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John Hancock Funds
- --------------------------------------------------------------------------------
Cash
Reserve,
Inc.
ANNUAL REPORT
December 31, 1996
<PAGE>
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CHAIRMAN'S MESSAGE
DIRECTORS
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
ANNE C. HODSDON
CHARLES L. LADNER*
LEO E. LINBECK, JR.*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY STE 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
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02216-5072
DEAR FELLOW SHAREHOLDERS:
Most analysts agree that the Social Security system will run out of money by the
year 2030 unless Congress makes some changes. Although it seems a long way off,
the issue is serious enough that at least one group has already studied the
problem, and experts and politicians alike have weighed in with a slew of
prescriptions. Legislative action could be in the offing in 1997.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph]
The problem stems from demographic and societal changes. The number of
retirees collecting Social Security is growing rapidly, while the number of
workers supporting the system is shrinking. Consider this: in 1950, there were
16 workers paying into the Social Security system for each retiree collecting
benefits. Today, there are three workers for each retiree and by 2019 there will
be two. Starting then, the Social Security Administration estimates that the
amount paid out in Social Security benefits will start to be greater than the
amount collected in Social Security taxes. Compounding the issue is the fact
that people are retiring earlier and living longer.
The state of the system has already left many people, especially younger and
middle-aged workers, feeling insecure about Social Security. A recent survey by
the Employee Benefits Research Institute (EBRI) found that 79% of current
workers polled had little confidence in the ability of Social Security to
maintain the same level of benefits as those received by today's retirees.
Instead, they said they expect to use their own savings or employer-sponsored
pensions for their retirement. Yet, remarkably, another EBRI survey revealed
that only slightly more than half of America's current workers are saving money
for retirement.
Fewer than half own IRAs or participate in employer-sponsored pension or savings
plans.
No matter how Social Security's problems get solved, one thing is clear.
Americans need to rely on themselves for accumulating the bulk of their
retirement savings. There's no law that says you should have to reduce your
standard of living once you stop working. So we encourage you to save all that
you can now, so you can live the way you'd like later.
Sincerely,
/s/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY DAWN BAILLIE, FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Cash Reserve, Inc.
Short-term rates and money market yields remain steady
in 1996 despite mixed economic signals
Money market yields remained fairly steady during 1996, despite some
significant changes in market sentiment during the last 12 months. As the year
began, the Federal Reserve's mindset was toward lowering short-term interest
rates to spur the slow-growing economy and prevent it from slipping into
recession. It did just that in January, with a quarter-percent cut in the
federal funds rate that brought it to 5.25%. This important short-term interest
rate is the rate banks charge each other for overnight loans and is also a
benchmark for pricing money market securities.
But in March, sentiment changed dramatically, as the first in a series of
monthly employment reports provoked concerns that the economy was growing faster
than was expected. That triggered inflation fears, sent interest rates up and
kept the bond market volatile for most of the year as it reacted to each monthly
set of economic data. Investors also started to wonder if the Fed would reverse
its course and push up short-term rates to cool down the economy and prevent an
inflation outbreak. But the Fed left the federal funds rate alone at 5.25% right
through year end, believing the economy's growth rate was under control. Even
though unemployment is at its lowest level in years, that has not translated
into wage inflation, one key factor that the Fed watches in determining when to
tweak the federal funds rate.
"Money market yields remained
fairly steady during 1996..."
Fund yield and strategy
On December 31, 1996, John Hancock Cash Reserve, Inc. had a 7-day average yield
of 4.97%. By comparison, the average taxable money market fund had a 7-day
average yield of 4.90%, according to IBC/Donoghue's Money Fund Report.
Between January and March, as rates were falling, the Fund took an aggressive
approach to finding higher yields by lengthening its average maturity.
[A 2 1/4" x 2" photo of Dawn Baillie at bottom center. Caption reads: "Dawn
Baillie".]
3
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John Hancock Funds - Cash Reserve, Inc.
[Bar chart with the heading "7-Day Yield" at top of left hand column. Under the
heading is the footnote: "As of December 31, 1996." The chart is scaled in
increments of 1% from top to bottom, with 5% at the top and 0% at the bottom.
Within the chart, there are two solid bars. The first represents the 4.97% 7-day
yield for John Hancock Cash Reserve Fund, Inc. The second represents the 4.90%
7-day yield for the average taxable money market fund. Footnote below reads:
"The average taxable money market fund is tracked by IBC/Donoghue's Money
Fund Report. Past performance is no guarantee of future results"]
- --------------------------------------------------------------------------------
"...our view is that for now, money market fund
investors are in for more of the same."
This helped us lock in higher yields as rates were falling. But as market
sentiment changed, we took a more conservative stance and stopped extending the
average maturity. Midway through the year, the Fund's average maturity was 52
days, which was in line with the average for IBC/Donoghue's All-Taxable Group.
By autumn, the Fund's focus was on liquidity, and that caused us to begin
investing in shorter-term, lower-yielding securities. This strategy was driven
by the Fund's closure to new investments in October, as you may recall from our
recent correspondence. At the time, shareholders in Cash Reserve, Inc. wishing
to continue building on their money market investments were given, and still
have, the ability to invest in a much larger fund, John Hancock Money Market
Fund.
The effect on Cash Reserve, Inc. of this closure has been heightened
shareholder activity as a number of investors have made the switch to the Money
Market Fund. As a result, the Fund's average yield has declined because we have
invested in shorter-term investments to accommodate shareholders' needs. By
their nature, shorter-term investments provide a lower yield because they carry
less interest-rate risk. By the end of the year, the Fund's average maturity was
45 days, compared to an average 53 days for Donoghue's All-Taxable Group. Given
the absence of new investment dollars and considering our liquidity focus, we
expect to maintain a shorter-than-average maturity for the Fund going forward.
Outlook
We believe that the economy will maintain its moderate growth path with signs
that inflation is staying tame. As long as that's the case, we don't expect the
Fed to change short-term interest rates. While the Fed's inclination still
remains toward raising rates rather than lowering them, it still seems unlikely
that it will be forced to act, given the current economic environment. As 1997
begins, therefore, our view is that for now, money market fund investors are in
for more of the same.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
The Fund is neither insured nor guaranteed by the U.S. government. There can be
no assurance that the Fund will be able to maintain a net asset value of $1.00
per share.
4
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FINANCIAL STATEMENTS
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John Hancock Funds - Cash Reserve, Inc.
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 December 31, 1996. You'll
also find the net asset value per share as of that date.
Statement of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, in money market instruments,
at value - Note C:
Commercial paper (cost - $5,989,578)................. $ 5,989,578
Negotiable bank certificates of deposit
(cost - $1,999,903)................................ 1,999,903
Corporate interest bearing obligations
(cost - $45,384,517)............................... 45,384,517
U.S. government obligations (cost - $9,798,088) ..... 9,798,088
Joint repurchase agreement (cost - $2,664,000) ...... 2,664,000
-----------
65,836,086
Cash.................................................. 278,897
Interest receivable................................... 976,258
Other assets.......................................... 36,725
-----------
Total Assets........................ 67,127,966
---------------------------------------------------
Liabilities:
Payable for shares repurchased........................ 310
Dividend payable...................................... 9,186
Payable to John Hancock Advisers, Inc.
and affiliates - Note B.............................. 42,391
Accounts payable and accrued expenses................. 73,180
-----------
Total Liabilities................... 125,067
---------------------------------------------------
Net Assets:
Capital paid-in....................................... 67,002,899
-----------
Net Assets.......................... $67,002,899
===================================================
Net Asset Value, Offering Price and
Redemption Price Per Share:
(based on 67,002,899 shares of beneficial interest
outstanding - unlimited number of shares authorized
with no par value).................................... $ 1.00
=====================================================================
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund.
Statement of Operations
Year ended December 31, 1996
- --------------------------------------------------------------------------------
Investment Income:
Interest.............................................. $5,716,199
----------
Expenses:
Investment management fee - Note B................... $ 363,452
Transfer agent fee - Note B.......................... 131,066
Registration and filing fees......................... 62,067
Custodian fee........................................ 45,602
Auditing fee......................................... 30,000
Financial services fee - Note B...................... 19,471
Trustees' fees....................................... 12,504
Advisory board fee................................... 6,779
Printing............................................. 4,868
Legal fees........................................... 1,536
Miscellaneous........................................ 1,333
----------
Total Expenses...................... 678,678
----------------------------------------------------
Net Investment Income............... 5,037,521
----------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .......... $5,037,521
====================================================
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
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FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996
------------- -------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment Income ....................... $ 6,096,238 $ 5,037,521
------------- -------------
Net Increase in Net Assets Resulting
from Operations .......................... 6,096,238 5,037,521
------------- -------------
Distributions to Shareholders:
Dividends from net investment income ($0.0526
and $0.0489 per share, respectively) ...... ( 6,096,238) ( 5,037,521)
------------- -------------
From Fund Share Transactions - Net* ........... ( 22,538,046) ( 52,760,079)
------------- -------------
Net Assets:
Beginning of period ......................... 142,301,024 119,762,978
------------- -------------
End of period ............................... $ 119,762,978 $ 67,002,899
============= =============
* Analysis of Fund Share Transactions at
$1 Per Share:
Shares sold ................................. $ 314,379,252 $ 714,206,543
Shares issued to shareholders in reinvestment
of distributions .......................... 5,606,946 4,480,168
------------- -------------
319,986,198 718,686,711
Less shares repurchased ..................... (342,524,244) (771,446,790)
------------- --------------
Net decrease ................................ ($ 22,538,046) ($ 52,760,079)
============= =============
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, distributions paid to shareholders, and any increase or
decrease in money shareholders invested in the Fund. The footnote illustrates
the Fund shares sold, reinvested and redeemed during the last two periods.
SEE NOTES TO FINANCIAL STATEMENTS.
6
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FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
Financial Highlights
Selected data for each share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios, and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994(1) 1995 1996
--------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------
Net Investment Income......................................... 0.03 0.03 0.04 0.05 0.05
-------- -------- -------- -------- -------
Less Distributions
Dividends from Net Investment Income.......................... ( 0.03)( 0.03)( 0.04)( 0.05)( 0.05)
-------- -------- -------- -------- -------
Net Asset Value, End of Period................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =======
Total Investment Return at Net Asset Value(2)................. 3.33% 2.60% 3.74% 5.38% 5.00%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted)..................... $266,349 $130,405 $142,301 $119,763 $67,003
Ratio of Expenses to Average Net Assets....................... 0.63% 0.66% 0.62% 0.73% 0.65%
Ratio of Net Investment Income to Average Net Assets.......... 3.34% 2.58% 3.72% 5.30% 4.85%
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(2) Total investment return assumes dividend reinvestment.
The Financial Highlights summarizes the impact of net investment income and
dividends on a single share for the period indicated. Additionally, important
relationships between some items presented in the financial statements are
expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
7
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FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
Schedule of Investments
December 31, 1996
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Cash
Reserve, Inc. on December 31, 1996. It's divided into five types of short-term
investments. Most categories of short-term investments are further broken down
by industry group.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST QUALITY (000's
ISSUER, DESCRIPTION RATE RATINGS* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
COMMERCIAL PAPER
Automotive (4.48%)
Ford Motor Credit Co.,
01-03-97................................................... 5.620% Tier 1 $3,000 $ 2,999,063
-----------
Mortgage Banking (4.46%)
Countrywide Funding Corp.,
01-22-97................................................... 5.420 Tier 1 3,000 2,990,515
----------
TOTAL COMMERCIAL PAPER
(Cost $5,989,578) ( 8.94%) 5,989,578
------ ----------
NEGOTIABLE BANK CERTIFICATE OF DEPOSIT
U.S Branches of Foreign Banks (2.98%)
National Bank of Canada
01-21-97................................................... 5.400 Tier 1 2,000 1,999,903
----------
TOTAL NEGOTIABLE BANK
CERTIFICATES OF DEPOSIT
(Cost $1,999,903) ( 2.98%) 1,999,903
------ ----------
CORPORATE INTEREST BEARING OBLIGATIONS
Automotive (12.26%)
Chrysler Financial Corp.,
01-30-97................................................... 8.070 Tier 1 2,500 2,504,359
General Motors Acceptance Corp.,
02-03-97................................................... 4.950 Tier 1 2,300 2,298,137
General Motors Acceptance Corp.,
02-04-97................................................... 7.650 Tier 1 1,000 1,001,433
General Motors Acceptance Corp.,
04-10-97................................................... 7.800 Tier 1 1,000 1,005,182
General Motors Acceptance Corp.,
07-07-97................................................... 7.000 Tier 1 1,400 1,405,844
----------
8,214,955
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST QUALITY (000's
ISSUER, DESCRIPTION RATE RATINGS* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Banking (21.58%)
Keycorp.,
04-15-97.................................................. 7.125% Tier 1 $2,000 $ 2,007,483
Keycorp.,
04-25-97.................................................. 6.500 Tier 1 4,000 4,008,016
BankAmerica Corp.,
02-03-97.................................................. 7.250 Tier 1 3,200 3,203,737
BankAmerica Corp.,
03-15-97.................................................. 7.500 Tier 1 2,925 2,934,198
NBD Bancorp, Inc.,
06-02-97.................................................. 6.550 Tier 1 1,300 1,303,811
Republic National Bank of New York
01-14-97.................................................. 7.950 Tier 1 1,000 1,000,784
-----------
14,458,029
-----------
Beverage (8.20%)
PepsiCo Inc.,
02-24-97.................................................. 5.000 Tier 1 5,500 5,492,393
-----------
Electronics (1.49%)
Pitney Bowes Credit Corp.,
02-15-97.................................................. 5.625 Tier 1 1,000 1,000,645
-----------
Finance (18.11%)
American Express Credit Corp.,
03-01-97.................................................. 7.750 Tier 1 1,800 1,807,187
Associates Corp. of North America
01-15-97.................................................. 6.875 Tier 1 2,000 2,000,770
Associates Corp. of North America
01-24-97.................................................. 7.350 Tier 1 1,000 1,001,014
Associates Corp. of North America
05-01-97.................................................. 9.700 Tier 1 2,000 2,024,597
General Electric Capital Corp.,
05-12-97**................................................ 5.420 Tier 1 2,300 2,299,377
International Lease Finance Corp.,
01-15-97.................................................. 4.750 Tier 1 3,000 2,998,702
-----------
12,131,647
-----------
Insurance (1.49%)
American General Finance Corp.,
01-15-97.................................................. 7.750 Tier 1 1,000 1,000,738
-----------
Tobacco (1.73%)
Philip Morris Cos., Inc.,
05-01-97.................................................. 9.750 Tier 1 1,147 1,160,492
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST QUALITY (000's
ISSUER, DESCRIPTION RATE RATINGS* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Utilities (2.88%)
Southern California Edison Co.
01-15-97................................................ 5.900% Tier 1 $1,925 $ 1,925,618
-----------
TOTAL CORPORATE INTEREST
BEARING OBLIGATIONS
(Cost $45,384,517) (67.74%) 45,384,517
------ -----------
U.S. GOVERNMENT OBLIGATIONS
Governmental - U.S. Agencies (14.62%)
Federal Home Loan Bank,
11-04-97................................................ 5.810 Tier 1 2,000 2,000,000
Federal National Mortgage Association,
08-22-97**.............................................. 5.420 Tier 1 5,000 4,998,068
Student Loan Marketing Association,
01-02-97#............................................... 6.075 Tier 1 2,800 2,800,020
-----------
9,798,088
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $9,798,088) (14.62%) 9,798,088
------ -----------
JOINT REPURCHASE AGREEMENT (3.98%)
Investment in a joint repurchase
agreement transaction with
Lehman Brothers, Inc.
Dated 12-31-96, due 01-02-97
(secured by U.S. Treasury Bonds, 8.75% thru 13.25%
due 11-15-08 thru 11-15-18, and U.S.Treasury Note,
6.25% due 06-30-98) - Note A......................... 6.70 -- 2,664 2,664,000
-----------
TOTAL JOINT REPURCHASE AGREEMENT
(Cost $2,664,000) ( 3.98%) 2,664,000
------ -----------
TOTAL INVESTMENTS (98.26%) $65,836,086
====== ===========
</TABLE>
* Quality ratings indicate the categories of eligible securities, as defined by
Rule 2a-7 of the U.S. Securities and Exchange Commission, owned by the Fund.
** Floating rate note, interest rate effective December 31, 1996.
# Call date
The percentage shown for each investment category is the total value of that
category expressed as a percentage of the total net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
NOTE A --
ACCOUNTING POLICIES
John Hancock Cash Reserve, Inc. (the "Fund") is a diversified, open-end
management investment company, registered under the Investment Company Act of
1940. The investment objective of the Fund is to provide maximum current income,
consistent with capital preservation and liquidity. Effective October 1, 1996,
the Fund is closed to all sales other than dividend reinvestments.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS The Board of Directors have determined appropriate
methods for valuing portfolio securities. Accordingly, portfolio securities are
valued at amortized cost, in accordance with Rule 2a-7 of the Investment Company
Act of 1940, which approximates market value. The amortized cost method involves
valuing a security at its cost on the date of purchase and thereafter assuming a
constant amortization to maturity of the difference between the principal amount
due at maturity and the cost of the security to the Fund. Interest income on
certain portfolio securities such as negotiable bank certificates of deposit and
interest bearing notes is accrued daily and included in interest receivable.
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.
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.
Accordingly, the Fund will not be subject to federal income tax on taxable
earnings which are distributed to shareholders.
DIVIDENDS The Fund's net investment income is declared daily as dividends to
shareholders of record as of the close of business on the preceding day and
distributed monthly.
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.
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, of 0.35% of the Fund's average daily net assets.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of John Hancock Mutual Life
Insurance Company. 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 1996 is to be
paid at an annual rate of 0.01875% of the average net assets of each Fund.
Mr. Edward J. Boudreau, Jr. , Ms. Anne C. Hodsdon and Richard S. Scipione are
directors and/or officers of the Adviser and/or its affiliates, as well as
Directors of the Fund. The compensation of unaffiliated Directors is borne by
the Fund. Effective with the fees paid for 1995, the unaffiliated Directors 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
11
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
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. The
investment has no impact on the operations of the Fund.
The Fund had an independent advisory board established under an agreement
which expired in December, 1996, composed of certain retired Directors who
provided advice to the current Board of Directors. The Fund paid the advisory
board and its counsel a fee under this agreement.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities, including discount earned on
investment securities, other than obligations of the U.S. government and its
agencies, during the period ended December 31, 1996, aggregated $4,106,837,433
and $4,169,664,333, respectively. Purchases and proceeds from maturities of
obligations of the U.S. government and its agencies aggregated $36,132,088 and
$30,488,100, respectively, during the period ended December 31, 1996.
The cost of investments owned at December 31, 1996 for federal income tax
purposes was $65,836,086.
12
<PAGE>
- --------------------------------------------------------------------------------
John Hancock Funds - Cash Reserve, Inc.
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
John Hancock Cash Reserve, Inc.
We have audited the accompanying statement of assets and liabilities of the John
Hancock Cash Reserve, Inc. (the "Fund"), including the schedule of investments,
as of December 31, 1996, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Cash Reserves, Inc. at December 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernest & Young LLP
Boston, Massachusetts
February 7, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund during its fiscal year ended December 31,
1996. All of the dividends paid for the fiscal year are taxable as ordinary
income. None of the 1996 dividends qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1996 U.S. Treasury Department Form 1099-DIV in
January of 1997. This will reflect the total of all distributions which are
taxable for calendar year 1996.
13
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John Hancock Funds - Cash Reserve, Inc.
14
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NOTES
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John Hancock Funds - Cash Reserve, Inc.
15
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[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
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Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
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This report is for the information of shareholders of John Hancock Cash
Reserve, Inc. It may be used as sales literature when preceded or accompanied by
the current prospectus, which details charges, investment objectives and
operating policies.
[A recycled logo in lower left hand corner wih caption "Printed on Recycled
Paper."]
4200A 12/96
2/97
