ANNUAL REPORT
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[GRAPHIC OMITTED]
Global
Fund
OCTOBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
----------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
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 & TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02199-7603
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
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===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The Stock market in 1997 has been anything but dull. Investors have been treated
to record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances amid relatively
little volatility, the market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY MIREN ETCHEVERRY, JOHN L.F. WILLS AND GERARDO J. ESPINOZA,
CO-PORTFOLIO MANAGERS
John Hancock Global Fund
U.S. market advances smartly; Asian turmoil
causes world market chaos in late October
Shareholders of John Hancock Global Marketplace Fund have approved the merger of
their fund into John Hancock Global Fund, effective after the close of business
on December 5, 1997. The Global Fund seeks long-term capital appreciation by
investing in stocks of companies in the United States and abroad that management
believes have above-average earnings growth potential.
It was a nerve-wracking 12 months for global investors, who wound up gaining
ground during the year, but endured heightened volatility and dramatic worldwide
market plunges at the end of October. When the Fund's fiscal year began last
November, most markets were on a roll, boosted by falling interest rates and a
strong U.S. stock market. As the period progressed, however, the landscape
changed. World markets fretted periodically about the strength of the U.S.
economy and the potential for rising interest rates. More importantly, in the
summer, the growing currency and financial problems in Southeast Asia had a
ripple effect on Latin America, and spread to the rest of the world, including
Wall Street, in late October.
Despite the year-end turmoil, the emerging markets of Latin America still
managed to produce double-digit results for the fiscal year. The developed
worlds of Europe and the United States also recovered from the shock waves.
However, almost every Asian market, including Japan and Hong Kong, ended the
year in negative territory, from Hong Kong's 15% drop to Thailand's 69% plunge.
The "Asian contagion" kept many markets edgy beyond the fiscal year end.
Fund performance
Despite strong performance for most of the year, John Hancock Global Fund ended
the period
"It was a nerve-wracking 12 months for global investors..."
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A 2" x 3 3/4" photo of the portfolio management team. Caption reads: "(l-r)
Gerardo J. Espinoza, Miren Etcheverry and John L.F. Wills".
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3
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John Hancock Funds - Global Fund
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Pie Chart with the heading "Portfolio Diversification" at top left hand column.
The chart is divided into seven sections. Going from top left to right: Short
Term Investments & Other 5%; United States 35%; Pacific Rim 18%; United Kingdom
8%; Ireland 5%; Continental Europe 21%; Latin America 8%. Footnote below states
"As a percentage of net assets on October 31, 1997."
- --------------------------------------------------------------------------------
behind its peers. In the first half of the fiscal period, we were held back by
our large stakes in Japan and Hong Kong when these markets underperformed.
Although we subsequently cut our stake in Japan, our continued emphasis on Hong
Kong hurt us again in October - the height of the emerging-market turmoil and an
especially difficult month. Indeed, because of the "contagion effect," several
of our focus markets, most notably Brazil, had significant drops in October in
the 20% to 30% range. As a result, the Fund lost 11% in the month of October
alone, bringing its 22% advance of the first 11 months of the fiscal year back
down to single-digit performance results for the year. For the 12 months ended
October 31, 1997, the Fund's Class A and Class B shares posted total returns of
9.36% and 8.67%, respectively, at net asset value. That compared to the 16.50%
return of the average international fund, according to Lipper Analytical
Services, Inc.(1) See pages six and seven for longer-term performance
information.
Strong U.S. stake boosts results
Our 35% stake in the United States contributed to the Fund's performance over
the last year, given the enduring bull market run. We focused on the larger,
blue-chip names such as General Electric, and kept a portfolio of stocks that
were representative of the larger market.
Growing stake in Europe
With heightened turbulence elsewhere, we continued to up our holdings in Europe
over the year, from 21% to 34% of net assets by the end of October. We remain
focused on individual companies that are increasing value to shareholders
through corporate restructurings. A perfect example is our new holding Axa, a
French insurance company. We're also finding good opportunities among companies
that are successfully going outside their home markets to capture growth, such
as Dutch bank ING and Ireland's Allied Irish Bank. These stocks have also helped
boost our stake in the financial sector, where we see good growth potential.
Asian contagion
Following a brief market rally at the beginning of the fiscal period, we further
cut our stake in Japan, decreasing it from 18% a year ago to 7% by the end of
October. While exporters, which are the Fund's focus, remain the only source of
strength for the economy, even they could feel the effects of the region's
economic weaknesses. On the other hand, we remain overweighted in Hong Kong,
although we reduced our stake to 5% from a 16% high a year ago. Despite regional
woes, we believe the country's fundamentals -- a strong economy and sound
banking system --
"...we continued to up our stake in Europe..."
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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 Johnson &
Johnson followed by an up arrow and the phrase "Strong product diversification
and earnings growth." The second listing is Saga Petroleum followed by a
horizontal arrow and the phrase "Market focuses on company's oil exploration."
The third listing is Sony followed by a down arrow and the phrase "Profit taking
and Asian turmoil hurt stock." Footnote below reads: "See "Schedule of
Investments." Investment holdings are subject to change."
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4
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John Hancock Funds - Global Fund
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FUND PERFORMANCE
For the year ended October 31, 1997
Total returns for John Hancock Global Fund are at net asset value with all
distributions reinvested. The average global fund is tracked by Lipper
Analytical Services, Inc.(1) See the following two pages for historical
performance information.
- -------------------------------------------------------------------------------
are solid. More importantly, we believe China is the real driver to Hong Kong's
future. Although slowing, China's growth rate remains in the high single digits,
interest rates are coming down and economic liberalization should drive the
Chinese economy going forward.
Fortunately, we had only small positions in the Southeast Asian markets
during much of the year. The one exception was Singapore, where our exposure
hurt us when even this traditional safe-haven market was unable to escape the
regional rout.
Latin America
Despite a pause in April and a steep drop in October, most Latin American
equities markets posted gains for the fiscal year. We built our stake in Latin
America to 8% of net assets, because there, too, we believe the economic
backdrop remains positive. Our largest bet is in Brazil, at 5% of the Fund's net
assets, which is at the beginning of a dramatic liberalization process including
billions of dollars worth of privatization over the next few years. Our focus is
on large companies in the telecommunications and utilities areas that serve a
critical role in this process. That said, the picture for Brazil could get
temporarily cloudy in the wake of rising interest rates and other government
measures aimed at defending its currency, which could slow growth.
Looking ahead
In our view, world markets are in for more volatility in the short term, as
investors sort out the impact of the Asian currency crisis. Certainly, Southeast
Asia's weakened economies will have an impact on companies doing business there.
There could also be a resulting tempering of world growth, but only marginally,
in our opinion. We choose to see a silver lining in this tempest: the real
possibility of diminished inflation fears, since slower economies could reduce
the need for further interest rate hikes in the U.S. and Europe. Since Latin
America's growth and markets generally march in greater synch with the U.S., we
expect stability inevitably to return there as well. As for Asia, a lot of the
outlook depends on how serious those countries are about making structural
changes needed to put their economies back on track. We're waiting for some
strong signs of commitment before we make any further moves. In Japan
especially, we want to see more government efforts to strengthen the economy and
deal effectively with the banking problems.
"...world markets are in for more volatility in the short term..."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
International investing involves special risks such as political and currency
risks and differences in accounting standards and financial reporting.
(1) Figures from Lipper Analytical Servies, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
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John Hancock Funds - Global Fund
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A LOOK AT PERFORMANCE
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The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Global Fund. Total return measures the change
in value of an investment from the beginning to the end of a period, assuming
all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. Prior to August 1992, different sales charges were in effect for
Class A shares and are not reflected in the performance data. Class B
performance reflects a maximum contingent deferred sales charge (maximum 5% and
declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus for a discussion of the risks associated with international
investing, including currency and political risks and differences in accounting
standards and financial reporting, before you invest or send money.
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CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
---- ----- --------
Cumulative Total Returns 16.94% 89.52% 75.28%
Average Annual Total Returns 16.94% 13.64% 10.27%
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CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
Cumulative Total Returns 17.11% 91.30% 79.71%
Average Annual Total Returns 17.11% 13.85% 6.04%
6
<PAGE>
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John Hancock Funds - Global Fund
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The charts on the right show how much a $10,000 investment in the John Hancock
Global Fund would be worth, assuming all distributions were reinvested for the
period indicated. For comparison, we've shown the same $10,000 investment in the
Morgan Stanley World Index -- an unmanaged index that measures the performance
of global stock markets. In addition, the Fund is compared to the Morgan Stanley
All Country World Free Index -- an unmanaged index used to mea-sure the
performance of both developed and emerging non-U.S. stock markets. The index
represents stocks that are freely traded on equity exchanges around the world.
The Adviser has chosen to remove the Morgan Stanley World Index from future
reports, but will continue comparing the Fund to the Morgan Stanley All Country
World Free Index, which more closely represents the investment strategy of the
Fund. Past performance is not indicative of future results.
* No contingent deferred sales charge applicable.
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Line chart with the heading Global Fund: Class A, representing the growth of a
hypothetical $10,000 investment over the life of the fund. Within the chart are
four lines. The first line represents the value of the Morgan Stanley All
Country World Free Index and is equal to $18,989 as of October 31, 1997. The
second line represents the value of the Morgan Stanley World Index and is equal
to $18,866 as of October 31, 1997. The third line represents the value of the
hypothetical $10,000 investment made in the Global Fund on January 3, 1992,
before sales charge, and is equal to $16,443 as of October 31, 1997. The third
line represents the Global Fund, after sales charge and is equal to $15,621 as
of October 31, 1997.
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- --------------------------------------------------------------------------------
Line chart with the heading Global 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 World
Index and is equal to $28,405 as of October 31, 1997. The second line represents
the value of the hypothetical $10,000 investment made in the Global Fund, before
sales charge, on October 31, 1987, and is equal to $23,346 as of October 31,
1997. The third line represents the value of the Morgan Stanley All Country
World Free Index and is equal to $23,342 as of October 31, 1997.
- --------------------------------------------------------------------------------
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Global Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on October 31, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
October 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $93,625,820) ........................ $113,087,158
Preferred stocks (cost - $3,932,256) ...................... 2,081,464
Short-term investments (cost - $8,450,925) - Note A ....... 8,450,925
-------------
123,619,547
Cash ....................................................... 1,823,491
Foreign currency, at value (cost - $3,248,609) ............. 3,248,764
Receivable for investments sold ............................ 1,397,521
Receivable for shares sold ................................. 29,497
Dividends receivable ....................................... 101,036
Foreign tax receivable ..................................... 66,766
Other assets ............................................... 9,201
-------------
Total Assets ............................... 130,295,823
-------------------------------------------------------------
Liabilities:
Payable for bank borrowings - Note A ....................... 1,439,500
Payable for shares repurchased ............................. 38,632
Payable for securities on loan - Note A .................... 8,450,925
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................... 153,543
Accounts payable and accrued expenses ...................... 78,968
-------------
Total Liabilities .......................... 10,161,568
-------------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 93,342,091
Accumulated net realized gain on investments and
foreign currency transactions ............................. 9,186,901
Net unrealized appreciation of investments and
foreign currency transactions ............................. 17,610,866
Accumulated net investment loss ............................ (5,603)
-------------
Net Assets ................................. $120,134,255
=============================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $92,127,104/7,117,571 ............................ $12.94
=============================================================================
Class B - $28,007,151/2,260,919 ............................ $12.39
=============================================================================
Maximum Offering Price Per Share
Class A - ($12.94 x 105.26%) ............................... $13.62
=============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more and
group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended October 31, 1997
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Investment Income:
Dividends (net of foreign withholding
taxes of $108,966) ......................................... $1,777,447
Interest (including income on
securities loaned of $7,973) ............................... 131,331
------------
1,908,778
------------
Expenses:
Investment management fee - Note B ......................... 1,251,029
Distribution and service fee - Note B
Class A .................................................. 300,894
Class B .................................................. 306,219
Transfer agent fee - Note B ................................ 453,738
Custodian fee .............................................. 138,193
Registration and filing fees ............................... 40,649
Auditing fee ............................................... 38,013
Financial services fee - Note B ............................ 24,127
Printing ................................................... 19,109
Trustees' fees ............................................. 10,212
Miscellaneous .............................................. 10,100
Legal fees ................................................. 2,186
Interest expense - Note A .................................. 245
------------
Total Expenses ............................ 2,594,714
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Net Investment Loss ....................... (685,936)
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold ....................... 17,520,293
Net realized loss on foreign currency transactions .......... (418,367)
Change in net unrealized appreciation/depreciation of
investments ................................................ (3,986,356)
Change in net unrealized appreciation/depreciation of
foreign currency transactions .............................. 18
------------
Net Realized and Unrealized
Gain on Investments and
Foreign Currency Transactions ............. 13,115,588
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................. $12,429,652
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Global Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ................................................................ ($393,746) ($685,936)
Net realized gain on investments sold and foreign currency transactions ............ 10,509,890 17,101,926
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions ..................................................... 1,357,847 (3,986,338)
------------- -------------
Net Increase in Net Assets Resulting from Operations ............................. 11,473,991 12,429,652
------------- -------------
Distributions to Shareholders:
Distributions from net realized gain on investments sold and foreign
currency transactions
Class A - ($0.8842 and $1.1872 per share, respectively) .......................... (6,456,924) (8,357,133)
Class B - ($0.8842 and $1.1872 per share, respectively) .......................... (1,721,689) (2,563,799)
------------- -------------
Total Distributions to Shareholders ............................................ (8,178,613) (10,920,932)
------------- -------------
From Fund Share Transactions - Net:* .................................................. 882,664 (3,719,829)
------------- -------------
Net Assets:
Beginning of period ................................................................ 118,167,322 122,345,364
------------- -------------
End of period (including accumulated net investment loss of $3,700 and
$5,603 respectively) .............................................................. $122,345,364 $120,134,255
============= =============
*Analysis of Fund Share Transactions:
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------- ----------------------------
1996 1997
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................. 8,943,917 $114,915,031 11,923,445 $155,591,350
Shares issued to shareholders in reinvestment
of distributions ............................ 516,713 6,236,722 653,263 8,071,990
------------ ------------- ------------ -------------
9,460,630 121,151,753 12,576,708 163,663,340
Less shares repurchased ...................... (9,539,925) (122,803,879) (167,535,151)
------------ ------------- ------------ -------------
Net decrease ................................. (79,295) ($1,652,126) (190,081) ($3,871,811)
============ ============= ============ =============
CLASS B
Shares sold .................................. 583,478 $7,131,162 1,192,325 $15,564,013
Shares issued to shareholders in reinvestment
of distributions ............................ 134,330 1,577,033 197,728 2,351,027
------------ ------------- ------------ -------------
717,808 8,708,195 1,390,053 17,915,040
Less shares repurchased ...................... (504,739) (6,173,405) (1,330,189) (17,763,058)
------------ ------------- ------------ -------------
Net increase ................................. 213,069 $2,534,790 59,864 $151,982
============ ============= ============ =============
</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.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Global Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $10.55 $14.30 $14.16 $12.67 $12.97
------- ------- ------- ------- -------
Net Investment Loss(1) ................................... (0.10) (0.07) (0.03) (0.02) (0.05)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ...................... 3.85 1.24 (0.13) 1.20 1.21
------- ------- ------- ------- -------
Total from Investment Operations ..................... 3.75 1.17 (0.16) 1.18 1.16
------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold
and Foreign Currency Transactions ...................... -- (1.31) (1.33) (0.88) (1.19)
------- ------- ------- ------- -------
Net Asset Value, End of Period ........................... $14.30 $14.16 $12.67 $12.97 $12.94
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value(3) ............ 35.55% 8.64% (0.37%) 9.87% 9.36%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $90,787 $100,973 $93,597 $94,746 $92,127
Ratio of Expenses to Average Net Assets .................. 2.12% 1.98% 1.87% 1.88% 1.81%(8)
Ratio of Net Investment Loss to Average Net Assets ....... (0.86%) (0.54%) (0.23%) (0.19%) (0.36%)
Portfolio Turnover Rate .................................. 108% 61% 60% 98% 81%
Average Broker Commission Rate(6) ........................ N/A N/A N/A $0.0221 $0.0216
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $10.50 $14.17 $13.93 $12.36 $12.54
------- ------- ------- ------- -------
Net Investment Loss(1) ................................... (0.15) (0.15) (0.11) (0.10) (0.14)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ...................... 3.82 1.22 (0.13) 1.16 1.18
------- ------- ------- ------- -------
Total from Investment Operations ..................... 3.67 1.07 (0.24) 1.06 1.04
------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold
and Foreign Currency Transactions ...................... -- (1.31) (1.33) (0.88) (1.19)
------- ------- ------- ------- -------
Net Asset Value, End of Period ........................... $14.17 $13.93 $12.36 $12.54 $12.39
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value(3) ............ 34.95% 7.97% (1.01%) 9.10% 8.67%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $19,340 $31,822 $24,570 $27,599 $28,007
Ratio of Expenses to Average Net Assets .................. 2.49% 2.59% 2.57% 2.54% 2.49%(8)
Ratio of Net Investment Loss to Average Net Assets ....... (1.25%) (1.12%) (0.89%) (0.83%) (1.04%)
Portfolio Turnover Rate .................................. 108% 61% 60% 98% 81%
Average Broker Commission Rate(6) ........................ N/A N/A N/A $0.0221 $0.0216
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Global Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD ENDED
---------------------- MARCH 31, 1995
1993 1994 (UNAUDITED)
------- ------- --------
<S> <C> <C> <C>
CLASS C(2)
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................ $11.75 $14.34 $14.27
------- ------- -------
Net Investment Loss ......................................... (0.02) -- --
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions .......................... 2.61 1.24 (0.97)
------- ------- -------
Total from Investment Operations .......................... 2.59 1.24 (0.97)
------- ------- -------
Less Distributions:
Distributions from Net Realized Gain on Investments
Sold and Foreign Currency Transactions ..................... -- (1.31) (1.33)
------- ------- -------
Net Asset Value, End of Period .............................. $14.34 $14.27 $11.97
======= ======= =======
Total Investment Return at Net Asset Value(3) ............... 22.04% 9.15% (6.70%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................... $406 $752 $795
Ratio of Expenses to Average Net Assets ..................... 1.43%(5) 1.42% 1.37%(5)
Ratio of Net Investment Income (Loss) to Average Net Assets . (0.35%)(5) 0.03% 0.06%(5)
Portfolio Turnover Rate ..................................... 108% 61% 60%(7)
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Class C shares commenced operations on May 7, 1993. Net asset value and net
assets at the end of the period ended March 31, 1995, reflect amounts prior
to the redemption of all shares on March 31, 1995.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) Per portfolio share traded. Required for the fiscal years that began
September 1, 1995 or later.
(7) For the year ended October 31, 1995.
(8) Expense ratios do not include interest expense due to bank loans which
amounted to less than $0.01 per share.
The Financial Highlights summarize the impact of the following factors on a
single share for each period indicated: net investment loss, gains (losses),
distributions and total investment return of the Fund. It shows how the Fund's
net asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Global Fund
Schedule of Investments
October 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Global Fund on October 31, 1997. It's divided into three main categories: common
stocks, preferred stock and short-term investments. Common and preferred stocks
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
- ------------------- ---------------- -----
COMMON STOCKS
Australia (3.42%)
Normandy Mining Ltd. (Metal) .................... 2,626,000 $2,862,439
WMC Ltd. (Metal) ................................ 350,000 1,242,995
----------
4,105,434
----------
Brazil (3.65%)
Centrais Electricas Brasileiras S/A
American Depositary Receipts
(ADR) (Utilities) ............................. 51,600 1,088,203
Companhia Paranaense de Energia
(ADR) (Utilities) ............................. 69,900 834,431
Telecomunicacoes Brasileiras S/A
(ADR) (Telecommunications) .................... 24,200 2,456,300
----------
4,378,934
----------
Chile (0.48%)
Maderas y Sinteticos SA (ADR) (Building) ........ 46,800 573,300
----------
China (0.14%)
China Telecom Ltd. (ADR)
(Telecommunications)* ........................ 5,100 165,113
----------
France (6.30%)
Axa-UAP (Insurance) ............................. 10,000 684,783
Carrefour SA (Retail) ........................... 4,220 2,202,089
France Telecom SA (ADR)
(Telecommunications)* ........................ 39,800 1,507,425
LVMH Moet Hennessy Louis Vuitton SA
(Beverages) .................................. 6,167 1,047,746
Suez Lyonnaise des Eaux
(Diversified Operations) ..................... 20,500 2,128,809
----------
7,570,852
----------
Germany (3.92%)
Bayerische Motoren Werke AG
(Automobile/Trucks) ............................ 3,900 2,821,267
Volkswagen AG (Automobile/Trucks) ............... 3,200 1,891,635
----------
4,712,902
----------
Hong Kong (4.53%)
Cheung Kong Holdings Ltd.
(Real Estate Operations) ...................... 265,000 1,842,301
China Resources Enterprise Ltd.
(Real Estate Operations) ...................... 305,000 836,319
Hutchison Whampoa Ltd.
(Diversified Operations) ...................... 400,000 2,767,897
----------
5,446,517
----------
India (0.86%)
State Bank of India Global Depositary
Receipts (Banks - Foreign) .................... 56,300 1,035,920
----------
Ireland (5.40%)
Allied Irish Banks PLC (ADR)
(Banks - Foreign) ............................. 127,481 6,485,596
----------
Italy (0.16%)
Gucci Group NV (Retail) ......................... 5,370 195,334
----------
Japan (7.25%)
Ito-Yokado Co., Ltd. (Retail) ................... 50,000 2,484,420
Sony Corp. (Electronics) ........................ 35,000 2,905,276
TDK Corp. (Electronics) ......................... 40,000 3,316,992
----------
8,706,688
----------
Mexico (2.51%)
Grupo Industrial Maseca SA de CV (ADR)
(Food) ........................................ 100,900 1,469,356
Panamerican Beverages, Inc.
(Beverages) ................................... 49,800 1,543,800
----------
3,013,156
----------
Netherlands (0.97%)
ING Groep N.V. (ADR)
(Banks - Foreign) ............................. 9,200 382,950
Ispat International NV (Steel)* ................. 30,800 779,625
----------
1,162,575
----------
Norway (1.57%)
Saga Petroleum ASA (Oil & Gas) ................. 96,300 1,890,833
----------
Portugal (0.09%)
Electricidade de Portugal, S.A. (ADR)
(Utilities)* .................................. 3,100 108,306
----------
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Global Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Singapore (1.20%)
NatSteel Ltd. (Steel) ........................... 417,000 $675,143
Overseas-Chinese Banking Corp., Ltd.
(Banks - Foreign) ............................. 137,000 761,111
-----------
1,436,254
-----------
South Korea (0.27%)
L.G. Construction Ltd. (Building) ............... 36,530 321,767
-----------
Sweden (1.84%)
Investor AB (Diversified Operations) ............ 47,500 2,213,314
-----------
Switzerland (6.29%)
Novartis AG (Medical) ........................... 2,133 3,340,596
SMH AG (Consumer Products Misc.) ................ 16,500 2,162,292
Zurich Versicherungs-Gesellschaft
(Insurance) ................................... 4,970 2,051,534
-----------
7,554,422
-----------
United Kingdom (8.24%)
EMAP PLC (Media) ................................ 231,000 3,325,269
Marks & Spencer PLC (Retail) .................... 325,000 3,298,878
Pearson PLC (Media) ............................. 250,000 3,271,614
-----------
9,895,761
-----------
United States (35.05%)
Adaptec, Inc. (Computers)* ...................... 32,000 1,550,000
Cisco Systems, Inc. (Computers)* ................ 33,000 2,707,031
Colgate-Palmolive Co.
(Soap & Cleaning Preparations) ............... 40,000 2,590,000
Disney (Walt) Co., (The) (Leisure) .............. 32,093 2,639,649
Du Pont (E.I.) De Nemours & Co.
(Diversified Operations) ..................... 60,000 3,412,500
Fannie Mae (Mortgage Banking) ................... 20,000 968,750
General Electric Co. (Electronics) .............. 70,000 4,519,375
Intel Corp. (Electronics) ....................... 40,000 3,080,000
International Business Machines Corp.
(Computers) .................................. 30,000 2,941,875
Johnson & Johnson (Medical) ..................... 40,000 2,295,000
Microsoft Corp. (Computers)* .................... 20,000 2,600,000
Morgan Stanley, Dean Witter,
Discover & Co. (Finance) ..................... 80,000 3,920,000
Phillips Petroleum Co. (Oil & Gas) .............. 50,000 2,418,750
Schering-Plough Corp. (Medical) ................. 70,000 3,924,375
Williams Cos., Inc. (The) (Oil & Gas) ........... 50,000 2,546,875
-----------
42,114,180
-----------
TOTAL COMMON STOCKS
(Cost $93,625,820) (94.14%) 113,087,158
--------- -----------
PREFERRED STOCK
Brazil (1.73%)
Compania Riograndense
de Telecomunicaciones SA
(Telecommunications) ......................... 2,699,658 2,081,464
-----------
TOTAL PREFERRED STOCK
(Cost $3,932,256) (1.73%) 2,081,464
--------- -----------
PAR VALUE
(000s OMITTED)
------------
SHORT-TERM INVESTMENTS
Navigator Securities Lending
Prime Portfolio** ............................ 8,451 8,450,925
-----------
TOTAL SHORT-TERM INVESTMENTS (7.03%) 8,450,925
--------- -----------
TOTAL INVESTMENTS (102.90%) $123,619,547
========= ============
*Non-income producing security.
**Represents investment of security lending collateral - NoteA.
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 - Global Fund
Portfolio Concentration (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, 1997 assigned to the various investment categories.
MARKET VALUE
OF SECURITIES
AS A PERCENTAGE
INVESTMENT CATEGORIES OF FUND NET ASSETS
- --------------------- ------------------
Automobile/Trucks........................................... 3.92%
Banks - Foreign............................................. 7.21
Beverages................................................... 2.16
Building.................................................... 0.74
Computers................................................... 8.16
Consumer Products Misc...................................... 1.80
Diversified Operations...................................... 8.76
Electronics................................................. 11.51
Finance..................................................... 3.26
Food........................................................ 1.22
Insurance................................................... 2.28
Leisure..................................................... 2.20
Media....................................................... 5.49
Medical..................................................... 7.96
Metal....................................................... 3.42
Mortgage Banking............................................ 0.80
Oil & Gas................................................... 5.71
Real Estate Operations...................................... 2.23
Retail...................................................... 6.81
Soap & Cleaning Preparations................................ 2.16
Steel....................................................... 1.21
Telecommunications.......................................... 5.17
Utilities................................................... 1.69
Short-Term Investments...................................... 7.03
------
TOTAL INVESTMENTS 102.90%
======
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Global Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom Investment
Trust II) is an open-end management investment company, registered under the
Investment Company Act of 1940. The Trust consists of six series: John Hancock
Global Fund (the "Fund"), John Hancock Special Opportunities 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 to achieve long-term growth of capital primarily through investment
in common stocks of companies domiciled in foreign countries and the United
States.
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 May 7, 1993,
through March 31, 1995, but the Trustees abolished 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, 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.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date or in the case of some foreign securities,
on the date thereafter when the Fund identifies the dividend. Interest income on
investment securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Global Fund
daily to each class of shares based on the relative net assets of the respective
classes. Distribution and service fees, if any, are calculated daily at the
class level based on the appropriate net assets of each class and the specific
expense rate(s) applicable to each class.
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.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowings, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The maximum loan balance
for the fund during the year for which loans were outstanding amounted to
$1,439,500. At October 31, 1997 the outstanding balance was $1,439,500 with a
rate of 6.1875%.
SECURITIES LENDING The Fund may lend its securities to certain qualified brokers
who pay the Fund negotiated lender fees. These fees are included in interest
income. The loans are collateralized at all times with cash or securities with a
market value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in recovery
of the loaned securities or even loss of rights in the collateral should the
borrower of the securities fail financially. At October 31, 1997, the Fund
loaned securities having a market value of $8,419,967 collateralized by cash in
the amount of $8,450,925, which was invested in a short-term instrument.
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 pm, 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
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Global Fund
facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intends to take delivery of the foreigncurrency.
Such contracts normally involve no market risk other than that not offset by the
currency amount of the underlying transaction.
At October 31, 1997, 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. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure to
the underlying instrument or hedge other Fund instruments. At the time the Fund
enters into a financial futures contract, it is required to deposit with its
custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at the
official settlement price of the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market," are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the 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, 1997, there were no open positions in financial futures
contracts.
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 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 $100,000,000 of the Fund's average
daily net asset value, (0.90% effective after December 5, 1997) (b) 0.80% of the
next $200,000,000, (c) 0.75% of the next $200,000,000 and (d) 0.625% of the
Fund's average daily net asset value in excess of $500,000,000. 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.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") acted as Co-Distributors
for shares of the Fund. For the year ended October 31, 1997, net sales charges
received with regard to sales of Class A shares amounted to $114,878. Of this
amount, $18,135 was retained and used for printing prospectuses, advertising,
sales literature and other purposes, $37,407 was paid as sales commissions to
unrelated broker-dealers and $59,336 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 ("JHMLICo"), is the indirect sole shareholder of Distributors
and was the indirect sole shareholder until November 29, 1996 of John Hancock
Freedom Securities Corporation and its subsidiaries which include FDC, 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
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Global Fund
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 for providing distribution related services to the Fund in connection
with the sale of Class B shares. For the year ended October 31, 1997, contingent
deferred sales charges paid to JH Funds amounted to $59,701.
In addition, to reimburse the Co-Distributors for the services they provide
as distributors of shares of the Fund, the Fund has adopted Distribution Plans
with respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to the
Co-Distributors for distribution and service expenses, at an annual rate not to
exceed 0.30% of Class A average daily net assets and 1.00% of Class B average
daily net assets to reimburse the Co-Distributors for their distribution and
service costs. Up to a maximum of 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon, and Mr. Richard S. Scipione
are trustees and/or officer of the Adviser and/or its affiliates, as well as a
Trustee of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked-to-market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At October 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $668.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended October 31, 1997, aggregated $102,921,513 and $118,984,118, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended October 31, 1997.
The cost of investments owned at October 31, 1997 (including short-term
investments) for federal income tax purposes was $106,011,523.Gross unrealized
appreciation and depreciation of investments aggregated $25,443,141 and
$7,835,117, respectively, resulting in net unrealized appreciation of
$17,608,024.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of
$7,914,935, a decrease in accumulated net investment loss of $684,033 and an
increase in capital paid-in of $7,230,902. This represents the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1997. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to the treatment of
net operating losses in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting principles,
and the Fund's use of the tax accounting practice known as equalization. The
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Global Fund
calculation of net investment income per share in the financial highlights
excludes these adjustments.
NOTE E -
SUBSEQUENT EVENT
On November 12, 1997, the shareholders of John Hancock Global Marketplace Fund
("Global Marketplace Fund") approved a vote on a proposed merger between the
Fund and Global Marketplace Fund. The reorganization provided for a transfer of
substantially all the assets and liabilities of the Global Marketplace Fund to
the Fund. After the transaction and as of the close of business on December 5,
1997, the Global Marketplace Fund will be terminated.
19
<PAGE>
================================================================================
John Hancock Funds - Global Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Global Fund
and the Trustees of John Hancock Investment Trust III
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 JohnHancock Global Fund (the
"Fund") (a series of John Hancock Investment Trust III) at October 31, 1997, and
the results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at October 31, 1997 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 15, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund paid during its taxable year ended
October 31, 1997.
The Fund designated distributions to shareholders of $14,523,619 as capital
gain dividend. All of this capital gain distribution is subject to the 28% tax.
The Fund did not pay any ordinary income dividends during the fiscal year ended
October 31, 1997.
With respect to the dividends paid by the fund for the fiscal year ended
October 31, 1997, 9.51% of the dividends qualify for the corporate dividends
received deduction.
20
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Global Fund
21
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Global Fund
22
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Global Fund
23
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Special
Opportunities
Fund
OCTOBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
================================================================================
CHAIRMAN'S MESSAGE
------------------------------------------------
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
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
------------------------------------------------
DEAR FELLOW SHAREHOLDERS:
The stock market in 1997 has been anything but dull. Investors have been
treated to record-breaking performance by the Dow Jones Industrial Average, but
with record-breaking volatility. After two years of strong advances amid
relatively little volatility, the market's recent sharp drops and enormous
rebounds have caused a fair share of investor concern.
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
- --------------------------------------------------------------------------------
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.
- --------------------------------------------------------------------------------
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY ROBERT G. FREEDMAN, BENJAMIN A. HOCK, JR. CFA AND
JAMES M. BOYD, CO-PORTFOLIO MANAGERS
John Hancock
Special Opportunities Fund
Despite increased volatility, stock market advances sharply
The stock market advanced briskly in a near-perfect economic scenario over the
last 12 months, as inflation stayed in check while the economy remained buoyant.
However, the year was also marked by intense periods of volatility as investors
grew nervous about the surging economy and the specter of renewed inflation. As
many stocks rose to valuation levels that many viewed as lofty relative to
earnings prospects, it appeared only a matter of time before the market would
pause. The trigger wound up being turmoil in Asian markets, which served as the
excuse for the market to consolidate on October 27, when the Dow Jones
Industrial Average fell 554 points. A rebound quickly followed, and despite the
sharp correction, the overall market as measured by the Standard & Poor's 500
Stock Index advanced by an astounding 32.32%, including reinvested dividends,
during the 12-month period ended October 31, 1997.
Performance and strategy review
By comparison, the Fund's return was modest. For the year ended October 31,
1997, the Fund's Class A and Class B shares posted total returns of 8.79% and
7.84% respectively, at net asset value. That compared to the 22.74% return of
the average capital appreciation fund, according to Lipper Analytical Services,
Inc.1 Please see pages six and seven for longer-term performance information.
The Fund's underperformance was primarily due to a rough patch
Turmoil in Asia gave the market an excuse for a correction.
- --------------------------------------------------------------------------------
A 2" x 3" photo of the fund management team at bottom right. Caption reads:
"Special Opportunities Fund management team members (l - r) Robert Freedman, Ben
Hock and Jim Boyd."
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - Special Opportunities Fund
"The economic backdrop remains ideal for financial stocks..."
- --------------------------------------------------------------------------------
Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) EVI 4.2% 2) CVS 3.3 % 3) BJ Services 3.2% 4)
EMC Corp 3.1% 5) Morningstar Group 3.1%. A footnote below reads "As a percentage
of net assets on October 31, 1997."
- --------------------------------------------------------------------------------
in the first six months of the fiscal year. Then, several factors held us back,
including our stake in basic materials stocks, which were hurt by the heavy gold
selling by central banks and record low levels of inflation. Our large weighting
in energy stocks also took a brief but very sharp tumble during the winter, when
oil prices fell along with demand in a relatively mild winter. Finally, because
of the Fund's underweightings in the finance and technology sectors early in the
period, we missed their strong advances then. In the second half of the fiscal
year, however, the Fund rebounded strongly and performance was more in line with
our peers, after the Fund made some sector shifts.
Sector shifts
In June, we focused more of the Fund's attention on three sectors that we
believe show prospects for above-market earnings growth over the next two years.
They include energy, financials and technology stocks, and by the end of the
fiscal year, the Fund had 64% of its net assets invested in these three groups.
We accomplished this by eliminating our stake in basic materials, cutting back
our retail holdings, and moving away from healthcare. Although the long-term
story for healthcare remains compelling, the best opportunities in this sector
have been the large drug companies that are above our target mid-cap size. To a
lesser degree, our other two focus groups remained retail and capital equipment.
Energy
Despite the earlier downturn, energy stocks rebounded, and we believe the
environment remains fairly stable for energy companies, given the growth in
worldwide demand. Although we have kept a sizable weighting here, we cut our
position in half from 49% of net assets a year ago to 24% by the end of October.
We shifted our emphasis away from exploration and production companies toward
energy service companies whose stock prices are less correlated to moves in the
underlying commodities. We're buying companies with strong revenue and earnings
growth, pricing power and the ability to dominate their market. Coincidentally,
the most attractive names are in our target mid-sized range. They include
companies such as EVI, the Fund's largest holding, which is the dominant
producer of premium piping for drillers; BJ Services, one of three remaining
companies in the consolidated industry of pressure pumping; and Cooper Cameron,
an equipment manufacturer for the energy industry.
Financials
The economic backdrop remains ideal for financial stocks and in the last six
months we re-established our stake and grew it to 24% of the Fund's net assets.
On top of the favorable environment, the phenomenon of baby boomers saving more
for retirement and a shift toward employee-contribu-
- --------------------------------------------------------------------------------
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 BJ Services
followed by an up arrow and the phrase "Increased pricing power." The second
listing is Flowserve followed by a down and the phrase "Integration problems
with recent acquisition." The third listing is St.Paul Companies followed by a
down arrow and the phrase "Temporary pricing pressure." Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."
- --------------------------------------------------------------------------------
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, 1997." The chart is
scaled in increments of 5% from bottom to top, with 25% at the top and 5% at the
bottom. Within the chart there are three solid bars. The first represents the
8.79% total return for the John Hancock Special Opportunities Fund: Class A. The
second represents the 7.84% total return for the John Hancock Special
Opportunities Fund: Class B. The third represents the 22.74% 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 the following two pages for historical
performance information."
- --------------------------------------------------------------------------------
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, Inc.(1) See the following two pages for
historical performance information.
tion retirement plans have also bolstered the prospects for asset management
companies such as Fund holdings T.Rowe Price and Kansas City Southern
Industries. Along with its railroad holdings, the latter company owns a majority
interest in two mutual fund companies Janus and Berger. Among insurers, our
choices include CMAC, a private mortgage insurer and Life Re, Corp., a provider
of reinsurance for life and health risks in the United States. Our bank focus is
on select regional banks with strong franchises that can grow both revenues and
earnings, with targets of 15% or more. Top holdings include Banc One, Comerica
and U.S. Bancorp, which just bought the largest regional bank in the Pacific
northwest.
Technology, capital equipment, retail
Technology represents 16% of the Fund's net assets, up from 2% six months ago
and 8% a year earlier. Here, we have targeted small, well-situated subsectors
where we can find good earnings growth at more reasonable prices. One is
wireless communications, where our top holding is Nokia. In addition to its
growing cell phone business, Nokia is beating its larger competitors in winning
infrastructure contracts worldwide. Another area is data storage companies, such
as EMC and Network Appliance, which have accelerating earnings growth due to
growing demand. Within the software subsector, we own technology services
companies Compuware and Keane.
Our retail and capital equipment holdings together totaled 22% of the Fund
by October 31. Our biggest retail position is drugstore CVS, which is a play on
the industry's consolidation and the strong pharmaceutical distribution
business. Our top capital equipment stock is Tower Automotive, which has
flourished as the prime outsourcer to automotive companies for metal stampings
and assemblies.
Outlook
Going forward, our outlook is optimistic, particularly for mid-cap stocks which
are the Fund's focus. After lagging their larger brethren until only recently,
mid-sized companies remain attractively valued, while their rates of forecasted
earnings growth have actually accelerated. Besides, the mid-sized companies we
own have little exposure to emerging markets, where recent turmoil could impact
the earnings growth of the large multinational companies. Finally, the
possibility of lower interest rates brought on by slower growth also bodes well
for stocks in general and financial stocks in particular.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
Sector investing is subject to different, and sometimes greater, risks than the
market as a whole.
(1)Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges.
Actual load-adjusted performance is lower.
"....our outlook is optimistic, particularly for mid-cap stocks..."
5
<PAGE>
================================================================================
John Hancock Funds - Special Opportunities Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Special Opportunities Fund. Total return
measures the change in value of an investment from the beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include the maximum applicable sales
charge of 5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (11/1/93)
--------- -----------
Cumulative Total Returns 8.70% 57.67%
Average Annual Total Returns 8.70% 12.34%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (11/1/93)
--------- -----------
Cumulative Total Returns 8.47% 58.37%
Average Annual Total Returns 8.47% 12.47%
6
<PAGE>
================================================================================
John Hancock Funds - Special Opportunities Fund
- --------------------------------------------------------------------------------
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, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index. The Standard &
Poor's 500 Stock Index is an unmanaged index that includes 500 widely traded
common stocks and is a commonly used measure of stock market performance. In
addition, the Fund is compared to the Russell Midcap Growth Index -- an
unmanaged index that contains those securities from the Russell Midcap Index
with a greater-than-average growth orientation. Past performance is not
indicative of future results.
- --------------------------------------------------------------------------------
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 four lines. The first line represents the value of the
Standard & Poor's 500 Index and is equal to $21,519 as of October 31, 1997. The
second line represents the value of the Russell Midcap Index and is equal to
$18,726 as of October 31, 1997. The third 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 $16,241 as of October 31,
1997. The fourth line represents the Special Opportunities Fund, after sales
charge, and is equal to $15,429 as of October 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 four lines. The first line represents the value of the
Standard & Poor's 500 Index and is equal to $21,519 as of October 31, 1997. The
second line represents the value of the Russell Midcap Index and is equal to
$18,726 as of October 31, 1997. The third 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 $15,779 as of October 31,
1997. The fourth line represents the Special Opportunities Fund, after sales
charge, and is equal to $15,479 as of October 31, 1997.
- --------------------------------------------------------------------------------
*No contingent deferred sales charge applicable.
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on October 31, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
October 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $300,343,091) ...................... $ 338,697,419
Joint repurchase agreement (cost - $7,658,000) ........... 7,658,000
Corporate savings account ................................ 689
-------------
346,356,108
Receivable for investments sold ........................... 7,373,518
Receivable for shares sold ................................ 19,086
Interest receivable ....................................... 1,278
Dividends receivable ...................................... 29,962
Foreign tax receivable .................................... 11,980
Deferred organization expenses - Note A ................... 26,125
Other assets .............................................. 16,285
-------------
Total Assets ............................ 353,834,342
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ......................... 6,223,993
Payable for shares repurchased ............................ 340,898
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................. 386,904
Accounts payable and accrued expenses ..................... 72,802
-------------
Total Liabilities ....................... 7,024,597
-----------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 268,884,365
Accumulated net realized gain on investments and
foreign currency transactions ............................ 39,586,213
Net unrealized appreciation of investments and
foreign currency transactions ............................ 38,355,940
Accumulated net investment loss ........................... (16,773)
-------------
Net Assets .............................. $ 346,809,745
===========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of
beneficial interest outstanding -
unlimited number of shares authorized
with no par value)
Class A - $141,997,341 / 12,460,966 .......................... $11.40
==============================================================================
Class B - $204,812,404 / 18,576,137 .......................... $11.03
==============================================================================
Maximum Offering Price Per Share*
Class A - ($11.40 x 105.26%) ................................. $12.00
==============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended October 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes
of $56,157) ............................................... $ 2,612,745
Interest ................................................... 1,271,530
-------------
3,884,275
-------------
Expenses:
Investment management fee-- Note B ........................ 3,039,997
Distribution and service fee-- Note B
Class A ................................................. 461,941
Class B ................................................. 2,233,403
Transfer agent fee-- Note B ............................... 1,453,921
Custodian fee ............................................. 149,385
Registration and filing fees .............................. 68,188
Financial services fee-- Note B ........................... 69,934
Trustees' fees ............................................ 32,813
Printing .................................................. 28,243
Organization expense-- Note A ............................. 26,047
Auditing fee .............................................. 26,500
-------------
Total Expenses ........................... 7,590,372
-----------------------------------------------------------
Net Investment Loss ...................... (3,706,097)
------------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions:
Net realized gain on investments sold ...................... 61,644,405
Net realized loss on investments sold short ................ (1,158,361)
Net realized loss on foreign currency transactions ......... (145,077)
Change in net unrealized appreciation/depreciation
of investments ............................................ (30,350,148)
Change in net unrealized appreciation/depreciation
of foreign currency transactions .......................... 7,346
-------------
Net Realized and Unrealized
Gain on Investments and Foreign
Currency Transactions .................... 29,998,165
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................ $ 26,292,068
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment loss ................................................... ($ 4,193,647) ($ 3,706,097)
Net realized gain on investments sold and foreign currency transactions 69,904,536 60,340,967
Change in net unrealized appreciation/depreciation of
investments and foreign currency transactions ......................... 22,495,622 (30,342,802)
------------- -------------
Net Increase in Net Assets Resulting from Operations ................ 88,206,511 26,292,068
------------- -------------
Distributions to Shareholders:
Distributions from net realized gain on investments sold
Class A - ($1.6317 and $0.4581 per share, respectively) ............. (16,983,647) (6,629,671)
Class B - ($1.6317 and $0.4581 per share, respectively) ............. (25,051,185) (10,356,319)
------------- -------------
Total Distributions to Shareholders ................................ (42,034,832) (16,985,990)
------------- -------------
From Fund Share Transactions - Net:* ..................................... 110,382,843 (57,976,265)
------------- -------------
Net Assets:
Beginning of period ................................................... 238,925,410 395,479,932
------------- -------------
End of period (including accumulated net investment loss of
$11,101 and $16,773, respectively) .................................. $ 395,479,932 $ 346,809,745
============= =============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1996 1997
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ............................ 8,559,130 $ 96,067,916 13,788,334 $ 149,978,302
Shares issued in reorganization - Note E 1,877,582 19,116,784 -- --
Shares reinvested ...................... 1,583,421 15,945,056 574,409 6,255,139
---------- ------------- ----------- -------------
12,020,133 131,129,756 14,362,743 156,233,441
Less shares repurchased ................ (8,586,867) (95,919,018) (16,237,930) (175,622,420)
---------- ------------- ----------- -------------
Net increase (decrease) ................ 3,433,266 $ 35,210,738 (1,875,187) ($ 19,388,979)
========== ============= =========== =============
CLASS B
Shares sold ............................ 6,000,021 $ 65,825,284 4,201,630 $ 43,981,077
Shares issued in reorganization - Note E 4,519,844 44,987,360 -- --
Shares reinvested ...................... 2,350,721 23,155,093 886,671 9,406,661
---------- ------------- ----------- -------------
12,870,586 133,967,737 5,088,301 53,387,738
Less shares repurchased ................ (5,421,096) (58,795,632) (8,910,759) (91,975,024)
---------- ------------- ----------- -------------
Net increase (decrease) ................ 7,449,490 $ 75,172,105 (3,822,458) ($ 38,587,286)
========== ============= =========== =============
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders, and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last two periods, 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 each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1994 1995 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CLASS A(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 8.50 $ 7.93 $ 9.32 $ 10.92
-------- -------- -------- --------
Net Investment Loss (2) ....................................... (0.03) (0.07) (0.11) (0.06)
Net Realized and Unrealized Gain (Loss) on Investments ........ (0.54) 1.46 3.34 1.00
-------- -------- -------- --------
Total from Investment Operations ............................. (0.57) 1.39 3.23 0.94
-------- -------- -------- --------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold ...... -- -- (1.63) (0.46)
-------- -------- -------- --------
Net Asset Value, End of Period ................................ $ 7.93 $ 9.32 $ 10.92 $ 11.40
======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ................ (6.71%) 17.53% 36.15% 8.79%
Total Adjusted Investment Return at Net Asset Value (3,4) ..... (6.83%) -- -- --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $ 92,325 $ 101,562 $ 156,578 $ 141,997
Ratio of Expenses to Average Net Assets ....................... 1.50% 1.59% 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%) (0.57%)
Ratio of Adjusted Net Investment Loss to Average Net Assets (5) (0.53%) -- -- --
Portfolio Turnover Rate ....................................... 57% 155% 240% 317%
Expense Reimbursement Per Share ............................... $ 0.01(2) -- -- --
Average Broker Commission Rate (6) ............................ N/A N/A $ 0.0600 $ 0.0645
CLASS B(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 8.50 $ 7.87 $ 9.19 $ 10.67
-------- -------- -------- --------
Net Investment Loss (2) ....................................... (0.09) (0.13) (0.18) (0.13)
Net Realized and Unrealized Gain (Loss) on Investments ........ (0.54) 1.45 3.29 0.95
-------- -------- -------- --------
Total from Investment Operations ............................. (0.63) 1.32 3.11 0.82
-------- -------- -------- --------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold ...... -- -- (1.63) (0.46)
-------- -------- -------- --------
Net Asset Value, End of Period ................................ $ 7.87 $ 9.19 $ 10.67 $ 11.03
======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ................ (7.41%) 16.77% 35.34% 7.84%
Total Adjusted Investment Return at Net Asset Value (3,4) ..... (7.53%) -- -- --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $ 131,983 $ 137,363 $ 238,901 $ 204,812
Ratio of Expenses to Average Net Assets ....................... 2.22% 2.30% 2.29% 2.28%
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%) (1.25%)
Ratio of Adjusted Net Investment Loss to Average Net Assets (5) (1.25%) -- -- --
Portfolio Turnover Rate ....................................... 57% 155% 240% 317%
Expense Reimbursement Per Share ............................... $ 0.01(2) -- -- --
Average Broker Commission Rate (6) ............................ N/A N/A $ 0.0600 $ 0.0645
</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) PERIOD ENDED
TO OCTOBER 31, 1994 APRIL 11, 1995(9)
---------------------------- -----------------
<S> <C> <C>
CLASS C
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%(8)
Total Adjusted Investment Return at Net Asset Value (3,4) ....... (4.85%)(8) --
Ratios and Supplemental Data
Net Assets, End of Period (000s 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) Not Annualized.
(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 summarize the impact of the following factors on a
single share for each period indi cated: the net investment income (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 rela tionships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
Schedule of Investments
October 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Special Opportunities Fund on October 31, 1997. It's divided into two main
categories: common stocks and short-term investments. The common stocks are
further broken down by industry group. Short-term investments, which represent
the Fund's "cash" position, are listed last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS
Automobile / Trucks (2.05%)
Tower Automotive, Inc.* ............................ 170,000 $ 7,118,750
-----------
Banks - Foreign (0.38%)
Allied Irish Banks PLC American Depositary
Receipts (ADR) (Ireland) ......................... 25,600 1,302,400
-----------
Banks - United States (6.83%)
Banc One Corp. ..................................... 92,000 4,795,500
Comerica, Inc. ..................................... 69,000 5,455,312
Silicon Valley Bancshares* ......................... 52,200 2,851,425
TCF Financial Corp. ................................ 45,000 2,559,375
U.S. Bancorp ....................................... 79,000 8,033,312
-----------
23,694,924
-----------
Computers (8.88%)
Adaptec, Inc.* ..................................... 188,000 9,106,250
Compuware Corp.* ................................... 64,000 4,232,000
EMC Corp.* ......................................... 192,000 10,752,000
Keane, Inc.* ....................................... 125,000 3,703,125
Network Appliance, Inc.* ........................... 60,000 3,015,000
-----------
30,808,375
-----------
Containers (3.25%)
Owens-Illinois, Inc.* .............................. 174,000 6,003,000
Sealed Air Corp.* .................................. 102,000 5,259,375
-----------
11,262,375
-----------
Diversified Operations (1.03%)
Crane Co. .......................................... 86,000 3,574,375
-----------
Electronics (2.54%)
Texas Instruments, Inc. ............................ 20,000 2,133,750
Westinghouse Electric Corp. ........................ 253,000 6,688,687
-----------
8,822,437
-----------
Finance (4.08%)
Charter One Financial, Inc. ........................ 118,250 $ 6,873,281
Price (T. Rowe) Associates, Inc. ................... 110,000 7,287,500
-----------
14,160,781
-----------
Food (8.07%)
Dole Food Co., Inc. ................................ 153,000 6,779,812
Morningstar Group, Inc.* ........................... 250,400 10,704,600
Quaker Oats Co. .................................... 219,000 10,484,625
-----------
27,969,037
-----------
Insurance (9.99%)
Allmerica Financial Corp. .......................... 170,000 7,968,750
CMAC Investment Corp. .............................. 157,000 8,585,938
Executive Risk, Inc. ............................... 49,500 3,260,812
Frontier Insurance Group, Inc. ..................... 220,200 7,417,987
General Re Corp. ................................... 20,000 3,943,750
Life Re Corp. ...................................... 63,000 3,472,875
-----------
34,650,112
-----------
Machinery (1.09%)
Flowserve Corp. .................................... 127,000 3,778,250
-----------
Medical (1.82%)
AmeriSource Health Corp. (Class A)* ................ 106,000 6,293,750
-----------
Oil & Gas (24.62%)
BJ Services Co.* ................................... 130,000 11,017,500
Cooper Cameron Corp.* .............................. 146,000 10,548,500
EVI, Inc.* ......................................... 227,400 14,596,238
Falcon Drilling Co., Inc.* ......................... 260,000 9,457,500
Fred. Olsen Energy ASA (Norway)*(R) ................ 34,800 852,600
Global Industries Ltd.* ............................ 386,000 7,768,250
Grey Wolf, Inc.* ................................... 570,200 4,704,150
Gulf Canada Resources Ltd. (Canada)* ............... 398,000 3,333,250
Halliburton Co. .................................... 119,000 7,095,375
Mitchell Energy & Development Corp.* ............... 128,500 3,228,563
Rowan Cos., Inc.* .................................. 83,000 3,226,625
UTI Energy Corp.* .................................. 99,700 4,449,113
Veritas DGC, Inc.* ................................. 125,000 5,117,188
-----------
85,394,852
-----------
Pollution Control (3.12%)
Philip Services Corp. (Canada)* .................... 320,400 5,607,000
US Filter Corp.* ................................... 130,000 5,216,250
-----------
10,823,250
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Retail (7.08%)
CVS Corp. ...................................... 184,000 $ 11,281,500
Safeway, Inc.* ................................. 120,000 6,975,000
U.S. Office Products Co.* ...................... 201,000 6,281,250
-----------
24,537,750
-----------
Telecommunications (7.17%)
CellStar Corp.* ................................ 106,000 3,597,375
NEXTLINK Communications, Inc. (Class A)* ....... 46,000 1,040,750
Nokia Corp. (ADR) (Finland) .................... 115,000 10,148,750
Tel-Save Holdings, Inc.* ....................... 300,000 6,450,000
Teleport Communications Group, Inc.* ........... 75,000 3,628,125
-----------
24,865,000
-----------
Transport (5.66%)
C.H. Robinson Worldwide, Inc.* ................. 6,400 140,800
CNF Transportation, Inc. ....................... 165,300 7,376,513
Halter Marine Group, Inc.* ..................... 79,000 4,132,688
Kansas City Southern Industries, Inc. .......... 262,000 7,991,000
-----------
19,641,001
-----------
TOTAL COMMON STOCKS
(Cost $300,343,091) (97.66%) 338,697,419
--------- -----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.21%)
Investment in a joint repurchase
agreement transaction with
Aubrey G. Lanston & Co. - Dated
10-31-97, Due 11-03-97
(secured by U.S. Treasury
Notes, 5.00% thru
9.25% Due 02-28-98 thru
04-30-02) - Note A ................... 5.68% $ 7,658 $7,658,000
-----------
Corporate Savings Account ( 0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ....................... 689
-----------
TOTAL SHORT-TERM INVESTMENTS (2.21%) 7,658,689
--------- -----------
TOTAL INVESTMENTS (99.87%) $346,356,108
========= ===========
* 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.
(R) This 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 $852,600, as of October 31, 1997.
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, 1997 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ---------------
Canada...................... 2.58%
Finland..................... 2.93
Ireland..................... 0.38
Norway...................... 0.25
United States............... 93.73
---------------
TOTAL INVESTMENTS 99.87%
===============
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom Investment
Trust II) 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, 1997, the fund has
$11,066,430 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: October 31, 1998 - $769,302, October 31, 1999 -
$1,297,087, October 31, 2000 - $12,856, October 31, 2001 - $4,531,602 and
October 31, 2002 - $4,455,583. Availability of a certain amount of loss
carryforwards which were acquired on September 6, 1996 in a merger, 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.
The fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
14
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are 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.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
ORGANIZATION EXPENSE Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged to the Fund's operations
ratably over a five-year period that began with the commencement of investment
operations of the Fund.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended October 31, 1997.
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 PM, 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.
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
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 the offset by the currency amount of the underlying
transaction.
At October 31, 1997 there were no open foreign currency forward contracts.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it is required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at the
official settlement price of the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market," are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At October 31, 1997, there were no open positions in financial futures
contracts.
SHORT SALE POSITIONS The Fund, in "selling short," sells borrowed securities
which must at some date be repurchased and returned to the lender. The risk
associated with this practice is that, if the market value of securities sold
short increases, the Fund may realize losses upon repurchase at prices which may
exceed the prices used in determining the liability on the Statement of Assets
and Liabilities. Further, in unusual circumstances, the Fund may be unable to
repurchase securities to close its short positions except at prices above those
previously quoted in the market.
At October 31, 1997, there were no open positions in short sales.
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.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended October
31, 1997, net sales charges received with regard to sales of Class A shares
amounted to $579,686. Out of this amount, $91,952 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$208,475 was paid as sales commissions to unrelated broker-dealers and $279,259
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 ("JHMLICo"), is the indirect
sole shareholder of Distributors and was the indirect sole shareholder until
November 29, 1996 of 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
16
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
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 year ended October 31, 1997,
contingent deferred sales charges paid to JH Funds amounted to $908,073.
In addition, to reimburse JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of each Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its affiliates as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At October 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $1,612.
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, 1997 aggregated $1,136,905,048 and $1,195,802,591
respectively. There were no purchases or sales of obligations of the U.S.
government and its agencies during the year ended October 31, 1997.
The cost of investments owned at October 31, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $308,032,104. Gross
unrealized appreciation and depreciation of investments aggregated $45,164,571
and $6,841,256, respectively, resulting in net unrealized appreciation of
$38,323,315.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of
$20,081,390, a decrease in accumulated net investment loss of $3,700,425 and an
increase in capital paid-in of $16,380,965. This represents the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1997. 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 certain
differences in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles, and the
Fund's use of the tax
17
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Opportunities Fund
accounting practice known as equalization. The calculation of net investment
income per share in the financial highlights excludes these adjustments.
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.
18
<PAGE>
================================================================================
John Hancock Funds - Special Opportunities Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Special Opportunities Fund and the Trustees
of John Hancock Investment Trust III
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 John Hancock Investment Trust III)at October 31,
1997, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at October 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where investments purchased were not yet received by the custodian,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 15, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended October
31, 1997.
The Fund designated a distribution to shareholders of $4,516,227 as
long-term capital gain dividends, which is all 28%. These amounts were reported
on the 1996 U.S. Treasury Department Form 1099-DIV.
With respect to the dividends paid by the Fund for the fiscal year ended
October 31, 1997, 7.79% qualify for the corporate dividends received deduction.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV
in January, 1998. This will reflect the total of all distributions which are
taxable for calendar year 1997.
19
<PAGE>
[LOGO] JOHN HANCOCK FUNDS -------------------
A Global Investment Management Firm Bulk Rate
U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
INTERNET: www.jhancock.com/funds 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.
[RECYCLE LOGO] Printed on Recycled Paper 3900A 10/97
12/97
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
International Fund
OCTOBER 31, 1997
[LOGO] John Hancock Funds
A Global Investment Management Firm
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
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 AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The stock market in 1997 has been anything but dull. Investors have been treated
to record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances amid relatively
little volatility, the market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round came in October and was largely due to uncertainty in foreign
markets. Southeast Asia sneezed and the rest of the world caught a cold. On
October 27, the Dow experienced its largest one-day point decline, dropping 554
points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
- --------------------------------------------------------------------------------
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.
- --------------------------------------------------------------------------------
In the face of such uncertainty, a trusted investment professional can be your
best ally. Now, more than ever, your investment professional can help you take
the emotion out of investment decisions. At a time when your instincts might
have you react to the heat of the market's moment, your investment professional
can serve as an objective voice to put current events in a longer-term
perspective. He or she can also help you evaluate your investments in any market
environment to ensure that they fit your risk tolerance and time horizons. On an
ongoing basis, your investment professional is there for you to check out new
investment ideas or to get an informed opinion about current economic and market
conditions.
We encourage you to take advantage of this important resource. Working together,
you can draw up a detailed road map to help reach your financial destination
regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY MIREN ETCHEVERRY, JOHN L.F. WILLS AND GERARDO J. ESPINOZA,
CO-PORTFOLIO MANAGERS
John Hancock
International Fund
Asian turmoil erodes the fortunes of many emerging markets
It was a nerve-wracking 12 months for overseas investors, who wound up gaining
ground during the year, but endured heightened volatility and dramatic worldwide
market plunges at the end of October. When the Fund's fiscal year began last
November, most foreign markets were on a roll, boosted by falling interest rates
and a strong U.S. stock market. As the period progressed, however, the landscape
changed. World markets fretted periodically about the strength of the U.S.
economy and the potential for rising interest rates. More importantly, in the
summer, the growing currency and financial problems in Southeast Asia had a
ripple effect on Latin America, and spread to the rest of the world, including
Wall Street, in late October.
Despite the year-end turmoil, the emerging markets of Latin America still
managed to produce double-digit results for the fiscal year. Likewise, the
developed worlds of Europe and the United States recovered from the shock waves.
However, almost every Asian market, including Japan and Hong Kong, ended the
year in negative territory, from Hong Kong's 15% drop to Thailand's 69% plunge.
The "Asian contagion" kept many markets edgy beyond the fiscal year end.
Performance
John Hancock International Fund ended the year behind its peers. In the first
half of the fiscal period, we were held back by our large stakes in Japan and
Hong Kong when these markets underperformed. Although we subsequently cut our
stake in Japan, our continued emphasis on
"Almost every Asian market... ended the year in negative territory..."
- --------------------------------------------------------------------------------
A 2" x 3" photo of portfolio management team at bottom right. Caption reads:
"(l-r) Gerardo Espinoza, Miren Etcheverry and John Wills."
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - International Fund
- --------------------------------------------------------------------------------
A pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into seven sections. Going from top left to right:
"Short-Term Investments & Other 8%, Continental Europe 30%, U.K. & Irelans 21%,
Japan 12%, Latin America 12%, Hong Kong 7%, Australia 6%, Emerging Asia 4%.",
- -------------------------------------------------------------------------------
Hong Kong hurt us again in October - the height of the emerging-market turmoil
and an especially difficult month. Indeed, because of the "contagion" effect,
several of our focus markets, most notably Brazil, had drops in the 20% to 30%
range in October. That contributed to the Fund's losing 13% in the month of
October alone and wiping out its gains for the year. For the 12 months ended
October 31, 1997, the Fund's Class A and Class B shares posted total returns of
- -3.22% and -3.86%, respectively, at net asset value, compared to the 10.39%
return of the average international fund, according to Lipper Analytical
Services, Inc.(1) See pages six and seven for longer-term performance
information.
Growing stake in Europe
With heightened turbulence elsewhere, we continued to up our stake in Europe
over the year, from 34% to 51% of net assets by the end of October. We remain
focused on individual companies that are increasing value to shareholders
through corporate restructurings. A perfect example is our new holding Axa, a
French insurance company that recently acquired another European-based insurance
company. We are also finding good opportunities among companies that are
successfully going outside their home markets to capture growth. One new example
is Ireland's Allied Irish Banks, which has an important presence in the United
States through several subsidiaries, as well as a top management team and a
strong earnings outlook. These stocks have also helped boost our stake in the
financial sector, a previously underweighted area where we see good growth
potential.
Asian contagion
Following a brief market rally at the beginning of the fiscal period, we further
cut our stake in Japan, decreasing it from 28% a year ago to 12% by the end of
October. While exporters, which are the Fund's focus, remain the only source of
strength for the economy, even they could feel the effects of the region's
economic weakness. On the other hand, we remain overweighted in Hong Kong,
although we reduced our stake to 7% from its 20% level a year ago. Despite
regional woes and their impact on Hong Kong's market in October, we believe the
country's fundamentals -- a strong economy and sound banking system -- are
solid. More importantly, we believe China is the real driver to Hong Kong's
future. Although slowing, China's growth rate remains in the high single digits,
interest rates are coming down and economic liberalization should drive the
Chinese economy going forward.
Fortunately, we had only had small positions
"...we continued to up our stake in Europe..."
- --------------------------------------------------------------------------------
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 Zurich
Insurance followed by an up arrow and the phrase "Positive consolidation and
restructuring results." The second listing is Saga Petroleum followed by a
horizontal arrow and the phrase "Markets focus on company's oil exploration."
The third listing is Sony followed by a down arrow and the phrase "Profit taking
and Asian turmoil hurt stock despite solid growth." Footnote below reads: "See
"Schedule of Investments." Investment holdings are subject to change."
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
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, 1997." The chart is
scaled in increments of 2% from bottom to top, with 12% at the top and -4% at
the bottom. Within the chart there are three solid bars. The first represents
the -3.22% total return for the John Hancock International Fund: Class A. The
second represents the -3.86% total return for John Hancock International Fund:
Class B. The third represents the 10.39% 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
the following two pages for historical performance information."
- --------------------------------------------------------------------------------
in the Southeast Asian markets during much of the year. The one exception was
Singapore, where our exposure hurt us when this usually traditional safe-haven
market was unable to escape the regional rout.
Latin America
Despite a pause in April and a steep drop in October, most Latin American
equities markets posted gains for the year. We built our stake in Latin America
to 12% of net assets, because there, too, we believe the economic backdrop
remains positive. Our largest bet is in Brazil at 9% of the Fund's net assets,
which is at the beginning of a dramatic liberalization process including
billions of dollars worth of privatization over the next few years. The Fund's
focus is on large companies in the telecommunications and utilities areas that
serve a critical role in this process. That said, the picture for Brazil could
get temporarily cloudy in the wake of rising interest rates and other government
measures aimed at defending its currency, all of which could slow growth.
Looking ahead
In our view, foreign markets are in for more volatility in the short term, as
investors sort out the impact of the Asian currency crisis. Certainly, Southeast
Asia's weakened economies and slower growth will have an impact on companies
doing business there. There could also be a resulting tempering of world growth,
but only marginally, in our opinion. We choose to see a silver lining in this
tempest: the real possibility of diminished inflation fears, since slower
economies should reduce the need for further interest rate hikes in the U.S. and
Europe. Since Latin America's growth and markets generally march in greater
synch with the U.S., we expect stability to return there, as well. As for Asia,
a lot of the outlook depends on how serious those countries are about making
structural changes needed to put their economies back on track. If anything,
recent events could prompt them to speed up the process of needed reform. In any
event, we're waiting for some strong signs of commitment before we make any
further moves. In Japan, especially, we want to see more government efforts to
strengthen the economy and deal effectively with the banking problems.
"...foreign markets are in for more volatility in the short term..."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
International investing involves special risks such as political and currency
risks and differences in accounting standards and financial reporting.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
John Hancock Funds - International Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock International Fund. Total return measures the
change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus for a discussion of the risks associated with international
investing, including currency and political risks and differences in accounting
standards and financial reporting before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (1/3/94)
------------- -------------
Cumulative Total Returns 7.13% 9.85%
Average Annual Total Returns(1) 7.13% 2.54%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (1/3/94)
------------- -------------
Cumulative Total Returns 7.15% 9.61%
Average Annual Total Returns(1) 7.15% 2.49%
Notes to Performance
(1) Effective January 3, 1994, the Adviser has temporarily voluntarily
undertaken to limit the Fund's expenses, including the management fee (but
not including the transfer agent fee and 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 5.84% and 0.46% for Class A shares and 5.86% and 0.41% for Class B
shares.
6
<PAGE>
================================================================================
John Hancock Funds - International Fund
- --------------------------------------------------------------------------------
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, assuming all distributions were reinvested
for the period indicated. 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 Far East. In addition,
the Fund is compared to the Morgan Stanley All Country World-Ex U.S. Free Index,
which measures the performance of developed and emerging stock markets around
the world. The index represents stocks that are freely traded on various equity
exchanges around the world. The Adviser has chosen to remove the Morgan Stanley
EAFE Index from future reports, but will continue comparing the Fund to the
Morgan Stanley All Country World-Ex U.S. Free Index, which more closely
represents the investment strategy of the Fund.
International Fund Fund
- --------------------------------------------------------------------------------
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 four lines. The first line represents the value of the Morgan Stanley EAFE
Index and is equal to $13,099 as of October 31, 1997. The second represents the
value of the Morgan Stanley All Country World Ex-U.S. Free Index and is equal to
$12,636 as of October 31, 1997. The third 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 $10,005 as of October 31, 1997. The
fourth line represents theInternational Fund, after sales charge, and is equal
to $9,504 as of October 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 $13,099 as of October 31, 1997. The second represents the
value of the Morgan Stanley All Country World Ex-U.S. Free Index and is equal to
$12,636 as of October 31, 1997. The third 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 $9,734 as of October 31, 1997. .
- --------------------------------------------------------------------------------
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - International Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on October 31, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
October 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $12,051,204) ........................... $12,215,583
Preferred stocks (cost - $679,312) ........................... 356,861
Short-term investments (cost - $3,056,174) - Note A .......... 3,056,174
------------
15,628,618
Foreign currency, at value (cost - $332,886) .................. 332,886
Foreign taxes receivable ...................................... 8,129
Receivable for investments sold - Note B ...................... 2,409,205
Receivable for shares sold. ................................... 22,090
Dividends receivable .......................................... 10,972
Deferred organization expenses - Note A ....................... 27,056
Other assets .................................................. 334
------------
Total Assets ......................... 18,439,290
-----------------------------------------------------
Liabilities:
Due to Custodian .............................................. 578,610
Payable for bank borrowings - Note A .......................... 1,040,000
Payable for shares repurchased ................................ 22,795
Payable for securities on loan - Note A ....................... 3,056,174
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 2,400
Accounts payable and accrued expenses ......................... 60,506
------------
Total Liabilities .................... 4,760,485
-----------------------------------------------------
Net Assets:
Capital paid-in ............................................... 13,721,429
Accumulated net realized gain on investments
and foreign currency transactions ........................... 115,788
Net unrealized depreciation of investments
and foreign currency transactions ............................ (157,986)
Accumulated net investment loss ............................... (426)
------------
Net Assets ........................... $13,678,805
=====================================================
Net Asset Value Per Share:
(Based on net asset values and
shares of beneficial interest oustanding -
unlimited number of shares authorized
with no par value)
Class A - $4,965,476/590,271 .................................. $8.41
==============================================================================
Class B - $8,713,329/1,059,964 ................................ $8.22
==============================================================================
Maximum Offering Price Per Share*
Class A - ($8.41 x 105.26%) ................................... $8.85
==============================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended October 31, 1997
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $21,740) ....... $196,383
Interest (including income on securities
loaned of $2,006) ............................................ 39,480
------------
235,863
------------
Expenses:
Investment management fee - Note B ........................... 150,931
Distribution and service fee - Note B
Class A ..................................................... 17,083
Class B ..................................................... 93,988
Custodian fee ................................................ 72,969
Transfer agent fee - Note B .................................. 80,476
Auditing fee ................................................. 38,013
Registration and filing fees ................................. 30,983
Organization expense - Note A ................................ 23,017
Printing ..................................................... 9,650
Trustees' fees ............................................... 1,097
Financial services fee - Note B .............................. 2,771
Miscellaneous ................................................ 1,364
Legal fees ................................................... 992
Interest expense - Note A .................................... 177
------------
Total Expenses ....................... 523,511
-----------------------------------------------------
Less expense reductions - Note B ..... (195,954)
-----------------------------------------------------
Net Expenses ......................... 327,557
-----------------------------------------------------
Net Investment Loss .................. (91,694)
-----------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold ......................... 707,894
Net realized loss on foreign currency transactions ............ (99,161)
Change in net unrealized appreciation/depreciation
of investments ............................................... (1,164,047)
Change in net unrealized appreciation/depreciation
of foreign currency transactions ............................. 339
------------
Net Realized and Unrealized
Loss on Investments and
Foreign Currency Transactions ........ (554,975)
-----------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ............ ($646,669)
=====================================================
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - International Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------
1996 1997
------------ ------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) ................ $35,713 ($91,694)
Net realized gain (loss) on
investments sold and foreign
currency transactions ..................... (103,249) 608,733
Change in net unrealized
appreciation/depreciation of
investments and foreign currency
transactions .............................. 727,115 (1,163,708)
------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations ................ 659,579 (646,669)
------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - (none and $0.0109 per
share, respectively) ..................... -- (6,338)
------------ ------------
From Fund Share Transactions - Net:* .......... 4,408,817 1,058,453
------------ ------------
Net Assets:
Beginning of period ......................... 8,204,963 13,273,359
------------ ------------
End of period (including undistributed
net investment income of $6,064 and
net investment loss of $426,
respectively) ............................. $13,273,359 $13,678,805
============ ============
*Analysis of Fund Share Transactions
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1996 1997
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
CLASS A
Shares sold .............. 1,161,618 $9,954,113 553,881 $5,138,738
Shares issued to
shareholders in
reinvestment of
distributions .......... -- -- 674 6,082
---------- ---------- ---------- ----------
1,161,618 9,954,113 554,555 5,144,820
Less shares repurchased .. (1,093,395) (9,411,237) (550,545) (5,104,530)
---------- ---------- ---------- ----------
Net increase ............. 68,223 $542,876 4,010 $40,290
========== ========== ========== ==========
CLASS B
Shares sold .............. 1,141,712 $9,576,146 780,756 $6,676,625
Shares issued to
shareholders in
reinvestment of
distributions .......... -- -- -- --
---------- ---------- ---------- ----------
1,141,712 9,576,146 780,756 6,676,625
Less shares repurchased .. (680,493) (5,710,205) (677,361) (5,658,462)
---------- ---------- ---------- ----------
Net increase ............. 461,219 $3,865,941 103,395 $1,018,163
========== ========== ========== ==========
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders, and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last two periods, along with
the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================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
(COMMENCEMENT OF YEAR ENDED OCTOBER 31,
OPERATIONS) TO ----------------------------------------
OCTOBER 31, 1994 1995 1996 1997
---------------- ---------- ---------- ----------
CLASS A
Per Share Operating Performance
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ... $8.50 $8.65 $8.14 $8.70
------- ------- ------- -------
Net Investment Income (Loss) ........... 0.07(1) 0.04 0.06(1) (0.02)(1)
Net Realized and Unrealized
Gain (Loss) on Investments and
Foreign Currency Transactions ........ 0.08 (0.47) 0.50 (0.26)
------- ------- ------- -------
Total from Investment Operations ...... 0.15 (0.43) 0.56 (0.28)
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ... -- (0.03) -- (0.01)
Distributions from Net Realized Gain
on Investments Sold and Foreign
Currency Transactions ................ -- (0.05) -- --
------- ------- ------- -------
Total Distributions ................... -- (0.08) -- (0.01)
------- ------- ------- -------
Net Asset Value, End of Period ......... $8.65 $8.14 $8.70 $8.41
======= ======= ======= =======
Total Investment Return at Net
Asset Value(2) ....................... 1.77%(3) (4.96%) 6.88% (3.22%)
Total Adjusted Investment Return
at Net Asset Value (2,4) ............. (0.52%)(3) (8.12%) 5.33% (4.52%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) ....................... $4,426 $4,215 $5,098 $4,965
Ratio of Expenses to Average
Net Assets ........................... 1.50%(5) 1.64% 1.75% 1.73%(9)
Ratio of Adjusted Expenses to Average
Net Assets (6) ....................... 3.79%(5) 4.80% 3.30% 3.03%(9)
Ratio of Net Investment Income (Loss)
to Average Net Assets ................ 1.02%(5) 0.56% 0.68% (0.16%)
Ratio of Adjusted Net Investment Loss
to Average Net Assets (6) ............ (1.27%)(5) (2.60%) (0.87%) (1.46%)
Portfolio Turnover Rate ................ 50% 69% 83% 169%
Fee Reduction Per Share (1) ............ $0.16 $0.25 $0.14 $0.12
Average Brokerage Commission Rate (7) .. N/A N/A $0.0192 $0.0186
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indi cated: the net invest ment 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 rela tionships between some
items presented in the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - International Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 3, 1994
(COMMENCEMENT OF YEAR ENDED OCTOBER 31,
OPERATIONS) TO ----------------------------------------
OCTOBER 31, 1994 1995 1996 1997
---------------- ---------- ---------- ----------
CLASS B
Per Share Operating Performance
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ... $8.50 $8.61 $8.05 $8.55
------- ------- ------- -------
Net Investment Income (Loss) ........... 0.02(1) (0.03) 0.00(1,8) (0.08)(1)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions ................ 0.09 (0.48) 0.50 (0.25)
------- ------- ------- -------
Total from Investment Operations ...... 0.11 (0.51) 0.50 (0.33)
------- ------- ------- -------
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 $8.22
======= ======= ======= =======
Total Investment Return at
Net Asset Value (2) .................. 1.29%(3) (5.89%) 6.21% (3.86%)
Total Adjusted Investment Return
at Net Asset Value (2,4) ............. (1.00%)(3) (9.05%) 4.66% (5.16%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) ....................... $3,948 $3,990 $8,175 $8,713
Ratio of Expenses to Average
Net Assets ........................... 2.22%(5) 2.52% 2.45% 2.43%(9)
Ratio of Adjusted Expenses to Average
Net Assets (6) ....................... 4.51%(5) 5.68% 4.00% 3.73%(9)
Ratio of Net Investment Income (Loss)
to Average Net Assets ................ 0.31%(5) (0.37%) 0.02% (0.88%)
Ratio of Adjusted Net Investment Loss
to Average Net Assets (6) ............ (1.98%)(5) (3.53%) (1.53%) (2.18%)
Portfolio Turnover Rate ................ 50% 69% 83% 169%
Fee Reduction Per Share (1) ............ $0.16 $0.25 $0.14 $0.12
Average Brokerage Commission Rate (7) .. N/A N/A $0.0192 $0.0186
</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.
(9) Expense ratios do not include interest expense due to bank loans which
amounted to less than $0.01 cents per share.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - International Fund
Schedule of Investments
October 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
International Fund on October 31, 1997. It's divided into three main categories:
common stocks, preferred stocks and short-term investments. Common stocks and
preferred stocks 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
- ------------------- ---------------- ------------
COMMON STOCKS
Australia (6.35%)
Normandy Mining Ltd. (Metal) ................ 537,950 $586,386
RGC Ltd. (Metal) ............................ 60,000 122,408
WMC Ltd. (Metal) ............................ 45,000 159,814
------------
868,608
------------
Brazil (6.08%)
Centrais Electricas Brasileiras S/A
American Depositary Receipts (ADR)
(Utilities) ................................ 3,700 78,030
Companhia Paranaense de Energia (ADR)
(Utilities) ................................ 7,900 94,306
Telecomunicacoes Brasileiras S/A (ADR)
(Telecommunications) ....................... 6,500 659,750
------------
832,086
------------
Chile (0.83%)
Maderas y Sinteticos SA (ADR) (Building) .... 9,300 113,925
------------
China (0.14%)
China Telecom Ltd. (ADR)
(Telecommunications)* 600 19,425
------------
France (8.62%)
Axa-UAP (Insurance) ......................... 3,780 258,848
Carrefour SA (Retail) ....................... 790 412,239
LVMH Moet Hennessy Louis Vuitton SA
(Beverages) ................................ 1,154 196,059
Suez Lyonnaise des Eaux
(Diversified Operations) ................... 3,000 311,533
------------
1,178,679
------------
Germany (6.00%)
Bayerische Motoren Werke AG
(Automobile / Trucks) ...................... 645 466,594
Volkswagen AG (Automobile / Trucks) ......... 600 354,681
------------
821,275
------------
Hong Kong (6.62%)
Cheung Kong Holdings Ltd.
(Real Estate Operations) ................... 35,000 243,323
China Resources Enterprise Ltd.
(Real Estate Operations) ................... 100,000 274,203
Hutchison Whampoa Ltd.
(Diversified Operations) ................... 56,000 387,506
------------
905,032
------------
India (1.57%)
State Bank of India Global Depositary
Receipts (Banks - Foreign) ................. 11,700 215,280
------------
Ireland (5.29%)
Allied Irish Banks PLC (ADR)
(Banks - Foreign) .......................... 14,223 723,595
------------
Japan (12.42%)
Ito-Yokado Co., Ltd. (Retail) ............... 11,000 546,572
Shin-Etsu Chemical Co., Ltd. (Chemicals) .... 20,000 488,575
Sony Corp. (Electronics) .................... 4,000 332,032
TDK Corp. (Electronics) ..................... 4,000 331,699
------------
1,698,878
------------
Mexico (2.00%)
Grupo Industrial Maseca SA de CV
(ADR) (Food) ............................... 18,800 273,775
------------
Netherlands (1.49%)
Ispat International NV (Steel)* ............. 8,050 203,766
------------
Norway (2.15%)
Saga Petroleum ASA (Oil & Gas) .............. 15,000 294,522
------------
Romania (1.46%)
Societe Generale Romania Fund Ltd.
(Finance-Public Investment Fund) ........... 2,000 200,000
------------
Singapore (1.81%)
Oversea-Chinese Banking Corp., Ltd.
(Banks - Foreign) .......................... 24,000 133,333
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - International Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ------------
Singapore (continued)
Wing Tai Holdings Ltd.
(Real Estate Operations) ................... 90,000 $114,286
------------
247,619
------------
Sweden (2.90%)
Investor AB (Diversified Operations) ........ 8,500 396,067
------------
Switzerland (7.72%)
Novartis AG (Medical) ....................... 448 701,635
SMH AG (Consumer Products Misc.) ............ 2,700 353,830
------------
1,055,465
------------
United Kingdom (15.85%)
EMAP PLC (Media) ............................ 42,000 604,594
Marks & Spencer PLC (Retail) ................ 70,000 710,527
Pearson PLC (Media) ......................... 52,000 680,496
Regal Hotel Group PLC (Leisure) ............. 250,000 171,969
------------
2,167,586
------------
TOTAL COMMON STOCKS
(Cost $12,051,204) (89.30%) 12,215,583
--------- ------------
PREFERRED STOCKS
Brazil (2.61%)
Compania Riograndense de
Telecomunicaciones SA
(Telecommunications) ....................... 462,848 356,861
------------
TOTAL PREFERRED STOCKS
(Cost $679,312) (2.61%) 356,861
--------- ------------
PAR VALUE
(000s OMITTED)
--------------
SHORT-TERM INVESTMENTS
Navigator Securities Lending
Prime Portfolio** .......................... 3,056 3,056,174
------------
TOTAL SHORT-TERM INVESTMENTS (22.34%) 3,056,174
--------- ------------
TOTAL INVESTMENTS (114.25%) $15,628,618
========= ============
* Non-Income producing security.
** Represents investment of security lending collateral - Note A.
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 - International Fund
Portfolio Concentration (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, 1997 assigned to the various investment categories.
MARKET VALUE
OF SECURITIES
AS A PERCENTAGE
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
- --------------------- ----------------
Automobile/Trucks........................................... 6.00%
Banks-Foreign............................................... 7.84
Beverages................................................... 1.43
Building.................................................... 0.83
Chemicals................................................... 3.57
Consumer Products Misc...................................... 2.59
Diversified Operations...................................... 8.01
Electronics................................................. 4.85
Finance-Public Investment Fund.............................. 1.46
Food........................................................ 2.00
Insurance................................................... 1.89
Leisure..................................................... 1.26
Media....................................................... 9.40
Medical..................................................... 5.13
Metal....................................................... 6.35
Oil & Gas................................................... 2.15
Real Estate Operations...................................... 4.62
Retail...................................................... 12.20
Steel....................................................... 1.49
Telecommunications.......................................... 7.58
Utilities................................................... 1.26
Short-term investments...................................... 22.34
-------
TOTAL INVESTMENTS 114.25%
=======
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - International Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom Investment
Trust II) 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.
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 identifies the dividend. Interest income on
investment securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
CLASS ALLOCATIONS Income, common expenses, and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - International Fund
respective classes. Distribution and service fees if any, are calculated daily
at the class level based on the appropriate net assets of each class and the
specific expense rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
ORGANIZATION EXPENSES Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged to the Fund's operations
ratably over a five year period that commenced with the investment operations of
the Fund.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowings, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The maximum loan balance
during the periods for which loans were outstanding amounted to $1,040,000. At
October 31, 1997, the loan outstanding was $1,040,000 with a rate of 6.1875%.
SECURITIES LENDING The Fund may lend its securities to certain qualified brokers
who pay the Fund negotiated lenders fees. These fees are included in interest
income. The loans are collateralized at all times with cash or securities with a
market value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in recovery
or even loss of rights in the collateral should the borrower of the securities
fail financially. At October 31, 1997, the Fund loaned securities having a
market value of $3,014,185 collateralized by cash in the amount of $3,056,174,
which was invested in a short-term instrument.
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 PM, 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
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - International Fund
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.
At October 31, 1997, there were no open forward currency contracts.
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.
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
amounted to $195,954 for the year ended October 31, 1997. The Adviser reserves
the right to terminate this limitation in the future.
The Adviser compensated the Fund during the year in the amount of $777,151 for
a loss incurred as a result of inaccurate execution of a trade.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended October
31, 1997, net sales charges received with regard to sales of Class A shares
amounted to $41,697. Out of this amount, $6,635 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $29,175
was paid as sales commissions to unrelated broker-dealers and $5,887 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 ("JHMLICo"), is the indirect
sole shareholder of Distributors and was the indirect sole shareholder until
November 29, 1996 of John Hancock Freedom Securities Corporation and its
subsidairies which include FDC, 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 year ended October 31, 1997, contingent deferred
sales charges paid to JH Funds amounted to $35,875.
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
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - International Fund
the Investment Company Act of 1940. Accordingly, the Fund will make payments to
JH Funds for distribution and service expenses, at an annual rate not to exceed
0.30% of Class A average daily net assets and 1.00% of Class B average daily net
assets to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.25% of such payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Receivable for investments sold in the amount of $581,280 is a result of a
related party transaction.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon, and Mr. Richard S. Scipione
are trustees and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked-to-market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At October 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $50.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended October 31, 1997, aggregated $24,348,859 and $23,793,380, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended October 31, 1997.
The cost of investments owned at October 31, 1997 (including short-term
investments) for federal income tax purposes was $15,786,690. Gross unrealized
appreciation and depreciation of investments aggregated $1,354,858 and
$1,512,930, respectively, resulting in net unrealized depreciation of $158,072.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect an increase in accumulated net realized gain on investments of $99,164,
a decrease in accumulated net investment loss of $91,542 and a decrease in
capital paid-in of $190,706. This represents the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
October 31, 1997. 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 certain differences 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>
================================================================================
John Hancock Funds - International Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock International Fund and
the Trustees of John Hancock Investment Trust III
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 series of John Hancock Investment Trust III) at October 31,
1997, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at October 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where investments purchased were not yet received by the custodian,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
Deccember 15, 1997
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, 1997.
None of the distributions qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV in
January of 1998. This will reflect the total of all distributions which are
taxable for calendar year 1997.
19
<PAGE>
================================================================================
-------------
[LOGO] John Hancock Funds Bulk Rate
A Global Investment Management Firm U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713(TDD) Randolph, MA
INTERNET: www.jhancock.com/funds Permit No. 75
-------------
- --------------------------------------------------------------------------------
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.
[LOGO] Printed on Recycled Paper 4000A 10/97
12/97
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
Short-Term
Strategic Income
Fund
OCTOBER 31, 1997
[LOGO] John Hancock Funds
A Global Investment Management firm
<PAGE>
================================================================================
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
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 AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
- --------------------------------------------------------------------------------
CHAIRMAN'S MESSAGE
- --------------------------------------------------------------------------------
DEAR FELLOW SHAREHOLDERS:
The stock market in 1997 has been anything but dull. Investors have been
treated to record-breaking performance by the Dow Jones Industrial Average, but
with record-breaking volatility. After two years of strong advances amid
relatively little volatility, the market's recent sharp drops and enormous
rebounds have caused a fair share of investor concern.
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
- --------------------------------------------------------------------------------
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.
- --------------------------------------------------------------------------------
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY LAWRENCE J. DALY, ANTHONY A. GOODCHILD AND JANET L. CLAY,
CO-PORTFOLIO MANAGERS
John Hancock
Short-Term Strategic
Income Fund
Crisis in Southeast Asia interrupts good times for bond investors
Bond markets worldwide rallied over most of the past year, but volatility,
especially in October, sent many investors scurrying to safe havens. In the
United States, bond yields fell until the Federal Reserve hiked short-term
interest rates in March. This sent bond prices into a tailspin. But signs of
slower economic growth and continued low inflation soon turned the market around
again. In Europe, bond investors weren't as lucky. Western European bond markets
outpaced their U.S. counterparts early in 1997, but then shifted direction late
in the spring. An improving economic outlook started to scare investors, who
feared inflation and interest rates might be on the rise.
Many emerging markets were hitting on all cylinders until late in the period
- -- despite a hiccup in April that echoed the downturn in U.S. bond markets.
"Bond markets
rallied over
most of the
past year..."
The best performing bond markets were in Latin America, which benefited from
signs of growing political stability, improved economic conditions, stable
inflation, and large investor inflows. Asian emerging markets -- like Thailand,
Indonesia, Malaysia, and the Philippines -- were among the worst performers, as
concerns about their local economies, currencies and banking
- --------------------------------------------------------------------------------
A 2 1/4" x 3 1/2" photo of fund management team at bottom right. Caption reads:
Anthony Goodchild, Janet Clay and Lawrence Daly, Co-Portfolio Managers."
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
- --------------------------------------------------------------------------------
Chart with heading "Top Five Bond Categories" at top of left hand column. The
chart lists five sectors: 1) US government 38% 2) Foreign governments 20% 3) Oil
& Gas 5% 4) Banks 5% 5) Steel 3% . A footnote below reads "As a percentage of
net assets on October 31, 1997."
- --------------------------------------------------------------------------------
"...we
eliminated
most of our
stake in
developed
Europe..."
systems mounted. By October, currencies in the region had fallen 30% to 40%
against the dollar, causing foreign-denominated investments to lose value in
U.S. dollar terms. Investors were forced to sell investments elsewhere to raise
cash. This, together with a general flight to safety, caused a massive sell-off
in all emerging markets, including Latin America.
Performance review
Despite the volatile climate, John Hancock Short-Term Strategic Income Fund
posted solid returns. For the year ended October 31, 1997, the Fund's Class A
and Class B shares had total returns of 5.55% and 4.83%, respectively, at net
asset value. These returns slightly lagged the average short-term
investment-grade bond fund's return of 6.12%, according to Lipper Analytical
Services, Inc.1 Please see pages six and seven for longer-term performance
information.
The Fund avoided Southeast Asia and Europe, focusing mainly on Latin America
and the United States. This mix boosted performance until the Asian currency
crisis erupted in the fall and spilled over to other emerging markets.
Fortunately, as the U.S. dollar strengthened against most foreign currencies,
the Fund had a strong bias toward U.S. dollar-denominated bonds. We were pleased
that we were able to deliver a positive return for shareholders even in the
midst of stormy market conditions.
Portfolio strategy
The Fund owned both higher quality securities like U.S. Treasuries and lower
quality, emerging-markets bonds. This combination helped returns, while meeting
our target average portfolio credit rating of single A -- the mid-point among
investment-quality bonds. We also kept the Fund's average maturity under three
years.
Emerging markets. Our investment in high-yielding emerging markets totalled
44% of the Fund's net assets at the end of October. Our heaviest concentration
was in dollar-denominated Latin American government and corporate bonds,
particularly from Mexico, Brazil and Argentina. On the corporate side, we
focused on high quality companies in industries like telecommunications and
steel that are vital to building the economies of developing nations. Companies
like these tend to have credit ratings that are constrained by the country's
credit rating. As local economic conditions improve, they're often among the
first to experience a credit upgrade.
We also owned small stakes in a few other emerging markets. Over the summer,
for example, we bought Russian government bonds. We believe these bonds will
benefit as the country comes out of its long recession and begins to enjoy
modest economic growth. A stabilizing
- --------------------------------------------------------------------------------
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 U.S.
Treasuries followed by an up arrow and the phrase "Flight to quality." The
second listing is U.K. bonds followed by an up arrow and the phrase "Yields come
down." The third listing is Latin American bonds followed by a down arrow and
the phrase "Sell-offs from Asian contagion". Footnote below reads: "See
"Schedule of Investments." Investment holdings are subject to change."
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
- --------------------------------------------------------------------------------
Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended October 31, 1997." The chart is
scaled in increments of 2% from bottom to top, with 8% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
5.55% total return for the John Hancock Short-Term Strategic Income Fund, Class
A. The second represents the 4.83% total return for John Hancock Short-Term
Strategic Income Fund, Class B. The third represents the 6.12% total return for
the average short-term investment grade bond fund. A footnote below reads:
"Total returns for John Hancock Short-Term Strategic Income Fund are at net
asset value with all distributions reinvested. The average short-term investment
grade fund is tracked by Lipper Analytical Services. (1) See the following two
pages for historical performance information."
- --------------------------------------------------------------------------------
political environment and fiscal improvements should also help.
United States. To offset our stake in emerging-market bonds, we upped our
investment in high-quality U.S. Treasuries to 38% of the Fund's net assets -- up
from about 34% last April. Our focus was on short-term Treasuries with
maturities of two to three years. U.S. Treasury prices rose over the course of
the year, especially as turmoil and uncertainty in other corners of the globe
sent investors scurrying for safe havens.
Europe. During the first half of the period, we eliminated most of our stake
in developed European countries because we believed there were better
opportunities elsewhere. Yields there have remained low and seem poised to go up
as Europe comes out of its recession. We did, however, hold onto a small
investment in the United Kingdom. We took profits when U.K. bonds rallied,
following the election of Labor party officials in the fall.
Outlook
We believe that Southeast Asia -- the highest growth area in the world -- is the
wildcard for global bond markets. Already the currency turmoil in Asian emerging
markets has rocked financial markets worldwide -- from Hong Kong and Korea to
the United States and Latin America. No one knows what the final outcome will
be. A lot depends on how serious Southeast Asian countries are about making the
structural changes needed to put their economies back on track. Until the
situation changes, other countries will continue to feel the impact of an
economic slowdown in this part of the world.
Discounting the wildcard effect, we believe the U.S. bond market has
reasonably good prospects. Economic growth pressures here seem minimal, which
bodes well for inflation and interest rates. Europe looks less promising,
however, because short-term interest rates seem to have no place to go but up.
In the near term, we expect continued turmoil in Latin America. So as we see
market opportunities arise, we intend to trim our emerging-market stake in the
short term. But we believe Latin American bonds have significant upside
potential once the situation in Southeast Asia stabilizes.
"...Southeast
Asia...is
the wild
card for
global bond
markets."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
International investing involves special risks such as political and currency
risks and differences in accounting standards and financial reporting.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average
annual total returns for the John Hancock Short-Term Strategic Income Fund.
Total return measures the change in value of an investment from the beginning to
the end of a period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 3%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 3% and declining to 0% over four years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please 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.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
------ ------ ---------
Cumulative Total Returns 5.10% 35.51% 37.25%
Average Annual Total Returns 5.10% 6.27 5.67%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/28/90)
---- ------ ----------
Cumulative Total Returns 4.61% 34.70% 46.37%
Average Annual Total Returns 4.61% 6.14% 5.80%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of October 31, 1997
SEC 30-DAY
YIELD
----------
John Hancock Short-Term Strategic Income Fund:
Class A 6.29%
John Hancock Short-Term Strategic Income Fund:
Class B 5.77%
6
<PAGE>
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Short-Term Strategic Income Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Salomon Brothers World Money Market Index -- an
unmanaged index that is composed of various non-U.S. currency-denominated bonds,
usually with an average maturity of three years or less. Past performance is not
indicative of future results.
- --------------------------------------------------------------------------------
Line chart with the heading Short-Term Strategic Income Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines. The first line represents the value
of the hypothetical $10,000 investment made in the Short-Term Strategic Income
Fund on January 3, 1992, before sales charge, and is equal to $13,870 as of
October 31, 1997. The second line represents the Short-Term Strategic Income
Fund, after sales charge, and is equal to $12,554 as of October 31, 1997. The
third line represents the value of the Salomon Brothers World Money Market Index
and is equal to $13,454 as of October 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Line chart with the heading Short-Term Strategic Income Fund Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are two lines. The first line represents the value of
the hypothetical $10,000 investment made in the Short-Term Strategic Income Fund
on December 28, 1990, and is equal to $14,339 as of October 31, 1997. The second
line represents the value of Salomon Brothers World Money Market Index and is
equal to $13,708 as of October 31, 1997.
- --------------------------------------------------------------------------------
*No contingent deferred sales charge applicable.
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Short-Term Strategic Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on October 31, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
October 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $74,252,318)....................... $75,087,838
Short-term investments (cost - $23,768,910) -
Note A ......................................... 23,768,910
------------
98,856,748
Cash............................................. 1,011,739
Receivable for investments sold.................. 7,811,745
Receivable for forward foreign currency exchange
contracts sold - Note A......................... 29,426
Receivable for closed forward foreign currency
exchange contracts - Note A..................... 3,333
Receivable for shares sold....................... 44,628
Interest receivable.............................. 1,857,590
Other assets..................................... 3,677
-----------
Total Assets................... 109,618,886
---------------------------------------------
Liabilities:
Payable for forward foreign currency exchange
contracts sold - Note A......................... 5,971
Payable for closed forward foreign currency exchange
contracts - Note A.............................. 20,956
Payable for shares repurchased................... 135,983
Payable for securities on loan - Note A 19,288,910
Dividend payable................................. 8,582
Payable to John Hancock Advisers, Inc. and
affiliates - Note B............................. 76,624
Accounts payable and accrued expenses............ 114,346
-----------
Total Liabilities.... 19,651,372
---------------------------------------------
Net Assets:
Capital paid-in.................................. $117,072,069
Accumulated net realized loss on investments and
foreign currency transactions................... (27,884,467)
Net unrealized appreciation of investments and
foreign currency transactions................... 816,668
Distributions in excess of net investment income (36,756)
-----------
Net Assets..................... $89,967,514
=============================================
Net Asset Value Per Share:
(Based on net asset values and shares of
beneficial interest outstanding - unlimited
number of shares authorized with no par value)
Class A - $64,059,155/7,705,392.................. $8.31
===============================================================
Class B - $25,908,359/3,120,100.................. $8.30
===============================================================
Maximum Offering Price Per Share*
Class A - ($8.31 x 103.09%)...................... $8.57
===============================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of 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, 1997
- -------------------------------------------------------------------------------
Investment Income:
Interest (net of foreign withholding taxes of
$1,281 and including income on securities
loaned of $10,379) ............................. $8,310,267
-----------
Expenses:
Investment management fee - Note B.............. 625,143
Distribution and service fee - Note B
Class A....................................... 181,706
Class B....................................... 353,672
Transfer agent fee - Note B..................... 189,816
Custodian fee................................... 112,643
Auditing fee.................................... 64,000
Registration and filing fees.................... 33,429
Printing........................................ 22,712
Financial services fee - Note B................. 17,692
Trustees' fees.................................. 7,905
Miscellaneous................................... 5,440
Organization expense - Note A................... 4,210
Legal........................................... 3,337
---------
Total Expenses................. 1,621,705
---------------------------------------------
Net Investment Income ......... 6,688,562
---------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions:
Net realized loss on investments sold............ (596,172)
Net realized gain on foreign currency
transactions .................................. 378,953
Change in net unrealized appreciation/
depreciation of investments.................... (1,355,356)
Change in net unrealized appreciation/
depreciation of foreign currency transactions.. (11,978)
-----------
Net Realized and Unrealized Loss
on Investments and Foreign
Currency Transactions ........ (1,584,553)
----------------------------------------------
Net Increase in Net Assets
Resulting from Operations ..... $5,104,009
==============================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Short-Term Strategic Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income..................................................... $7,145,128 $6,688,562
Net realized loss on investments sold and foreign currency transactions... (849,953) (217,219)
Change in net unrealized appreciation/depreciation of investments
and foreign currency transactions ..................................... 1,372,886 (1,367,334)
---------- -----------
Net Increase in Net Assets Resulting from Operations.................... 7,668,061 5,104,009
---------- -----------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5702 and $0.5176 per share, respectively)................. (2,214,100) (3,698,646)
Class B - ($0.5203 and $0.4678 per share, respectively)................. (4,078,534) (1,962,894)
Distributions in excess of net investment income
Class A - (none and $0.0764 per share, respectively).................... - (545,931)
Class B - (none and $0.0158 per share, respectively).................... - (289,729)
Distributions from capital paid-in
Class A - ($0.0773 and $0.0175 per share, respectively)................. (299,953) (125,016)
Class B - ($0.0706 and $0.0691 per share, respectively)................. (552,541) (66,346)
----------- -----------
Total Distributions to Shareholders..................................... (7,145,128) (6,688,562)
----------- -----------
From Fund Share Transactions - Net:* ........................................ (4,644,938) (5,923,514)
----------- -----------
Net Assets:
Beginning of period....................................................... 101,597,586 97,475,581
----------- -----------
End of period (including distributions in excess of net investment income
of $3,155 and $36,756 respectively) ................................... $97,475,581 $89,967,514
=========== ===========
*Analysis of Fund Share Transactions:
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1996 1997
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------ ----------------------------
CLASS A
Shares sold .......................................................... 5,224,426 $44,002,197 4,479,598 $38,000,567
Shares issued to shareholders in reinvestment of distributions ....... 173,166 1,459,286 283,851 2,403,553
---------- ----------- ------------ ------------
5,397,592 45,461,483 4,763,449 40,404,120
Less shares repurchased .............................................. (1,584,884) (13,356,794) (2,890,921) (24,502,562)
----------- ------------ ------------ ------------
Net increase ..................................................... 3,812,708 $32,104,689 1,872,528 $15,901,558
=========== ============ ============ ============
CLASS B
Shares sold .......................................................... 1,947,251 $16,384,501 1,869,770 $15,839,024
Shares issued to shareholders in reinvestment of distributions ....... 276,956 2,329,163 125,322 1,060,356
---------- ----------- ------------ ------------
2,224,207 18,713,664 1,995,092 16,899,380
Less shares repurchased .............................................. (6,595,024) (55,463,291) (4,572,712) (38,724,452)
----------- ------------ ------------ ------------
Net decrease ......................................................... (4,370,817) ($36,749,627) ($2,577,620) ($21,825,072)
---------- ----------- ------------ -------------
</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 redeemed during the last two periods, along
with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Short-Term Strategic Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ......................... $9.32 $9.12 $8.47 $8.41 $8.46
----- ----- ----- ----- -----
Net Investment Income ........................................ 0.83(1) 0.76(1) 0.77(1) 0.65 0.61(1)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ......................... (0.20) (0.53) (0.06) 0.05 (0.15)
----- ----- ----- ----- -----
Total from Investment Operations ......................... 0.63 0.23 0.71 0.70 0.46
----- ----- ----- ----- -----
Less Distributions:
Dividends from Net Investment Income ......................... (0.83) (0.62) (0.61) (0.57) (0.52)
Distributions in Excess of Net Investment Income ............. -- (0.04) -- -- (0.08)
Distributions in Excess of Net Realized Gain on
Investments Sold .......................................... (0.12) -- -- --
Distributions from Capital Paid-in ........................... -- (0.10) (0.16) (0.08) (0.01)
----- ----- ----- ----- -----
Total Distributions ...................................... (0.83) (0.88) (0.77) (0.65) (0.61)
----- ----- ----- ----- -----
Net Asset Value, End of Period ............................... $9.12 $8.47 $8.41 $8.46 $8.31
===== ===== ===== ===== =====
Total Investment Return at Net Asset Value(2) ................ 6.78% 2.64% 8.75% 8.60% 5.55%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .....................$11,130 $13,091 $16,997 $49,338 $64,059
Ratio of Expenses to Average Net Assets ...................... 1.21% 1.26% 1.33% 1.48% 1.43%
Ratio of Net Investment Income to Average Net Assets ......... 8.59% 8.71% 9.13% 7.59% 7.22%
Portfolio Turnover Rate ...................................... 306% 150% 147% 77% 71%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends 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.
10
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Short-Term Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
----------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................... $9.31 $9.11 $8.46 $8.40 $8.45
-------- -------- ------- -------- --------
Net Investment Income .......................................... 0.75(1) 0.70(1) 0.70(1) 0.59 0.55(1)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ............................ (0.20) (0.53) (0.06) 0.05 (0.15)
-------- -------- ------- -------- --------
Total from Investment Operations ........................... 0.55 0.17 0.64 0.64 0.40
-------- -------- ------- -------- --------
Less Distributions:
Dividends from Net Investment Income ........................... (0.75) (0.56) (0.56) (0.52) (0.47)
Distributions in Excess of Net Investment Income ............... -- (0.04) -- -- (0.07)
Distributions in Excess of Net Realized Gain on
Investments Sold ............................................ -- (0.12) -- -- --
Distributions from Capital Paid-in ............................. -- (0.10) (0.14) (0.07) (0.01)
-------- ------- ------ ------ --------
Total Distributions ........................................ (0.75) (0.82) (0.70) (0.59) (0.55)
-------- -------- ------- -------- --------
Net Asset Value, End of Period ................................. $9.11 $8.46 $8.40 $8.45 $8.30
Total Investment Return at Net Asset Value(2) .................. 5.98% 1.93% 7.97% 7.89% 4.83%
======== ======== ======= ======== ========
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .......................$142,873 $98,390 $84,601 $48.137 $25,908
Ratio of Expenses to Average Net Assets ........................ 2.01% 1.99% 2.07% 2.12% 2.13%
Ratio of Net Investment Income to Average Net Assets ........... 7.81% 8.00% 8.40% 7.07% 6.51%
Portfolio Turnover Rate ........................................ 306% 150% 147% 77% 71%
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds -- Short-Term Strategic Income Fund
Schedule of Investments
October 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Short-Term Strategic Income Fund on October 31, 1997. It's divided into two main
categories: bonds and short-term investments. Bonds are further broken down by
currency denomination. Short-term investments, which represent the Fund's "cash"
position, are listed last.
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED)# VALUE
- ------------------- -------- -------------- -------
BONDS
Egyptian Pound (1.13%)
Citibank, N.A.,
Nassau Time Deposit
11-17-97 (Time deposit
with redemption linked
to Egyptian Pound
Fx rates)** ......................... 8.000% 3,397 $1,012,760
----------
U.S. Dollar (82.33%)
Altos Hornos de Mexico S.A.,
(Mexico), Bond 04-30-02 ............. 11.375 250 257,500
Banco Central de Costa Rica,
(Costa Rica), Floating Rate
Bond Ser A 05-21-05 ................ 6.539* 724 665,933
Banco Credibanco S.A., (Brazil),
Deb Ser EMTN 11-25-97 ............... 11.625 1,376 1,376,000
Banco de Galica y Bueno Aries
S.A., (Argentina), Floating Rate
Note Ser EMTN 04-15-99 .............. 9.458* 1,500 1,515,000
Bridas Corp., (British Virgin
Islands),Sr Note 11-15-99 ........... 12.500 1,500 1,605,000
Centrais Electricas Brasileiras
S.A., (Brazil), Sr Unsub Deb
10-30-98 (R) ........................ 10.000 1,000 990,000
City of Moscow, (Russia),
Note 05-31-00 (R) ................... 9.500 1,250 1,206,250
Copamex Industrias, S.A ...............
de C.V., (Mexico),
Bond 04-30-04 (R) ................... 11.375 750 772,500
Empresas ICA Sociedad S.A
de C.V., (Mexico),
Note 05-30-01 (R) ................... 11.875 2,000 2,180,000
Espirito Santo Centrais
Electric, (Brazil),
Sr Note 07-15-07 (R) ................ 10.000 750 675,000
Federative Republic of Brazil,
(Brazil), Global Bond
11-05-01 ............................ 8.875 2,000 1,900,000
Financiera Energetica Nacional
S.A., (Colombia), Unsub Deb
Ser REGS 06-15-06 ................... 9.375 1,000 1,000,000
Innova S. de R.L., (Mexico),
Sr Note 04-01-07 .................... 12.875 200 203,000
Klabin Fabricadora de Papel
e Celulose S.A., (Brazil),
Gtd Deb 08-12-04 (R) ................ 11.000 500 485,000
Northwest Airlines, Inc.,
Sr Note 12-31-00 .................... 12.092 1,183 1,206,794
OPP Petroquimica S.A., (Brazil),
Bond 10-29-04 (R) ................... 11.000 500 482,500
Sr Note Ser REGS 10-29-04 ........... 11.000 500 482,500
Petroleo Brasileiro S.A.,
(Brazil), Floating Rate Note
06-08-98 ............................ 10.400* 2,000 2,000,000
Petroleos Mexicanos, (Mexico),
Gtd Deb 09-15-07 (R) ................ 8.850 1,000 985,000
Republic of Argentina,
(Argentina), Floating Rate
Bond 03-31-05 ....................... 6.688* 960 806,400
Global Bond 02-23-01 ................ 9.250 2,000 1,957,400
Republic of Ecuador, (Ecuador),
Unsub Deb 04-25-02 (R) .............. 11.250 750 757,500
Republic of Panama, (Panama),
Bond 02-13-02 (R) ................... 7.875 2,500 2,400,000
Floating Rate Note 05-10-02 7.031* .. 2,115 2,030,791
Republic of Venezuela,
(Venezuela), Floating Rate
Bond Ser DL 12-18-07 ................ 6.750* 3,500 3,027,500
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED)# VALUE
- ------------------- -------- -------------- -------
U.S. Dollar (continued)
Russian Federation Ministry of
Finance, (Russia),
Unsub Deb 11-27-01 (R) ......... 9.250% 1,000 $945,000
Unsub Deb Ser REGS
11-27-01 ....................... 9.250 1,500 1,417,500
Unsub Deb 06-26-07 (R) ......... 10.000 250 240,000
Transportacion Maritima
Mexicana S.A. de C.V.,
(Mexico), Note 05-15-03 ........ 9.250 1,500 1,455,000
Tubos de Acero de Mexico,
(Mexico), Unsub Deb Ser
REGS 12-08-99 .................. 13.750 2,500 2,750,000
TV Azteca, S.A. de C.V.,
(Mexico), Sr Note Ser A
02-15-04 ....................... 10.125 500 490,000
United Mexican States,
(Mexico), Global Bond
02-06-01 ....................... 9.750 1,500 1,597,500
United States Treasury,
Note 01-31-99 .................. 5.875 19,000 19,056,430
Note 05-15-99 .................. 6.375 13,000 13,140,140
Note 08-15-00 .................. 6.000 2,000 2,015,940
----------
74,075,078
TOTAL BONDS ----------
(Cost $74,252,318) (83.46%) 75,087,838
-------- ----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (4.98%)
Investment in a joint repurchase
agreement transaction with
Aubrey G. Lanston & Co. -
Dated 10-31-97, Due 11-03-97
(Secured by US Treasury Notes,
5.750% thru 7.125%, Due
12-31-98 thru 4-30-00)
- Note A....................... 5.680 4,480 4,480,000
----------
Cash Equivalents (21.44%)
Navigator Securities Lending
Prime Portfolio ***. 19,289 19,288,910
-----------
TOTAL SHORT-TERM INVESTMENTS (26.42%) 23,768,910
-------- -----------
TOTAL INVESTMENTS (109.88%) $98,856,748
======== ===========
NOTES TO SCHEDULE OF INVESTMENTS
* Represents rate in effect on October 31, 1997.
** An indexed security's value is linked to changes in foreign currencies,
interest rates or other reference instruments. Indexed securities amounted
to $1,012,760 or 1.13% as of October 31, 1997.
*** Represents investment of security lending collateral - Note A.
# Par value of non US$ denominated foreign bonds is expressed in local
currency for each country listed.
(R) These securities are 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 $12,118,750 or 13.47% of the Fund's net
assets as of October 31, 1997.
EMTN Euro Medium Term Note
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 -- Short-Term Strategic Income Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by companies and governments of other
countries. The performance of the Fund is closely tied to the economic condition
within the countries in which it invests. The concentration of investments by
currency denomination for individual securities held by the Fund is shown in the
schedule of investments. In addition, concentration of investments can be
aggregated by various investment categories. The table below shows the
percentages of the Fund's investments at October 31, 1997 assigned to the
various investment categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
- --------------------- ---------------
Banks ..................................................... 5.08%
Building .................................................. 2.42
Chemicals ................................................. 1.07
Finance ................................................... 1.11
Government - Foreign ...................................... 20.33
Government - U.S. ......................................... 38.03
Media ..................................................... 0.54
Oil & Gas ................................................. 5.10
Paper & Paper Products .................................... 1.40
Steel ..................................................... 3.34
Telecommunications ........................................ 0.23
Transportation ............................................ 2.96
Utility ................................................... 1.85
Short-term Investments .................................... 26.42
------
TOTAL INVESTMENTS 109.88%
======
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom Investment
Trust II) is a diversified open-end management investment company, registered
under the Investment Company Act of 1940. The Trust consists of six series: John
Hancock Short-Term Strategic Income Fund (the "Fund"), John Hancock Global Fund,
John Hancock World Bond Fund, John Hancock Special Opportunities 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 a high level of current income by investing primarily
in debt securities of foreign governments and companies including those in
emerging markets, as well as the U.S. Government, its agencies and
instrumentalities and U.S. companies. The Fund maintains an average portfolio
maturity of three years or less.
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. The Fund may invest in indexed securities whose value is linked either
directly or inversely to changes in foreign currencies, interest rates,
commodities, indices or other reference instruments. Indexed securities may be
more volatile than the reference instrument itself, but any loss is limited to
the amount of the original investment.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. 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. The Fund
has $27,884,467 capital loss carryforwards available, to the extent provided by
regulations, to offset future net realized capital gains. To the extent such
carryforwards are used by the Fund, no capital gains distributions will be made.
The carryforwards expire as follows: October 31, 2000 -- $16,879,029, October
31, 2001 -- $3,127,414, October 31, 2002 -- $2,774,082, October 31, 2003 --
$5,103,942. Expired capital loss carryforwards are reclassified to capital
paid-in, in the year of expiration.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
DISTRIBUTIONS AND INTEREST Interest income on investment securities is recorded
on the accrual basis. Foreign income may be subject to foreign withholding taxes
which are accrued as applicable.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
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.
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.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
ORGANIZATION EXPENSES Expenses incurred in connection with the organization of
the Fund were capitalized and were charged to the Fund's operations ratably over
a five year period that commenced with the investment operations of the Fund.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The fund had no borrowing
activity for the year ended October 31, 1997.
SECURITIES LENDING The Fund may lend its securities to certain qualified brokers
who pay the Fund negotiated lenders fees. These fees are included in interest
income. The loans are collateralized at all times with cash or securities with a
market value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay of the
loaned securities in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. At October 31, 1997, the Fund
loaned securities having a market value of $18,762,447 collateralized by cash in
the amount of $19,288,910, which was invested in a short-term instrument.
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 PM, 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
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
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.
Open foreign currency forward contracts at October 31, 1997, were as follows:
PRINCIPAL AMOUNT UNREALIZED
COVERED BY EXPIRATION APPRECIATION
CURRENCY CONTRACT DATE (DEPRECIATION)
- -------- ------------ --------- ---------------
SELLS
Mexican Pesos 13,940,170 NOV 97 $27,205
New Zealand Dollars 4,528,154 NOV 97 $1,341
New Zealand Dollars 2,969,460 NOV 97 $880
South African Rands 7,129,058 NOV 97 ($5,971)
--------
$23,455
========
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. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure to
the underlying instrument or hedge other Fund instruments. At the time the Fund
enters into a financial futures contract, it will be required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at the
official settlement price on the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market," will be recorded by the Fund as unrealized gains or
losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At October 31, 1997, there were no open positions in financial futures
contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked-to-market to reflect the current market
value of the written option.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
The Fund may use option contracts to manage its exposure to the market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the year ended October 31,
1997.
NOTE B --
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.65% of the first $500,000,000 of the Fund's
average daily net asset value and (b) 0.60% of the Fund's average daily net
asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") acted as Co-Distributors
for shares of the Fund. For the year ended October 31, 1997, net sales charges
received with regard to sales of Class A shares amounted to $84,777. Of this
amount, $11,040 was retained and used for printing prospectuses, advertising,
sales literature and other purposes, $43,164 was paid as sales commissions to
unrelated broker-dealers and $30,573 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 ("JHMLICo"), is the indirect sole shareholder of Distributors
and was the indirect sole shareholder until November 29, 1996 of John Hancock
Freedom Securities Corporation and its subsidiaries, which include FDC, Tucker
Anthony and Sutro.
Class B shares which are redeemed within four years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 3.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended October 31, 1997,
the contingent deferred sales charges paid to JH Funds amounted to $83,950.
In addition, to reimburse the Co-Distributors for the services they provide
as distributors of shares of the Fund, the Fund has adopted Distribution Plans
with respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to the
Co-Distributors for distribution and service expenses, at an annual rate not to
exceed 0.30% of Class A average daily net assets and 1.00% of Class B average
daily net assets to reimburse the Co-Distributors for their distribution and
service costs. Up to a maximum of 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
John Hancock Funds -- Short-Term Strategic Income Fund
JHMLICo. The Fund pays transfer agent fees based on the number of shareholder
accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At October 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $579.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended October 31, 1997, aggregated $38,936,096 and $75,275,235, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $24,948,775 and $1,002,461, respectively, during the year
ended October 31, 1997.
The cost of investments owned at October 31, 1997 for federal income tax
purposes was $98,021,228. Gross unrealized appreciation and depreciation of
investments aggregated $1,564,829 and $729,309, respectively, resulting in net
unrealized appreciation of $835,520.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $1,052,041
and an increase in distributions in excess of net investment income of $224,963,
and a decrease in capital paid-in of $827,078. This represents the amount
necessary to report these balances on a tax basis, excluding certain temporary
differences, as of October 31, 1997. 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 transactions, and return of
capital distribution 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
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John Hancock Funds -- Short-Term Strategic Income Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Short-Term Strategic Income Fund and the
Trustees of John Hancock Investment Trust III
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Short-Term Strategic
Income Fund (the "Fund") (a series of John Hancock Investment Trust III) at
October 31, 1997, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at October 31, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 15, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended October 31,
1997.
None of the distributions qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV in
January of 1998. This will reflect the total of all distributions which are
taxable for calendar year 1997.
20
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NOTES
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John Hancock Funds -- Short-Term Strategic Income Fund
21
<PAGE>
NOTES
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John Hancock Funds -- Short-Term Strategic Income Fund
22
<PAGE>
NOTES
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John Hancock Funds -- Short-Term Strategic Income Fund
23
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Printed on Recycled Paper 3200A 10/97
[LOGO] 12/97
