================================================================================
John Hancock Funds
- --------------------------------------------------------------------------------
Special
Opportunities
Fund
ANNUAL REPORT
October 31, 1996
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
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:
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.
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.
[A 1-1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
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>
================================================================================
BY KEVIN R. BAKER, PORTFOLIO MANAGER
John Hancock
Special Opportunities Fund
Stock market advances despite sector fluctuations;
energy holdings boost Fund's performance
Recently, shareholders of John Hancock Gold & Government Fund and John Hancock
Global Resources Fund approved the merger of their funds into John Hancock
Special Opportunities Fund. These changes became effective September 6, 1996.
The investment strategy of John Hancock Special Opportunities Fund worked
extremely well despite the fluctuations of some market sectors during the past
12 months. The premise of our Fund is simple: we strive to identify the
strongest companies in what we believe are the five strongest sectors of the
stock market. We conduct rigorous fundamental research to unearth companies with
the best growth prospects going forward.
When the period began last November, our five sectors included technology,
energy, precious metals, healthcare and media/information distribution. Over the
course of the last 12 months, we increased the Fund's weighting in energy, as
that sector continued to outperform the market. We nearly halved our technology
stake and folded our remaining precious metals stocks into a sector more
appropriately called basic materials. We also sold some health-care stocks at a
profit and eliminated our small position in media/information distribution in
favor of investments in financial and capital equipment stocks.
For the 12 months ended October 31, 1996, the Fund's Class A and Class B
shares returned 36.15% and 35.34%, respectively, at net asset value. The average
capital appreciation fund returned 17.31% for the same time period, according to
Lipper Analytical Services.1 For other comparisons, the Standard & Poor's
500-Stock Index returned 24.10% and the Russell Midcap Growth Index, which comes
closest to the Fund's focus on mid-sized
"...we increased the
Fund's holdings in energy..."
[photograph]
[A 2" x 3" photo of the fund management team at bottom right. Caption reads:
Kevin Baker (l) and Fund management team members Ben Hock (center) and Jim Boyd
(r)".]
<PAGE>
================================================================================
John Hancock Funds - Special Opportunities Fund
- --------------------------------------------------------------------------------
[Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) Benton Oil and Gas 3.2% 2) Energy Ventures
3.2% 3) Nuevo Energy 3.2% 4) Falcon Drilling 3.2% 5) Global Marine 3.0%. A
footnote below reads "As a percentage of net assets on October 31, 1996."]
- --------------------------------------------------------------------------------
Financial stocks make up
a new Fund category.
companies, returned 19.65% for the same period. Please see pages six and seven
for longer-term performance information.
Energy sector still powerful
During the past 12 months we've seen the positive scenario for energy stocks
continue. Worldwide demand is growing, and strong commodity prices for oil and
gas generated a lot of confidence in the industry while encouraging increased
drilling and exploration worldwide. This increased level of activity has boosted
the revenues and profits of the service companies. We focused the Fund's
investment in this group on two particular areas: drillers and exploration and
production companies -- with a strong preference for fast-growing, mid-cap
stocks.
- --------------------------------------------------------------------------------
[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 Benton Oil
and Gas followed by an up arrow and the phrase "Continued production gains." The
second listing is Green Tree financial followed by an up arrow and the phrase
"Increased demand for home equity loans." The third listing is Starwood Lodging
followed by an up arrow and the phrase "High occupancy rates in full-service
hotels." Footnote below reads" "See "Schedule of Investments." Investment
holdings are subject to change."]
- --------------------------------------------------------------------------------
Fortunately for our shareholders, we were involved in the energy sector
before it became a popular place to invest. We've seen dayrates for drillers --
the rate per day that owners of oil fields pay to owners of drilling rigs --
jump by more than 50 percent, with costs staying level and bottom-line profits
increasing. The Fund benefited from its holdings in stocks such as Falcon
Drilling, a shallow-water driller and Reading and Bates, a leading provider of
deep-water drilling services. On the exploration and production side, Chesapeake
Energy and Benton Oil and Gas have been big winners for the Fund. While nearly
49% of the Fund's investments are in the energy sector, we're confident about
the companies that we own and satisfied with the geographic and industry
diversification of the Fund's holdings.
Financial stocks
A major theme in financial stocks is the level of risk that banks and
credit-card companies are taking on to service over-leveraged customers. As a
result, we established a weighting of about 15% of the Fund's net assets in
financial companies that compete with banks by helping consumers borrow without
overextending themselves. Home equity lenders such as Aames Financial and Green
Tree Financial are companies with solid managements. Although they serve the
"sub-prime" market, the borrowers' homes serve as collateral, reducing the
incidence of bad loans. We've also made select investments in hotel and office
real estate investment trusts (REITS) in markets where demand far exceeds
supply.
Basic materials
Since the last report six months ago, the Fund has established a position in
titanium-related stocks. Titanium is a substance that is used in both aerospace
and defense manufacturing and in the production of golf clubs. As orders
4
<PAGE>
================================================================================
John Hancock Funds - Special Opportunities 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 10% from bottom to top, with 40% at the top and 0%
at the bottom. Within the chart there are three solid bars. The first represents
the 36.15% total return for the John Hancock Special Opportunities Fund: Class
A. The second represents the 35.43% total return for the John Hancock Special
Opportunities Fund: Class B. The third represents the 17.31% total return for
the average capital appreciation fund. A footnote below reads: "Total returns
for John Hancock Special Opportunities Fund are at net asset value with all
distributions reinvested. The average capital appreciation fund is tracked by
Lipper Analytical Services.(1) See following two pages for historical
performance information."]
- --------------------------------------------------------------------------------
for aircraft increase, demand for the metal, which is used to make many aircraft
components, has spiked as well. The Fund also continues to maintain a small
position in select gold stocks that have the potential to perform well, if
strong gold demand develops in Asia as we expect. Overall, 11% of the Fund's net
assets were invested in basic materials.
Technology and capital equipment
Some of the Fund's outperformance is attributable to the technology stocks the
Fund did not own. We largely avoided semiconductor stocks and the speculative
Internet stocks, thereby insulating the Fund from some of the losses in those
market segments. We also took profits in some technology companies that met or
exceeded our expectations, thereby decreasing our technology holdings from 18%
of the Fund's net assets a year ago to 8% by the end of October 1996. We've
tempered our enthusiasm for technology overall, but the Fund did benefit from
its holding in stocks such as Comverse Technology, a software developer of
profitable value-added telephone services.
Finally, we established a position in capital equipment stocks that stood at
nearly 5% of investments at the end of the period. We are enthusiastic about
companies such as Wyman-Gordon that serve aerospace and defense manufacturers,
and think that it and other capital equipment companies should continue to
benefit from increasing demand for commercial aircraft.
The Fund keeps a focused strategy of
finding the fastest-growing market sectors.
What's ahead
While we are comfortable with the Fund's stocks and industries, it will be a
challenge to maintain the significant outperformance in the next 12 months that
the Fund experienced in the past year. We're still bullish on energy, but don't
expect it to become a larger percentage of investments. The Fund's financial
holdings should continue to perform well as long as interest rates remain steady
or fall. We believe that our investment discipline should help us as we strive
to outperform the market, regardless of how it behaves. We are committed to
relentlessly searching for the sectors and industries that will lead the
economy, and the Fund, into the future.
- ----------
(1)Figures from Lipper Analytical Services include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
Sector investing is subject to different, and sometimes greater, risks than the
market as a whole.
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.
5
<PAGE>
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Special Opportunities 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 risks associated with industry segment investing.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended September 30, 1996
ONE LIFE OF
YEAR FUND
---- -------
John Hancock Special Opportunities Fund: Class A 22.31% 37.76%(1)
John Hancock Special Opportunities Fund: Class B 22.78% 39.21%(1)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended September 30, 1996
ONE LIFE OF
YEAR FUND
---- -------
John Hancock Special Opportunities Fund: Class A 22.31% 11.64%(1)
John Hancock Special Opportunities Fund: Class B 22.78% 12.05%(1)
Notes to Performance
(1) Both Class A and Class B shares commenced on November 1, 1993.
8
<PAGE>
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Special Opportunities 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
Standard & Poor's 500 Stock Index -- an unmanaged index that includes 500 widely
traded common stocks and is a commonly used measure of stock market performance.
- --------------------------------------------------------------------------------
[Line chart with the heading Special Opportunities 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
Standard & Poor's 500 Index and is equal to $16,290 as of October 31, 1996. The
second line represents the value of the hypothetical $10,000 investment made in
the Special Opportunities Fund on November 1, 1993, before sales charge, and is
equal to $14,929 as of October 31, 1996. The third line represents the Special
Opportunities Fund, after sales charge, and is equal to $14,178 as of October
31, 1996.]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Line chart with the heading Special Opportunities 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
Special Opportunities and is equal to $16,290 as of October 31, 1996. The second
line represents the value of the hypothetical $10,000 investment made in the
Special Opportunities Fund on November 1, 1993, and is equal to $14,632 as of
October 31, 1996. The third line represents the value of the Special
Opportunities Fund, after sales charge, and is equal to $14,332 as of October
31, 1996.]
- --------------------------------------------------------------------------------
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Statement of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $296,407,735).... $365,191,463
Preferred stocks (cost - $524,247)..... 445,625
Bonds (cost - $999,844)................ 1,000,160
Joint repurchase agreement (cost -
$39,726,000) 39,726,000
Corporate savings account.............. 9,675
-----------
406,372,923
Cash.................................... 24,675
Foreign cash (cost - $22,282)........... 22,940
Receivable for investments sold......... 6,680,563
Receivable for shares sold.............. 128,095
Interest receivable..................... 27,640
Dividends receivable.................... 1,925
Foreign tax receivable.................. 1,579
Deferred organization expenses - Note A. 52,172
Other assets............................ 20,403
-----------
Total Assets.......... 413,332,915
----------------------------------------------
Liabilities:
Payable for investments purchased....... 17,196,521
Payable for shares repurchased.......... 190,653
Payable to John Hancock Advisers, Inc. and
affiliates - Note B.................... 413,298
Accrued fees and expenses............... 52,511
-----------
Total Liabilities..... 17,852,983
----------------------------------------------
Net Assets:
Capital paid-in......................... 310,479,665
Accumulated net realized gain on investments and
foreign currency transactions.......... 16,312,626
Net unrealized appreciation of investments and
foreign currency transactions.......... 68,698,742
Accumulated net investment loss......... ( 11,101)
-----------
Net Assets............ $395,479,932
==============================================
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 - $156,578,435/14,336,153....... $ 10.92
==============================================
Class B - $238,901,497/22,398,595....... $ 10.67
==============================================
Maximum Offering Price Per Share *
Class A - ($10.92 x 105.26%)........... $ 11.49
==============================================
* 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.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses)for the
period stated.
Statement of Operations
Year ended October 31, 1996
- --------------------------------------------------------------------------------
Investment Income:
Interest................................ $ 1,075,521
Dividends (net of foreign withholding taxes
of $985)...................................... 675,754
-----------
1,751,275
-----------
Expenses:
Investment management fee - Note B..... 2,368,694
Distribution/service fee - Note B
Class A.............................. 362,909
Class B.............................. 1,751,171
Transfer agent fee - Note B............ 1,072,510
Registration and filing fees........... 97,004
Custodian fee.......................... 96,591
Printing............................... 62,872
Trustees' fees......................... 37,586
Auditing fee........................... 30,772
Organization expense - Note A.......... 26,118
Financial services fee - Note B........ 21,182
Legal fees............................. 11,582
Miscellaneous.......................... 5,931
-----------
Total Expenses........ 5,944,922
----------------------------------------------
Net Investment Loss... ( 4,193,647)
----------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold... 69,953,331
Net realized loss on foreign currency
transactions........................... ( 48,795)
Change in net unrealized appreciation/
depreciation of investments............ 22,514,256
Change in net unrealized appreciation/
depreciation of foreign currency
transactions......................... ( 18,634)
-----------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions 92,400,158
----------------------------------------------
Net Increase in Net Assets
Resulting from Operations $ 88,206,511
==============================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss.................................................................. ($ 2,954,092) ($ 4,193,647)
Net realized gain on investments sold and foreign currency transactions.............. 17,035,683 69,904,536
Change in net unrealized appreciation/depreciation of investments and foreign
currency transactions............................................................. 23,258,036 22,495,622
------------ ------------
Net Increase in Net Assets Resulting from Operations................................ 37,339,627 88,206,511
------------ ------------
Distribution to Shareholders:
Distribution from net realized gain on investments sold
Class A - (none and $1.6317, respectively).......................................... -- ( 16,983,647)
Class B - (none and $1.6317, respectively).......................................... -- ( 25,051,185)
------------ ------------
Total Distributions to Shareholders............................................... -- ( 42,034,832)
------------ ------------
From Fund Share Transactions-- Net*.................................................... ( 22,887,222) 110,382,843
------------ ------------
Net Assets:
Beginning of period.................................................................. 224,473,005 238,925,410
------------ ------------
End of period (including accumulated net investment loss of none and $11,101,
respectively)..................................................................... $238,925,410 $395,479,932
============ ------------
</TABLE>
<TABLE>
<CAPTION>
* Analysis of Fund Share Transactions: YEAR ENDED OCTOBER 31,
--------------------------------------------------
1995 1996
---------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold.................................................. 3,199,395 $27,308,044 8,559,130 $ 96,067,916
Shares issued in reorganization - Note E..................... 1,058,125 7,921,550 1,877,582 19,116,784
Shares reinvested............................................ -- -- 1,583,421 15,945,056
--------- ----------- ------------ ------------
4,257,520 35,229,594 12,020,133 131,129,756
Less shares repurchased...................................... (5,001,778) ( 42,409,032) ( 8,586,867) ( 95,919,018)
--------- ----------- ------------ ------------
Net increase (decrease)...................................... ( 744,258) ($ 7,179,438) 3,433,266 $ 35,210,738
========= =========== ============ ============
CLASS B
Shares sold.................................................. 2,612,144 $21,533,048 6,000,021 $ 65,825,284
Shares issued in reorganization - Note E..................... 69,972 519,918 4,519,844 44,987,360
Shares reinvested............................................ -- -- 2,350,721 23,155,093
--------- ----------- ------------ ------------
2,682,116 22,052,966 12,870,586 133,967,737
Less shares repurchased...................................... (4,494,039) ( 37,589,041) ( 5,421,096) ( 58,795,632)
--------- ----------- ------------ ------------
Net increase (decrease)...................................... (1,811,923) ($15,536,075) 7,449,490 $ 75,172,105
========= =========== ============ ============
CLASS C**
Shares sold.................................................. 11,302 $ 89,560
Less shares repurchased...................................... ( 32,055) ( 261,269)
--------- -----------
Net increase................................................. ( 20,753) ($ 171,709)
========= ===========
</TABLE>
**Class C shares commenced operations on July 6, 1994. All shares were
redeemed on April 11, 1995.
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 period, along with the
corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities 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,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CLASS A(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period................................ $ 8.50 $ 7.93 $ 9.32
-------- -------- --------
Net Investment Loss (2)............................................. ( 0.03) ( 0.07) ( 0.11)
Net Realized and Unrealized Gain (Loss) on Investments.............. ( 0.54) 1.46 3.34
-------- -------- --------
Total from Investment Operations................................... ( 0.57) 1.39 3.23
-------- -------- --------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold............ -- -- ( 1.63)
-------- -------- --------
Net Asset Value, End of Period...................................... $ 7.93 $ 9.32 $ 10.92
======== ======== ========
Total Investment Return at Net Asset Value (3)...................... ( 6.71%)(8) 17.53% 36.15%
Total Adjusted Investment Return at Net Asset Value (5)............. ( 6.83%)(4) -- --
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted)........................... $ 92,325 $101,562 $156,578
Ratio of Expenses to Average Net Assets ............................ 1.50% 1.59% 1.59%
Ratio of Adjusted Expenses to Average Net Assets (5)................ 1.62% -- --
Ratio of Net Investment Loss to Average Net Assets.................. ( 0.41%) ( 0.87%) ( 1.00%)
Ratio of Adjusted Net Investment Loss to Average Net Assets (5)..... ( 0.53%) -- --
Portfolio Turnover Rate............................................. 57% 155% 240%
Expense Reimbursement Per Share..................................... $ 0.01(2) -- --
Average Broker Commission Rate (6).................................. N/A N/A $ 0.0600
CLASS B(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period................................ $ 8.50 $ 7.87 $ 9.19
-------- -------- --------
Net Investment Loss (2)............................................. ( 0.09) ( 0.13) ( 0.18)
Net Realized and Unrealized Gain (Loss) on Investments.............. ( 0.54) 1.45 3.29
-------- -------- --------
Total from Investment Operations................................... ( 0.63) 1.32 3.11
-------- -------- --------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold............ -- -- ( 1.63)
-------- -------- --------
Net Asset Value, End of Period...................................... $ 7.87 $ 9.19 $ 10.67
======== ======== ========
Total Investment Return at Net Asset Value (3)...................... ( 7.41%)(8) 16.77% 35.34%
Total Adjusted Investment Return at Net Asset Value (5)............. ( 7.53%)(4) -- --
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted)........................... $131,983 $137,363 $238,901
Ratio of Expenses to Average Net Assets............................. 2.22% 2.30% 2.29%
Ratio of Adjusted Expenses to Average Net Assets (5)................ 2.34% -- --
Ratio of Net Investment Loss to Average Net Assets.................. ( 1.13%) ( 1.55%) ( 1.70%)
Ratio of Adjusted Net Investment Loss to Average Net Assets (5)..... ( 1.25%) -- --
Portfolio Turnover Rate............................................. 57% 155% 240%
Expense Reimbursement Per Share..................................... $ 0.01(2) -- --
Average Broker Commission Rate (6).................................. N/A N/A $ 0.0600
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
===============================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Financial Highlights (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD JULY 6, 1994
(COMMENCEMENT OF OPERATIONS) PERIODENDED
TO OCTOBER 31, 1994 APRIL 11, 1995
---------------------------- --------------
<S> <C> <C>
CLASS C (9)
Per Share Operating Performance
Net Asset Value, Beginning of Period................................ $ 7.60 $ 7.94
-------- --------
Net Investment Income............................................... -- 0.01
Net Realized and Unrealized Gain on Investments..................... 0.34 0.29
-------- --------
Total From Investment Operations................................... 0.34 0.30
-------- --------
Net Asset Value, End of Period...................................... $ 7.94 $ 8.24
======== ========
Total Investment Return at Net Asset Value (3)...................... ( 4.47%)(8) 3.40%
Total Adjusted Investment Return at Net Asset Value (5)............. ( 4.85%)(4) --
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted)........................... $ 165 $ 218
Ratio of Expenses to Average Net Assets ............................ 1.01%(7) 0.98%(7)
Ratio of Adjusted Expenses to Average Net Assets (5)................ 1.39%(7) --
Ratio of Net Investment Income to Average Net Assets................ 0.03%(7) 0.23%(7)
Ratio of Adjusted Net Investment Income to Average Net Assets (5)... ( 0.35%)(7) --
Portfolio Turnover Rate............................................. 57% N/A
Expense Reimbursement Per Share..................................... $ 0.01(2) --
</TABLE>
(1) Class A and B shares commenced operations on November 1, 1993.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation which does not take into
consideration fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) Annualized.
(8) Without the reimbursements total investment return would be lower.
(9) Per share operating performance and the ratios and supplemental data are
calculated as of April 11, 1995, the date on which Class C shares were
redeemed.
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>
===============================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Schedule of Investments
October 31, 1996
- -------------------------------------------------------------------------------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -------
COMMON STOCKS
Advertising (0.49%)
Catalina Marketing Corp.*..... 38,000 $ 1,933,250
-----------
Aerospace (4.41%)
Precision Castparts Corp...... 145,000 6,778,750
Tracor, Inc.*................. 152,000 3,458,000
Wyman-Gordon Co.*............. 327,000 7,194,000
-----------
17,430,750
-----------
Agricultural Operations (1.05%)
Dekalb Genetics Corp. (Class B) 52,500 2,073,750
Northland Cranberries, Inc. (Class A) 108,000 2,079,000
-----------
4,152,750
-----------
Building (1.04%)
Coachmen Industries, Inc...... 147,400 4,127,200
-----------
Computers (7.82%)
BDM International, Inc.*...... 143,000 7,185,750
Electronic Arts, Inc. *....... 112,000 4,200,000
Gateway 2000, Inc.*........... 60,000 2,823,750
Jack Henry & Associates....... 45,000 1,816,875
McAfee Associates, Inc.*...... 75,000 3,412,500
Netscape Communications Corp.* 37,500 1,659,375
Scopus Technology, Inc.*...... 93,500 3,599,750
Sykes Enterprises, Inc.*...... 73,300 3,408,450
Whittman-Hart, Inc.*.......... 59,300 2,816,750
-----------
30,923,200
-----------
Finance (2.58%)
Amresco, Inc.*................ 124,000 2,619,500
Newcourt Credit Group, Inc. (Canada) 128,000 3,970,547
SunAmerica, Inc............... 96,000 3,600,000
-----------
10,190,047
-----------
Leisure (1.94%)
Lewis Galoob Toys, Inc.*...... 285,000 7,659,375
-----------
Metals (4.62%)
Aurora Gold Ltd. (Australia)*. 770,000 1,465,464
Bema Gold Corp. (Canada)*..... 921,000 5,583,562
Euro-Nevada Mining Corp. (Canada) 227,000 6,702,992
Getchell Gold Corp.*.......... 45,000 2,002,500
Greenstone Resources Ltd. (Canada)* 200,000 2,525,000
-----------
18,279,518
-----------
The Schedule of Investments is a complete list of all securities owned by
Special Opportunities Fund on October 31, 1996. It's divided into four main
categories: common stocks, preferred stocks, bonds, and short-term investments.
The common stocks and preferred stocks are further broken down by industry
groups.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -------
Mortgage Banking (4.50%)
Aames Financial Corp.......... 130,000 $ 5,801,250
Green Tree Financial Corp..... 157,000 6,221,125
Imperial Credit Industries, Inc.* 319,000 5,781,875
-----------
17,804,250
-----------
Oil & Gas - Drilling (16.80%)
Diamond Offshore Drilling, Inc.* 157,000 9,557,375
ENSCO International, Inc.*.... 263,000 11,374,750
Falcon Drilling Co., Inc.*.... 355,000 12,558,125
Global Marine, Inc.*.......... 641,000 11,778,375
Noble Drilling Corp.*......... 434,000 8,083,250
Reading & Bates Corp.*........ 349,000 10,033,750
Transocean Offshore Inc....... 48,500 3,067,625
-----------
66,453,250
-----------
Oil & Gas - Equipment & Services (10.10%)
Energy Ventures, Inc.*........ 289,200 12,724,800
Petroleum Geo-Services ASA
(American Depositary Receipt)
(Norway)*.................... 143,000 4,897,750
Smith International, Inc.*.... 281,500 10,697,000
Tosco Corp.................... 105,000 5,893,125
Tuboscope Vetco International Corp.* 376,000 5,734,000
-----------
39,946,675
-----------
Oil & Gas - Exploration & Production (22.09%)
Barrett Resources Corp.*...... 193,100 7,410,213
Benton Oil & Gas Co.*......... 523,000 12,813,500
Canadian Natural Resources Ltd.
(Canada)*.................... 400,000 9,932,360
Chesapeake Energy Corp.*...... 161,500 9,407,375
Flores & Rucks, Inc.*......... 220,500 10,418,625
Forcenergy, Inc.*............. 263,000 7,199,625
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
===============================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -------
Oil & Gas - Exploration & Production (continued)
Helmerich & Payne, Inc........ 139,000 $ 7,523,375
Newfield Exploration Co.*..... 90,500 4,276,125
Nuevo Energy Corp.*........... 253,500 12,643,312
Vintage Petroleum, Inc........ 195,000 5,752,500
-----------
87,377,010
-----------
Real Estate Operations (5.77%)
Arden Realty Group, Inc.*..... 127,000 2,873,375
Beacon Properties Corp........ 116,500 3,422,188
Patriot American Hospitality Inc. 58,000 2,037,250
Prentiss Properties Trust*.... 115,000 2,371,875
Reckson Associates Realty Corp. 43,000 1,531,875
Starwood Lodging Trust........ 235,000 10,575,000
-----------
22,811,563
-----------
Retail (0.14%)
Quality Food Centers, Inc. *.. 14,900 543,850
-----------
Specialty Alloys (6.01%)
Oregon Metallurgical Corp.*... 208,000 6,552,000
RMI Titanium Co.*............. 302,000 7,285,750
Titanium Metals Corp.*........ 322,700 9,923,025
-----------
23,760,775
-----------
Telecommunications Equipment (2.98%)
Comverse Technology, Inc.*.... 228,000 7,980,000
Tadiran Telecommunications Ltd.
(Israel)*.................. 166,000 3,818,000
-----------
11,798,000
-----------
TOTAL COMMON STOCKS
(Cost $296,407,735) ( 92.34%) 365,191,463
------- -----------
PREFERRED STOCKS
Metal (0.11%)
Freeport-McMoran Copper & Gold Inc. 23,000 445,625
-----------
TOTAL PREFERRED STOCKS
(Cost $524,247) ( 0.11%) 445,625
------- -----------
TOTAL COMMON STOCKS AND
PREFERRED STOCKS
(Cost $296,931,982) ( 92.45%) 365,637,088
------- -----------
INTEREST MARKET
ISSUER, DESCRIPTION RATE NUMBER OF SHARES VALUE
- ------------------- -------- ---------------- -------
BONDS
Government - U.S. Agencies (0.25%)
Federal National
Mortgage Assn.,
Medium Term
Note 11-21-96...... 5.44% $ 1,000 $ 1,000,160
-----------
TOTAL BONDS
(Cost $999,844) ( 0.25%) 1,000,160
------- -----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (10.05%)
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, 6.25%
thru 12.00% due 11-15-12
thru 8-15-23) - Note A 5.54% 39,726 39,726,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75%. 9,675
-----------
TOTAL SHORT-TERM INVESTMENTS ( 10.05%) 39,735,675
------- -----------
TOTAL INVESTMENTS (102.75%) $406,372,923
======= ===========
* Non-income producing security.
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.
13
<PAGE>
===============================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Portfolio Concentration (Unaudited)
- -------------------------------------------------------------------------------
The Special Opportunities Fund invests primarily in common stocks of U.S. and
foreign issuers. The performance of the Fund is closely tied to the economic and
financial conditions within the countries in which it invests. The concentration
of investments by industry category for individual securities held by the Fund
is shown in the Schedule of Investments.
In addition, concentration of investments can be aggregated by various
countries. The table below shows the percentages of the Fund's investments at
October 31, 1996 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- --------------
Australia.................................... 0.37%
Canada....................................... 7.26
Israel....................................... 0.96
Norway....................................... 1.24
United States................................ 92.92
------
TOTAL INVESTMENTS 102.75%
======
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities 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 six series: John Hancock Special Opportunities Fund (the "Fund"), John
Hancock Global Fund, John Hancock World Bond Fund, John Hancock Short-Term
Strategic Income Fund, John Hancock Growth Fund and John Hancock International
Fund. The other five series of the Trust are reported in separate financial
statements. The investment objective of the Fund is long-term capital
appreciation by investing in those economic sectors that appear to have a higher
than average earnings potential.
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. Class C shares were outstanding during the period from July 6, 1994,
through April 11, 1995, but the Trustees terminated Class C shares as of May 1,
1995.
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 transaction. Aggregate
cash balances are invested in one or more repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis. 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, at October 31, 1996, the Fund has
$13,060,425 of 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 gain distributions will be made. The Fund's
carryforwards expire as follows: 1998 -- $1,326,439, 1999 -- $1,297,087, 2000
- -- $12,856, 2001 -- $71,925, 2002 -- $6,628,947 and 2003 -- $3,723,171. Of the
capital loss carryforwards expiring in 2002 and 2003, $5,896,535 and
$3,723,171, respectively, were acquired on September 6, 1996 in a merger with
John Hancock Gold and Government Fund. Their availability may be limited in a
given year.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date or, in the case of some foreign securities,
on the date thereafter when the Fund is made aware of the dividend. Interest
income on investment securities is recorded on the accrual basis. Foreign
income may be subject to foreign withholding taxes which are accrued as
applicable.
15
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
The fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses
that may be applied differently to each class.
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 determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
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 investment
operations of the Fund.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities,
revenues, and expenses of the Fund. Actual results could differ from these
estimates.
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 not offset by the currency amount of the underlying
transaction.
16
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
At October 31, 1996, there were no open forward foreign currency exchange
contracts.
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
is required to deposit with its custodian a specified amount of cash or U.S.
government securities, known as "initial margin," equal to a certain percentage
of the value of the financial futures contract being traded. Each day, the
futures contract is valued at the official settlement price of the board of
trade or U.S. commodities exchange. Subsequent payments, known as "variation
margin," to and from the broker are made on a daily basis as the market price
of the financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market," are recorded by the Fund as
unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities.
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, 1996, there were no open positions in financial futures
contracts.
NOTE B --
MANAGEMENT FEE, AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser, for a continuous investment program equivalent,
on an annual basis, to the sum of: (a) 0.80% of the first $500,000,000 of the
Fund's average daily net asset value, (b) 0.75% of the next $500,000,000 and (c)
0.70% of the Fund's average daily net asset value in excess of $1,000,000,000.
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 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 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 $737,384. Out of this amount, $102,281 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$290,250 was paid as sales commissions to unrelated broker-dealers and $344,853
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 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 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,
1996, contingent deferred sales charges paid to JH Funds amounted to $599,489.
In addition, to reimburse JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make
17
<PAGE>
===============================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
payments to JH Funds for distribution and service expenses, at an annual rate
not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B
average daily net assets to reimburse JH Funds for its distribution and service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances. The Fund has
a transfer agent agreement with John Hancock Investor Services Corporation
("Investor Services"), a wholly-owned subsidiary of The Berkeley Financial
Group. The Fund pays transfer agent fees 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 Funds. The compensation for 1996 is estimated to be
at an annual rate of 0.01875% of the average net assets of each fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C. Hodsdon
are directors and officers of the Adviser, and 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 $666.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than other than
obligations of the U.S. government and its agencies and short-term securities,
during the period ended October 31, 1996 aggregated $694,097,292 and
$663,828,999 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 $338,326,720. Gross
unrealized appreciation and depreciation of investments aggregated $71,351,807
and $3,315,279, respectively, resulting in net unrealized appreciation of
$68,036,528.
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 gain on investments of
$5,642,634, a decrease in accumulated net investment loss of $4,182,546 and an
increase in capital paid-in of $1,460,088. 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, net realized foreign currency losses, and net operating
losses 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.
18
<PAGE>
===============================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
NOTE E --
REORGANIZATION
On August 14, 1996, the shareholders of John Hancock Global Resources Fund
(JHGRF) and on August 15, 1996, the shareholders of the John Hancock Gold &
Government Fund (JHG&GF) approved plans of reorganization between JHGRF and the
Fund, and JHG&GF and the Fund, providing for the transfer of substantially all
of the assets and liabilities of JHGRF and JHG&GF to the Fund in exchange solely
for Class A shares and Class B shares of the Fund. The acquisition of JHGRF was
accounted for as a tax free exchange of 501,258 Class A shares and 3,438,771
Class B shares of the Fund (valued at $5,103,607 and $34,227,123, respectively)
for the 274,943 Class A shares and 1,876,138 Class B shares of JHGRF, including
$9,558,517 of unrealized appreciation, after the close of business at September
6, 1996. The acquisition of JHG&GF was accounted for as a tax free exchange of
1,376,324 Class A shares and 1,081,073 Class B shares of the Fund (valued at
$14,013,177 and $10,760,237, respectively) for 991,292 Class A shares and
762,359 Class B shares of JHG&GF, including $1,486,018 of unrealized
appreciation, after the close of business at September 6, 1996. The aggregate
net assets of JHGRF, and JHG&GF and the Fund were $39,330,730, $24,773,414, and
$298,425,478, respectively, immediately before the acquisition.
19
<PAGE>
===============================================================================
John Hancock Funds - Special Opportunities Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Special Opportunities 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 Special Opportunities
Fund (the "Fund") (a series 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 and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 12, 1996
SHAREHOLDER MEETING (UNAUDITED)
On July 23, 1996, a special meeting of John Hancock Special Opportunities Fund
was held.
The Shareholders approved a new investment management contract between John
Hancock Advisers, Inc. and the Fund. The shareholder votes were 11,656,459 FOR,
339,490 AGAINST and 1,022,002 ABSTAINING.
The Shareholders approved an Amended and Restated Declaration of Trust. The
shareholder votes were 11,631,365 FOR, 267,627 AGAINST and 1,060,097
ABSTAINING.
The Shareholders elected the following Trustees with the votes as indicated:
NAME OF TRUSTEE FOR WITHHELD
- ----------------------------------------------------------
Dennis S. Aronowitz............. 15,572,440 477,641
Edward J. Boudreau, Jr. ........ 15,584,614 465,466
Richard P. Chapman, Jr. ........ 15,577,558 472,522
William J. Cosgrove............. 15,573,116 476,964
Douglas M. Costle............... 15,585,353 464,727
Leland O. Erdahl................ 15,569,703 480,377
Richard A. Farrell.............. 15,574,934 475,146
Gail D. Fosler.................. 15,585,107 464,973
William F. Glavin............... 15,566,418 483,663
Anne C. Hodsdon................. 15,586,467 463,613
Dr. John A. Moore............... 15,584,438 465,642
Patti McGill Peterson........... 15,581,982 468,099
John W. Pratt................... 15,573,140 476,940
Richard S. Scipione............. 15,573,925 476,156
Edward J. Spellman.............. 15,581,563 468,517
20
<PAGE>
===============================================================================
John Hancock Funds - Special Opportunities Fund
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, 1996.
The Fund designated distributions to shareholders of $30,285,070 as a long
term capital gain dividend during the fiscal year ended October 31, 1996. The
Fund has not paid any distributions of ordinary income dividends during the
fiscal year ended October 31, 1996.
It is anticipated that there will be a distribution from sales of securities
to shareholders of record on December 23, 1996 and payable December 30, 1996.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-DIV in
January 1997 representing their proportionate share.
None of the distributions qualify for the dividends received deduction
available to corporations.
21
<PAGE>
===============================================================================
NOTES
John Hancock Funds - Special Opportunities Fund
22
<PAGE>
===============================================================================
NOTES
John Hancock Funds - Special Opportunities Fund
23
<PAGE>
================================================================================
[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
-------------
Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
-------------
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Special Opportunities 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."]
3900A 10/96
12/96
