- --------------------------------------------------------------------------------
FINAL REPORT
V.A. WORLD BOND
FUND
John Hancock Funds
MARCH 26, 1999
- --------------------------------------------------------------------------------
<PAGE>
John Hancock Funds - V.A.World Bond Fund
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
* Members of the Audit Committee
Officers
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Anne C. Hodsdon
President,Chief
Operating Officer and
Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Vice President and
Compliance Officer
Custodian
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Transfer Agent
John Hancock Servicing Center.
P.O. Box 9298
Boston, Massachusetts 02205-9298
Investment Adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Principal Distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
<PAGE>
John Hancock Funds - V.A. World Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C>
Statement of Assets and Liabilities
March 26, 1999 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
Assets:
Investments at value - Note D:
Bonds (cost - $2,468,156) $2,463,888
Joint repurchase agreement (cost - $77,000) 77,000
-----------------
2,540,888
Cash 991
Receivable for closed forward foreign currency exchange contracts - Note B 2,475
Interest receivable 43,863
Other assets 125
-----------------
Total Assets 2,588,342
-------------------------------------------
Liabilities:
Payable for open forward foreign currency exchange contracts purchased - Note B 14,396
Distribution payable 3
Payable to John Hancock Advisers, Inc.
and affiliates - Note C 773
Accounts payable and accrued expenses 3,334
-----------------
Total Liabilities 18,506
-------------------------------------------
Net Assets:
Capital paid-in 2,579,630
Accumulated net realized loss on investments and foreign currency transactions (4,130)
Net unrealized depreciation of investments and foreign currency transactions (17,012)
Undistributed net investment income 11,348
-----------------
Net Assets $2,569,836
===========================================
Net Asset Value Per Share:
(Based on 273,886 shares of beneficial interest outstanding-
unlimited number of shares authorized with no par value) $ 9.38
============================================================================================================================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - V.A. World Bond Fund
Statement of Operations
Period from January 1,1999 to March 26, 1999 (Unaudited)
- ---------------------------------------------------------------------------------------------------
Investment Income:
Interest $ 36,265
-------------------------------
Expenses:
Investment management fee - Note C 4,571
Organization Expense - Note B 5,690
Custodian fee 3,871
Financial Service Fee - Note C 88
Trustees' fees 29
Miscellaneous 2
-------------------------------
Total Expenses 14,251
----------------------------------------------------------------------------------
Less Expense Reductions- Note C (8,156)
----------------------------------------------------------------------------------
Net Expenses 6,095
----------------------------------------------------------------------------------
Net Investment Income 30,170
----------------------------------------------------------------------------------
Realized and Unrealized Loss on Investments and
Foreign Currency Transactions:
Net realized loss on investments sold (1,048)
Net realized loss on foreign currency transactions (24,101)
Change in net unrealized appreciation/depreciation
of investments (87,353)
Change in net unrealized appreciation/depreciation
of foreign currency transactions (17,402)
-------------------------------
Net Realized and Unrealized Loss on
Investments and Foreign Currency Transactions (129,904)
----------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations $ (99,734)
==================================================================================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - V.A. World Bond Fund
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
JANUARY 1, 1999 TO
YEAR ENDED MARCH 26, 1999
DECEMBER 31, 1998 (UNAUDITED)
------------------------ -----------------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $131,686 $30,170
Net realized loss on investments sold and foreign currency transactions (28,346) (25,149)
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions 61,572 (104,755)
------------------------ -----------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 164,912 (99,734)
------------------------ -----------------------
Distributions to Shareholders: *
Dividends from net investment income (75,591) -
Distributions in excess of net investment income (17,306) -
Tax return of capital (38,789) (30,170)
------------------------ -----------------------
Total Distributions to Shareholders (131,686) (30,170)
------------------------ -----------------------
From Fund Share Transactions Net: **
Shares sold 310,523 -
Shares issued to shareholders in reinvestment of distributions 131,895 30,167
------------------------ -----------------------
442,418 30,167
Less shares repurchased (101,279) (7,388)
------------------------ -----------------------
Net Increase 341,139 22,779
------------------------ -----------------------
Net Assets:
Beginning of period 2,302,596 2,676,961
------------------------ -----------------------
End of period (including distributions in excess of net investment income
of $7,414 and undistributed net investment income of
$11,348, respectively) $2,676,961 $2,569,836
======================== =======================
* Distributions to Shareholders:
Per share dividends from net investment income $ 0.2977 $ -
------------------------ -----------------------
Per share distributions in excess of net investment income $ 0.0682 $ -
------------------------ -----------------------
Tax return of capital $ 0.1528 $ 0.1108
------------------------ -----------------------
** Analysis of Fund Share Transactions:
Shares sold 31,886 -
Shares issued to shareholders in reinvestment of distributions 13,557 3,166
------------------------ -----------------------
45,443 3,166
Less shares repurchased (10,410) (782)
------------------------ -----------------------
Net Increase 35,033 2,384
======================== =======================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are as
follows:
................................................................................
PERIOD FROM JANUARY 1, 1999
PERIOD ENDED YEAR ENDED DECEMBER 31, TO MARCH 26, 1999
DECEMBER 31, 1996 (1) 1997 1998 (UNAUDITED)
--------------------- ---- ---- -----------
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 10.00 $ 10.20 $ 9.74 $ 9.86
------------------ --------- --------- -------------------
Net Investment Income (2) 0.20 0.59 0.52 0.11
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions 0.20 (0.46) 0.12 (0.48)
------------------ --------- --------- -------------------
Total from Investment Operations 0.40 0.13 0.64 (0.37)
------------------ --------- --------- -------------------
Less Distribution:
Dividends from Net Investment Income (0.20) (0.21) (0.30) -
Distributions in Excess of Net Investment Income - (0.09) (0.07) -
Tax Return of Capital - (0.29) (0.15) (0.11)
------------------ --------- --------- -------------------
Total Distributions (0.20) (0.59) (0.52) (0.11)
------------------ --------- --------- -------------------
Net Asset Value, End of Period $ 10.20 $ 9.74 $ 9.86 $ 9.38
================== ========= ========= ===================
Total Investment Return at Net Asset Value (3) 4.05% (5) 1.37% 6.76% (3.76%)(5)
Total Adjusted Investment Return at Net Asset Value (3,4) 3.30% (5) 0.07% 5.73% (4.07%)(5)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $ 2,083 $ 2,303 $ 2,677 $ 2,570
Ratio of Expenses to Average Net Assets 1.00% (6) 1.00% 1.00% 1.00% (6)
Ratio of Adjusted Expenses to Average Net Assets (7) 3.19% (6) 2.30% 2.03% 2.34% (6)
Ratio of Net Investment Income to Average Net Assets 5.83% (6) 5.98% 5.32% 4.95% (6)
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets (7) 3.64% (6) 4.68% 4.29% 3.61% (6)
Portfolio Turnover Rate 30% 176% 90% 13%
Fee Reduction Per Share (2) $ 0.08 $ 0.13 $ 0.10 $ 0.03
(1) Commenced operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) An estimated total return calculation which does not take into consideration
fee reductions by the Adviser during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - V.A. World Bond Fund
Schedule of Investments
March 26, 1999 (Unaudited)
....................................................................................................................................
The Schedule of Investments is a complete list of all securities owned by
V.A. World Bond Fund on March 26, 1999. It's divided into two main
categories: bonds and short-term investments. The bonds are further
broken down by currency denomination. Short-term investments, which
represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST (000s
ISSUER, DESCRIPTION RATE OMITTED)# MARKET VALUE
- ------------------- ---- --------- ------------
BONDS
Australian Dollar (3.97%)
Commonwealth of Australia,
Bond Ser 808 08-15-08 8.750% 130 $102,003
---------------
British Pound Sterling (6.63%)
United Kingdom Treasury,
Bond 12-07-00 8.000 50 85,128
Bond 11-06-01 7.000 50 85,314
---------------
170,442
---------------
Canadian Dollar (4.07%)
Government of Canada,
Deb 03-01-01 7.500 75 51,784
Deb 06-01-08 6.000 75 52,711
---------------
104,495
---------------
Danish Krone (5.68%)
Kingdom of Denmark, (Denmark),
Bond 02-15-01 4.000 1,000 146,048
---------------
Deutsche Mark (8.10%)
Colt Telecom Group Plc, (United Kingdom),
Sr Note Ser DTC 07-31-08 7.625 15 8,446
Ford Motor Credit Co., (United States),
Bond 06-16-08 5.250 350 199,659
---------------
208,105
---------------
Euro (11.46%)
Federal Republic of Germany, (Germany)
Bond Ser 121 11-20-01 4.750 238 266,104
Orange Plc, (United Kingdom)
Sr Note 08-01-08 7.625 25 28,470
---------------
294,574
---------------
New Zealand Dollar (3.66%)
Government of New Zealand,
Bond Ser 403 04-15-03 5.500 175 94,115
---------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PAR VALUE
INTEREST (000s
ISSUER, DESCRIPTION RATE OMITTED)# MARKET VALUE
- ------------------- ---- --------- ------------
U.S. Dollar (52.30%)
Federal Home Loan Bank,
Bond 10-15-03 5.440% $150 $149,086
Bond 03-26-07 6.945 100 106,531
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 7.000 96 98,539
Federal National Mortgage Assn.,
Note 02-13-04 5.125 264 259,586
Government of Jamaica, (Jamaica),
Note 06-10-05 (R) 10.875 10 8,850
Republic of Costa Rica, (Costa Rica),
Deb 05-01-03 (R) 8.000 25 24,250
Republic of Panama, (Panama),
Note Ser REGS 02-13-02 7.875 50 48,500
United Mexican States, (Mexico),
Global Bond 02-06-01 9.750 50 51,725
United States Treasury,
Bond 08-15-27 6.375 75 80,567
Note 04-30-03 5.750 25 25,492
Note 08-15-03 5.250 55 55,138
Note 05-15-07 6.625 120 129,600
Note 08-15-07 6.125 75 78,644
Note 05-15-08 5.625 100 102,047
Note 11-15-08 4.750 130 125,551
-------------
1,344,106
TOTAL BONDS -------------
(Cost $2,468,156) (95.87%) 2,463,888
---------- -------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.00%)
Investment in a joint repurchase agreement
transaction with Barclay's Capital Corp. -
Dated 03-26-99, Due 03-29-99 (Secured by
U.S. Treasury Bonds, 7.750% thru 8.875%
due 11-30-99 thru 08-15-17) - Note B 4.820 77 77,000
----------- -------------
TOTAL SHORT-TERM INVESTMENTS (3.00%) 77,000
----------- -------------
TOTAL INVESTMENTS (98.87%) 2,540,888
----------- -------------
OTHER ASSETS AND LIABILITIES, NET (1.13%) 28,948
----------- -------------
TOTAL NET ASSETS (100.00%) $2,569,836
=========== =============
</TABLE>
# Par value of non US dollar 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 $33,100 or 1.29% of the Fund's net assets as of
March 26, 1999.
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
<PAGE>
John Hancock Funds - Declaration Trust - V.A. World Bond Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by the U.S. government, its agencies
or instrumentalities, foreign governments and companies. 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 March 26, 1999 assigned to the various investment categories.
MARKET VALUE
AS A %
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
----------------------
Finance 7.77%
Government - Foreign 39.55
Government - U.S. 23.23
Government - U.S. Agencies 23.88
Telecommunications 1.44
Short-term Investments 3.00
======================
TOTAL INVESTMENTS 98.87%
======================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
(UNAUDITED)
NOTE A --
ORGANIZATION
John Hancock Declaration Trust (the "Trust") is an open-end management
investment company registered under the Investment Company Act of 1940. The
Trust, organized as a Massachusetts business trust in 1995, consists of fifteen
different series: John Hancock V.A. World Bond Fund (the "Fund"), John Hancock
V.A. International Fund, John Hancock V.A. Regional Bank Fund, John Hancock V.A.
Financial Industries Fund, John Hancock V.A. Small Cap Growth Fund (formerly
known as John Hancock V.A. Emerging Growth Fund), John Hancock V.A. Mid Cap
Growth Fund (formerly known as John Hancock V.A. Special Opportunities Fund),
John Hancock V.A. Large Cap Growth Fund (formerly known as John Hancock Growth
Fund), John Hancock V.A. Large Cap Value Fund (formerly known as John Hancock
V.A. Growth and Income Fund, John Hancock V.A. Core Equity Fund (formerly known
as John Hancock V.A. Independence Equity Fund), John Hancock V.A. Sovereign
Investors Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. Bond Fund,
John Hancock V.A. Strategic Income Fund, John Hancock V.A. High Yield Bond Fund
and John Hancock V.A. Money Market Fund (collectively the "Funds"). Prior to
October 1, 1998, V.A. Bond Fund was known as John Hancock V.A. Sovereign Bond
Fund. Prior to January 2, 1998, V.A. Growth Fund was known as John Hancock V.A.
Discovery Fund. The other fourteen series are reported in separate financial
statements. The Fund currently had one class of shares with equal rights as to
voting, redemption, dividends and liquidation. The Trustees may authorize the
creation of additional series from time to time to satisfy various investment
objectives. An insurance company issuing a Variable Contract that participates
in the Trust will vote shares of the Funds held by the insurance company's
separate accounts as required by law. In accordance with current law and
interpretations thereof, participating insurance companies are required to
request voting instructions from policy owners and must vote shares of the Funds
in proportion to the voting instructions received. The investment objective of
the Fund was to seek a high total investment return, a combination of current
income and capital appreciation, by investing primarily in a global portfolio of
fixed-income securities.
On March 18,1999, the shareholders of the Fund approved a plan of
reorganization between the Fund and the V.A. Strategic Income Fund providing for
the transfer of substantially all of the assets and liabilities of the Fund to
the V.A. Strategic Income Fund in exchange solely for shares of beneficial
interest of the John Hancock V.A. Strategic Income Fund. After this transaction
and as of the close of business March 26, 1999, the Fund was terminated. The
financial statements presented herein reflect the position of the Fund prior to
the exchange of net assets and termination of the Fund.
Significant accounting policies of the Fund are as follows:
NOTE B -
ACCOUNTING POLICIES
VALUATION OF INVESTMENTS Securities in the Fund portfolio were 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
were 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.
<PAGE>
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., participated in joint repurchase agreement transactions. Aggregate cash
balances were invested in one or more large repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Funds' custodian bank received delivery of the underlying
securities for the joint account on the Funds' behalf. The Adviser was
responsible for ensuring that the agreement was fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions were recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments were determined on the identified cost basis. Capital gains realized
on some foreign securities were subject to foreign taxes and were accrued, as
applicable.
FEDERAL INCOME TAXES The Fund's policy was to comply with the requirements of
the Internal Revenue Code that were applicable to regulated investment companies
and to distribute all of their taxable income, including net realized gain on
investments, to their shareholders. Therefore, no federal income tax provision
was required. For federal income tax puposes, net currency exchange gains and
losses from sales of foreign debt securities were treated as ordinary income
even though such items were gains and losses for accounting purposes.
For federal income tax purposes, the Fund had $4,130 of capital loss
carryforward available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent such carryforward was used by the
Fund, no capital gain distributions were made. The carryforward was assumed by
the John Hancock V.A. Strategic Income Fund as part of the merger with that
Fund. The carryforward will expire on December 31, 2006.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
was recorded on the ex-dividend date or, in the case of some foreign securities,
on the date thereafter when the Funds were notified of the dividend. Interest
income on investment securities was recorded on the accrual basis. Foreign
income may have been subject to foreign withholding taxes, which were accrued as
applicable.
The Fund recorded all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions were determined
in conformity with income tax regulations, which could have differed from
generally accepted accounting principles.
EXPENSES The majority of the expenses of the Trust were directly identifiable to
an individual fund. Expenses which were not readily identifiable to a specific
fund were allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative size of the funds.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporated estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Funds. Actual results could have differed from these
estimates.
ORGANIZATION EXPENSES Any expenses incurred in connection with the organization
of the Fund were capitalized and were being charged to the Fund's operations
ratably over a five-year period that commenced with the investment operations of
each applicable fund. The remaining balance was expensed in the current period.
<PAGE>
BANK BORROWINGS The Fund was permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might have required the untimely disposition of securities. Effective March 12,
1999, the Fund entered into a syndicated line of credit agreement with various
banks, and the agreements previously in effect were terminated. This agreement
enabled the Fund to participate with other funds managed by the Adviser in
unsecured lines of credit with banks, which permitted borrowings up to $500
million, collectively. Interest was charged to each of the funds based on its
borrowings. In addition, a commitment fee was charged based on the average daily
unused portion of the line of credit and was allocated among the participating
funds. The Fund had no borrowing activity for the period ended March 26, 1999.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially expressed in
terms of foreign currencies were translated into U.S. dollars based on London
currency exchange quotations as of 5:00 P.M., London time, on the date of any
determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/(loss) on investments
were translated at the rates prevailing at the dates of the transactions.
The Fund did 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 were included with the net realized and unrealized gain or loss
from investments.
Reported net realized foreign exchange gains or losses arisen 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 arisen 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 could have entered into
forward foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency exchange
contract involved an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the contracts
were marked to market daily at the applicable foreign currency exchange rates.
Any resulting unrealized gains and losses were included in the determination of
the Fund's daily net assets. The Fund recorded realized gains and losses at the
time the forward foreign currency contract were closed out or offset by a
matching contract. Risks could have arisen 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 involved market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statements of Assets and
Liabilities.
The Fund could have also purchased and sold forward contracts to
facilitate the settlement of foreign currency denominated portfolio
transactions, under which they intended to take delivery of the foreign
currency. Such contracts normally involved no market risk if they were offset by
the currency amount of the underlying transaction.
Open forward foreign currency exchange contracts for the Fund at March 26, 1999
were as follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT MONTH DEPRECIATION
- -------- ------------------- ----- ------------
BUYS
Euro Currency 185,000 APRIL 99 $11,103
Japanese Yen 16,997,040 APRIL 99 3,293
-----
$14,396
=======
<PAGE>
FINANCIAL FUTURES CONTRACTS The Fund could buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates,
currency exchange rates and other market conditions. Buying futures tended to
increase the Fund's exposure to the underlying instrument. Selling futures
tended to decrease the Fund's exposure to the underlying instrument or hedge
other Funds instruments. At the time the Fund entered into a financial futures
contract, it was 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 was valued at the official settlement price on
the board of trade or U.S. commodities exchange on which it traded. Subsequent
payments, known as "variation margin," to and from the broker were 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," were
recorded by the Fund as unrealized gains or losses.
When the contracts were closed, the Fund recognized a gain or loss.
Risks of entering into futures contracts include the possibility that there
could have been 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 have been 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 could have been affected as a result of futures
contracts.
OPTIONS The Fund could have entered into options contracts. Listed options were
valued at the last quoted sales price on the exchange on which they were
primarily traded. Over-the-counter options were valued at the mean between the
last bid and asked prices. Upon the writing of a call or put option, an amount
equal to the premium received by the Fund would have been included in the
Statement of Assets and Liabilities as an asset and corresponding liability. The
amount of the liability was subsequently marked to market to reflect the current
market value of the written option.
The Fund could have used option contracts to manage their exposure to
changing security prices. Writing puts and buying calls would have tended to
increase the Fund's exposure to the underlying instrument and buying puts and
writing calls would have tended to decrease the Fund's exposure to the
underlying instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options were limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value reflected the maximum exposure of
the Fund in these contracts, but the actual exposure was limited to the change
in value of the contract over the period the contract remains open.
Risks may have also arisen if counterparties did not perform under the
contract's terms ("credit risk"), or if the Fund was unable to offset a contract
with a counterparty on a timely basis ("liquidity risk"). Exchange-traded
options had 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 continuously monitored the creditworthiness of all its
counterparties.
At any particular time, except for purchased options, market or credit
risk could have involved amounts in excess of those reflected in the Fund's
Statements of Assets and Liabilities.
There were no written option transactions for the period ended March
26, 1999, for the Fund.
<PAGE>
NOTE C-
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the investment management contract, the Fund paid a monthly management fee
to the Adviser, for a continuous investment program equivalent, on an annual
basis, of 0.75% of the Fund's average daily net assets.
The Adviser had voluntarily agreed to limit the Fund's expenses, excluding the
management fee, to 0.25% of the Fund's average daily net assets. The Adviser had
reserved the right to terminate this limitation in the future. Accordingly, for
the period ended March 26, 1999, the reduction in the Fund's expenses with any
additional amounts not borne by the Fund by virtue of the expense limit amounted
to $8,156.
The Fund had an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Stephen L. Brown, Mr. Richard S.
Scipione and Ms. Anne C. Hodsdon were directors and/or officers of the Adviser
and/or its affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees was borne by the Fund. The unaffiliated Trustees could
have elected to defer, for tax purposes, their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The Fund made
investments into other John Hancock funds, as applicable, to cover their
liability for the deferred compensation. Investments to cover the Funds'
deferred compensation liability were recorded on the Fund's books as an other
asset. The deferred compensation liability and the related other asset were
always equal and were marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses.
NOTE D-
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities, other than obligations of U.S.
government and its agencies and short-term securities, during the period ended
March 26, 1999, aggregated $351,587 and $320,205, respectively. Purchases and
proceeds from sales of obligations of the U.S. government and its agencies
aggregated $125,694 and none, respectively, during the period ended March 26,
1999.
The cost of investments owned at March 26, 1999 for federal income tax
purposes was $2,545,156. Gross unrealized appreciation and depreciation of
investments aggregated $40,292 and $44,560, respectively, resulting in net
unrealized depreciation of $4,268.
NOTE E-
RECLASSIFICATION OF ACCOUNTS
During the period ended March 26, 1999, the Fund had reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $24,851,
an increase in undistributed net investment income of $18,762 and a decrease in
capital paid-in of $43,613. This represented the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
March 26, 1999. These reclassifications, which have no impact on the net asset
value of the Fund, are primarily attributable to the treatment of realized
gain/loss on foreign currency transactions, as well as the treatment of net
operating losses and return of capital 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 excluded these adjustments.
