergers -- excess capacity in the U.S. banking system
- --remains and will serve as a catalyst for this process well into the 21st
century.
Earnings in abundance
Headlines in recent months have been chock full of the travails of the large
money center banks:
- --------------------------------------------------------------------------------
[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Star Banc
Corp. followed by an up arrow with the phrase "Ohio bank bucks market trend and
attains cult status." The second listing is Summit Bancorp followed by a down
arrow with the phrase "Fundamentally undervalued New Jersey regional." The third
listing is Bank Plus Corp. followed by a down arrow with the phrase "String of
write-offs hurt this California thrift." A note below the table reads "See
`Schedule of Investments.' Investment holdings are subject to change."]
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4
<PAGE>
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John Hancock Funds - Regional Bank Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended October 31, 1998." The chart is
scaled in increments of 1% with 0% at the bottom and 8% at the top. The first
bar represents the 5.33% Total return for John Hancock Regional Bank Fund Class
A. The second bar represents the 4.62% total return for John Hancock Regional
Bank Fund Class B. The third bar represents the 6.26% total return for Average
financial services fund. A note below the chart reads "Total returns for John
Hancock Regional Bank Fund are at net asset value with all distributions
reinvested. The average financial services fund is tracked by Lipper Analytical
Services, Inc. See pages seven and eight for historical performance
information."]
- --------------------------------------------------------------------------------
lending miscues to hedge funds, trading losses in emerging markets and revenue
shortfalls in investment banking. Although these risks are not insignificant to
these banks, the companies do have other domestic engines to power their
earnings. Note that only about 5% of the Fund's net assets are invested in
companies with substantial overseas businesses. Despite the machinations of the
market, the earnings environment for most regional banks has been rather dull.
In recently released third-quarter results, the median bank owned by the Fund
posted 11% earnings growth over the third quarter of 1997 and 3% growth when
compared to the second quarter of 1998.
Investor interest in bank stocks seems to have been rekindled by recent cuts
in interest rates by the Federal Reserve. While we welcome the advance in share
prices, we continue to believe that most investors overestimate the impact of
changes in interest rates on bank earnings. If anything, we think net interest
margins at most commercial banks will decline somewhat if rates move lower
because the rates paid on many of the savings deposit products are already so
paltry it will be difficult to move them still lower. The savings and loans will
fare a little better because the restoration of some slope to the yield curve
(the difference between short- and longer-term interest rates) within the first
year will improve the spreads on adjustable rate mortgages.
In general, we think our holdings will show average earnings-per-share gains
of about 8% next year, as the positive impact of share buybacks will mitigate
some loss in net interest margins. This profit forecast reflects our belief that
the U.S. economy will continue to grow in 1999, albeit at a 1.5% to 2% rate that
would represent a noticeable slowdown from this year. Asset quality remains as
one of the bright spots in the earnings equation, as most of our holdings report
non-performing assets to be stable and amounting to less than 1% of their
balance sheets.
Although we do not anticipate a recession in 1999, we should not rule out the
possibility, as the impact of turmoil in the capital markets and the
deterioration of some of the emerging-market economies is difficult to quantify.
Fortunately, we feel that the banking industry is far better equipped to deal
with an economic downturn now as opposed to 1989, when the economy last swooned.
What hurt the banks in the last recession was their lending heavily against
inflated commercial real estate values. Recent bank loan growth has been
diversified across all sectors of their portfolios, backed more by sustainable
cash flows than by inflated collateral. More importantly, the levels of
profitability, capital and loss reserves are almost twice what they were in
1989, mitigating the impact of rising problem loans on bank earnings.
Importantly,
"Asset quality remains as one of the bright spots in the earnings equation..."
5
<PAGE>
================================================================================
John Hancock Funds - Regional Bank Fund
"...the underperformance has created an opportunity."
consolidation has reduced the number of banks by over 30% since the late 1980s.
This has alleviated over-zealous competition and should lead to far less stress
on the system should trouble start brewing.
Fund composition and activity
Our focus remains on regional banks and thrifts with solid fundamentals that are
selling at below-average valuation levels. We believe that the decline in the
prices of many banks and thrifts this year has created opportunities for us.
Many mid-sized regional banks in the $10 billion to $30 billion asset range are
now selling at the same or lower price-earnings multiples as the larger
"superregional" banks that they may eventually be acquired by. This anomaly has
not occurred in several years. Interestingly, these banks tend to have little or
no credit exposure to the emerging markets or hedge funds, which are the areas
that most investors are wary of. As we noted earlier, this year's decline in
interest rates might help the earnings of some of the savings and loans, and yet
these stocks have performed poorly this year. We believe many of the smaller
thrifts are now worth more dead than alive, as they are trading below their
liquidation value (i.e., book value plus a modest deposit premium).
The consummation of several recent mammoth mergers has built up the Fund's
holdings in First Union, BankAmerica and Bank One. Over time, we look for
chances to prune these positions at more favorable prices.
At the end of the period, the Fund announced that it would re-open to new
investors as of November 4, 1998. This decision had its roots in the dramatic
sell-off in the banks in the ten-week period following July 14. This produced
much more attractive prices for bank investors and also, in our estimation,
lessened the likelihood of enormous new cash flows into the Fund, which was what
caused us to close the Fund in March 1997. We will continually evaluate the
Fund's cash position to ensure that it stays at a level that does not interfere
with the integrity of the Fund's investment strategy.
A look ahead
While we are disappointed in the failure of stock prices of banks and thrifts to
perform as well as the market this year, we feel that the underperformance has
created an opportunity. The relative price-earnings multiple between the banking
institutions and the S&P 500 is now 10% below its long-term average, even though
we expect earnings growth for most banks to exceed that of the market in 1999.
We think the undervaluation is particularly pronounced in some of the smaller
banks, as the market has overwhelmingly favored large companies over small in
the last two years, regardless of the industry. Our investment strategy is
driven to a considerable extent by our expectation of substantial consolidation
among banks over the next decade. Although this activity has slowed in the last
several months, we believe that the trend toward fewer banks in the country is
solidly in place and inevitable. This should continue to work in the favor of
the Fund and its shareholders.
- --------------------------------------------------------------------------------
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 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
<PAGE>
================================================================================
John Hancock Funds - Regional Bank Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Regional Bank Fund. Total return measures the
change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. Prior to August 1992, different sales charges were in effect for
Class A shares and are not reflected in the performance data. 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.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
-------- --------- -------------
Cumulative Total Returns (6.54%) 142.76% 343.29%
Average Annual Total Returns (6.54%) 19.41% 24.71%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1998
ONE FIVE TEN
YEAR YEARS YEARS
-------- --------- -------------
Cumulative Total Returns (7.10%) 144.76% 584.83%
Average Annual Total Returns (7.10%) 19.60% 21.22%
7
<PAGE>
================================================================================
John Hancock Funds - Regional Bank Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Regional Bank 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-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 John Hancock Regional Bank 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 hypothetical $10,000 investment made in the John Hancock Regional Bank
Fund on January 3, 1992, before sales charge, and is equal to $50,099 as of
October 31, 1998. The second line represents the same hypothetical investment
made in the John Hancock Regional Bank Fund, after sales charge, and is equal to
$47,591 as of October 31, 1998. The third line represents the Standard & Poor's
500 Stock Index and is equal to $31,607 as of October 31, 1998.
Line chart with the heading John Hancock Regional Bank Fund Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are two lines. The first line represents the value of
the hypothetical $10,000 investment made in the John Hancock Regional Bank Fund
on October 31, 1988, before sales charge, and is equal to $71,942 as of October
31, 1998. The second line represents the Standard & Poor's 500 Stock Index and
is equal to $51,737 as of October 31, 1998.
- --------------------------------------------------------------------------------
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank 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, 1998. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
October 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common and preferred stocks, warrants and other
Unaffiliated issuers (cost - $2,795,812,360) .......... $5,386,485,949
Affiliated issuers (cost - $87,136,362) ............... 159,303,565
Bonds (cost - $12,624,710) .............................. 13,073,710
Joint repurchase agreement (cost - $152,762,000) ........ 152,762,000
Short-term notes (cost - $289,478,148) .................. 289,411,765
Corporate savings account ............................... 459
--------------
6,001,037,448
Receivable for investments sold .......................... 20,648,143
Receivable for shares sold ............................... 973,949
Dividends receivable ..................................... 11,185,029
Interest receivable ...................................... 7,644,714
Other assets ............................................. 130,911
--------------
Total Assets ........................... 6,041,620,194
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ........................ 24,109,456
Payable for shares repurchased ........................... 4,718,677
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................. 5,147,678
Accounts payable and accrued expenses .................... 462,112
--------------
Total Liabilities ...................... 34,437,923
-----------------------------------------------------------
Net Assets:
Capital paid-in .......................................... 3,162,199,904
Accumulated net realized gain on investments and
foreign currency transactions ........................... 175,226,473
Net unrealized appreciation of investments ............... 2,663,229,531
Undistributed net investment income ...................... 6,526,363
--------------
Net Assets ............................. $6,007,182,271
===========================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $1,500,199,562/29,800,353....................... $50.34
=============================================================================
Class B - $4,506,982,709/90,002,798....................... $50.08
=============================================================================
Maximum Offering Price Per Share*
Class A - ($50.34 x 105.26%).............................. $52.99
=============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended October 31, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends (including $4,906,722 received from
affiliated issuers and net of foreign withholding
taxes of $24,775) ....................................... $131,080,114
Interest ................................................. 41,709,995
--------------
172,790,109
--------------
Expenses:
Investment management fee - Note B ...................... 52,576,384
Distribution and service fee - Note B
Class A ............................................... 5,221,164
Class B ............................................... 50,931,129
Transfer agent fee - Note B ............................. 10,017,883
Financial services fee - Note B ......................... 1,162,435
Custodian fee ........................................... 857,710
Trustees' fees .......................................... 419,188
Miscellaneous ........................................... 267,424
Printing ................................................ 264,767
Registration and filing fees ............................ 81,374
Legal fees .............................................. 72,971
Auditing fee ............................................ 41,791
--------------
Total Expenses ......................... 121,914,220
-----------------------------------------------------------
Net Investment Income .................. 50,875,889
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold (including
$6,229,816 gain on sales of investments in
affiliated issuers) ..................................... 202,591,762
Net realized loss on foreign currency transactions ....... (398)
Change in net unrealized appreciation/depreciation
of investments .......................................... 53,450,817
--------------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions .......... 256,042,181
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .............. $306,918,070
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................................... $52,301,693 $50,875,889
Net realized gain on investments sold and foreign currency
transactions ............................................................................ 59,106,829 202,591,364
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ........................................... 1,780,828,190 53,450,817
--------------- ---------------
Net Increase in Net Assets Resulting from Operations .................................... 1,892,236,712 306,918,070
--------------- ---------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6125 and $0.6470 per share, respectively) ................................. (19,020,629) (20,963,084)
Class B - ($0.3392 and $0.2841 per share, respectively) ................................. (31,890,024) (27,817,233)
Distributions from net realized gain on investments sold
Class A - ($0.3143 and $0.3926 per share, respectively) ................................. (8,142,308) (13,035,642)
Class B - ($0.3143 and $0.3926 per share, respectively) ................................. (24,538,932) (39,463,958)
--------------- ---------------
Total Distributions to Shareholders ..................................................... (83,591,893) (101,279,917)
--------------- ---------------
From Fund Share Transactions - Net:* ......................................................... 1,366,590,293 (643,047,648)
--------------- ---------------
Net Assets:
Beginning of period ....................................................................... 3,269,356,654 6,444,591,766
--------------- ---------------
End of period (including undistributed net investment
income of $4,943,179 and $6,526,363, respectively) ...................................... $6,444,591,766 $6,007,182,271
=============== ===============
</TABLE>
*Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1997 1998
------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ....................................... 38,788,657 $1,491,103,323 9,772,747 $519,672,746
Shares issued to shareholders in reinvestment of
distributions ................................... 559,414 22,095,071 517,773 27,781,650
--------------- --------------- --------------- ---------------
39,348,071 1,513,198,394 10,290,520 547,454,396
Less shares repurchased ........................... (31,907,187) (1,238,344,932) (13,257,504) (698,208,336)
--------------- --------------- --------------- ---------------
Net increase (decrease) ........................... 7,440,884 $274,853,462 (2,966,984) ($150,753,940)
=============== =============== =============== ===============
CLASS B
Shares sold ....................................... 40,654,404 $1,573,447,820 9,602,715 $509,059,888
Shares issued to shareholders in reinvestment of
distributions ................................... 929,268 35,725,726 814,268 43,409,949
--------------- --------------- --------------- ---------------
41,583,672 1,609,173,546 10,416,983 552,469,837
Less shares repurchased ........................... (12,781,798) (517,436,715) (20,411,405) (1,044,763,545)
--------------- --------------- --------------- ---------------
Net increase (decrease) ........................... 28,801,874 $1,091,736,831 (9,994,422) ($492,293,708)
=============== =============== =============== ===============
</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 and foreign currency gains, distributions
paid to shareholders and any increase or decrease in money shareholders invested
in the Fund. The footnote illustrates the number of Fund shares sold, reinvested
and repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $21.62 $21.52 $27.14 $33.99 $48.73
-------- -------- -------- ---------- ----------
Net Investment Income(1) ................................ 0.39 0.52 0.63 0.64 0.66
Net Realized and Unrealized Gain on Investments ......... 0.91 5.92 7.04 15.02 1.99
-------- -------- -------- ---------- ----------
Total from Investment Operations ...................... 1.30 6.44 7.67 15.66 2.65
-------- -------- -------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income .................... (0.34) (0.48) (0.60) (0.61) (0.65)
Distributions from Net Realized Gain on
Investments Sold ...................................... (1.06) (0.34) (0.22) (0.31) (0.39)
-------- -------- -------- ---------- ----------
Total Distributions ................................... (1.40) (0.82) (0.82) (0.92) (1.04)
-------- -------- -------- ---------- ----------
Net Asset Value, End of Period .......................... $21.52 $27.14 $33.99 $48.73 $50.34
======== ======== ======== ========== ==========
Total Investment Return at Net Asset Value(2) ........... 6.44% 31.00% 28.78% 46.79% 5.33%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $216,978 $486,631 $860,843 $1,596,836 $1,500,200
Ratio of Expenses to Average Net Assets ................. 1.34% 1.39% 1.36% 1.30% 1.24%
Ratio of Net Investment Income to Average Net Assets .... 1.78% 2.23% 2.13% 1.55% 1.23%
Portfolio Turnover Rate ................................. 13% 14% 8% 5% 5%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains,
distributions and total investment return of the Fund. It shows how the Fund's
net asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $21.56 $21.43 $27.02 $33.83 $48.48
-------- ---------- ---------- ---------- ----------
Net Investment Income(1) ................................ 0.23 0.36 0.42 0.35 0.30
Net Realized and Unrealized Gain on Investments ......... 0.91 5.89 7.01 14.95 1.97
-------- ---------- ---------- ---------- ----------
Total from Investment Operations ...................... 1.14 6.25 7.43 15.30 2.27
-------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income .................... (0.21) (0.32) (0.40) (0.34) (0.28)
Distributions from Net Realized Gain on
Investments Sold ...................................... (1.06) (0.34) (0.22) (0.31) (0.39)
-------- ---------- ---------- ---------- ----------
Total Distributions ................................... (1.27) (0.66) (0.62) (0.65) (0.67)
-------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period .......................... $21.43 $27.02 $33.83 $48.48 $50.08
======== ========== ========== ========== ==========
Total Investment Return at Net Asset Value(2) ........... 5.69% 30.11% 27.89% 45.78% 4.62%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $522,207 $1,236,447 $2,408,514 $4,847,755 $4,506,983
Ratio of Expenses to Average Net Assets ................. 2.06% 2.09% 2.07% 2.00% 1.92%
Ratio of Net Investment Income to Average Net Assets .... 1.07% 1.53% 1.42% 0.84% 0.56%
Portfolio Turnover Rate ................................. 13% 14% 8% 5% 5%
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
Schedule of Investments
October 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Regional Bank Fund on October 31, 1998. It's divided into four main categories:
common stocks, warrants and other, preferred stocks, bonds, and short-term
investments. Common stocks are further broken down by industry group. Short-term
investments, which represent the Fund's "cash" position, are listed last.
MARKET
ISSUER, DESCRIPTION, STATE NUMBER OF SHARES VALUE
- -------------------------- ---------------- -----
COMMON STOCKS, WARRANTS AND OTHER
Money Center Banks (2.53%)
Bankers Trust New York Corp. (NY) ....... 246,695 $15,495,530
Chase Manhattan Corp. (NY) .............. 1,770,310 100,575,737
Citigroup, Inc (NY) ..................... 231,460 10,893,086
Morgan (J.P.) & Co., Inc. (NY) .......... 266,000 25,070,500
--------------
152,034,853
--------------
Superregional Banks (26.18%)
Bank One Corp. (OH) ..................... 5,180,441 253,194,054
BankAmerica Corp. (NC) .................. 4,310,382 247,577,579
BankBoston Corp. (MA) ................... 2,561,500 94,295,219
Bank of New York Co., Inc. (NY) ......... 4,178,898 131,896,468
First Union Corp. (NC) .................. 4,825,744 279,893,152
Fleet Financial Group, Inc. (MA) ........ 1,722,296 68,784,197
KeyCorp. (OH) ........................... 1,640,434 49,725,656
Mellon Bank Corp. (PA) .................. 793,902 47,733,358
National City Corp. (OH) ................ 2,537,914 163,219,594
Norwest Corp. (MN) ...................... 2,452,232 91,192,378
PNC Bank Corp. (PA) ..................... 1,900,900 95,045,000
Wachovia Corp. (NC) ..................... 550,225 50,001,697
--------------
1,572,558,352
--------------
Banks - United States (45.40%)
ABC Bancorp. (GA) ....................... 173,000 2,281,438
American Bancorp. (WV) .................. 148,000 3,071,000
American Bancshares, Inc.* (FL) ......... 77,000 784,438
AmSouth Bancorp. (AL) ................... 1,035,158 41,471,017
ANB Corp. (IN) .......................... 137,500 3,454,687
Associated Banc-Corp. (WI) .............. 569,206 19,993,361
Atlantic Bank & Trust Co.* (MA) ......... 35,000 560,000
BancFirst Corp. (OK) .................... 340,600 12,900,225
BancFirst Ohio Corp. (OH) ............... 103,000 3,064,250
BancorpSouth, Inc. (MS) ................. 330,000 6,558,750
Banknorth Group, Inc. (VT) .............. 800,000 25,500,000
BB&T Corp. (NC) ......................... 3,428,284 122,346,885
Brenton Banks, Inc. (IA) ................ 378,909 6,441,453
Bryn Mawr Bank Corp. (PA) ............... 180,400 4,555,100
BT Financial Corp. (PA) ................. 203,726 5,653,396
CB Bancshares, Inc. (HI) ................ 145,100 4,969,675
CCB Financial Corp. (NC) ................ 1,019,064 53,628,243
Centura Banks, Inc. (NC) ................ 478,025 32,983,725
Chittenden Corp. (VT) ................... 152,750 4,563,406
Citizens Banking Corp. (MI) ............. 142,600 4,598,850
City National Corp. (CA) ................ 520,550 17,796,303
CNB Bancshares, Inc. (IN) ............... 342,201 14,543,542
Colonial BancGroup, Inc. (AL) .......... 1,086,600 14,193,712
Comerica, Inc. (MI) ..................... 1,220,697 78,734,956
Commerce Bancshares, Inc. (MO) .......... 740,586 32,261,778
Commercial Bankshares, Inc. (FL) ........ 180,547 4,107,444
Community Bank System, Inc. (NY) ........ 135,000 3,780,000
Community First Bankshares, Inc. (ND) ... 794,500 15,790,687
Compass Bancshares, Inc. (AL) .......... 1,628,250 59,939,953
Crestar Financial Corp. (VA) ............ 1,674,339 110,297,082
Cullen / Frost Bankers, Inc. (TX) ....... 964,700 51,370,275
Evergreen Bancorp., Inc. (NY) .......... 280,600 7,786,650
F & M National Corp. (VA) ............... 138,650 4,116,172
First American Corp. (TN) ............... 3,511,528 144,850,530
First Citizens BancShares, Inc.
(Class A) (NC) ........................ 87,344 7,795,452
First Colonial Group, Inc. (PA) ......... 31,874 898,448
First Hawaiian, Inc. (HI) ............... 770,100 30,707,737
First Merchants Corp. (IN) .............. 165,150 4,087,462
First Republic Bank* (CA) ............... 274,162 6,785,509
First Security Corp. (UT) ............... 1,966,278 40,185,807
First Source Corp. (IN) ................. 112,626 3,604,032
First State Bancorp. (NM) ............... 107,500 2,096,250
First Tennessee National Corp. (TN) ..... 3,046,800 96,545,475
First Virginia Banks, Inc. (VA) ......... 127,249 5,805,736
First Western Bancorp., Inc. (PA) ....... 246,250 6,340,937
Firstar Corp. (WI) ...................... 1,225,900 69,569,825
Firstbank Corp. (MI) .................... 104,652 3,034,908
FirstMerit Corp. (OH) ................... 184,924 4,900,481
F.N.B. Corp. (PA) ...................... 218,162 5,999,455
FNB Rochester Corp. (NY) ................ 197,837 3,400,323
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
MARKET
ISSUER, DESCRIPTION, STATE NUMBER OF SHARES VALUE
- -------------------------- ---------------- -----
Banks - United States (continued)
Franklin Bank, NA (MI) .................. 62,628 $665,423
Fulton Financial Corp. (PA) ............. 356,658 7,356,071
GBC Bancorp. (CA) ....................... 170,000 4,526,250
Grand Premier Financial, Inc. (IL) ...... 84,118 1,125,078
Greater Bay Bancorp. (CA) ............... 40,018 1,280,576
Hancock Holding Co. (MS) ................ 333,700 16,017,600
Harleysville National Corp. (PA) ........ 43,575 1,525,125
Hibernia Corp. (Class A) (LA) .......... 1,490,600 24,874,387
HUBCO, Inc. (NJ) ........................ 837,096 22,601,592
Huntington Bancshares, Inc. (OH) ........ 421,489 12,117,809
Imperial Bancorp.* (CA) ................. 382,300 5,304,412
Independent Bank Corp. (MA) ............. 825,000 12,890,625
Interchange Financial Services
Corp. (NJ) ............................ 323,625 5,238,680
Keystone Financial, Inc. (PA) .......... 171,245 5,008,916
LSB Bancshares, Inc. (NC) ............... 18,010 301,668
MainStreet Financial Corp. (VA) ......... 221,700 9,061,987
Marshall & Ilsley Corp. (WI) ............ 590,730 28,798,087
Mercantile Bancorp., Inc. (MO) .......... 1,949,343 89,060,608
Mercantile Bankshares Corp. (MD) ........ 817,550 26,672,569
Merchants Bancorp., Inc. (IL) .......... 141,600 4,248,000
MetroBanCorp. (IN) ...................... 78,750 698,906
Michigan Financial Corp. (MI) .......... 67,860 2,302,999
Mississippi Valley Bancshares, Inc. (MO). 226,000 7,881,750
National City Bancshares, Inc. (IN) ..... 86,743 3,523,934
North Fork Bancorp., Inc. (NY) .......... 4,408,127 87,611,524
North Valley Bancorp. (CA) .............. 84,100 2,407,362
Old Kent Financial Corp. (MI) .......... 1,047,791 44,072,709
One Valley Bancorp., Inc. (WV) .......... 340,606 11,027,119
Pacific Century Financial Corp. (HI) .... 1,570,766 32,004,357
Peoples Bank Corp. of Indianapolis (IN).. 71,100 2,044,125
PNB Financial Group* (CA) ............... 30,000 900,000
Prime Bancshares, Inc. (TX) ............. 51,400 886,650
Princeton National Bancorp., Inc. (IL) .. 64,250 1,092,250
Provident Bankshares Corp. (MD) ......... 641,040 16,346,520
Provident Financial Group, Inc. (OH) .... 183,375 7,065,677
Regions Financial Corp. (AL) ............ 1,150,000 42,550,000
Republic Bancorp., Inc. (MI) ............ 132,950 2,193,675
Republic New York Corp. (NY) ............ 1,204,200 50,350,612
Riggs National Corp. (DC) ............... 360,000 8,685,000
Seacoast Banking Corp. (Class A) (FL) ... 164,300 4,292,338
Security Bank Holding Co. (OR) .......... 41,000 366,438
SierraWest Bancorp. (CA) ................ 82,500 2,062,500
Signal Corp. (OH) ....................... 37,696 1,262,816
Silicon Valley Bancshares* (CA) ......... 305,000 6,252,500
Simmons First National Corp.
(Class A) (AR) ........................ 303,500 13,619,562
SouthTrust Corp. (AL) ................... 1,671,150 60,996,975
Southwest Bancorp., Inc. (OK) .......... 89,000 1,924,625
Star Banc Corp. (OH) .................... 74,595 5,641,247
State Financial Services Corp.
(Class A) (WI) ........................ 208,664 3,964,616
State Street Corp. (MA) ................. 341,000 21,269,875
Sterling Bancshares, Inc. (TX) .......... 347,880 4,957,290
Summit Bancorp. (NJ) .................... 3,988,725 151,322,255
Surety Capital Corp.* (TX) .............. 95,000 249,375
Susquehanna Bancshares, Inc. (PA) ....... 1,069,893 24,206,329
Synovus Financial Corp. (GA) ............ 381,800 8,852,988
TCF Financial Corp. (MN) ................ 1,563,666 36,843,880
Texas Regional Bancshares, Inc.
(Class A) (TX) ........................ 419,000 9,532,250
TriCo Bancshares (CA) ................... 216,050 5,077,175
Trustmark Corp. (MS) .................... 326,000 6,255,125
UnionBanCal Corp. (CA) .................. 759,300 70,235,250
Union Planters Corp. (TN) ............... 1,982,333 92,054,589
U.S. Bancorp. (OR) ...................... 3,942,331 143,895,081
U.S.B. Holding Co., Inc. (NY) .......... 98,000 1,764,000
USBANCORP., Inc. (PA) ................... 216,500 4,005,250
UST Corp. (MA) .......................... 340,300 7,869,437
Vermont Financial Services Corp. (VT) ... 744,672 16,848,204
Wells Fargo & Co. (CA) .................. 268,466 99,332,420
Westamerica Bancorp. (CA) ............... 815,600 27,118,700
West Coast Bancorp. (OR) ................ 169,571 3,115,858
Western Bancorp. (CA) ................... 121,126 3,815,469
Whitney Holding Corp. (LA) .............. 450,800 16,566,900
Wilmington Trust Corp. (DE) ............. 117,000 6,442,312
Zions Bancorp. (UT) ..................... 987,000 52,372,687
--------------
2,727,413,768
--------------
Thrifts (14.72%)
Acadiana BancShares, Inc. (LA) .......... 23,000 396,750
Afsala Bancorp., Inc. (NY) .............. 30,000 472,500
ALBANK Financial Corp. (NY) ............. 143,500 8,771,437
Alliance Bancorp. (IL) .................. 24,561 469,729
Ambanc Holding Co., Inc. (NY) .......... 175,000 2,712,500
Andover Bancorp., Inc. (MA) ............. 45,000 1,406,250
Astoria Financial Corp. (NY) ............ 1,432,992 61,618,656
Bank Plus Corp.* (CA) ................... 602,144 2,446,210
Bank United Corp. (Class A) (TX) ........ 263,600 10,502,826
BankUnited Financial Corp.
(Class A) * (FL) ...................... 128,760 1,166,888
Bay View Capital Corp. (CA) ............. 435,000 7,503,750
Bayonne Bancshares, Inc. (NJ) .......... 35,000 522,813
Bedford Bancshares, Inc. (VA) .......... 40,000 600,000
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
MARKET
ISSUER, DESCRIPTION, STATE NUMBER OF SHARES VALUE
- -------------------------- ---------------- -----
Thrifts (continued)
BostonFed Bancorp., Inc. (MA) .......... 330,700 $5,973,269
Calumet Bancorp., Inc.* (IL) ............ 207,000 6,235,875
Camco Financial Corp. (OH) .............. 31,888 502,236
Cameron Financial Corp. (MO) ............ 107,500 1,652,813
Catskill Financial Corp. (NY) .......... 210,000 2,926,875
CCF Holding Co. (GA) .................... 48,770 826,042
Charter One Financial, Inc. (OH) ........ 3,446,158 94,553,960
Coastal Bancorp., Inc. (TX) ............ 75,000 1,425,000
Commercial Federal Corp. (NE) .......... 2,587,082 58,694,423
Commonwealth Bancorp., Inc. (PA) ........ 146,000 2,080,500
CSB Financial Group, Inc.* (IL) ......... 25,000 243,750
Dime Bancorp., Inc. (NY) .............. 1,379,500 32,849,344
Dime Community Bancorp., Inc. (NY) ...... 285,000 6,822,187
Eagle Bancshares, Inc. (GA) ............. 104,000 1,898,000
East Texas Financial Services,
Inc. (TX) ............................. 66,000 746,625
Elmira Savings Bank (NY) ................ 36,697 770,637
ESB Financial Corp. (PA) ................ 141,928 2,324,071
Fidelity Financial of Ohio, Inc. (OH) ... 55,000 745,938
First Defiance Financial Corp. (OH) ..... 270,700 3,857,475
First Federal Bancorp.* (MN) ............ 84,000 1,197,000
First Federal Capital Corp. (WI) ........ 320,334 4,885,093
First Financial Holdings, Inc. (SC) ..... 175,000 3,368,750
First Independence Corp. (KS) .......... 46,500 514,406
First Keystone Financial, Inc. (PA) ..... 28,500 427,500
First Mutual Bancorp., Inc. (IL) ........ 233,000 3,961,000
First Washington Bancorp., Inc. (WA) .... 121,000 2,662,000
Flagstar Bancorp., Inc. (MI) ............ 180,000 4,320,000
Flushing Financial Corp. (NY) .......... 125,000 1,914,063
FMS Financial Corp. (NJ) ................ 72,000 720,000
Fort Bend Holding Corp. (TX) ............ 78,000 1,657,500
Fort Thomas Financial Corp. (KY) ........ 55,000 601,563
Frankfort First Bancorp., Inc. (KY) ..... 72,500 1,114,688
GA Financial, Inc. (PA) ................. 392,500 5,495,000
Golden State Bancorp., Inc.* (CA) ....... 1,311,686 25,167,975
Golden West Financial Corp. (CA) ........ 100,000 9,068,750
Granite State Bankshares, Inc. (NH) ..... 126,600 2,595,300
Green Street Financial Corp. (NC) ....... 5,000 64,375
GreenPoint Financial Corp. (NY) ......... 3,241,500 106,361,719
Harbor Federal Bancorp., Inc. (MD) ...... 106,500 2,183,250
HF Financial Corp. (SD) ................. 195,000 2,730,000
Highland Bancorp., Inc. (CA) ............ 90,500 3,077,000
HMN Financial, Inc. (MN) ................ 165,000 2,206,875
Home Bancorp of Elgin, Inc. (IL) ........ 60,000 847,500
Home Federal Bancorp. (IN) .............. 335,700 7,888,950
Industrial Bancorp., Inc. (OH) .......... 140,000 2,660,000
InterWest Bancorp., Inc. (WA) .......... 151,500 4,024,219
ISB Financial Corp. (LA) ................ 320,000 7,960,000
Kankakee Bancorp., Inc. (IL) ............ 31,020 763,868
Kentucky First Bancorp., Inc. (KY) ...... 60,000 750,000
Klamath First Bancorp., Inc. (OR) ....... 380,000 6,935,000
Little Falls Bancorp., Inc. (NJ) ........ 120,000 1,807,500
Logansport Financial Corp. (IN) ......... 77,500 1,104,375
MAF Bancorp., Inc. (IL) ................. 669,243 16,396,453
Marion Capital Holdings, Inc. (IN) ...... 12,500 276,563
MASSBANK Corp. (MA) ..................... 77,399 2,825,064
Medford Bancorp., Inc. (MA) ............. 205,000 3,177,500
Mystic Financial, Inc. (MA) ............. 104,500 1,423,813
New Hampshire Thrift Bancshares,
Inc. (NH) ............................. 40,000 680,000
North Central Bancshares, Inc. (IA) ..... 111,000 1,873,125
NS & L Bancorp. (MO) .................... 35,000 472,500
Ocean Financial Corp. (NJ) .............. 70,000 1,015,000
Pamrapo Bancorp., Inc. (NJ) ............. 120,000 2,850,000
Park Bancorp., Inc.* (IL) ............... 25,000 365,625
Patriot Bank Corp. (PA) ................. 157,500 2,008,125
PBOC Holdings, Inc.* (CA) ............... 283,500 2,728,688
Peekskill Financial Corp. (NY) .......... 101,500 1,382,938
Peoples Heritage Financial Group,
Inc. (ME) ............................. 2,026,088 36,469,584
Permanent Bancorp., Inc. (IN) .......... 110,000 1,320,000
PFF Bancorp., Inc.* (CA) ................ 190,000 2,790,625
Piedmont Bancorp., Inc. (NC) ............ 16,000 146,000
Pittsburgh Home Financial Corp. (PA) .... 70,000 883,750
Prestige Bancorp., Inc. (PA) ............ 94,300 1,284,838
QCF Bancorp., Inc.* (MN) ................ 70,000 1,793,750
Quaker City Bancorp., Inc.* (CA) ........ 109,688 1,645,313
Richmond County Financial Corp. (NY) ... 25,000 365,625
St. Paul Bancorp., Inc. (IL) ............ 293,125 6,027,383
SFS Bancorp., Inc. (NY) ................. 79,000 1,738,000
SIS Bancorp., Inc. (MA) ................. 103,000 4,094,250
Skaneateles Bancorp., Inc. (NY) ......... 69,150 959,456
Sobieski Bancorp., Inc. (IN) ............ 40,000 580,000
South Street Financial Corp. (NC) ....... 55,000 457,188
Southern Banc Co., Inc. (AL) ............ 55,500 707,625
Southern Financial Bancorp., Inc. (VA) .. 64,098 1,554,377
Southern Missouri Bancorp., Inc. (MO) ... 21,000 349,125
Sovereign Bancorp., Inc. (PA) .......... 835,702 10,968,589
Staten Island Bancorp., Inc. (NY) ....... 65,000 1,182,188
Statewide Financial Corp. (NJ) .......... 160,000 2,480,000
Sterling Financial Corp.* (WA) .......... 241,877 3,960,736
Teche Holding Co. (LA) .................. 81,000 1,225,125
TeleBanc Financial Corp.* (VA) .......... 200,000 3,650,000
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
MARKET
ISSUER, DESCRIPTION, STATE NUMBER OF SHARES VALUE
- -------------------------- ---------------- -----
Thrifts (continued)
Texarkana First Financial Corp. (AR) .... 124,800 $2,714,400
TF Financial Corp. (PA) ................. 50,000 937,500
TR Financial Corp. (NY) ................. 50,000 1,637,500
Warwick Community Bancorp., Inc. (NY) ... 65,000 828,750
Washington Federal, Inc. (WA) .......... 1,139,968 30,422,896
Washington Mutual, Inc. (WA) ............ 4,376,474 163,844,245
Webster Financial Corp. (CT) ............ 180,000 4,443,750
WesterFed Financial Corp. (MT) .......... 270,426 4,935,275
WSFS Financial Corp. (DE) ............... 239,400 4,099,725
York Financial Corp. (PA) ............... 68,750 1,375,000
--------------
884,102,510
--------------
Other - Financial (2.46%)
Apartment Investment & Management
Co. (Class A) ......................... 112,500 3,930,469
Associates First Capital Corp.
(Class A) ............................. 212,000 14,946,000
Capital One Financial Corp. ............. 335,100 34,096,425
CB Commercial Real Estate Services
Group, Inc.* .......................... 61,600 1,201,200
Edwards (A.G.), Inc. .................... 146,750 5,072,047
Enhance Financial Services Group, Inc. .. 162,400 3,988,950
Equity Office Properties Trust .......... 164,260 3,942,240
EVEREN Capital Corp. .................... 60,000 1,222,500
Fannie Mae .............................. 310,825 22,010,295
Interstate/Johnson Lane, Inc. ........... 11,500 352,188
Investors Financial Services Corp. ...... 60,000 3,232,500
ITLA Capital Corp.* ..................... 245,600 3,745,400
Legg Mason, Inc. ........................ 115,200 3,060,000
Morgan Keegan, Inc. ..................... 95,700 1,782,413
Prentiss Properties Trust ............... 131,300 2,708,063
Prime Retail, Inc. ...................... 390,431 3,782,300
Raymond James Financial, Inc. ........... 172,575 3,958,439
RB Asset, Inc.* ......................... 145,000 1,087,500
SLM Holding Corp. ....................... 754,500 30,227,156
Temple-Inland, Inc. ..................... 71,206 3,457,941
--------------
147,804,026
--------------
Banks - Foreign (0.57%)
Allied Irish Banks PLC, American
Depositary Receipts (ADR) (Ireland) ... 37,400 3,246,787
Popular, Inc. (Puerto Rico) ............. 1,023,000 31,073,625
--------------
34,320,412
--------------
WARRANTS (0.17%)
Golden State Bancorp., Inc. *
(Litigation) (CA) ..................... 1,288,032 6,279,156
Golden State Bancorp., Inc.* (CA) ....... 310,000 3,797,500
--------------
10,076,656
--------------
OTHER (0.00%)
California Federal Bank, Inc. * (CA)
Contingent Litigation
Participation Int...................... 10,833 $174,682
TOTAL COMMON STOCKS, WARRANTS
AND OTHER
(Cost $2,866,813,772) .......... (92.03%) 5,528,485,259
------- --------------
PREFERRED STOCKS
Chevy Chase Pref. Capital Corp.,
Ser A, 10.375% (MD) ................... 18,000 904,500
Chevy Chase Savings, 13.00% (MD) ........ 50,000 1,512,500
Community Bank, Ser B, 13.00% (CA) ...... 40,000 1,075,000
First Preferred Capital I, 9.25% (MO) ... 100,000 2,650,000
First Source Capital Trust I,
9.00% (IN) ............................ 40,000 1,055,000
First Source Capital Trust II,
6.81% ** (IN) ......................... 40,000 1,000,000
First Washington Realty Trust, Ser A,
9.75% (MD) ............................ 113,498 3,277,255
IFC Capital Trust I, 9.25% (IN) ......... 160,000 4,240,000
Sterling Bancshares Capital Trust I,
9.28% (TX) ............................ 60,000 1,590,000
--------------
TOTAL PREFERRED STOCKS
(Cost $16,134,950) (0.29%) 17,304,255
------- --------------
TOTAL COMMON AND PREFERRED STOCKS,
WARRANTS AND OTHER
(Cost $2,882,948,722) (92.32%) 5,545,789,514
------- --------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED)
- ------------------- -------- ------------
BONDS
BFC Capital Trust I,
Capital Securities, Ser A
01-15-27 ............................... 9.650% $1,000 1,075,000
BankUnited Capital Trust,
Pref Sec., Ser A 12-31-26 .............. 10.250 2,000 2,020,000
General Motors Acceptance Corp.,
Note 06-15-99 .......................... 8.625 6,000 6,111,000
Imperial Capital Trust I,
Capital Securities 12-31-26 ............ 9.980 1,500 1,526,250
Susquehanna Bancshares, Inc.,
Conv Sub Deb 02-01-05 .................. 9.000 2,000 2,341,460
------------
TOTAL BONDS
(Cost $12,624,710) (0.22%) 13,073,710
------ ------------
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Regional Bank Fund
<TABLE>
<CAPTION>
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- -------- ------------ ------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.54%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 10-30-98, due 11-02-98
(Secured by U.S. Treasury Bond,
7.125%, due 02-15-23 and
U.S. Treasury Notes, 6.25%,
due 01-31-02 thru 02-28-02)
-- Note A ............................... 5.380% $152,762 $152,762,000
--------------
Short-Term Notes (4.82%)
Associates Corp. of North America,
due 12-22-98 ........................... 8.350 1,000 1,003,750
Beneficial Corp.,
due 11-17-98 ........................... 8.090 8,000 8,094,880
Beneficial Corp.,
due 11-30-98 ........................... 8.230 1,080 1,102,432
Beneficial Corp.,
due 03-15-99 ........................... 7.950 3,000 3,014,370
CIT Group Holdings, Inc.,
due 11-09-98 ........................... 5.875 7,785 7,767,041
CIT Group Holdings, Inc.,
due 05-21-99 ........................... 6.375 5,150 5,184,248
Cooper Industries, Inc.,
due 11-16-98 ........................... 7.890 2,000 2,001,660
Deutsche Bank Financial, Inc.,
due 12-23-98 ........................... 6.375 12,000 12,029,280
John Deere Capital Corp.,
due 02-01-99 ........................... 6.000 4,000 3,998,800
John Deere Capital Corp.,
due 04-19-99 ........................... 6.680 1,000 1,006,610
FCC National Bank,
due 11-04-98 ........................... 6.050 2,400 2,401,824
Federal Home Loan Bank,
due 01-29-99 # ......................... 4.920 20,000 19,987,400
Federal Home Loan Bank,
due 01-29-99 # ......................... 5.030 14,000 13,902,000
Federal Home Loan Bank,
due 03-02-99 ........................... 5.610 23,700 23,843,622
Federal Home Loan Bank,
due 05-14-99 ........................... 5.777 5,810 5,811,162
Federal National Mortgage
Association, due 12-10-98 .............. 5.300 550 549,726
Ford Motor Credit Corp.,
due 01-15-99 ........................... 5.625 2,000 2,018,840
General Electric Capital Corp.,
due 01-26-99 ........................... 8.100 5,000 5,011,700
Hydro Quebec,
due 01-25-99 ........................... 7.670 7,900 7,909,875
IBM Corp.,
due 12-15-98 ........................... 6.120 50,000 50,110,500
IBM Credit Corp.,
due 06-04-99 ........................... 5.600 25,000 25,050,000
International Lease Finance Corp.,
due 11-02-98 ........................... 7.740 1,000 1,017,410
International Lease Finance Corp.,
due 12-01-98 ........................... 8.290 1,000 1,002,160
Sears Roebuck Acceptance Corp.,
due 11-01-98 ........................... 8.450 2,500 2,553,000
Sears Roebuck Acceptance Corp.,
due 11-30-98 ........................... 5.600 3,450 3,449,548
Sears Roebuck Acceptance Corp.,
due 12-07-98 ........................... 5.820 3,440 3,439,561
Societe Generale N.A., Inc.,
due 12-17-98 ........................... 5.850 1,000 1,000,366
Societe Generale N.A., Inc.,
due 04-16-99 ........................... 5.760 75,000 75,150,000
--------------
TOTAL SHORT-TERM NOTES
(Cost $289,478,148) (4.82%) 289,411,765
------- --------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.35% ..................... 459
--------------
TOTAL SHORT-TERM INVESTMENTS (7.36%) 442,174,224
------- --------------
TOTAL INVESTMENTS (99.90%) 6,001,037,448
------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.10%) 6,144,823
------- --------------
TOTAL NETASSETS (100.00%) $6,007,182,271
======= ==============
</TABLE>
* Non-income producing security.
** Variable rate, rate shown as of October 31, 1998.
# Call date.
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.
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Regional Bank Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Investment Trust II (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust consists of two series portfolios: John Hancock Regional Bank Fund (the
"Fund") and John Hancock Financial Industries Fund. The other series of the
Trust is reported in separate financial statements. The investment objective of
the Fund is to achieve long-term capital appreciation from a portfolio of equity
securities of regional banks and lending institutions. The Fund had suspended
sales to new investors since March 12, 1997. The Board of Trustees voted to
re-open the Fund to new investors effective November 4, 1998.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. Effective December 8, 1998,
the Board of Trustees have authorized the issuance of Class C shares in 1999.
The shares of each class represent an interest in the same portfolio of
investments of the Fund and have equal rights to voting, redemptions, dividends
and liquidation, except that certain expenses, subject to the approval of the
Trustees, may be applied differently to each class of shares in accordance with
current regulations of the Securities and Exchange Commission and the Internal
Revenue Service. Shareholders of a class which bears distribution and service
expenses under terms of a distribution plan have exclusive voting rights to that
distribution plan.
Significant policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt instruments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement transaction. Aggregate
cash balances are invested in one or more repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date 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.
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.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable,
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Regional Bank Fund
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 determined at the fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
purchased from either the date of issue or the date of purchase over the life of
the security, as required by the Internal Revenue Code.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $800 million,
collectively. Interest is charged to each fund, based on its borrowings, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the line of credit, is allocated among the participating funds. The
Fund had no borrowing activity for the year ended October 31, 1998.
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.
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.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, acts as a distributor for shares of the Fund. For the year ended
October 31, 1998, JH Funds received net sales charges of $3,839,591 with regard
to sales of Class A shares. Out of this amount, $622,699 was retained and used
for printing prospectuses, advertising, sales literature and other purposes,
$2,828,095 was paid as sales commissions to unrelated broker-dealers and
$388,797 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), a related broker-dealer. The Adviser's
indirect parent, John Hancock Mutual Life Insurance Company ("JHMLICo"), is the
indirect sole shareholder of Distributors.
Class B shares which are redeemed within six years of purchase are subject to
a contingent deferred sales charge ("CDSC") at declining rates beginning at
5.00% of the lesser of the current market value at the time of redemption or the
original purchase cost of the shares being redeemed. Proceeds from the CDSC are
paid to JH Funds and are used in whole or in part to defray its expenses related
to providing distribu-
19
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Regional Bank Fund
tion related services to the Fund in connection with the sale of Class B shares.
For the year ended October 31, 1998, the contingent deferred sales charges
received by JH Funds amounted to $12,913,376.
In addition, to reimburse JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets,
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. 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 directors and/or officers of the Adviser, and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At October 31, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $6,122.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other then obligations of the
U.S. government and its agencies and short-term securities, during the year
ended October 31, 1998, aggregated $296,915,213 and $808,718,782, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended October 31, 1998.
The cost of investments owned at October 31, 1998 (including the short-term
investments) for federal income tax purposes was $3,338,868,039. Gross
unrealized appreciation and depreciation of investments aggregated
$2,683,306,843 and $21,137,893, respectively, resulting in net unrealized
appreciation of $2,662,168,950.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1998, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of
$26,820,684, a decrease in undistributed net investment income of $512,388 and
an increase in capital paid-in of $27,333,072. This represents the amount
necessary to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1998. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to the treatment of
real estate investment trusts in the computation of distributable income and
capital gains under federal tax rules versus generally accepted accounting
principles, and the Fund's use of the tax accounting practice known as
equalization. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
20
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Regional Bank Fund
NOTE E -
TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS
Affiliated issuers, as defined by the Investment Company Act of 1940, are those
in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer.
A summary of the Fund's transactions in the securities of these issuers during
the year ended October 31, 1998 is set forth below.
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITIONS
BEGINNING --------------------------------------------------
SHARE SHARE SHARE
AFFILIATE AMOUNT AMOUNT COST AMOUNT COST
- --------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BancFirst Corp. (OK) 345,600 -- $ -- 5,000 $161,406
Banknorth Group, Inc. (VT) 416,500 30,000 946,138 56,500 1,272,125
Bay View Capital Corp. (CA) 757,400 -- -- 322,400 6,733,044
BostonFed Bancorp., Inc. (MA) 325,700 5,000 90,975 -- --
CCF Holding Co. (GA) 44,700 -- -- 400 4,182
California Community Bancshares (CA) 60,020 -- -- -- --
Calumet Bancorp, Inc. (IL) 138,000 -- -- -- --
Commercial Bankshares, Inc. (FL) 171,950 -- -- -- --
Commercial Federal Corp. (NE) 1,297,200 663,983 9,266,310 22,500 768,151
Community Bank, Ser B, 13.00% (CA) 40,000 -- -- -- --
Elmira Savings Bank (NY) 34,950 -- -- -- --
FNB Rochester Corp. (NY) 225,337 -- -- 27,500 409,637
First Federal Bancorp. (MN) 56,000 -- -- -- --
First Independence Corp. (KS) 71,000 -- -- 24,500 145,469
First Mutual Bancorp., Inc. (IL) 238,000 -- -- 5,000 78,750
First Source Capital Trust II, 6.81% (IN) 40,000 -- -- -- --
GA Financial, Inc. (PA) 420,000 -- -- 27,500 316,275
HF Financial Corp. (SD) 150,000 -- -- 30,000 218,750
Harbor Federal Bancorp., Inc. (MD) 115,000 -- -- 20,000 315,909
Home Federal Bancorp. (IN) 223,800 20,000 625,000 20,000 515,833
IFC Capital Trust I, 9.25% (IN) 160,000 -- -- -- --
ISB Financial Corp. (LA) 350,000 -- -- 30,000 609,542
Independent Bank Corp. (MA) 974,000 65,000 1,186,250 214,000 2,836,063
Interchange Financial Services Corp. (NJ) 210,750 5,000 117,850 -- --
Kentucky First Bancorp., Inc. (KY) 65,000 -- -- 5,000 63,358
Landmark Bancshares, Inc. (KS) 100,000 -- -- 100,000 1,043,125
Logansport Financial Corp. (IN) 117,500 -- -- 40,000 485,000
MFB Corp. (IN) 90,000 -- -- 90,000 1,030,938
Mississippi View Holding Co. (MN) 70,000 -- -- 70,000 787,500
Northeast Indiana Bancorp., Inc. (IN) 94,500 -- -- 94,500 1,194,438
NS & L Bancorp. (MO) 35,000 -- -- -- --
Prestige Bancorp Inc. (PA) 82,000 -- -- -- --
<CAPTION>
ENDING
SHARE REALIZED DIVIDEND ENDING
AFFILIATE AMOUNT GAIN (LOSS) INCOME VALUE
- --------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
BancFirst Corp. (OK) 340,600 $63,586 $165,288 $12,900,225
Banknorth Group, Inc. (VT) 800,000(2) 983,787 506,865 25,500,000
Bay View Capital Corp. (CA) 435,000(1) (685,026) 285,960 --
BostonFed Bancorp., Inc. (MA) 330,700 -- 110,738 5,973,269
CCF Holding Co. (GA) 48,770(3) 2,618 37,012 826,042
California Community Bancshares (CA) --(1,4) -- -- --
Calumet Bancorp, Inc. (IL) 207,000(5) -- -- 6,235,875
Commercial Bankshares, Inc. (FL) 180,547(6) -- 72,219 4,107,444
Commercial Federal Corp. (NE) 2,587,082(1,7) (225,554) 470,831 --
Community Bank, Ser B, 13.00% (CA) 40,000 -- 130,000 1,075,000
Elmira Savings Bank (NY) 36,697(8) -- 23,207 770,637
FNB Rochester Corp. (NY) 197,837 90,096 149,181 3,400,323
First Federal Bancorp. (MN) 84,000(9) -- -- 1,197,000
First Independence Corp. (KS) 46,500(1) 215,894 14,900 --
First Mutual Bancorp., Inc. (IL) 233,000 48,746 74,560 3,961,000
First Source Capital Trust II, 6.81% (IN) 40,000 -- 34,997 1,000,000
GA Financial, Inc. (PA) 392,500 162,409 215,400 5,495,000
HF Financial Corp. (SD) 195,000(1,10) 439,728 66,600 --
Harbor Federal Bancorp., Inc. (MD) 106,500(11) 49,079 57,545 2,183,250
Home Federal Bancorp. (IN) 335,700(12) 16,986 132,084 7,888,950
IFC Capital Trust I, 9.25% (IN) 160,000 -- 369,992 4,240,000
ISB Financial Corp. (LA) 320,000(1) 85,480 188,650 7,960,000
Independent Bank Corp. (MA) 825,000 688,007 376,460 12,890,625
Interchange Financial Services Corp. (NJ) 323,625(13) -- 126,214 5,238,680
Kentucky First Bancorp., Inc. (KY) 60,000 10,752 31,250 750,000
Landmark Bancshares, Inc. (KS) -- 1,266,673 -- --
Logansport Financial Corp. (IN) 77,500 109,980 47,150 1,104,375
MFB Corp. (IN) -- 955,246 -- --
Mississippi View Holding Co. (MN) -- 685,558 -- --
Northeast Indiana Bancorp., Inc. (IN) -- 774,559 -- --
NS & L Bancorp. (MO) 35,000 -- 21,875 472,500
Prestige Bancorp Inc. (PA) 94,300(14) -- 15,375 1,284,838
</TABLE>
21
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Regional Bank Fund
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITIONS
BEGINNING --------------------------------------------------
SHARE SHARE SHARE
AFFILIATE AMOUNT AMOUNT COST AMOUNT COST
- --------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary Bank (NH) 110,250 -- $ -- -- $ --
QCF Bancorp, Inc. (MN) 70,000 -- -- -- --
SFS Bancorp., Inc. (NY) 74,000 5,000 105,625 -- --
Simmons First National Corp.
(Class A)(AR) 303,500 -- -- -- --
Sobieski Bancorp., Inc. (IN) 40,000 -- -- -- --
State Financial Services Corp.
(Class A) (WI) 187,220 -- -- 15,000 273,575
Sterling Bancshares Capital Trust I,
9.28% (TX) 60,000 -- -- 17,501 72,227
Tappan Zee Financial, Inc. (NY) 87,500 -- -- 87,500 1,135,156
Texarkana First Financial Corp. (AR) 124,800 -- -- -- --
Vectra Banking Corporation (CO) 292,150 -- -- 292,150 3,226,213
Vermont Financial Services Corp. (VT) 779,672 -- -- 35,000 625,873
WesterFed Financial Corp. (MT) 287,426 -- -- 17,000 361,250
----------- -----------
$12,338,148 $24,683,789
=========== ===========
<CAPTION>
ENDING
SHARE REALIZED DIVIDEND ENDING
AFFILIATE AMOUNT GAIN (LOSS) INCOME VALUE
- --------- ------------------------------------------------------
<S> <C> <C> <C> <C>
Primary Bank (NH) --(1,15) $ -- $ -- $ --
QCF Bancorp, Inc. (MN) 70,000 -- -- 1,793,750
SFS Bancorp., Inc. (NY) 79,000 -- 24,080 1,738,000
Simmons First National Corp.
(Class A)(AR) 303,500 -- 188,170 13,619,562
Sobieski Bancorp., Inc. (IN) 40,000 -- 12,800 580,000
State Financial Services Corp.
(Class A) (WI) 208,664(16) 56,914 100,885 3,964,616
Sterling Bancshares Capital Trust I,
9.28% (TX) 60,000 223,083 139,200 1,590,000
Tappan Zee Financial, Inc. (NY) --(1) -- -- --
Texarkana First Financial Corp. (AR) 124,800 -- 72,384 2,714,400
Vectra Banking Corporation (CO) --(1,17) -- -- --
Vermont Financial Services Corp. (VT) 744,672 262,222 489,640 16,848,204
WesterFed Financial Corp. (MT) 270,426(1) (51,007) 155,210 --
---------- ---------- ------------
$6,229,816 $4,906,722 $159,303,565
========== ========== ============
</TABLE>
(1) As of October 31, 1998, no longer an affiliated issuer.
(2) Reflects two-for-one stock split as of April 7, 1998.
(3) Reflects 10% stock dividend payments as of December 30, 1997.
(4) Acquired by SierraWest Bancorp. effective April 16, 1998.
(5) Reflects three-for-two stock split as of November 18, 1997.
(6) Reflects 5% stock dividend payment as of December 8, 1997.
(7) Reflects three-for-two stock split as of December 16, 1997.
(8) Reflects 5% stock dividend payment as of December 11, 1997.
(9) Reflects three-for-two stock split as of December 19, 1997.
(10) Reflects three-for-two stock split as of June 1, 1998.
(11) Reflects 10% stock dividend payment as of July 29, 1998.
(12) Reflects three-for-two stock split as of November 25, 1997.
(13) Reflects three-for-two stock split as of April 20, 1998.
(14) Reflects 15% stock dividend payment as of May 29, 1998.
(15) Acquired by Granite State Bankshares effective November 3, 1997.
(16) Reflects six-for-five stock split as of February 11, 1998.
(17) Acquired by Zions Bancorp. effective January 7, 1998.
22
<PAGE>
================================================================================
John Hancock Funds - Regional Bank Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Regional Bank 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 Regional Bank Fund
(the "Fund") (a series of John Hancock Investment Trust II) at October 31, 1998,
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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
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,
1998.
The Fund designated distributions to shareholders of $30,669,804 as capital
gain dividends.
With respect to the dividends paid by the Fund for the fiscal year ended
October 31, 1998, 100.00% of the dividends qualify for the corporate dividends
received deduction.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the total of all distributions that are taxable
for the calendar year 1998.
23
<PAGE>
================================================================================
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