================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
International
Fund
ANNUAL REPORT
October 31, 1996
<PAGE>
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TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN. JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TRANSFER AGENTS
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:
Since late 1994, prospectus simplification has been a major topic in the mutual
fund industry. At that time, Securities and Exchange Commission Chairman Arthur
Levitt called on fund companies to make their prospectuses more user-friendly.
He noted that prospectuses are often overloaded with technical detail and are
hard for most investors to understand. Many industry observers agreed, and
rightly so.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.]
So it is my pleasure to let you know that after being under development for
a year, John Hancock Funds has introduced new simplified and consolidated
prospectuses. The prospectuses feature shorter, clearer language with a
streamlined design, and they incorporate several funds with similar investment
objectives into one document. They cover our income, growth, growth and income,
tax-free income, international/global and money market funds. We are gratified
at the favorable reviews that our new prospectuses have received from
shareholders, financial advisers, industry analysts and the press. We believe
they are a bold but sensible step forward. And while they are easier to read,
they still comply with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page spread
highlighting each fund's goals and investment strategy, the types of securities
it buys, its portfolio management and risk factors, all in plainer language.
Fund expenses and financial highlights are now found here, too, as is a new bar
chart that shows year-to-year volatility for each fund. Other features include a
better presentation of fund services, a new glossary of investment risks and a
discussion about how funds are organized, including a diagram showing the
connection of the various players that provide services to your Hancock fund(s).
We believe we have made a significant advancement in the drive toward better
mutual fund prospectuses. We hope you will agree because in the end, we did it
for you, our shareholders.
Sincerely,
/s/Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
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BY JOHN L.F. WILLS, PORTFOLIO MANAGER
John Hancock
International Fund
Hong Kong, Europe lead foreign markets for
U.S. dollar-based investors
Foreign stocks finally began to show signs of life over the past 12 months.
Declining interest rates, low inflation, steady or rebounding economies and
ample liquidity fueled the markets and moved many foreign stocks forward. While
it still wasn't enough to push the major world markets ahead of the U.S., which
astounded many by continuing to charge ahead, it at least narrowed the gap and
gave international investors positive returns.
For the 12 months ended October 31, 1996, John Hancock International Fund
posted total returns for its Class A and Class B shares of 6.88% and 6.21%,
respectively, at net asset value. That compared to the 10.73% return for the
average international fund, according to Lipper Analytical Services.1 Please see
pages six and seven for longer-term performance information. The Fund lagged its
peers for several reasons, including our heavy position in Japan, where results
were disappointing for U.S.-dollar based investors because of a 10% decline in
the yen against the dollar during the period. By trimming our stake in
continental Europe to boost our weightings in Japan and Hong Kong, the Fund also
benefited less from Europe's strong performance. Even with currency declines,
Europe turned in better dollar-based results than Japan. Partially offsetting
those drags were the Fund's strong exposure to the United Kingdom, whose
economic recovery is leading the rest of Europe, and our increased position in
Hong Kong, whose market rose by 31% in the last 12 months. Here's a closer look
at the Fund's strategies and performance, region by region.
Japan
As the Japanese economy finally began to improve early this year, we added more
Japanese stocks, raising our stake from 16% of net assets at the beginning of
the period to 28% by the
"Foreign stocks finally began to show signs
of life over the past 12 months."
[A 2" x 3" photo of portfolio management team at bottom right. Caption reads:
"John L.F. Wills (center) and Fund management team members Ben Hock (l) and Rob
Hallisey (r)."]
3
<PAGE>
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John Hancock Funds - International Fund
- --------------------------------------------------------------------------------
[A pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into six sections. Going from top left to right:
United Kingdom 17%; Japan 28%, Latin America 3%; Pacific Rim 14%; Hong Long 20%;
Continental Europe 18%. A footnote states: "As a percentage of net assets on
October 31, 1996."]
- --------------------------------------------------------------------------------
"Hong Kong dominated
the Fund's investment
in emerging markets..."
end of October. The market stumbled in the summer when investors grew concerned
that the strong economic growth earlier this year would cause interest rates to
rise, which they have yet to do. But overall, trends in Japan continue to be
promising. While the decline of the yen versus the dollar undercut the profits
of U.S. dollar-based investors, it also sparked a sharp rise in Japanese
exports, contributing to higher profits and an accelerating growth rate.
Corporate restructuring efforts have also helped corporate profits and
investors. We focused on sectors of the Japanese market that we believe have the
best potential to perform. They include large exporters, such as Bridgestone
Tire, Honda Motors and consumer electronics companies such as Sony and
Matsushita Electric Industrial. We also built up our technology holdings with
Sharp, Matsushita Communication Industrial, which makes parts for mobile phones,
and Matsushita-Kotobuki Electronics Industries, which is involved in the new
digital video disc technology. We're keeping our positions in Japan because we
still expect strong earnings growth, while the yen appears to have bottomed out.
- --------------------------------------------------------------------------------
[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 Dixons Group
followed by an up arrow and the phrase "U.K. consumer confidence at eight-year
high." The second listing is TDK followed by an up arrow and the phrase "Weak
yen aids Japanese exports." The third listing is Plutonic Resources followed by
a flat arrow and the phrase "Low inflation makes for weak gold prices." Footnote
below reads: "See "Schedule of Investments." Investment holdings are subject to
change."]
- --------------------------------------------------------------------------------
Hong Kong: Fund's top emerging market
Hong Kong dominated the Fund's investment in emerging markets, with our stake
rising from 9% at the beginning of the period to 20% by the end of October. The
main factor influencing Hong Kong stock prices, other than U.S. interest rates,
was the colony's planned transfer to China next summer. Investors around the
world now believe what we have thought all along: that far from crushing Hong
Kong's free market economy, China has acknowledged its value as a financial
center and wants to see it flourish. Already, there's been a significant influx
of Chinese investment capital into Hong Kong, much of it into real estate, which
has been a key focus of the Fund's investments there. Real estate development
companies such as Cheung Kong Holdings and Wharf Holdings have benefited from
rising real estate prices. We've also had great success investing in companies
that do most of their business in China. First Sign International Holdings,
which has numerous chains of retail clothes stores, has seen its stock price
rise by 40% in the last six months. Two other top performers were Hong Kong &
Shanghai Hotels, the largest hotel chain in China, and CITIC Pacific, a holding
company with interests in Hong Kong blue chip companies. Elsewhere in Asia, we
cut the Fund's Southeast Asian holdings from 13% to 7% of net assets, in
response to rising interest rates and a sharp slowdown in the rate of economic
growth. The Fund is less involved in Latin America than in Asia, with only a few
holdings in Brazil and Chile.
4
<PAGE>
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John Hancock Funds - International 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, 1996." The chart is
scaled in increments of 4% from bottom to top, with 12% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
6.88% total return for the John Hancock International Fund: Class A. The second
represents the 6.21% total return for John Hancock International Fund: Class B.
The third represents the 10.73% total return for the average international fund.
A footnote below reads: "Total returns for John Hancock International Fund are
at net asset value with all distributions reinvested. The average international
fund is tracked by Lipper Analytical Services. (1)" See following two pages for
historical performance information."]
- --------------------------------------------------------------------------------
Europe
Of the Fund's 35% stake in Europe, nearly half was in the United Kingdom.
Because interest rates are low in Britain and consumer confidence is at an
eight-year high, we've focused on consumer stocks, such as Dixons Group, an
electronics retailer; Burton Group, a mid-price clothing retailer and Marks &
Spencer, well-established as a purveyor of high-quality clothes. Other
consumer-oriented stocks include theme pub chain Wetherspoon (JD), and
PizzaExpress. During the last six months, we've focused more on France, which
has some attractive exporters including luxury goods producers LVMH Moet
Henessey Luis Vuitton. It also has the best choice in Europe of undervalued
blue-chip companies, including Lyonnaise des Eaux, a water utility and
industrial conglomerate. One top performer in Europe was the Swiss drug company
Ciba Geigy, whose stock rose by 60% after its proposed merger with Sandoz was
announced.
Australia/New Zealand
We de-emphasized this part of the world, but kept a 6% stake in Australian
mining stocks such as Plutonic Resources, Newcrest Mining and WMC. Despite
short-term swings, the positive outlook for worldwide economic growth and low
metal stockpiles still suggest rising metal prices, which would help these
companies.
Outlook
The outlook for the international markets appears promising for several reasons.
Long term, the markets should be bolstered by a growing amount of investor cash
stemming from corporate takeovers, stock buybacks, increased equities investment
by government pensions and, in Europe, the accelerating trend toward more
private pensions. For now, we'll continue to watch interest rates and inflation.
Even if rates rise, which they well could in the next six to 12 months, we think
it won't be by much. There are no signs of inflation picking up, but if energy
prices keep rising, it could be a cloud on the distant inflation horizon. Yet
another reason for optimism is that foreign stocks still look inexpensive by
most traditional standards of value.
"The outlook for the international
markets appears promising
for several reasons."
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end
of the Fund's period discussed in this report. Of course, the manager's
views are subject to change as market and other conditions warrant.
International investing involves special risks such as currency risks,
political risks and differences in accounting standards and financial
reporting. See prospectus for additional information.
5
<PAGE>
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- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock International Fund. Total return is a
performance measure that equals the sum of all income and capital gain
distributions, assuming reinvestment of these distributions and the change in
the price of the Fund's shares, expressed as a percentage of the Fund's net
asset value per share. Performance figures include the maximum applicable sales
charge of 5% for Class A shares. The effect of the maximum contingent deferred
sales charge for Class B shares (maximum 5% and declining to 0% over six 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 a discussion of the risks associated with international
investing, including currency and political risks and differences in accounting
standards and financial reporting.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended September 30, 1996
ONE LIFE OF
YEAR FUND
---- ----
John Hancock International Fund: Class A(2) (0.92%) (2.62%)(1)
John Hancock International Fund: Class B(2) (1.46%) (2.58%)(1)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended September 30, 1996
ONE LIFE OF
YEAR FUND
---- ----
John Hancock International Fund: Class A(2) (0.92%) (0.96%)(1,2)
John Hancock International Fund: Class B(2) (1.46%) (0.95%)(1,2)
Notes to Performance
(1) Both Class A and Class B shares commenced on January 3, 1994.
(2) Effective January 3, 1994, the Advisor has temporarily voluntarily
undertaken to limit the Fund's expenses, including the management fee (but
not including the transfer agent fee and the 12b-1 fee) to 0.90% of the
Fund's daily net asset value. Without the limitations of expenses, the
average annual total return for the one-year period and since inception
would have been (2.23%) and (3.24%) for Class A shares and (2.77%) and
(3.23%) for Class B shares.
6
<PAGE>
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- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
International Fund would be worth on October 31, 1996, 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 Morgan Stanley EAFE
Index -- an unmanaged index that measures the performance of stock markets in
Europe, Australia and the Far East.
- --------------------------------------------------------------------------------
[Line chart with the heading International 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 Morgan
Stanley EAFE Index and is equal to $12,485 as of October 31, 1996. The second
line represents the value of the hypothetical $10,000 investment made in the
International Fund before sales charge, on January 3,1994, and is equal to
$10,337 as of October 31, 1996. The third line represents the International
Fund, after sales charge, and is equal to $9,817 as of October 31, 1996.]
[Line chart with the heading International Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Morgan
Stanley EAFE Index and is equal to $12,485 as of October 31, 1996. The second
line represents the value of the hypothetical $10,000 investment made in the
International Fund, before sales charge, on January 3, 1994 and is equal to
$10,125 as of October 31, 1996. The third line represents the value of
the International Fund after sales charge, and is equal to $9,825 as of October
31, 1996.]
- --------------------------------------------------------------------------------
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - International Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common stocks and warrants (cost - $12,244,316) ............................ $ 13,250,318
Joint repurchase agreement (cost - $233,000) ............................... 233,000
------------
13,483,318
Cash ......................................................................... 909
Foreign taxes receivable ..................................................... 1,962
Dividends and interest receivable ............................................ 21,899
Receivable from John Hancock Advisers, Inc. - Note B ......................... 24,788
Deferred organization expenses - Note A ...................................... 50,073
Other assets ................................................................. 273
------------
Total Assets ............................................ 13,583,222
------------------------------------------------------------------------
Liabilities:
Payable for investments purchased ............................................ 229,841
Payable for shares repurchased ............................................... 11,458
Payable for forward foreign currency contracts sold .......................... 2,297
Accounts payable and accrued expenses ........................................ 66,267
------------
Total Liabilities ....................................... 309,863
------------------------------------------------------------------------
Net Assets:
Capital paid-in .............................................................. 12,853,682
Accumulated net realized loss on investments and foreign currency transactions (592,109)
Net unrealized appreciation of investments and foreign currency transactions . 1,005,722
Undistributed net investment income .......................................... 6,064
------------
Net Assets .............................................. $ 13,273,359
========================================================================
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 - $5,098,190/586,261 ................................................. $ 8.70
=============================================================================================
Class B - $8,175,169/956,569 ................................................. $ 8.55
=============================================================================================
Maximum Offering Price Per Share *
Class A - ($8.70 * 105.26%) ................................................. $ 9.16
=============================================================================================
</TABLE>
* 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 Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on October 31, 1996. You'll
also find the net asset value and the maximum offering price per share as of
that date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - International Fund
<TABLE>
<CAPTION>
Statement of Operations
Year ended October 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of foreign withholding taxes of $22,661) .............................................. $ 229,561
Interest ............................................................................................. 67,711
---------
297,272
---------
Expenses:
Investment management fee - Note B ................................................................. 121,360
Distribution/service fee - Note B
Class A .......................................................................................... 15,267
Class B .......................................................................................... 70,471
Custodian fee ...................................................................................... 78,812
Transfer agent fee - Note B ........................................................................ 66,571
Auditing fee ....................................................................................... 39,072
Registration and filing fees ....................................................................... 23,367
Organization expense - Note A ...................................................................... 23,080
Printing ........................................................................................... 8,623
Trustees' fees ..................................................................................... 1,490
Financial services fee - Note B .................................................................... 826
Miscellaneous ...................................................................................... 695
Legal fees ......................................................................................... 391
---------
Total Expenses .................................................................. 450,025
Less expense reductions - Note B ................................................ (188,466)
---------
Net Expenses .................................................................... 261,559
---------------------------------------------------------------------------------------------
Net Investment Income ........................................................... 35,713
---------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions:
Net realized loss on investments sold ................................................................ (60,559)
Net realized loss on foreign currency transactions ................................................... (42,690)
Change in net unrealized appreciation/depreciation of investments .................................... 727,248
Change in net unrealized appreciation/depreciation of foreign currency transactions .................. (133)
---------
Net Realized and Unrealized Gain on Investments and Foreign Currency Transactions 623,866
---------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations ............................ $ 659,579
=============================================================================================
</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 stated.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - International Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .......................................................... $ 10,619 $ 35,713
Net realized loss on investments sold and foreign currency transactions ........ (563,681) (103,249)
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions .................................................. 46,088 727,115
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations .............. (506,974) 659,579
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.0268 and none per share, respectively) ......................... (14,822) --
Distributions from net realized gain on investments sold
Class A - ($0.0512 and none per share, respectively) ......................... (28,343) --
Class B - ($0.0512 and none per share, respectively) ......................... (25,719) --
------------ ------------
Total Distributions to Shareholders ........................................ (68,884) --
------------ ------------
From Fund Share Transactions-- Net*: ............................................. 407,315 4,408,817
------------ ------------
Net Assets:
Beginning of period ............................................................ 8,373,506 8,204,963
------------ ------------
End of period (including undistributed net investment income of none and $6,064,
respectively) .................................................................. $ 8,204,963 $ 13,273,359
============ ============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1995 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 284,149 $ 2,274,882 1,161,618 $ 9,954,113
Shares issued to shareholders in reinvestment of distributions 4,863 38,128 -- --
----------- ----------- ----------- -----------
289,012 2,313,010 1,161,618 9,954,113
Less shares repurchased ...................................... (282,754) (2,241,182) (1,093,395) (9,411,237)
----------- ----------- ----------- -----------
Net increase ................................................. 6,258 $ 71,828 68,223 $ 542,876
=========== =========== =========== ===========
CLASS B
Shares sold .................................................. 255,410 $ 2,065,161 1,141,712 $ 9,576,146
Shares issued to shareholders in reinvestment of distributions 2,888 22,582 -- --
----------- ----------- ----------- -----------
258,298 2,087,743 1,141,712 9,576,146
Less shares repurchased ...................................... (221,662) (1,752,256) (680,493) (5,710,205)
----------- ----------- ----------- -----------
Net increase ................................................. 36,636 $ 335,487 461,219 $ 3,865,941
=========== =========== =========== ===========
</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, if any, and any increase or decrease in
money shareholders invested in the Fund. The footnote illustrates the number of
Fund shares sold, reinvested and repurchased during the last two periods, along
with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - International 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>
FOR THE PERIOD JANUARY 3, 1994 YEAR ENDED OCTOBER 31,
(COMMENCEMENT OF OPERATIONS) ---------------------------
TO OCTOBER 31, 1994 1995 1996
------------------------------ ----------- -----------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................... $ 8.50 $ 8.65 $ 8.14
----------- ----------- -----------
Net Investment Income ..................................... 0.07(1) 0.04 0.06(1)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ......................... 0.08 (0.47) 0.50
----------- ----------- -----------
Total from Investment Operations ........................ 0.15 (0.43) 0.56
----------- ----------- -----------
Less Distributions:
Dividends from Net Investment Income ...................... -- (0.03) --
Distributions from Net Realized Gain on Investments Sold
and Foreign Currency Transactions ......................... -- (0.05) --
----------- ----------- -----------
Total Distributions ..................................... -- (0.08) --
----------- ----------- -----------
Net Asset Value, End of Period ............................ $ 8.65 $ 8.14 $ 8.70
=========== =========== ===========
Total Investment Return at Net Asset Value (2) ............ 1.77%(3) (4.96%) 6.88%
Total Adjusted Investment Return at Net Asset Value (2)(4) (0.52%)(3) (8.12%) 5.33%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ................. $ 4,426 $ 4,215 $ 5,098
Ratio of Expenses to Average Net Assets ................... 1.50%(5) 1.64% 1.75%
Ratio of Adjusted Expenses to Average Net Assets (6) ...... 3.79%(5) 4.80% 3.30%
Ratio of Net Investment Income to Average Net Assets ...... 1.02%(5) 0.56% 0.68%
Ratio of Adjusted Net Investment Loss to Average Net
Assets (6) ................................................ (1.27%)(5) (2.60%) (0.87%)
Portfolio Turnover Rate ................................... 50% 69% 83%
Fee Reduction Per Share (1) ............................... $ 0.16 $ 0.25 $ 0.14
Average Brokerage Commission Rate (7) ..................... N/A N/A $ 0.0192
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: the net investment income, gains
(losses), distributions of the Fund, 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>
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FINANCIAL STATEMENTS
John Hancock Funds - International Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY 3, 1994 YEAR ENDED OCTOBER 31,
(COMMENCEMENT OF OPERATIONS) ---------------------------
TO OCTOBER 31, 1994 1995 1996
------------------------------ ----------- -----------
<S> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ...................... $ 8.50 $ 8.61 $ 8.05
----------- ----------- -----------
Net Investment Income (Loss) .............................. 0.02(1) (0.03) 0.00(1)(8)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ......................... 0.09 (0.48) 0.50
----------- ----------- -----------
Total from Investment Operations ........................ 0.11 (0.51) 0.50
----------- ----------- -----------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold
and Foreign Currency Transactions ......................... -- (0.05) --
----------- ----------- -----------
Net Asset Value, End of Period ............................ $ 8.61 $ 8.05 $ 8.55
=========== =========== ===========
Total Investment Return at Net Asset Value (2) ............ 1.29%(3) (5.89%) 6.21%
Total Adjusted Investment Return at Net Asset Value (2)(4) (1.00%)(3) (9.05%) 4.66%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) ................. $ 3,948 $ 3,990 $ 8,175
Ratio of Expenses to Average Net Assets ................... 2.22%(5) 2.52% 2.45%
Ratio of Adjusted Expenses to Average Net Assets (6) ...... 4.51%(5) 5.68% 4.00%
Ratio of Net Investment Income (Loss) to Average Net Assets 0.31%(5) (0.37%) 0.02%
Ratio of Adjusted Net Investment Loss to Average Net
Assets (6) ................................................ (1.98%)(5) (3.53%) (1.53%)
Portfolio Turnover Rate ................................... 50% 69% 83%
Fee Reduction Per Share (1) ............................... $ 0.16 $ 0.25 $ 0.14
Average Brokerage Commission Rate (7) ..................... N/A N/A $ 0.0192
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Not annualized.
(4) An estimated total return calculation that does not take into consideration
management fee reductions and other expense subsidies by the adviser during
the periods shown.
(5) Annualized.
(6) Unreimbursed, without fee reduction.
(7) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(8) Less than one cent per share.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - International Fund
Schedule of Investments
October 31, 1996
- --------------------------------------------------------------------------------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ------
COMMON STOCKS
Australia (6.81%)
Newcrest Mining Ltd. (Metal) ................... 60,000 $ 207,356
Plutonic Resources Ltd. (Metal) ................ 30,000 142,676
RGC Ltd. (formerly Renison Goldfields
Consolidated Ltd.) (Metal) ................... 60,000 271,084
WMC Ltd. (Metal) ............................... 45,000 282,855
------------
903,971
------------
Brazil (1.46%)
Telecomunicacoes Brasileiras S/A
(American Depositary Receipts) (ADR)
(Telecommunications) ......................... 2,600 193,700
------------
Chile (1.70%)
Santa Isabel S.A. (ADR) (Retail)* ............. 8,000 225,000
------------
Finland (2.58%)
Amer Group, Ltd. ...............................
(Diversified Operations) ..................... 15,000 342,337
------------
France (5.03%)
LVMH Moet Hennessy Louis
Vuitton (Beverages) .......................... 1,480 339,278
Lyonnaise des Eaux SA
(Diversified Operations) ..................... 3,000 265,232
Renault SA (ADR)
(Automobile / Trucks)* (R) ................... 3,000 63,750
------------
668,260
------------
Germany (1.21%)
Schering AG (Medical) .......................... 2,000 160,922
------------
Hong Kong (20.03%)
Cheung Kong (Holdings) Ltd. ....................
(Real Estate Operations) ..................... 35,000 280,645
China Resources Enterprise Ltd. ................
(Real Estate Operations) ..................... 200,000 225,033
CITIC Pacific Ltd. (Diversified Operations) .... 45,000 218,825
First Sign International
Holdings Ltd. (Textile) ...................... 1,000,000 339,489
Hong Kong & Shanghai
Hotels Ltd. (Leisure) ........................ 150,000 275,471
HSBC Holdings Ltd. .............................
(Banks - Foreign) ............................ 10,800 219,989
Hutchison Whampoa Ltd. .........................
(Diversified Operations) ..................... 42,000 293,319
The Schedule of Investments is a complete list of all securities
owned by the International Fund on October 31, 1996. It's divided into three
main categories: common stocks, warrants and short-term investments. Common
stocks and warrants are further broken down by country. Short-term investments,
which represent the Fund's "cash" position, are listed last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ------
Hong Kong (continued)
Joyce Boutique Holdings Ltd. (Retail) .......... 1,000,000 $ 245,726
Sun Hung Kai Properties Ltd. ...................
(Real Estate Operations) ..................... 22,000 250,382
Wharf (Holdings) Ltd. ..........................
(Real Estate Operations) ..................... 75,000 309,420
------------
2,658,299
------------
Japan (28.23%)
Bridgestone Corp. ..............................
(Rubber - Tires & Misc) ...................... 16,000 269,817
Honda Motor Co., Ltd. ..........................
(Automobile / Trucks) ........................ 15,000 358,351
Matsushita Communication Industrial Co.,
Ltd. (Telecommunications) .................... 4,000 105,749
Matsushita Electric Industrial Co.,
Ltd. (Electronics) ........................... 27,000 431,602
Matsushita-Kotobuki Electronics
Industries, Ltd. (Electronics) ............... 13,000 300,294
Mitsubishi Heavy Industries, Ltd. ..............
(Machinery) .................................. 40,000 307,409
Nippon Steel Corp. (Steel) ..................... 90,000 262,439
Rohm Co., Ltd. (Electronics) ................... 6,000 355,716
Sharp Corp. (Electronics) ...................... 10,000 151,948
Sony Corp. (Electronics) ....................... 5,000 299,943
Sony Music Entertainment, Inc. .................
(Electronics) ................................ 8,000 308,463
Takashimaya Co., Ltd. (Retail) ................. 17,000 243,380
TDK Corp. (Electronics) ........................ 6,000 352,027
------------
3,747,138
------------
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - International Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ------
Malaysia (3.96%)
Genting Berhad (Leisure) ....................... 30,000 $ 224,421
Sime Darby Berhad
(Diversified Operations) ..................... 85,000 301,108
------------
525,529
------------
Netherlands (1.42%)
PolyGram NV (Household) ........................ 4,000 187,894
------------
Norway (1.92%)
Saga Petroleum ASA (Oil & Gas) ................. 15,000 255,062
------------
Pakistan (0.02%)
Crescent Textile Mills (Textile)* ............. 6,433 1,966
------------
Singapore (2.02%)
Keppel Corp., Ltd. .............................
(Diversified Operations) ..................... 36,000 268,371
------------
South Korea (0.82%)
L.G. Construction Ltd. (Building) ............. 5,500 109,168
------------
Sweden (1.97%)
Investor AB (Diversified Operations) ........... 6,500 261,949
------------
Switzerland (3.65%)
Ciba Geigy AG (Medical) ........................ 200 246,361
SMH AG (Consumer Products Misc.) ............... 1,700 238,726
------------
485,087
------------
United Kingdom (16.95%)
Burton Group PLC (Retail) ...................... 150,000 364,990
Dixons Group PLC (Retail) ...................... 35,000 313,599
Marks & Spencer PLC (Retail) ................... 40,000 335,937
Pearson PLC (Media) ............................ 28,000 345,443
PizzaExpress PLC (Retail) ...................... 35,000 292,236
Regal Hotel Group PLC (Leisure) ................ 250,000 211,589
Wetherspoon (J.D.) PLC (Retail) ................ 20,000 385,742
------------
2,249,536
------------
TOTAL COMMON STOCKS
(Cost $12,235,585) (99.78%) 13,244,189
------------ ------------
WARRANTS
Sweden (0.05%)
Scania AB (Automobile / Trucks)* ............... 6,500 6,129
------------
TOTAL WARRANTS
(Cost $8,731) (0.05%) 6,129
------------ ------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $12,244,316) (99.83%) 13,250,318
------------ ------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S OMITTED) VALUE
- ------------------- ---- --------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.75%)
Investment in a joint
repurchase agreement
transaction with SBC
Capital Markets, Inc. -
Dated 10-31-96,
Due 11-01-96 (secured by
U.S. Treasury Bonds, 7.25%
Due 05-15-16, and
6.25% Due 08-15-23)
Note A.................... 5.54% $ 233 $ 233,000
------------ ------------
TOTAL SHORT-TERM INVESTMENTS (1.75%) 233,000
------------ ------------
TOTAL INVESTMENTS (101.58%) $ 13,483,318
============ ============
* Non-income producing security.
(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. Rule 144A securities
amounted to $63,750 as of October 31, 1996.
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>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - International Fund
Industry Diversification (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in securities issued by companies of
other countries. The performance of the Fund is closely tied to the economic
conditions within the countries it invests. The concentration of investments by
country for individual securities held by the Fund is shown in the schedule of
investments. In addition, the concentration of investments can be aggregated by
various industry groups. The table below shows the percentages of the Fund's
Investments at October 31, 1996 assigned to the various investment categories.
MARKET VALUE OF SECURITIES
INVESTMENT CATEGORIES AS A % OF FUND NET ASSETS
- --------------------- -------------------------
Automobile/Trucks............................... 3.23%
Banks - Foreign................................. 1.66
Beverages....................................... 2.56
Building........................................ 0.82
Consumer Products Misc.......................... 1.80
Diversified Operations.......................... 14.70
Electronics..................................... 16.57
Household....................................... 1.41
Leisure......................................... 5.36
Machinery....................................... 2.32
Media........................................... 2.60
Medical......................................... 3.07
Metal........................................... 6.81
Oil & Gas....................................... 1.92
Real Estate Operations.......................... 8.03
Retail.......................................... 18.13
Rubber-Tires & Misc............................. 2.03
Steel........................................... 1.98
Telecommunications.............................. 2.26
Textile......................................... 2.57
Short-Term Investments.......................... 1.75
------
TOTAL INVESTMENTS 101.58%
======
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - International Fund
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust II (the "Trust") is a diversified open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust consists of six series: John Hancock International Fund (the "Fund"), John
Hancock Global Fund, John Hancock Growth Fund, John Hancock World Bond Fund,
John Hancock Special Opportunities Fund and John Hancock Short-Term Strategic
Income Fund. The other five series of the Trust are reported in separate
financial statements. The investment objective of the Fund is long-term growth
of capital through investment primarily in stocks of foreign companies.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
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.
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. 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. Capital gains realized
on some foreign securities are subject to foreign taxes and are accrued, as
applicable.
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 of its taxable income, including any net realized gain on
investment, 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.
For federal income tax purposes, the Fund has $592,108 of capital loss
carryforwards available, to the extent provided in the regulations, to offset
future net realized gains. To the extent such carryforwards are used by the
Fund, no capital gains distributions will be made. The carryforwards expire as
follows: $531,549, October 31, 2003, and $60,559, October 31, 2004.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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
16
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - International Fund
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.
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 EXPENSES Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged to the Fund's operations
ratably over a five year period that commenced with the investment operations of
the Fund.
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.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION All assets 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.
At October 31, 1996 open forward currency contracts were as follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT DATE DEPRECIATION
- -------- ------------------- ---- ------------
BUYS
MALAYSIAN RINGGIT 580,694 NOV 96 ($2,297)
17
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - International Fund
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
The Adviser is solely responsible for advising the Fund with respect to
investments in the United States and Canada. The Fund and the Adviser also have
a sub-investment management contract with John Hancock Advisers International
Limited (the "Sub-Adviser"), a wholly owned subsidiary of the Adviser, under
which the Sub-Adviser, subject to the review of the Trustees and overall
supervision of the Adviser, provides the Fund with investment management
services and advice with respect to the portion of the Fund's assets invested in
countries other than the United States and Canada.
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) 1.00% of the first $250,000,000 of the Fund's
average daily net asset value, (b) 0.80% of the next $250,000,000, (c) 0.75% of
the next $250,000,000 and (d) 0.625% of the Fund's average daily net asset value
in excess of $750,000,000. The Adviser pays the Sub-Adviser a fee equivalent, on
an annual basis to the sum of (a) 0.70% of the first $200,000,000 of the Fund's
average daily net asset value and (b) 0.6375% of the Fund's average daily net
asset value in excess of $200,000,000. The Fund is not responsible for the
payment of the Sub-Adviser's fee.
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, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the transfer agent fee and the 12b-1 fee), to 0.90% of the
Fund's average daily net assets. Accordingly, the reduction in the Adviser's fee
and subsidy of other expenses amounted to $188,466 for the period ended October
31, 1996. The Adviser reserves the right to terminate this limitation in the
future.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended October
31, 1996, net sales charges received with regard to sales of Class A shares
amounted to $29,259. Out of this amount, $4,638 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $7,709
was paid as sales commissions to unrelated broker dealers and $16,912 was paid
as sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., Inc. ("Sutro"), all of which are broker dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses for providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended October 31,
1996, contingent deferred sales charges paid to JH Funds amounted to $21,678.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under
18
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - International Fund
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. The Fund pays Investor Services a fee based on the number of
shareholder accounts and certain out-of-pocket expenses.
On August 27, 1996, the Board of Trustees approved retroactively to July 1,
1996, an agreement with the Adviser to perform necessary tax and financial
management services for the Fund. The compensation for 1996 is estimated to be
at an annual rate of 0.01875% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione, and Ms. Anne C.
Hodsdon are directors and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The 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 makes
investments into other John Hancock funds, as applicable, to cover its liability
for the deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always equal and
are marked to market on a periodic basis to reflect any income earned by the
investment as well as any unrealized gains or losses. At October 31, 1996, the
Fund's investments to cover the deferred compensation liability had unrealized
appreciation of $23.
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 period
ended October 31, 1996, aggregated $13,968,983 and $9,051,137, respectively.
There were no purchases or sales of obligations of the U.S.
government and its agencies during the period ended October 31, 1996.
The cost of investments owned at October 31, 1996 (including the joint
repurchase agreement) for federal income tax purposes was $12,477,316. Gross
unrealized appreciation and depreciation of investments aggregated $1,421,058
and $415,056, respectively, resulting in net unrealized appreciation of
$1,006,002.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the period ended October 31, 1996, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $42,690, a
decrease in accumulated net investment income of $29,649 and a decrease in
capital paid-in of $13,041. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of October
31, 1996. Additional adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of the
Fund, are primarily attributable to the treatment of organization expense and
realized foreign currency transactions in the computation of distributable
income and capital gains under federal tax rules versus generally accepted
accounting principles. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
19
<PAGE>
================================================================================
John Hancock Funds - International Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock International 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 International Fund
(the "Fund") (a portfolio of Freedom Investment Trust II) at October 31, 1996,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
BOSTON, MASSACHUSETTS
DECEMBER 12, 1996
SHAREHOLDER MEETING (UNAUDITED)
On June 26, 1996, a special meeting of John Hancock International Fund was held.
The Shareholders approved a new investment management contract between John
Hancock Advisers, Inc. and the Fund. The shareholder votes were 800,951 FOR,
8,822 AGAINST and 42,931 ABSTAINING.
The Shareholders also approved an Amended and Restated Declaration of
Trust. The shareholder votes were 792,987 FOR, 11,830 AGAINST and 47,886
ABSTAINING.
The Shareholders elected the following Trustees with the votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- ------------------------------------------------------------------
Dennis S. Aronowitz........................ 925,987 35,573
Edward J. Boudreau, Jr..................... 928,024 33,536
Richard P. Chapman, Jr. ................... 926,388 35,171
William J. Cosgrove........................ 926,605 34,954
Douglas M. Costle.......................... 926,605 34,954
Leland O. Erdahl........................... 926,605 34,954
Richard A. Farrell......................... 926,605 34,954
Gail D. Fosler............................. 925,987 35,573
William F. Glavin.......................... 926,388 35,171
Anne C. Hodsdon............................ 927,405 34,155
Dr. John A. Moore.......................... 926,605 34,954
Patti McGill Peterson...................... 925,257 36,302
John W. Pratt.............................. 926,605 34,954
Richard S. Scipione........................ 926,388 35,171
Edward J. Spellman......................... 926,605 34,954
20
<PAGE>
================================================================================
NOTES
John Hancock Funds - International Fund
21
<PAGE>
================================================================================
NOTES
John Hancock Funds - International Fund
22
<PAGE>
================================================================================
NOTES
John Hancock Funds - International Fund
23
<PAGE>
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[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."]
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
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Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
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This report is for the information of shareholders of the John Hancock
International Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
4000A 10/96
12/96
