---------------------------
The latest report from your
Fund's management team
---------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC]
Small Cap
Value Fund
OCTOBER 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
------------------------------------------
TRUSTEES
DENNIS S. ARONOWITZ*
STEPHEN L. BROWN
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE
LELAND O. ERDAHL
RICHARD A. FARRELL
MAUREEN R. FORD
GAIL D. FOSLER
WILLIAM F. GLAVIN
ANNE C. HODSDON
DR. JOHN A. MOORE
PATTI MCGILL PETERSON
JOHN W. PRATT*
RICHARD S. SCIPIONE
*Members of the Audit Committee
OFFICERS
STEPHEN L. BROWN
Chairman
MAUREEN R. FORD
Vice Chairman and Chief Executive Officer
ANNE C. HODSDON
President, Chief Operating Officer
and Chief Investment Officer
OSBERT M. HOOD
Executive 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
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
------------------------------------------
===================================CEO CORNER===================================
DEAR FELLOW SHAREHOLDERS:
I am delighted that one of my first official duties at John Hancock Funds is to
welcome you to the New Millennium! I wish you all the best for a century filled
with momentous occasions.
Every New Year, of course, provides us with a built-in opportunity to make new
resolutions, or re-commit to old ones. It seems fitting, therefore, that this
special New Year 2000 coincides with a very important, although certainly less
exotic, event.
Starting last October, personalized Social Security statements are being sent to
125 million workers over age 25, showing estimates of the retirement, disability
and survivor benefits that they and their families are eligible to receive now
and in the future.
The statements, to be sent out annually, will provide people with a glimpse of
what they can expect from the government when they retire. This should be
comforting to those who feared that Social Security wouldn't be there for them
at all. But many people also already know that government benefits will only
fulfill a small piece of their retirement needs.
- --------------------------------------------------------------------------------
[A 1" x 1" photo of Maureen R. Ford, Vice Chairman and Chief Executive Officer,
flush right next to fourth paragraph.]
- --------------------------------------------------------------------------------
The best thing about this massive mailing is that it can serve as a wake-up call
to encourage families to focus more on planning for their financial future.
When you receive your statement, expected to be within three months of your next
birthday, we urge you to read it carefully for accuracy, making sure your annual
earnings history and amounts you have contributed over the years are correct.
Keep in mind that the estimated benefits are precisely that, and that rules and
regulations may change by the time you retire. Also remember that they are not
inflation adjusted, so it would be unrealistic to expect them to have the same
purchasing power in the future as they would today.
We also encourage you to use this mailing as a reason to contact your investment
professional, or to select one if you are not working with somebody. He or she
can help you focus on establishing and maintaining a sound plan to achieve a
comfortable retirement. Together, you should make sure to maximize your
participation in tax-advantaged programs like IRAs and 401(k)s.
The stakes are too high to leave your retirement lifestyle to chance. Congress'
awareness-raising effort is commendable. The next step is yours. Mark the
beginning of the New Millennium by taking it.
Sincerely,
/s/ Maureen R. Ford
MAUREEN R. FORD, VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY TIMOTHY E. KEEFE, CFA, AND TIMOTHY E. QUINLISK, CFA,
PORTFOLIO MANAGERS
John Hancock
Small Cap Value Fund
Fund far outpaces its peers in an
up-and-down year for small-cap stocks
The U.S. stock market made a strong comeback in the fall of 1998, following the
Federal Reserve's decision to lower short-term interest rates. As investors
poured back into stocks, small-company names -- which looked attractive compared
to high-priced, large-company names -- took off. The rally ended, however, early
in the new year, as signs of slower economic growth sent investors running back
to the safety of large-company stocks. By spring, with the domestic economy
looking strong, demand improving globally and interest rates heading up,
investors again shifted their focus toward cheaper stocks. Small-company names
benefited, rebounding until mid-summer, when inflation concerns and the
possibility of further interest-rate increases again pushed investors back into
large-company names. By early fall, small-cap stocks had given up much of the
headway made in the spring and finished the year ended October 31, 1999 with a
14.87% return as measured by the Russell 2000 Index -- well behind the 25.67%
return of the Standard & Poor's 500 Index.
Fund significantly outperforms
We are pleased to report that during the same period, John Hancock Small Cap
Value Fund significantly outperformed its peers and
"...Fund significantly outperformed its peers and its benchmark index."
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[A 3 1/2" x 2 1/2" photo bottom right side of John Hancock Small Cap Value Fund.
Caption below reads "Fund management team members (l-r): Tim Keefe, Tim Quinlisk
and Lisa Welch."]
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Fund management team members (l - r): Tim Keefe, Tim Quinlisk and Lisa Welch
3
<PAGE>
================================================================================
John Hancock Funds - Small Cap Value Fund
"Many of our largest stock selections did especially well..."
- --------------------------------------------------------------------------------
[Table at top left hand column entitled "Top Five Holdings." The first listing
is Oak Industries 6.2%, the second is Vicor 5.4%, the third Penton Media 5.0%,
the fourth Iron Mountain 3.8% and the fifth Sensormatic Electronics 3.7%. A note
below the table reads "As a percentage of net assets on October 31, 1999."]
- --------------------------------------------------------------------------------
its benchmark index. For the year ended October 31, 1999, the Fund's Class A,
Class B and Class C shares returned 61.39%, 60.33% and 60.24%, respectively, at
net asset value. Many of our largest stock selections did especially well,
helping the Fund outpace the average small-cap fund, which returned 25.06%
during the same period, according to Lipper, Inc.1 Keep in mind that your net
asset value return will differ from the Fund's performance if you were not
invested in the Fund for the entire period and did not reinvest all
distributions. For historical performance information, please turn to pages six
and seven.
Unlocking value
Good stock selection was the reason for our outperformance. We continued to
follow our disciplined investment strategy, focusing on great businesses that
were selling at a discount -- as opposed to bad businesses that were just cheap.
We also looked for evidence of a catalyst -- such as a spin-off, restructuring
or new management -- that could unlock the stock's true potential.
Strong stock selection
One of our top performers this past year was Calpine, an energy company with a
strong base of independent, low-cost power plants that has a unique position in
the deregulating electric utility industry. In the capital goods sector, Vicor
- -- a leading manufacturer of modular power systems whose second-generation
product is exceeding expectations -- and CommScope -- a spin-off from General
Instruments that is the dominant provider worldwide of coaxial cable to the
cable TV industry -- did exceptionally well. Nielsen Media Research, the leading
television ratings company in the United States, was another excellent
contributor to performance. It was bought out during the period by VNU, a
Netherlands-based media company. Finally, our investment in Commonwealth
Telephone, a phone company serving rural eastern Pennsylvania, took off as the
company began successfully entering new markets. We took profits in the stocks
whose prices reached levels that in our view fully reflected the company's
worth.
Shifting technology focus
The Fund's biggest stake continued to be in technology. Although investors don't
traditionally view technology as a value category, we don't exclude it from our
selection process as long as we can find companies that meet our criteria. Early
in the period, when hardware technology names were hit hard by problems in Asia,
we bought stocks like Applied Science & Technology, Data General, ANADIGICS and
Etec Systems. These stocks later made a nice rebound and we
- --------------------------------------------------------------------------------
[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 Vicor
followed by an up arrow with the phrase "Strong demand for new product." The
second listing is Commonwealth Telephone followed by an up arrow with phrase
"Faster-than-expected expansion into new markets." The third listing is DENTSPLY
International followed by a sideways arrow with the phrase "Continued weak sales
growth." A note below the table reads "See `Schedule of Investments.' Investment
holdings are subject to change."]
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4
<PAGE>
================================================================================
John Hancock Funds - Small Cap Value Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the year ended October 31, 1999." The
chart is scaled in increments of 10% with 0% at the bottom and 70% at the top.
The first bar represents the 61.39% total return for John Hancock Small Cap
Value Fund Class A. The second bar represents the 60.33% total return for John
Hancock Small Cap Value Fund Class B. The third bar represents the 60.24% total
return for John Hancock Small Cap Value Fund Class C. The fourth bar represents
the 25.06% total return for Average small-cap fund. A note below the chart reads
"Total returns for John Hancock Small Cap Value Fund are at net asset value with
all distributions reinvested. The average small-cap fund is tracked by Lipper,
Inc.1 See the following two pages for historical performance information."]
- --------------------------------------------------------------------------------
sold some. More recently, we've begun to move into software and services names
that have been beaten down by Y2K concerns. Our focus is on companies like
Metamor Worldwide, AXENT Technologies, DSET and Aspen Technology, all of which
have good products that should be in demand after year end when corporations
begin spending on technology again.
New additions
We build the portfolio one stock at a time, which means we find companies that
meet our criteria in a variety of industries. Among the new names we've added to
the portfolio in the last year are Penton Media, an advertising company with
strong assets whose stock price fell over the summer as advertising spending
weakened in its trade magazine business. We expect Penton to more than recoup
this loss through its emerging Internet business. We've also added Danka
Business Systems, a recently restructured company that distributes and services
office equipment. This business has many of the attributes we look for --
recurring revenues, new management, a new product offering and accelerating
earnings prospects. Another addition has been Brightpoint, a distributor of
wireless phones and accessories to retailers. We expect Brightpoint's recent
restructuring to serve as a catalyst that will re-awaken investor interest.
We've also built a sizable stake in Sensormatic Electronics, a company that
makes the electronic tags for retailers that prevent shoplifting. We believe new
management, improved market penetration and signs of accelerating revenue growth
all bode well for this company.
Optimistic outlook
Although the Fund has recently had an excellent run, we remain optimistic that
our disciplined investment process can help us continue to be competitive in the
future. Sixty-percent years are an historical anomaly; still, we believe the
Fund has many investments that have yet to realize their full value. These
include names like DENTSPLY International, Oak Industries and Wind River
Systems. In addition, the new names we discussed earlier offer strong potential.
Finally, valuations on small-company stocks (prices relative to earnings and
other measures) remain exceptionally attractive compared to their large-company
brethren.
"...the Fund has many investments that have yet to realize their full value..."
- --------------------------------------------------------------------------------
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.
(1)Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
5
<PAGE>
================================================================================
John Hancock Funds - Small Cap Value 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 Small Cap Value 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%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years). Class C performance
includes a contingent deferred sales charge (1% declining to 0% after one year).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/94)
------ ------- ---------
Cumulative Total Returns 54.68% 107.52% 128.74%
Average Annual Total Returns(1) 54.68% 15.72% 15.51%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/94)
------ ------- ---------
Cumulative Total Returns 56.80% 108.74% 130.23%
Average Annual Total Returns(1) 56.80% 15.86% 15.64%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended September 30, 1999
SINCE
ONE INCEPTION
YEAR (5/1/98)
------ ---------
Cumulative Total Returns 60.70% 18.35%
Average Annual Total Returns(1) 60.70% 12.63%
Note to Performance
(1) From its inception in 1994 until March 1999, the Adviser had voluntarily
undertaken to limit the Fund's expenses, including the management fee (but
not including the transfer fee and the 12b-1 fee), to the extent required
to prevent expenses from exceeding 0.40% of the Fund's net asset value.
This was done in order to reduce costs borne by a limited shareholder base
while the Fund was still in its infancy. Without the limitation of
expenses, the average annual total returns for the one-year period,
five-year period and since inception for Class A shares would have been
54.49%, 15.07% and 14.41%, respectively.
The average annual total returns for the one-year period, five-year period
and since inception for Class B shares would have been 56.62%, 15.21% and
14.55%, respectively. The average annual total returns for the one-year
period and since inception for Class C shares would have been 60.55% and
18.20%, respectively. Effective March 1, 1999, the Adviser removed the
subsidy on all share classes of the Small Cap Value Fund.
6
<PAGE>
================================================================================
John Hancock Funds - Small Cap Value Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Small Cap Value Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Russell 2000 Index, which is an unmanaged small-cap index
composed of 2,000 U.S. stocks. It is not possible to invest in an index. Past
performance is not indicative of future results.
- --------------------------------------------------------------------------------
Line chart with the heading John Hancock Small Cap Value 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 Small Cap Value
Fund on January 3, 1994, before sales charge, and is equal to $26,094 as of
October 31, 1999. The second line represents the value of the same hypothetical
investment made in the John Hancock Small Cap Value Fund, after sales charge,
and is equal to $24,782 as of October 31, 1999. The third line represents the
Russell 2000 Index and is equal to $18,007 as of October 31, 1999.
Line chart with the heading John Hancock Small Cap Value 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 Small Cap Value
Fund on January 3, 1994, before sales charge, and is equal to $25,040 as of
October 31, 1999. The second line represents the value of the same hypothetical
investment made in the John Hancock Small Cap Value Fund, after sales charge,
and is equal to $24,940 as of October 31, 1999. The third line represents the
Russell 2000 Index and is equal to $18,007 as of October 31, 1999.
Line chart with the heading John Hancock Small Cap Value Fund Class C*,
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 Small Cap Value
Fund on May 1, 1998, before sales charge, and is equal to $12,816 as of October
31, 1999. The second line represents the Russell 2000 Index and is equal to
$9,052 as of October 31, 1999.
*No contingent deferred sales charge applicable.
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7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value 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, 1999. 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, 1999
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $103,195,679) ......................... $123,622,164
Preferred stocks (cost - $555,000) .......................... 531,468
Corporate bonds (cost - $4,114,940) ......................... 4,796,500
Joint repurchase agreement (cost - $2,547,000) ............. 2,547,000
Corporate savings account ................................... 241
------------
131,497,373
Receivable for investments sold .............................. 1,277,614
Receivable for shares sold ................................... 635,154
Dividends receivable ......................................... 4,475
Interest receivable .......................................... 1,126
Other assets ................................................. 1,979
------------
Total Assets ............................... 133,417,721
-----------------------------------------------------------
Liabilities:
Payable for shares repurchased ............................... 40,604
Payable for investments purchased ............................ 2,676,931
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ..................................... 34,410
Accounts payable and accrued expenses ........................ 43,743
------------
Total Liabilities .......................... 2,795,688
-----------------------------------------------------------
Net Assets:
Capital paid-in .............................................. 98,841,797
Accumulated net realized gain on investments and
foreign currency transactions ............................... 10,697,055
Net unrealized appreciation of investments ................... 21,084,513
Accumulated net investment loss .............................. (1,332)
------------
Net Assets ................................. $130,622,033
===========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $51,745,920/2,995,758 .............................. $17.27
=============================================================================
Class B - $75,102,455/4,423,589 .............................. $16.98
=============================================================================
Class C - $3,773,658/222,352 ................................. $16.97
=============================================================================
Maximum Offering Price Per Share*
Class A - ($17.27 x 105.26%) ................................. $18.18
=============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains for the period
stated.
Statement of Operations
Year ended October 31, 1999
- --------------------------------------------------------------------------------
Investment Income:
Dividends .................................................... $417,662
Interest ..................................................... 97,993
-----------
515,655
-----------
Expenses:
Investment management fee - Note B .......................... 502,242
Distribution and service fee - Note B
Class A ................................................... 89,140
Class B ................................................... 393,526
Class C ................................................... 11,678
Transfer agent fee - Note B ................................. 215,475
Custodian fee ............................................... 51,462
Registration and filing fees ................................ 49,839
Printing .................................................... 32,757
Auditing fee ................................................ 14,687
Accounting and legal services fee - Note B .................. 12,450
Legal fees .................................................. 4,004
Organization expense - Note A ............................... 3,962
Miscellaneous ............................................... 3,303
Trustees' fees .............................................. 2,923
-----------
Total Expenses ............................. 1,387,448
-----------
Less Expense Reductions
- Note B ................................... (109,127)
-----------
Net Expenses ............................... 1,278,321
-----------
Net Investment Loss ........................ (762,666)
-----------
Realized and Unrealized Gain on Investments and
Foreign Currency Transactions:
Net realized gain on investments sold ........................ 12,809,694
Net realized gain on foreign currency transactions ........... 3,536
Change in net unrealized appreciation/depreciation
of investments .............................................. 23,034,773
-----------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions .............. 35,848,003
-----------
Net Increase in Net Assets
Resulting from Operations .................. $35,085,337
===========
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1997 OCTOBER 31, 1998(1) OCTOBER 31, 1999
----------------- ------------------- ----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ........................................ $18,984 ($89,535) ($762,666)
Net realized gain on investments sold and foreign currency
transactions ....................................................... 2,743,265 855,404 12,813,230
Change in net unrealized appreciation/depreciation of investments ... 5,495,186 (9,103,105) 23,034,773
----------- ----------- ------------
Net Increase (Decrease) in Net Assets Resulting from Operations .... 8,257,435 (8,337,236) 35,085,337
----------- ----------- ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.0321, none and none per share, respectively) ......... (45,691) -- --
Distributions from net realized gain on investments sold
Class A - ($0.6043, none and $0.1253 per share, respectively) ...... (969,735) -- (260,355)
Class B - ($0.6043, none and $0.1253 per share, respectively) ...... (1,638,314) -- (359,406)
Class C** - (none, none and $0.1253 per share, respectively) ....... -- -- (4,996)
----------- ----------- ------------
Total Distributions to Shareholders .............................. (2,653,740) --
(624,757)
----------- ----------- ------------
From Fund Share Transactions - Net: * ................................. 12,440,562 5,930,620 42,574,046
----------- ----------- ------------
Net Assets:
Beginning of period ................................................. 37,949,766 55,994,023 53,587,407
----------- ----------- ------------
End of period (including distributions in excess of net
investment income of $855 and accumulated net investment loss
of $937 and $1,332, respectively) .................................. $55,994,023 $53,587,407 $130,622,033
=========== =========== ============
</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 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 three periods, along
with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value Fund
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO YEAR ENDED
DECEMBER 31, 1997 OCTOBER 31, 1998(1) OCTOBER 31, 1999
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ............... 912,881 $11,525,980 982,861 $12,094,429 2,467,123 $36,131,692
Shares reinvested ......... 80,006 955,849 -- -- 21,741 244,370
--------- ----------- ---------- ----------- ---------- -----------
992,887 12,481,829 982,861 12,094,429 2,488,864 36,376,062
Less shares repurchased ... (820,449) (9,680,373) (610,415) (7,195,525) (1,574,480) (21,507,175)
--------- ----------- ---------- ----------- ---------- -----------
Net increase .............. 172,438 $2,801,456 372,446 $4,898,904 914,384 $14,868,887
========= =========== ========== =========== ========== ===========
CLASS B
Shares sold ............... 1,324,877 $16,869,969 1,152,839 $14,077,224 3,082,751 $44,813,213
Shares reinvested ......... 116,538 1,394,961 -- -- 28,600 318,057
--------- ----------- ---------- ----------- ---------- -----------
1,441,415 18,264,930 1,152,839 14,077,224 3,111,351 45,131,270
Less shares repurchased ... (714,300) (8,625,824) (1,161,942) (13,479,970) (1,548,060) (20,164,373)
--------- ----------- ---------- ----------- ---------- -----------
Net increase (decrease) ... 727,115 $9,639,106 (9,103) $597,254 1,563,291 $24,966,897
========= =========== ========== =========== ========== ===========
CLASS C **
Shares sold ............... -- -- 39,476 $435,230 194,189 $2,882,311
Shares reinvested ......... -- -- -- -- 443 4,931
--------- ----------- ---------- ----------- ---------- -----------
-- -- 39,476 435,230 194,632 2,887,242
Less shares repurchased ... -- -- (78) (768) (11,678) (148,980)
--------- ----------- ---------- ----------- ---------- -----------
Net increase .............. -- -- 39,398 $434,462 182,954 $2,738,262
========= =========== ========== =========== ========== ===========
</TABLE>
** Class C shares commenced operations on May 1, 1998.
(1) Effective October 31, 1998, the fiscal period end changed from December 31
to October 31.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value 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 DECEMBER 31,
---------------------------------------------
1994(1) 1995 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $8.50 $8.99 $10.39 $10.32
----- ------ ------ ------
Net Investment Income (Loss)(2) .................... 0.18 0.21 0.14 0.06
Net Realized and Unrealized Gain (Loss) on
Investments ...................................... 0.48 1.60 1.17 2.52
----- ------ ------ ------
Total from Investment Operations ............... 0.66 1.81 1.31 2.58
----- ------ ------ ------
Less Distributions:
Dividends from Net Investment Income ............. (0.17) (0.20) (0.14) (0.03)
Distributions from Net Realized Gain on
Investments Sold ............................... -- (0.21) (1.24) (0.60)
----- ------ ------ ------
Total Distributions ............................ (0.17) (0.41) (1.38) (0.63)
----- ------ ------ ------
Net Asset Value, End of Period ..................... $8.99 $10.39 $10.32 $12.27
===== ====== ====== ======
Total Investment Return at Net Asset Value(3) ...... 7.81%(4) 20.26% 12.91% 25.25%
Total Adjusted Investment Return at Net
Asset Value(3,5) ................................. 7.30%(4) 19.39% 12.20% 24.65%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $4,420 $12,845 $15,853 $20,961
Ratio of Expenses to Average Net Assets ............ 0.99%(7) 0.98% 0.99% 0.99%
Ratio of Adjusted Expenses to Average
Net Assets(6) .................................... 4.98%(7) 1.85% 1.70% 1.59%
Ratio of Net Investment Income (Loss) to Average
Net Assets ....................................... 2.10%(7) 2.04% 1.31% 0.47%
Ratio of Adjusted Net Investment Income (Loss)
to Average Net Assets(6) ......................... (1.89%)(7) 1.17% 0.60% (0.13%)
Portfolio Turnover Rate ............................ 0.3% 9% 72% 140%
Fee Reduction Per Share(2) ......................... $0.34 $0.09 $0.08 $0.07
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $8.50 $9.00 $10.38 $10.31
----- ------ ------ ------
Net Investment Income (Loss)(2) .................... 0.13 0.12 0.07 (0.03)
Net Realized and Unrealized Gain (Loss)
on Investments ................................... 0.48 1.59 1.17 2.53
----- ------ ------ ------
Total from Investment Operations ............... 0.61 1.71 1.24 2.50
----- ------ ------ ------
Less Distributions:
Dividends from Net Investment Income ............. (0.11) (0.12) (0.07) --
Distributions from Net Realized Gain on
Investments Sold ............................... -- (0.21) (1.24) (0.60)
----- ------ ------ ------
Total Distributions ............................ (0.11) (0.33) (1.31) (0.60)
----- ------ ------ ------
Net Asset Value, End of Period ..................... $9.00 $10.38 $10.31 $12.21
===== ====== ====== ======
Total Investment Return at Net Asset Value(3) ...... 7.15%(4) 19.11% 12.14% 24.41%
Total Adjusted Investment Return at Net
Asset Value(3,5) ................................. 6.64%(4) 18.24% 11.43% 23.81%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $3,296 $16,994 $22,097 $35,033
Ratio of Expenses to Average Net Assets ............ 1.72%(7) 1.73% 1.69% 1.69%
Ratio of Adjusted Expenses to Average
Net Assets(6) .................................... 5.71%(7) 2.60% 2.40% 2.29%
Ratio of Net Investment Income (Loss) to Average
Net Assets ....................................... 1.53%(7) 1.21% 0.62% (0.24%)
Ratio of Adjusted Net Investment Income (Loss)
to Average Net Assets(6) ......................... (2.46%)(7) 0.34% (0.09%) (0.84%)
Portfolio Turnover Rate ............................ 0.3% 9% 72% 140%
Fee Reduction Per Share(2) ......................... $0.34 $0.09 $0.08 $0.07
<CAPTION>
PERIOD FROM
JANUARY 1, 1998 TO YEAR ENDED
OCTOBER 31, 1998(8) OCTOBER 31, 1999
------------------- ----------------
<S> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $12.27 $10.82
------ ------
Net Investment Income (Loss)(2) .................... 0.02 (0.09)
Net Realized and Unrealized Gain (Loss) on
Investments ...................................... (1.47) 6.67
------ ------
Total from Investment Operations ............... (1.45) 6.58
------ ------
Less Distributions:
Dividends from Net Investment Income ............. -- --
Distributions from Net Realized Gain on
Investments Sold ............................... -- (0.13)
------ ------
Total Distributions ............................ -- (0.13)
------ ------
Net Asset Value, End of Period ..................... $10.82 $17.27
====== ======
Total Investment Return at Net Asset Value(3) ...... (11.82%)(4) 61.39%
Total Adjusted Investment Return at Net
Asset Value(3,5) ................................. (12.33%)(4) 61.24%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $22,528 $51,746
Ratio of Expenses to Average Net Assets ............ 1.01%(7) 1.39%
Ratio of Adjusted Expenses to Average
Net Assets(6) .................................... 1.62%(7) 1.54%
Ratio of Net Investment Income (Loss) to Average
Net Assets ....................................... 0.25%(7) (0.67%)
Ratio of Adjusted Net Investment Income (Loss)
to Average Net Assets(6) ......................... (0.36%)(7) (0.82%)
Portfolio Turnover Rate ............................ 69% 140%
Fee Reduction Per Share(2) ......................... $0.06 $0.02
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $12.21 $10.71
------ ------
Net Investment Income (Loss)(2) .................... (0.04) (0.18)
Net Realized and Unrealized Gain (Loss)
on Investments ................................... (1.46) 6.58
------ ------
Total from Investment Operations ............... (1.50) 6.40
------ ------
Less Distributions:
Dividends from Net Investment Income ............. -- --
Distributions from Net Realized Gain on
Investments Sold ............................... -- (0.13)
------ ------
Total Distributions ............................ -- (0.13)
------ ------
Net Asset Value, End of Period ..................... $10.71 $16.98
====== ======
Total Investment Return at Net Asset Value(3) ...... (12.29%)(4) 60.33%
Total Adjusted Investment Return at Net
Asset Value(3,5) ................................. (12.80%)(4) 60.18%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $30,637 $75,103
Ratio of Expenses to Average Net Assets ............ 1.71%(7) 2.06%
Ratio of Adjusted Expenses to Average
Net Assets(6) .................................... 2.32%(7) 2.21%
Ratio of Net Investment Income (Loss) to Average
Net Assets ....................................... (0.45%)(7) (1.34%)
Ratio of Adjusted Net Investment Income (Loss)
to Average Net Assets(6) ......................... (1.06%)(7) (1.49%)
Portfolio Turnover Rate ............................ 69% 140%
Fee Reduction Per Share(2) ......................... $0.06 $0.02
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS) TO YEAR ENDED
OCTOBER 31, 1998(8) OCTOBER 31, 1999
------------------- ----------------
<S> <C> <C>
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................. $13.39 $10.71
------ ------
Net Investment Loss(2) ........................................... (0.03) (0.19)
Net Realized and Unrealized Gain (Loss) on Investments ........... (2.65) 6.58
------ ------
Total from Investment Operations ............................. (2.68) 6.39
------ ------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold ....... -- (0.13)
------ ------
Net Asset Value, End of Period ................................... $10.71 $16.97
====== ======
Total Investment Return at Net Asset Value(3) .................... (20.01%)(4) 60.24%
Total Adjusted Investment Return at Net Asset Value(3,5) ......... (20.32%)(4) 60.09%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ......................... $422 $3,774
Ratio of Expenses to Average Net Assets .......................... 1.71%(7) 2.09%
Ratio of Adjusted Expenses to Average Net Assets(6) .............. 2.32%(7) 2.29%
Ratio of Net Investment Loss to Average Net Assets ............... (0.54%)(7) (1.43%)
Ratio of Adjusted Net Investment Loss to Average Net Assets(6) ... (1.15%)(7) (1.58%)
Portfolio Turnover Rate .......................................... 69% 140%
Fee Reduction Per Share(2) ....................................... $0.04 $0.02
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1994.
(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) Not annualized.
(5) An estimated total return calculation that does not take into
consideration expense reductions by the Adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
(8) Effective October 31, 1998, the fiscal period end changed from December 31
to October 31.
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: 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 relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value Fund
Schedule of Investments
October 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Small Cap Value Fund on October 31, 1999. It's divided into four main
categories: common stocks, preferred stocks, bonds and short-term investments.
Common and preferred stocks and bonds are further broken down by industry group.
Short-term investments, which represent the Fund's "cash" position, are listed
last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS
Advertising (5.01%)
Penton Media, Inc. .......................... 354,000 $6,549,000
----------
Broker Services (2.09%)
Investment Technology Group, Inc. ........... 51,000 1,345,125
Jefferies Group, Inc. ....................... 65,000 1,385,312
----------
2,730,437
----------
Business Services - Misc. (10.41%)
Iron Mountain, Inc.* ........................ 162,900 4,927,725
Metamor Worldwide, Inc.* .................... 202,450 3,821,244
Sensormatic Electronics Corp.* .............. 320,950 4,854,369
----------
13,603,338
----------
Chemicals (0.20%)
Sybron Chemicals, Inc.* ..................... 18,900 262,238
----------
Computers (14.48%)
Aspen Technology, Inc.* ..................... 193,350 2,392,706
AXENT Technologies, Inc. * .................. 240,250 3,558,703
Diversinet Corp.* (Canada) .................. 144,350 1,723,178
DSET Corp.* ................................. 217,000 3,797,500
Etec Systems, Inc. .......................... 25,100 958,506
FVC.com, Inc.* .............................. 171,650 2,252,906
Wind River Systems, Inc.* ................... 207,375 4,225,266
----------
18,908,765
----------
Electronics (15.85%)
Amphenol Corp. (Class A)* ................... 56,000 3,311,000
ESCO Electronics Corp.* ..................... 184,750 2,159,266
Oak Industries, Inc.* ....................... 198,550 8,140,550
Vicor Corp.* ................................ 255,550 7,091,513
----------
20,702,329
----------
Energy (2.22%)
Calpine Corp.* .............................. 50,200 $2,892,775
----------
Finance (1.93%)
Core Cap, Inc. (r) .......................... 22,200 359,640
Duff & Phelps Credit Rating Co. ............. 6,000 450,000
Eaton Vance Corp. ........................... 25,000 854,687
Federated Investors, Inc. (Class B) ......... 50,000 862,500
----------
2,526,827
----------
Insurance (7.40%)
Capital Re Corp. ............................ 117,500 1,659,687
Financial Security Assurance Holdings
Ltd ....................................... 49,185 2,772,804
MIIX Group, Inc. ............................ 45,400 726,400
Radian Group, Inc. .......................... 40,000 2,112,500
Reinsurance Group of America, Inc. .......... 72,190 2,400,318
----------
9,671,709
----------
Leisure (0.17%)
Metromedia International Group, Inc.* ....... 60,000 221,250
----------
Manufacturing (3.03%)
Dexter Corp. (The) .......................... 112,700 3,951,544
----------
Medical (6.67%)
DENTSPLY International, Inc. ................ 186,500 4,324,469
Haemonetics Corp.* .......................... 16,400 306,475
ProxyMed, Inc.* ............................. 41,750 521,875
Shire Pharmaceuticals Group Plc*
(United Kingdom) .......................... 170,000 1,841,083
Total Renal Care Holdings, Inc.* ............ 234,850 1,717,341
----------
8,711,243
----------
Metal (0.52%)
Brush Wellman, Inc. ......................... 50,750 672,438
----------
Office (3.59%)
Danka Business Systems Plc,
American Depositary Receipts
(ADR) (United Kingdom) .................... 449,067 4,687,137
----------
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Small Cap Value Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Oil & Gas (3.93%)
Basin Exploration, Inc.* .................. 165,500 $2,720,406
Chieftain International, Inc.* (Canada) ... 30,000 573,750
Grey Wolf, Inc.* .......................... 371,700 975,712
Veritas DGC, Inc.* ........................ 61,600 866,250
------------
5,136,118
------------
Pollution Control (0.83%)
Newpark Resources, Inc.* .................. 169,000 1,087,937
------------
Retail (1.05%)
Whole Foods Market, Inc.* ................. 40,500 1,377,000
------------
Schools/Education (1.84%)
Sylvan Learning Systems, Inc.* ............ 185,500 2,399,906
------------
Telecommunications (9.76%)
CFW Communications Co. .................... 90,000 2,047,500
Com21, Inc.* .............................. 85,000 1,126,250
Commonwealth Telephone Enterprises,
Inc.* ................................... 58,000 3,103,000
CT Communications, Inc. ................... 55,000 2,646,875
Intermedia Communications, Inc.* .......... 147,050 3,823,300
------------
12,746,925
------------
Transport (0.92%)
Air Canada* (Canada) ...................... 162,000 1,205,993
------------
Utilities (2.41%)
Independent Energy Holdings Plc (ADR)*
(United Kingdom) ........................ 116,148 3,143,255
------------
Waste Disposal Service & Equip. (0.33%)
Waste Systems International, Inc.* ........ 112,000 434,000
------------
TOTAL COMMON STOCKS
(Cost $103,195,679) (94.64%) 123,622,164
------- ------------
PREFERRED STOCKS
Finance (0.41%)
Core Cap, Inc., 10%, Ser A/I (r) .......... 22,200 531,468
------------
TOTAL PREFERRED STOCKS
(Cost $555,000) (0.41%) 531,468
------- ------------
INTEREST CREDIT PAR VALUE
RATE RATING** (000s OMITTED)
---- -------- --------------
BONDS
Retail (3.67%)
Brightpoint, Inc.,
Conv Bond 03-11-18 Zero B $18,100 4,796,500
------------
TOTAL BONDS
(Cost $4,114,940) (3.67%) 4,796,500
------- ------------
INTEREST PAR VALUE MARKET
RATE (000s OMITTED) VALUE
---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.95%)
Investment in a joint
repurchase agreement
transaction with SBC
Warburg, Inc. - Dated
10-29-99, due 11-01-99
(Secured by U.S.
Treasury Bonds, 7.125%
thru 13.375%, due
08-15-01 thru 02-15-23)
- Note A....................... 5.23% $2,547 $2,547,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.30%............... 241
------------
TOTAL SHORT-TERM INVESTMENTS (1.95%) 2,547,241
------- ------------
TOTAL INVESTMENTS (100.67%) 131,497,373
------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.67%) (875,340)
------- ------------
TOTAL NET ASSETS (100.00%) $130,622,033
======= ============
* Non-income producing security.
** Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investors Service or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
Parenthetical disclosure of a foreign country in the security description
represents country of foreign issuer; however, security is U.S. dollar
denominated.
(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:
<TABLE>
<CAPTION>
MARKET VALUE
AS A PERCENTAGE MARKET VALUE
ACQUISITION ACQUISITION OF FUND'S AS OF
DATE COST NET ASSETS OCTOBER 31, 1999
---- ---- ---------- ----------------
<S> <C> <C> <C> <C>
Core Cap, Inc. (Common) 10-31-97 $444,000 0.27% $359,640
Core Cap, Inc. (Preferred) 10-31-97 555,000 0.41 531,468
-------- ---- --------
$999,000 0.68% $891,108
======== ==== ========
</TABLE>
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.
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Small Cap Value 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 three series: John Hancock Small Cap Value Fund (the "Fund"),
John Hancock Financial Industries Fund and John Hancock Regional Bank Fund. The
other two series of the Trust are reported in separate financial statements.
Prior to June 1, 1999, the Fund was known as John Hancock Special Value Fund.
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, Class B and Class C shares. The shares of each
class represent an interest in the same portfolio of investments of the Fund and
have equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement. 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.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
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, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
ORGANIZATION EXPENSE 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 began with the
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Small Cap Value Fund
commencement of 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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing. In
addition, a commitment fee 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, 1999.
SECURITIES LENDING The Fund may lend its securities to certain qualified brokers
who pay the Fund negotiated lender fees. These fees are included in interest
income. The loans are collateralized at all times with cash or securities with a
market value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay of the
loaned securities in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. At October 31, 1999, the Fund
loaned securities having a market value of $4,590,844 collateralized by
securities in the amount of $4,806,044.
FOREIGN CURRENCY TRANSLATION All assets and 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 or 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 0.70% of the Fund's average daily net asset
value.
The Adviser limited Fund expenses, including the management fee (but not
including the transfer agent fee and the 12b-1 fee), to 0.40% of the Fund's
average daily net assets. The Adviser terminated the limitation effective March
1, 1999. Accordingly, the reduction in the Adviser's fee amounted to $109,127
for the year ended October 31, 1999.
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, 1999 net sales charges received with regard to sales of Class A shares
amounted to $196,007. Out of this amount, $30,525 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$133,547 was paid as sales commissions to unrelated broker-dealers and $31,935
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Small Cap Value Fund
related broker-dealer, formerly known as John Hancock Distributors, Inc. The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company
("JHMLICo"), is the indirect sole shareholder of Signator Investors.
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 5.00% 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 distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended October 31, 1999,
contingent deferred sales charges paid to JH Funds amounted to $126,143.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% 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 distribution related
services to the Fund in connection with the sale of Class C shares. For the year
ended October 31, 1999, contingent deferred sales charges paid to JH Funds
amounted to $545.
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, Class B and Class C 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 and Class C
average daily net assets, to reimburse JH Funds for its distribution and service
costs. A maximum of 0.25% of such payments may be service fees as defined by the
Conduct Rules of the National Association of Securities Dealers. Under the
Conduct Rules, 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 Signature Services a fee 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,
accounting and legal 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., Mr. Stephen L. Brown, Ms. Maureen R. Ford,
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 through
December 31, 1999. 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 obligations of the
U.S. government and its agencies and short-term securities, during the year
ended October 31, 1999, aggregated $143,524,458 and $102,951,632, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended October 31, 1999.
The cost of investments owned at October 31, 1999 (excluding the corporate
savings account), for federal income tax purposes was $110,778,181. Gross
unrealized appreciation and depreciation of investments aggregated $24,949,183
and $4,230,232, respectively, resulting in net unrealized appreciation of
$20,718,951.
17
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==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Small Cap Value Fund
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1999, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of
$1,918,448, a decrease in accumulated net investment loss of $762,271 and an
increase in capital paid-in of $1,156,177. These reclassifications, which have
no impact on the net asset value of the Fund, are primarily attributable to the
treatment of net operating losses and organizational costs 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.
18
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John Hancock Funds - Small Cap Value Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Investment Trust II,
John Hancock Small Cap Value Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Small Cap Value Fund (the "Fund"), one of the portfolios constituting
John Hancock Investment Trust II, including the schedule of investments, as of
October 31, 1999, and the related statement of operations, for the year then
ended, the statement of changes in net assets and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1999, by correspondence with the custodian
and brokers, and other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
John Hancock Small Cap Value Fund portfolio of John Hancock Investment Trust II
at October 31, 1999, the results of its operations for the year then ended, and
the changes in its net assets, and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 3, 1999
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during its taxable year ended October
31, 1999.
With respect to the distribution paid by the Fund for the fiscal year
ended October 31, 1999, 20.55% of the distributions qualify for the dividends
received deduction available to corporations.
The Fund designated distributions to shareholders of $573,892 as long-term
capital gain dividends.
Shareholders will be mailed a 1999 U.S. Treasury Department Form 1099-DIV in
January of 2000. This will reflect the total of all distributions which are
taxable for calendar year 1999.
19
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This report is for the information of shareholders of the John Hancock
Small Cap Value Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
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