<PAGE> 1
JOHN HANCOCK FUNDS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SHORT-TERM
STRATEGIC
INCOME
FUND
ANNUAL REPORT
October 31, 1995
<PAGE> 2
TRUSTEES
Edward J. Boudreau, Jr
Chairman
William A. Barron, III*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
William F. Glavin*
Patrick Grant*
Ralph Lowell, Jr.*
John A. Moore*
Patti McGill Peterson*
John W. Pratt*
*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
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President, Assistant Secretary and
Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse llp
160 Federal Street
Boston, Massachusetts 02110
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief Executive Officer,
flush right, next to first paragraph.]
Investors around the world have been watching Wall Street in awe for the better
part of 1995. Through October, the Standard & Poor's 500-Stock Index, a
widely-used barometer of stock performance, had grown by more than 25%.
Investors who stayed in the market after a disappointing 1994 have been
rewarded.
On another street, Pennsylvania Avenue, one of the hot topics many people
are watching is Medicare reform. While there's no clear-cut solution on the
horizon, today's Medicare debate should serve as another wake-up call to all
Americans about the need to have a financial plan and to save for retirement.
Whether or not the government changes the way health-care benefits are allotted
to senior citizens, the message is clear: your future security and well-being
lies in your own hands -- not Uncle Sam's.
We know you've heard it a hundred times. Pick up almost any financial
periodical today, and you'll see cover stories on retirement. Many of them will
perhaps scare you or make you think that the task of saving for retirement is
just too daunting. But take heart. We don't believe that and neither do many
financial experts.
Yet retirement planning is not to be taken lightly. To live the way you
want to -- the way you deserve to after all those years of hard work -- you need
to plan and save now, on a regular basis, no matter what your other costs, no
matter how small the amount, no matter what your current age. It may be easier
if you start earlier, but it's never too late.
Building a secure nest egg is indeed doable. Talk to your financial adviser
about establishing your retirement planning roadmap, if you haven't already. And
educate yourself by reading some of the many articles about how to save for
retirement. Take control of your future by saving today. That way, when it comes
time for retirement, you shouldn't have to think about any street but Easy
Street.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY LAWRENCE J. DALY AND ANTHONY A. GOODCHILD,
CO-PORTFOLIO MANAGERS
JOHN HANCOCK
SHORT-TERM STRATEGIC
INCOME FUND
Slower growth in developed economies and continued reform
in emerging markets spark global bond market rally
The global bond market has improved dramatically since the start of the Fund's
fiscal year in November 1994. Conditions then were poor. Interest rates were
rising in the United States and Europe and many of the world's emerging markets
were in disarray, as exemplified by the sudden devaluation of the Mexican peso
in December 1994. As late as February 1995, the Federal Reserve was still in a
restrictive mode, raising short-term interest rates in the United States to try
to slow down the economic growth rate and prevent an outbreak of inflation. The
dollar, meanwhile, was slumping against most world currencies. Since then,
however, growth has slowed dramatically in most of the world's developed
economies, putting downward pressure on interest rates and reducing the threat
of inflation. The dollar has rebounded sharply versus the yen. And while
conditions in emerging markets have been spotty, the overall trend has been
positive, with many Asian and Latin American countries demonstrating a renewed
commitment to fiscal restraint.
The upshot was a positive year for the Fund, with overall performance that
about matched that of its peers. During the year that ended
[A 2 1/4" x 3 1/2" photo of Lawrence Daly and Anthony Goodchild at bottom right.
Caption reads: "Lawrence Daly and Anthony Goodchild, Co-Portfolio Managers."]
[CAPTION]
"THE GLOBAL BOND MARKET HAS IMPROVED DRAMATICALLY..."
3
<PAGE> 4
John Hancock Funds - Short-Term Strategic Income Fund
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) U.S. government/agency bonds 27.5% 2) Foreign government
bonds 23.3% 3) Banks 18.9% 4) Transportation 8.9% 5) Steel 6.3%. A footnote
below reads "As a percentage of net assets on October 31, 1995."]
October 31, 1995, John Hancock Short-Term Strategic Income Fund's Class A and
Class B shares had total returns at net asset value of 8.75% and 7.97%,
respectively, compared to 8.79% for the average short-term investment grade bond
fund, according to Lipper Analytical Services.(1)
STRATEGIC OVERVIEW
We aim for an average portfolio credit rating of single A by offsetting
lower-rated emerging market securities and U.S. corporate bonds with
higher-rated U.S. government securities. During the year, we looked for
opportunities to add more emerging market bonds, while cutting back on
high-yield bonds. The breakdown at the end of October was roughly as follows:
45% emerging market bonds (up from 22% a year ago); 28% U.S. government
securities and the balance made up of small positions in high-yield domestic
bonds and high-quality foreign government bonds. The Fund had a modest 18%
exposure to foreign currencies, none of it hedged against currency fluctuations.
The Fund's duration, which measures the degree to which its share price will
vary with changes in interest rates, was stable at just under one year for most
of the period.
EMERGING MARKETS ATTRACTIVE
We're staunch believers in emerging markets. Progress has been bumpy so far but
the long-term trends are promising, favoring steadier economic growth, greater
fiscal responsibility and lower inflation. During the past year, we took a
two-pronged approach to building up the Fund's stake. First, we established core
positions in stronger countries that appear to have made the most meaningful
progress, such as Brazil and South Africa. Second, we looked for opportunities
to buy on weakness in less stable countries such as Mexico. Throughout, we took
pains to reduce our risk by diversifying the Fund's holdings as much as
possible.
Emerging market securities can be attractive because they carry both a high
current yield and the potential for price gains as interest rates fall and
credit quality improves. The Fund made successful investments in several such
countries during the period. In Mexico, short-term government bonds known as
tesobonos rallied in the wake of the currency crisis. In Panama, certain of the
Fund's holdings were restructured as Brady bonds, which carry U.S. government
backing. In South Africa, rates fell as
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investments"; the header for the right column is "Recent
performance ... and what's behind the numbers. The first listing is Panama
followed by an up arrow and the phrase "Brady bonds boost credit." The second
listing is South Africa followed by an up arrow and the phrase "Good news on
inflation." The third listing is USAfrica Airways followed by a down arrow and
the phrase "Disappointing earnings" Footnote below reads: "See "Schedule of
Investments." Investment holdings are subject to change."]
[CAPTION]
"...WE LOOKED FOR OPPORTUNITIES TO ADD MORE EMERGING MARKET BONDS..."
4
<PAGE> 5
John Hancock Funds - Short-Term Strategic Income Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended October 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 10% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
8.75% total return for the John Hancock Short-Term Strategic Income Fund, Class
A. The second represents the 7.97% total return for John Hancock Short-Term
Strategic Income Fund, Class B. The third represents the 8.79% total return for
the average short-term investment grade bond fund. A footnote below reads:
"Total returns for John Hancock Short-Term Strategic Income Fund are at net
asset value with all distributions reinvested. The average small-company growth
fund is tracked by Lipper Analytical Services. (1)" See following page for
historical performance information."]
inflation dropped from a 10% annual rate early in the year to about 6%.
UNITED STATES AND EUROPE - FOCUS ON QUALITY
Much of the buildup in emerging market bonds came at the expense of domestic
high-yield bonds, commonly known as junk bonds. During the Fund's fiscal year,
high-yield bonds declined from 16% of total assets to around 5%. One of our most
disappointing recent investments has been USAfrica Airways, a high-yield bond
which faltered when anticipated earnings from new routes connecting New York and
Washington to South Africa failed to materialize.
Most of the Fund's investments in the United States and Europe were not
high-yield bonds, but rather high-quality government and corporate bonds. Both
fared well as economic growth slowed and interest rates fell. The U.S. portion
of the Fund was divided roughly half and half between fixed-rate bonds and
floating-rate bonds. U.S. government agency bonds issued by the Student Loan
Marketing Association -- known as Sallie Maes -- comprised more than 20% of the
Fund's total assets at the end of the period.
OUTLOOK
The outlook for the global bond market remains favorable. Interest rates in many
of the world's developed economies, including the United States, remain high,
especially in light of the low inflation rate. That's likely to put a damper on
economic growth in the coming year and force still lower rates. Moreover,
inflation is unlikely to become a threat any time soon, given that wages are by
far the biggest component of corporate costs and wages continue to fall. Those
factors are all part of what we believe is a larger deflationary cycle affecting
the United States, Japan and Europe as they face growing competition from the
world's emerging markets. It's a process filled with opportunities as well as
pitfalls, and will require careful choices in the months ahead. We'll continue
to focus on those companies and countries that are making themselves more
competitive in the new global economy by reducing spending and paying down debt.
And we'll take pains to preserve enough diversity in the Fund's investments to
avoid being hurt too badly by the inevitable disruptions.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
[CAPTION]
"THE OUTLOOK FOR THE GLOBAL BOND MARKET REMAINS FAVORABLE."
5
<PAGE> 6
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Short-Term Strategic Income Fund. Total
return is a performance measure that equals the sum of all dividends and capital
gains, assuming reinvestment of these distributions and the change in the price
of the Fund's shares, expressed as a percentage of the Fund's average net
assets. Performance figures include the maximum applicable sales charge of 3%
for Class A shares. The effect of the maximum contingent deferred sales charge
for Class B shares (maximum 3% and declining to 0% over four years) is included
in Class B performance. Remember that all figures represent past performance and
are no guarantee of how the Fund will perform in the future. Also, keep in mind
that the total return and share price of the Fund's investments will fluctuate.
As a result, your Fund's shares may be worth more or less than their original
cost, depending on when you sell them. Please see your prospectus for risks
associated with international investing, including currency and political risks
and differences in accounting standards and financial reporting.
Note: Participant-directed defined-contribution plans with at least 100 eligible
employees at inception of the Fund account may purchase Class A shares without
an initial sales charge as of March 15, 1995. If those shares are redeemed,
however, during the year following the calendar year end during which they were
purchased, a contingent deferred sales charge will be assessed.
CUMULATIVE TOTAL RETURNS
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ONE LIFE OF
YEAR FUND(1)
---- -------
<S> <C> <C>
John Hancock Short-Term
Strategic Income Fund: Class A 5.14% 16.66%
John Hancock Short-Term
Strategic Income Fund: Class B 4.60% 25.02%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ONE LIFE OF
YEAR FUND(1)
---- -------
<S> <C> <C>
John Hancock Short-Term
Strategic Income Fund: Class A 5.14% 4.21%
John Hancock Short-Term
Strategic Income Fund: Class B 4.60% 4.80%
</TABLE>
YIELDS
AS OF OCTOBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
<S> <C>
John Hancock Short-Term
Strategic Income Fund: Class A 8.37%
John Hancock Short-Term
Strategic Income Fund: Class B 7.96%
</TABLE>
NOTES TO PERFORMANCE
(1) Class A shares started on January 1, 1992; Class B shares started on
December 28, 1990.
6
<PAGE> 7
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Short-Term Strategic Income Fund would be worth on October 31, 1995, assuming
you had invested on the day each class of shares started and reinvested all
distributions. For comparison, we've shown the same $10,000 investment in the
Salomon Brothers World Money Market Index -- an unmanaged index that is composed
of various non-U.S.-currency-denominated bonds, usually with an average maturity
of three years or less.
[Short-Term Strategic Income Fund
Class A shares
Line chart with the heading Short-Term Strategic Income 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 Salomon Brothers World Money Market
Index and is equal to $13,061 as of October 31, 1995. The second line represents
the value of the hypothetical $10,000 investment made in the Short-Term
Strategic Income Fund on January 3, 1992, before sales charge, and is equal to
$12,099 as of October 31, 1995. The third line represents the Short-Term
Strategic Income Fund after sales charge and is equal to $11,742 as of October
31, 1995.
Short-Term Strategic Income Fund
Class B shares
Line chart with the heading Short-Term Strategic Income 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 Salomon Brothers World Money Market
Index and is equal to $14,273 as of October 31, 1995. The second line represents
the value of the hypothetical $10,000 investment made in the Short-Term
Strategic Income Fund on December 28, 1990, before contingent deferred sales
charge, and is equal to $12,677 as of October 31, 1995.
*No contingent deferred sales charge applicable.]
7
<PAGE> 8
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Bonds (cost - $96,872,492) .................................................. $ 97,708,989
Joint repurchase agreement (cost - $2,587,000) .............................. 2,587,000
-------------
100,295,989
Cash ......................................................................... 47,740
Interest receivable .......................................................... 2,524,930
Deferred organization expenses - Note A ...................................... 8,623
Other assets ................................................................. 15,638
-------------
Total Assets ............................................... 102,892,920
----------------------------------------------------------------------------
LIABILITIES:
Dividend payable ............................................................. 15,650
Payable for shares repurchased ............................................... 52,270
Payable for investments purchased ............................................ 1,051,208
Payable to John Hancock Advisers, Inc. and affiliates - Note B ............... 69,523
Accounts payable and accrued expenses ........................................ 106,683
-------------
Total Liabilities .......................................... 1,295,334
----------------------------------------------------------------------------
NET ASSETS:
Capital paid-in .............................................................. 130,018,481
Accumulated net realized loss on investments and foreign
currency transactions ........................................................ (29,216,361)
Net unrealized appreciation of investments and foreign
currency transactions ........................................................ 811,116
Distributions in excess of net investment income ............................. (15,650)
-------------
Net Assets ................................................. $ 101,597,586
============================================================================
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, respectively)
Class A - $16,996,512/2,020,156 .............................................. $ 8.41
================================================================================================
Class B - $84,601,074 / 10,068,537 ........................................... $ 8.40
================================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($8.41 x 103.09%) .................................................. $ 8.67
================================================================================================
</TABLE>
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
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, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE PER SHARE AND THE MAXIMUM OFFERING PRICE AS OF
THAT DATE.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 9
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended October 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $5,127) ................................ $ 10,992,443
------------
Expenses:
Distribution/service fee - Note B
Class A ........................................................................... 48,128
Class B ........................................................................... 879,073
Investment management fee - Note B .................................................. 682,732
Transfer agent fee - Note B ......................................................... 187,299
Custodian fee ....................................................................... 99,641
Auditing fee ........................................................................ 62,800
Registration and filing fees ........................................................ 24,393
Printing ............................................................................ 23,228
Trustees' fees ...................................................................... 21,608
Organization expense - Note A ....................................................... 15,702
Miscellaneous ....................................................................... 5,970
Legal fees .......................................................................... 5,740
------------
Total Expenses ..................................................... 2,056,314
--------------------------------------------------------------------------------------
Net Investment Income .............................................. 8,936,129
--------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on investments sold ................................................ (5,505,804)
Net realized loss on foreign currency transactions ................................... (406,085)
Change in net unrealized appreciation/depreciation of investments .................... 4,079,849
Change in net unrealized appreciation/depreciation of foreign currency transactions... 981,818
------------
Net Realized and Unrealized Loss on Investments and Foreign
Currency Transactions .............................................. (850,222)
--------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations ............... $ 8,085,907
======================================================================================
</TABLE>
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.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income ........................................................ $ 8,936,129 $ 9,910,079
Net realized loss on investments sold and foreign currency transactions ...... (5,911,889) (5,810,926)
Change in net unrealized appreciation/depreciation of investments and foreign
currency transactions ........................................................ 5,061,667 (1,902,026)
------------- -------------
Net Increase in Net Assets Resulting from Operations ........................ 8,085,907 2,197,127
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($0.6084 and $0.6224 per share, respectively) ..................... (1,163,444) (693,087)
Class B - ($0.5592 and $0.5649 per share, respectively) ..................... (5,943,424) (7,303,157)
Dividends in excess of net investment income
Class A - (none and $0.0428 per share, respectively) ........................ -- (47,616)
Class B - (none and $0.0393 per share, respectively) ........................ -- (508,661)
Distributions in excess of net realized gain on investments sold
Class A - (none and $0.1154 per share, respectively) ........................ -- (114,916)
Class B - (none and $0.1154 per share, respectively) ........................ -- (1,691,979)
Distributions from capital paid-in
Class A - ($0.1566 and $0.0966 per share, respectively) ..................... (299,463) (107,572)
Class B - ($0.1439 and $0.0966 per share, respectively) ..................... (1,529,798) (1,249,943)
------------- -------------
Total Distributions to Shareholders ....................................... (8,936,129) (11,716,931)
------------- -------------
FROM FUND SHARE TRANSACTIONS-- NET* ............................................ (9,033,071) (33,002,925)
------------- -------------
NET ASSETS:
Beginning of period .......................................................... 111,480,879 154,003,608
------------- -------------
End of period (including distributions in excess of net investment income of
$15,650 and $1,275,819, respectively) ........................................ $ 101,597,586 $ 111,480,879
============= =============
* ANALYSIS OF FUND SHARE TRANSACTIONS:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................... 1,378,812 $ 11,536,477 932,145 $ 8,040,859
Shares issued to shareholders in reinvestment of distributions.. 123,825 1,038,224 74,101 644,945
----------- ------------ ----------- ------------
1,502,637 12,574,701 1,006,246 8,685,804
Less shares repurchased ........................................ (1,027,565) (8,585,443) (681,111) (6,037,753)
----------- ------------ ----------- ------------
Net increase ................................................... 475,072 $ 3,989,258 325,135 $ 2,648,051
=========== ============ =========== ============
CLASS B
Shares sold .................................................... 2,159,157 $ 18,090,152 1,599,938 $ 13,816,191
Shares issued to shareholders in reinvestment of distributions.. 493,658 4,130,850 681,528 5,955,744
----------- ------------ ----------- ------------
2,652,815 22,221,002 2,281,466 19,771,935
Less shares repurchased ........................................ (4,211,675) (35,243,331) (6,332,319) (55,422,911)
----------- ------------ ----------- ------------
Net decrease ................................................... (1,558,860) $(13,022,329) (4,050,853) $(35,650,976)
=========== ============ =========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 11
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
CLASS A 1995 1994 1993 1992(a)
------- ------- ------- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...................................... $ 8.47 $ 9.12 $ 9.32 $ 9.86
------- ------- ------- -------
Net Investment Income..................................................... 0.77** 0.76** 0.83** 0.65
Net Realized and Unrealized Loss on Investments and Foreign
Currency Transactions..................................................... (0.06) (0.53) (0.20) (0.55)
------- ------- ------- -------
Total from Investment Operations......................................... 0.71 0.23 0.63 0.10
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income...................................... (0.61) (0.62) (0.83) (0.64)
Distributions in Excess of Net Investment Income.......................... -- (0.04) -- --
Distributions in Excess of Net Realized Gain on Investments Sold.......... -- (0.12) -- --
Distributions from Capital Paid-in........................................ (0.16) (0.10) -- --
------- ------- ------- -------
Total Distributions...................................................... (0.77) (0.88) (0.83) (0.64)
------- ------- ------- -------
Net Asset Value, End of Period............................................ $ 8.41 $ 8.47 $ 9.12 $ 9.32
======= ======= ======= =======
Total Investment Return at Net Asset Value (c)............................ 8.75% 2.64% 6.78% 1.16%*
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)................................. $16,997 $13,091 $11,130 $20,468
Ratio of Expenses to Average Net Assets................................... 1.33% 1.26% 1.21% 1.37%*
Ratio of Net Investment Income to Average Net Assets...................... 9.13% 8.71% 8.59% 8.09%*
Portfolio Turnover Rate................................................... 147% 150% 306% 86%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: THE NET INVESTMENT LOSS, GAINS (LOSSES),
AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET ASSET VALUE
FOR A SHARE HAS CHANGED SINCE THE COMMENCEMENT OF OPERATIONS. ADDITIONALLY,
IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE FINANCIAL STATEMENTS
ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
CLASS B 1995 1994 1993 1992 1991(b)
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period .............................. $ 8.46 $ 9.11 $ 9.31 $ 10.01 $ 10.00
------- ------- -------- -------- --------
Net Investment Income ............................................. 0.70** 0.70** 0.75** 0.87 0.76+
Net Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions .................................... (0.06) (0.53) (0.20) (0.80) 0.01
------- ------- -------- -------- --------
Total from Investment Operations ................................. 0.64 0.17 0.55 0.07 0.77
------- ------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .............................. (0.56) (0.56) (0.75) (0.77) (0.76)
Distributions in Excess of Net Investment Income .................. -- (0.04) -- -- --
Distributions in Excess of Net Realized Gain on Investments Sold .. -- (0.12) -- -- --
Distributions from Capital Paid-in ................................ (0.14) (0.10) -- -- --
------- ------- -------- -------- --------
Total Distributions .............................................. (0.70) (0.82) (0.75) (0.77) (0.76)
------- ------- -------- -------- --------
Net Asset Value, End of Period .................................... $ 8.40 $ 8.46 $ 9.11 $ 9.31 $ 10.01
======= ======= ======== ======== ========
Total Investment Return at Net Asset Value (c) .................... 7.97% 1.93% 5.98% 0.64% 8.85%*+
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ......................... $84,601 $98,390 $142,873 $236,059 $218,562
Ratio of Expenses to Average Net Assets ........................... 2.07% 1.99% 2.01% 2.07% 1.89%*+
Ratio of Net Investment Income to Average Net Assets .............. 8.40% 8.00% 7.81% 8.69% 8.72%*+
Portfolio Turnover Rate ........................................... 147% 150% 306% 86% 22%
* On an annualized basis.
** On average month end shares outstanding.
+ Reflects expense limitation in effect for the period ended October 31,
1991. As a result of such limitation, expenses for Class B shares reflect a
reduction of $0.0039 per share. Absent of such reduction, for the year
ended October 31, 1991 the ratio of expenses to average net assets would
have been 1.93% and the ratio of net investment income to average net
assets would have been 8.68%. Without the reimbursement, total investment
return would have been 8.81%. This is an estimated total return calculation
which takes into consideration fees and expenses waived or borne by the
Adviser during the periods shown.
(a) Class A shares commenced operations on January 3, 1992.
(b) Class B shares commenced operations on December 28, 1990.
(c) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 13
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
SCHEDULE OF INVESTMENTS
October 31, 1995
- -------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
SHORT-TERM STRATEGIC INCOME FUND ON OCTOBER 31, 1995. IT'S DIVIDED INTO TWO MAIN
CATEGORIES: BONDS AND SHORT-TERM INVESTMENTS. BONDS ARE FURTHER BROKEN DOWN BY
CURRENCY DENOMINATION.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000'S
ISSUER, DESCRIPTION RATE OMITTED)# MARKET VALUE
- ------------------- -------- --------- ------------
<S> <C> <C> <C>
BONDS
CHILEAN PESO (4.87%)
*Citibank, N.A., Nassau
Time Deposit 11-09-95
(Time deposit with redemption
linked to Chilean Peso,
Fx rates) *** ...................... 12.900% 827,000 $1,989,894
*Citibank, N.A., Nassau
Time Deposit 11-20-95
(Time deposit with redemption
linked to CLP Fx rates) *** ........ 12.500 414,400 997,113
*Citibank, N.A., Nassau
Time Deposit 03-15-96
(Time deposit with redemption
linked to CLP Fx rates) *** ........ 13.000 817,000 1,965,832
----------
4,952,839
----------
CZECH KORUNA (1.52%)
*SKOFIN, Foreign Corp.
Bond 02-09-98 ...................... 11.625 40,000 1,544,933
----------
ITALIAN LIRA (.99%)
*Government of Italy, BTPS
Government Bond
12-01-97 ........................... 9.500 1,650,000 1,008,707
----------
MEXICAN PESO (1.78%)
*Mexican Cetes, Government
Bond 02-01-96 ...................... 0.000 14,481 1,805,719
----------
NEW ZEALAND DOLLAR (3.95%)
*Government of New Zealand,
Government Bond 11-15-96 ........... 9.000 6,000 4,010,879
----------
SWEDISH KRONA (1.03%)
*Kingdom of Sweden,
Government Bond
01-23-97 ........................... 10.750 6,800 1,045,806
----------
SOUTH AFRICAN RAND (3.95%)
*Transnet Ltd., Foreign Corp.
Bond 04-01-97 ...................... 12.500 1,000 267,979
*Transnet Ltd., Foreign Corp.
Bond 02-15-99 ...................... 11.500 4,000 1,019,055
*Republic of South Africa,
Government Bond
09-21-98 ........................... 14.650** 10,000 2,728,046
----------
4,015,080
----------
UNITED STATES DOLLAR (78.08%)
*Abbey National Treasury
Services, (United Kingdom),
Floating Rate Euronotes
03-08-99 ........................... 5.813%** 2,000 1,995,400
*Banco Central De Costa Rica,
Series A, (Costa Rica),
Foreign Corp Bond
05-21-05 ........................... 6.766** 1,504 1,158,450
*Banco Central De Costa Rica,
Series B, (Costa Rica),
Foreign Corp Bond
05-21-05 ........................... 6.766** 1,504 1,113,315
Banco Central Do Brazil,
(Brazil), Foreign Corp Bond
10-15-99 ........................... 6.750** 8,143 7,613,568
*Banco Credibanco S.A.,
(Brazil), Foreign Corp.
Bond 11-25-97 ...................... 11.625 1,376 1,379,440
*Banco Nacional Comercio,
(Mexico), Foreign Corp.
Bond 06-23-97 (R) .................. 10.875** 1,000 1,006,250
*Bridas Corp., Corp. Bond
11-15-99 ........................... 12.500 1,000 945,000
*Centrais Electricas Brasileiras
SA, (Brazil), Foreign Corp.
Bond 10-30-98 (R) .................. 10.000 1,000 996,250
*Empresas ICA Sociedad
Controladora, (Mexico),
Foreign Corp Bond
08-02-96 ........................... 8.125** 2,000 1,900,000
Essar Gujarat Ltd., (India),
Foreign Agency
07-15-99 (R) ....................... 8.400** 4,000 3,970,000
Government of Barbados,
(Barbados), Government
Bond 06-09-97 (R) .................. 10.500 1,000 1,010,000
IMO Industries, Inc., Sub
Deb 08-15-97 ....................... 12.250 933 937,665
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 14
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000'S
ISSUER, DESCRIPTION RATE OMITTED)# MARKET VALUE
- ------------------- -------- --------- ------------
<S> <C> <C> <C>
UNITED STATES DOLLAR (CONTINUED)
*Kingdom of Denmark,
(Denmark), Government
Bond 09-18-97.................... 5.750%** 4,000 $ 3,998,800
*Mexican Tesobonos,
(Mexico), Government Bond
12-21-95......................... 0.000 2,779 2,748,737
NWA Inc., Note 11-30-00 .......... 12.091 3,137 3,231,126
*Petroleo Brasileiro,
(Brazil), Foreign Corp
Bond 06-08-98.................... 10.213** 2,000 2,035,000
*PT Semen Cibinong,
(Indonesia), Foreign Corp.
Bond 12-15-98.................... 9.000 2,000 2,040,000
*Republic of Argentina,
(Argentina), Government
Bond 11-01-99.................... 10.950 1,000 1,000,000
*Republic of Panama,
(Panama), Government
Bond 05-10-02.................... 7.250** 5,250 4,305,000
*Siderar S.A.I.C., (Argentina),
Foreign Corp. Bond
10-18-97 (R)..................... 11.000 1,000 997,500
*Student Loan Marketing
Association, Government
Agency 09-28-98.................. 5.640** 5,000 4,966,250
*Student Loan Marketing
Association, Government
Agency 12-01-95.................. 5.705** 17,000 16,977,900
*Transportacion Maritima
Mexicana, (Mexico), Foreign
Corp Bond 10-28-97............... 9.750 1,500 1,455,000
*Tubos de Acero de Mexico,
(Mexico), 12-08-99............... 13.750 2,500 2,462,500
USAfrica Airways, Inc., Unit
(Sr Note 05-31-99 and
Warrant), (r)+................... 12.000 1,000 350,000
USAir, Inc., Sr Notes 07-01-03 10.000 3,000 2,730,000
*U.S. Treasury Note,
Government Note
10-31-97......................... 5.625 6,000 6,001,875
------------
79,325,026
------------
TOTAL BONDS (Cost $96,872,492) (96.17%) 97,708,989
------- ------------
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (2.55%)
Investment in a joint repurchase
agreement transaction with
SBC Capital Markets -
Dated 10-31-95, Due 11-01-95
(secured by U.S. Treasury Bond,
8.750% Due 05-15-17, and by
U.S. Treasury Note, 5.750%
Due 09-30-97) - Note A 5.890% 2,587 $ 2,587,000
------------
TOTAL SHORT-TERM INVESTMENTS (2.55%) 2,587,000
------ ------------
TOTAL INVESTMENTS (98.72%) $100,295,989
====== ============
<FN>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities, other than short-term investments, newly added to the portfolio
during the period ended October 31, 1995.
** Represents rate in effect on October 31, 1995.
*** An indexed security's value is linked to changes in foreign currencies,
interest rates or other reference instruments. Indexed securities amounted
to $4,952,839 or 4.87% of the Fund's net assets as of October 31, 1995.
# Par value of non US$ denominated foreign bonds is expressed in local
currency for each country listed.
(R) Security is exempt from registration under rule 144A of the Securities Act
of 1933. Such securities may be resold, normally to qualified institutional
buyers, in transactions exempt from registration. See Note A of the Notes
to Financial Statements for valuation policy. Rule 144A securities amounted
to $7,980,000 or 7.85% as of October 31, 1995.
(r) Direct placement securities are restricted to resale. They have been valued
using procedures approved by the Trustees after considerations of
restrictions as to resale, financial condition and prospects of the issuer,
general market conditions and pertinent information in accordance with the
Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund
has limited rights to registration under the Securities Act of 1933 with
respect to these restricted securities.
+ Non-income producing.
</TABLE>
Additional information on each restricted security is as follows:
<TABLE>
<CAPTION>
VALUE AS A
PERCENTAGE VALUE AT
ACQUISITION ACQUISITION OF FUND'S OCTOBER 31,
DATE COST NET ASSETS 1995
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
USAfrica Airways, Inc.,
Unit (Sr Note
05-31-99 and
Warrant) 10-13-94 $1,000,000 0.34% $350,000
</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> 15
FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
PORTFOLIO CONCENTRATION (Unaudited)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE FUND PRIMARILY INVESTS IN BONDS ISSUED BY COMPANIES AND GOVERNMENTS OF OTHER
COUNTRIES. THE PERFORMANCE OF THE FUND IS CLOSELY TIED TO THE ECONOMIC CONDITION
WITHIN THE COUNTRIES IN WHICH IT INVESTS. THE CONCENTRATION OF INVESTMENTS BY
CURRENCY DENOMINATION FOR INDIVIDUAL SECURITIES HELD BY THE FUND IS SHOWN IN THE
SCHEDULE OF INVESTMENTS. IN ADDITION, CONCENTRATION OF INVESTMENTS CAN BE
AGGREGATED BY VARIOUS INVESTMENT CATEGORIES. THE TABLE BELOW SHOWS THE
PERCENTAGES OF THE FUND'S INVESTMENTS AT OCTOBER 31, 1995 ASSIGNED TO THE
VARIOUS INVESTMENT CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE AS A
INVESTMENT CATEGORIES % OF NET ASSETS
<S> <C>
Automobile/Trucks ............................................ 1.52%
Banks ........................................................ 18.92
Building Products ............................................ 2.01
Construction ................................................. 1.87
Electronics .................................................. 0.92
Finance ...................................................... 0.98
Governmental -- Foreign ...................................... 23.29
Governmental -- U.S. Agencies ................................ 27.51
Oil & Gas .................................................... 2.00
Steel ........................................................ 6.33
Transportation ............................................... 8.91
Utility ...................................................... 1.91
Short-term investments ....................................... 2.55
-----
TOTAL INVESTMENTS 98.72%
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust II (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of five series portfolios: John Hancock Short-Term Strategic Income Fund (the
"Fund"), John Hancock Global Fund, John Hancock Global Income Fund, John Hancock
International Fund, and John Hancock Special Opportunities Fund. Prior to
January 1, 1995, John Hancock Global Fund was known as John Hancock Freedom
Global Fund, John Hancock Global Income Fund was known as John Hancock Freedom
Global Income Fund and John Hancock International Fund was known as John Hancock
Freedom International Fund.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission. Shareholders of a class which bears
distribution/service expenses under terms of a distribution plan, have exclusive
voting rights to such 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. All portfolio
transactions initially expressed in terms of foreign currencies have been
translated into U.S. dollars as described in "Foreign Currency Translation"
below. The Fund may invest in indexed securities whose value is linked either
directly or inversely to changes in foreign currencies, interest rates,
commodities, indices or other reference instruments. Indexed securities may be
more volatile than the reference instrument itself, but any loss is limited to
the amount of the original investment.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more large repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, net currency exchange gains and
losses from sales of foreign debt securities must be treated as ordinary income
even though such items are gains and losses for accounting purposes. The Fund
has $29,216,361 capital loss carryforwards available, to the extent provided by
regulations, to offset future net realized capital gains. If such carryforwards
are used by the Fund, no capital gains distribution will be made. The
carryforwards expire as follows: October 31, 1999 -- $1,001,257, October 31,
2000 -- $17,243,199, October 31, 2001 -- $3,127,414, October 31, 2002 --
$2,740,548 and October 31, 2003 -- $5,103,943. Expired capital loss
carryforwards are reclassified to capital paid-in, in the year of expiration.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
Such distributions are determined in conformity with income tax regulations,
which may differ from generally accepted accounting principals. 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 as explained
previously.
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.
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/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.
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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward
foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the contracts are
marked-to-market daily at the applicable foreign currency exchange rates. Any
resulting unrealized gains and losses are included in the determination of the
Fund's daily net assets. The Fund records realized gains and losses at the time
the forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering these contracts from potential inability
of counterparties to meet the terms of the contract and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the unrealized
gain or loss reflected in the Fund's Statement of Assets and Liabilities. The
Fund may also purchase and sell forward contracts to facilitate the settlement
of foreign currency denominated portfolio transactions, under which it intends
to take delivery of the foreign currency. Such contracts normally involve no
market risk other than that offset by the currency amount of the underlying
transaction.
There were no open forward foreign currency exchange contracts at October
31, 1995.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. At the time the Fund enters into a financial futures contract, it
will be 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 on the
board of trade or U.S. commodities exchange. 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
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
margin adjustments, arising from this "mark to market", will be 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, 1995, there were no open position in financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked-to-market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and writing calls will 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 will reflect 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 contract's
terms, or if the Fund is unable to offset a contract with a counterparty on a
timely basis ("liquidity risk"). Exchange-traded options have minimal credit
risk as the exchanges act as counterparties to each transaction, and only
present liquidity risk in highly unusual market conditions. To minimize credit
and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended October 31,
1995.
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.
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 commencement of operations
of the Fund.
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) 0.65% of the first $500,000,000 of the Fund's
average daily net asset value and (b) 0.60% of the Fund's average daily net
asset value in excess of $500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
2.5% of the first $30,000,000 of the Fund's average daily net asset value, 2.0%
of the next $70,000,000, and 1.5% of the remaining average daily net asset
value.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-Distributors for
shares of the Fund. Prior to January 1, 1995 JH Funds was known as John Hancock
Broker Distribution Services, Inc. For the period ended October 31, 1995, net
sales charges received with regard to sales of Class A shares amounted to
$128,857. Out of this amount, $15,493 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $28,408 was paid
as sales commissions to unrelated broker-dealers and $84,956 was paid as sales
commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., ("Sutro"), all of which are broker dealers. The Adviser's indirect parent,
John Hancock Mutual Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries which include FDC, Tucker Anthony and Sutro.
Class B shares which are redeemed within four years of purchase (three
years for purchases prior to January 1, 1994) will be subject to a contingent
deferred sales charge ("CDSC") at declining rates beginning at 3.0% of the
lesser of the current market value at the time of redemption or the original
purchase cost of the shares being redeemed. Proceeds from CDSC are paid to JH
Funds and are used in whole or in part to defray its expenses related to
providing distribution related services to the Fund in connection with the sale
of Class B shares. For the period ended October 31, 1995, contingent deferred
sales charges paid to JH Funds amounted to $85,980.
In addition, to reimburse the Co-Distributors for the services they provide
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 the
Co-Distributors for distribution and service expenses, at an annual rate not
exceed 0.30% of Class A average daily net assets and 0.95% (1.00% prior to
August 1, 1995) of Class B average daily net assets to reimburse the
Co-Distributors for their distribution/service costs. Effective November 1,
1995, the rate was increased back to 1.00%. 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 Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. Prior to January 1, 1995, Investor Services was known as John
Hancock Fund Services, Inc.
Prior to January 1, 1995, the Fund paid Investor Services a monthly
transfer agent fee equivalent, on an annual basis, to 0.10% and 0.13% of the
average daily net asset value of Class A and Class B shares of the Fund,
respectively, plus out-of-pocket expenses incurred by Fund Services on behalf of
the Fund. For the period January 1, 1995 through September 30, 1995 Class A and
Class B shares paid transfer agent fees based on the number of shareholder
accounts and certain out-of-pocket expenses. For the eleven months ended
September 30, 1995 the transfer agent expense, calculated as a class specific
expense was $19,452 for Class A and $154,232 for Class B, respectively.
Effective October 1, 1995 transfer agent expense is being treated as a fund
expense based on the number of shareholder accounts in the Fund and certain
out-of-pocket expenses.
Edward J. Boudreau, Jr., is a director and officer of the Adviser and its
affiliates, as well as a Trustee of the Fund. The compensation of unaffiliated
Trustees is borne by the Fund. Effective with the fees paid for 1995, 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 will make 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 will be recorded on the
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Short-Term Strategic Income Fund
Fund's books as an other asset. The deferred compensation liability will be
marked to market on a periodic basis and income earned by the investment will be
recorded on the Fund's books.
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 period
ended October 31, 1995, aggregated $122,630,736 and $102,644,309, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $28,056,506 and $53,849,653, respectively, during the period
ended October 31, 1995.
The cost of investments owned at October 31, 1995 (including the joint
repurchase agreement) for Federal income tax purposes was $99,459,492. Gross
unrealized appreciation and depreciation of investments aggregated $2,329,264
and $1,492,767, respectively, resulting in net unrealized appreciation of
$836,497.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1995, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of
$1,264,473, a decrease in accumulated net investment loss of $1,260,169 and a
decrease in capital paid-in of $2,524,642. This represents the cumulative amount
necessary to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1995. 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
net operating losses in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting principle.
20
<PAGE> 21
John Hancock Funds - Short-Term Strategic Income Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Short-Term Strategic Income Fund and the
Trustees of Freedom 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 Short-Term Strategic
Income Fund (the "Fund") (a portfolio of Freedom Investment Trust II) at October
31, 1995, 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 significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 18, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during the fiscal year ended October
31, 1995.
None of the distributions qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1995 U.S. Treasury Department Form 1099-DIV
in January of 1996. This will reflect the total of all distributions which are
taxable for calendar year 1995.
21
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NOTES
John Hancock Funds - Short-Term Strategic Income Fund
22
<PAGE> 23
NOTES
John Hancock Funds - Short-Term Strategic Income Fund
23
<PAGE> 24
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A GLOBAL INVESTMENT MANAGEMENT FIRM U.S. Postage
101 Huntington Avenue Boston, MA 02199-7603 PAID
Brockton, MA
Permit No. 582
[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."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Short-Term Strategic Income 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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Paper." ]
JHD 3200A 10/95 12/95
