- --------------------------------------------------------------------------------
FINAL REPORT
WORLD BOND
FUND
John Hancock Funds
FEBRUARY 19, 1999
- --------------------------------------------------------------------------------
<PAGE>
John Hancock Funds - 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 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
60 State Street
Boston, Massachusetts 02109
<PAGE>
<TABLE>
<CAPTION>
John Hancock Funds - World Bond Fund
<S> <C>
Statement of Assets and Liabilities
February 19, 1999 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $31,658,057) $ 31,323,896
Options (cost - $50,444) -
Short-term investments (cost - $1,317,000) - Note A 1,317,000
-----------------
32,640,896
Cash 992
Receivable for forward foreign currency exchange contracts sold - Note A 125,402
Interest receivable 355,060
Other assets 10,601
-----------------
Total Assets 33,132,951
---------------------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased 47,813
Payable to John Hancock Advisers, Inc. and affiliates - Note B 27,553
Accounts payable and accrued expenses 48,891
-----------------
Total Liabilities 124,257
---------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 33,309,648
Net unrealized depreciation of investments and foreign currency transactions (263,986)
Distributions in excess of net investment income (36,968)
=================
Net Assets $ 33,008,694
=======================================================================================
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 - $21,151,500 / 2,463,198 $ 8.59
=======================================================================================================================
Class B - $11,857,194 / 1,380,829 $ 8.59
=======================================================================================================================
Maximum Offering Price Per Share*
Class A - ($8.59 x 104.71%) $ 8.99
=======================================================================================================================
* 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.
<PAGE>
John Hancock Funds - World Bond Fund
Statement of Operations
For the Period November 1, 1998 to February 19, 1999 (Unaudited)
- ------------------------------------------------------------------------------------------------------
Investment Income:
Interest $ 666,406
--------------------------
Expenses:
Investment management fee - Note B 80,678
Distribution and service fee - Note B
Class A 20,453
Class B 37,423
Transfer agent fee - Note B 29,550
Custodian fee 18,591
Registration and filing fees 4,253
Printing 3,067
Financial services fee - Note B 1,550
Trustees' fees 332
Legal 234
Miscellaneous 8
--------------------------
Total Expenses 196,139
----------------------------------------------------------------------------------------
Net Investment Income 470,267
----------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions:
Net realized gain on investments sold 804,700
Net realized gain on foreign currency transactions 37,626
Change in net unrealized appreciation/depreciation of investments (1,567,311)
Change in net unrealized appreciation/depreciation of foreign currency transactions 94,675
-------------
Net Realized and Unrealized Loss on Investments and Foreign
Currency Transactions (630,310)
----------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations $ (160,043)
========================================================================================
<PAGE>
John Hancock Funds - World Bond Fund
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------- FOR THE PERIOD
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1998 TO
---------------------- FEBRUARY 19, 1999
1997 1998 (UNAUDITED)
-------- --------- -------------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $3,363,664 $1,986,524 $470,267
Net realized gain (loss) on investments sold and foreign currency transactions (2,191,124) 394,038 842,326
Change in net unrealized appreciation/depreciation of investments and
foreign currency transactions 498,811 (401,735) (1,472,636)
----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations 1,671,351 1,978,827 (160,043)
----------- ----------- -----------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.2580, $0.0919 and $0.1064 per share, respectively) (786,477) (272,483) (263,741)
Class B - ($0.2269, $0.0789 and $0.0914 per share, respectively) (838,142) (157,361) (130,930)
Distributions in excess of net investment income
Class A - ($0.0180, $0.2924 and $0.0208 per share, respectively) (55,023) (866,911) (50,518)
Class B - ($0.0159, $0.2511 and $0.0179 per share, respectively) (58,638) (500,645) (25,078)
Distributions from capital paid-in
Class A - ($0.2580, $0.0404 and none per share, respectively) (786,847) (119,888) -
Class B - ($0.2270, $0.0348 and none per share, respectively) (838,537) (69,236) -
Distributions from net realized gains on investments sold
Class A - (none, none and $0.1708 per share, respectively) - - (411,389)
Class B - (none, none and $0.1708 per share, respectively) - - (230,073)
Distributions in excess of net realized gains on investments sold
Class A - (none, none and $0.1468 per share, respectively) - - (353,408)
Class B - (none, none and $0.1468 per share, respectively) - - (197,648)
Total Distributions to Shareholders (3,363,664) (1,986,524) (1,662,785)
------------ ------------ -------------
From Fund Share Transactions - Net:* (18,700,439) (15,784,630) (2,417,491)
------------ ------------ -------------
Net Assets:
Beginning of period 73,434,092 53,041,340 37,249,013
End of period (including distributions in excess of ------------ ------------ -------------
net investment income of $634,322,
$75,596 and $36,968, respectively) $53,041,340 $37,249,013 $33,008,694
============ ============ =============
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1998 TO
----------------------------------------------- FEBRUARY 19, 1999
* Analysis of Fund Share Transactions: 1997 1998 (UNAUDITED)
--------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- ----------- --------- ----------
CLASS A
Shares sold 1,140,051 $10,428,710 425,409 $3,813,818 76,818 $696,920
Shares issued to shareholders in reinvestment of
distributions 103,224 942,480 76,168 679,311 75,734 659,970
----------- ----------- ---------- ------------ --------- -----------
1,243,275 11,371,190 501,577 4,493,129 152,552 1,356,890
Less shares repurchased (1,005,157) (9,195,414) (1,176,536) (10,482,512) (220,482) (2,021,667)
----------- ----------- ---------- ------------ --------- -----------
Net increase (decrease) 238,118 $2,175,776 (674,959) ($5,989,383) (67,930) ($664,777)
=========== =========== ========== ============ ========= ===========
CLASS B
Shares sold 152,134 $1,401,591 85,596 $769,502 4,636 $41,888
Shares issued to shareholders in reinvestment of
distributions 83,206 761,099 37,211 331,899 40,467 350,319
----------- ---------- ---------- ------------ --------- -----------
235,340 2,162,690 122,807 1,101,401 45,103 392,207
Less shares repurchased (2,516,064) (23,038,905) (1,218,051) (10,896,648) (234,973) (2,144,921)
----------- ----------- ---------- ------------ --------- -----------
Net decrease (2,280,724) ($20,876,215) (1,095,244) ($9,795,247) (189,870) ($1,752,714)
=========== ============ ========== ============ ========= ===========
<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:
................................................................................
YEAR ENDED OCTOBER 31, FOR THE PERIOD NOVEMBER 1, 1998
---------------------------------------------------------- TO FEBRUARY 19, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
---- ---- ---- ---- ---- -----------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 9.62 $ 8.85 $ 9.30 9.28 $ 9.03 $ 9.08
---------- --------- --------- -------- --------- ------------------------
Net Investment Income (2) 0.64 0.57 0.51 0.53 0.42 0.13
Net Realized and Unrealized Gain (Loss)
on Investments, Options, Financial
Futures Contracts and Foreign Currency
Transactions (0.78) 0.48 (0.02) (0.25) 0.05 (0.17)
----------- --------- --------- --------- --------- ------------------------
Total from Investment Operations (0.14) 1.05 0.49 0.28 0.47 (0.04)
----------- --------- --------- --------- --------- ------------------------
Less Distribution:
Distributions from Net Investment Income (0.11) (0.59) (0.50) (0.25) (0.09) (0.11)
Distributions in Excess of
Net Investment Income - - - (0.02) (0.29) (0.02)
Distributions from Capital Paid-In (0.52) (0.01) (0.01) (0.26) (0.04) -
Distributions from Net Realized Gains on
Investments Sold - - - - - (0.17)
Distributions in excess of Net Realized
Gains on Investments Sold - - - - - (0.15)
----------- -------- -------- -------- -------- ------------------------
Total Distributions (0.63) (0.60) (0.51) (0.53) (0.42) (0.45)
----------- -------- -------- -------- -------- ------------------------
Net Asset Value, End of Period $ 8.85 $ 9.30 $ 9.28 9.03 $ 9.08 $ 8.59
=========== ======== ======== ======== ======== ========================
Total Investment Return at Net Asset Value (1) (1.30%) 12.25% 5.48% 3.15% 5.44% (0.51%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $ 8,949 $35,334 $27,537 $ 28,959 $22,985 $ 21,152
Ratio of Expenses to Average Net Assets 1.59% 1.48% 1.58% 1.68% (3) 1.66% (3) 1.59% (5)
Ratio of Net Investment Income to
Average Net Assets 7.00% 6.43% 5.54% 5.84% 4.76% 4.61% (5)
Portfolio Turnover Rate 174% 263% 214% 153% 107% 41%
<PAGE>
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are as
follows:
................................................................................
YEAR ENDED OCTOBER 31, FOR THE PERIOD NOVEMBER 1, 1998
---------------------------------------------------------- TO FEBRUARY 19, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
---- ---- ---- ---- ---- -----------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 9.62 $ 8.85 $ 9.30 9.28 $ 9.03 $ 9.08
---------- ------- -------- ------ -------- ------------------------
Net Investment Income (2) 0.59 0.55 0.45 0.47 0.36 0.11
Net Realized and Unrealized Gain (Loss)
on Investments, Options, Financial
Futures Contracts and Foreign Currency
Transactions (0.78) 0.44 (0.02) (0.25) 0.05 (0.17)
----------- ------- --------- ------- --------- ------------------------
Total from Investment Operations (0.19) 0.99 0.43 0.22 0.41 (0.06)
----------- ------- --------- ------- --------- ------------------------
Less Distribution:
Distributions from Net Investment Income (0.06) (0.53) (0.44) (0.23) (0.08) (0.09)
Distributions in Excess of
Net Investment Income - - - (0.01) (0.25) (0.02)
Distributions from Capital Paid-In (0.52) (0.01) (0.01) (0.23) (0.03) -
Distributions from Net Realized Gains on
Investments Sold - - - - - (0.17)
Distributions in excess of Net Realized
Gains on Investments Sold - - - - - (0.15)
----------- ------- --------- ------- --------- ------------------------
Total Distributions (0.58) (0.54) (0.45) (0.47) (0.36) (0.43)
----------- ------- --------- ------- --------- ------------------------
Net Asset Value, End of Period $ 8.85 $ 9.30 $ 9.28 9.03 $ 9.08 $ 8.59
=========== ======= ========= ======= ========= ========================
Total Investment Return at Net Asset Value (1) (1.88%) 11.51% 4.78% 2.43% 4.73% (0.71%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $ 114,656 $65,600 $45,897 $24,082 $14,264 $ 11,857
Ratio of Expenses to Average Net Assets 2.17% 2.16% 2.25% 2.38% (3) 2.33% (3) 2.24% (5)
Ratio of Net Investment Income to
Average Net Assets 6.41% 6.03% 4.87% 5.13% 4.09% 3.96% (5)
Portfolio Turnover Rate 174% 263% 214% 153% 107% 41%
(1) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share. (4) Not annualized.
(5) Annualized.
<PAGE>
Schedule of Investments
February 19, 1999 (Unaudited)
- --------------------------------------------------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000'S OMITTED)# MARKET VALUE
- ---------------------------------------------------------------- ----------------- ----------------------- -------------------
BONDS
British Pound Sterling (6.52%)
NTL Inc., (United States),
Sr Note 04-01-08 (R) 9.500% $260 $433,142
United Kingdom Treasury,
Bond 11-06-01 7.000 1,000 1,717,463
---------------------
2,150,605
---------------------
Deutsche Mark (9.32%)
Colt Telecom Group Plc, (United Kingdom),
Sr Note Ser DTC 07-31-08 7.625 195 113,503
Ford Motor Credit Co., (United States),
Bond 06-16-08 5.250 5,000 2,964,420
---------------------
3,077,923
---------------------
Euro (14.41%)
Federal Republic of Germany, (Germany),
Bond Ser 98 01-04-08 5.250 3,532 4,299,524
Orange Plc, (United Kingdom),
Sr Note 08-01-08 7.625 400 456,475
---------------------
4,755,999
---------------------
U.S. Dollar (64.65%)
Federative Republic of Brazil, (Brazil),
Variable Rate Bond Ser A 01-01-01 6.063 * 369 320,108
Government of Jamaica, (Jamaica),
Note 06-10-05 (R) 10.875 250 212,500
Innova S. de R.L., (Mexico),
Sr Note 04-01-07 12.875 200 144,000
Petroleo Brasileiro S.A., (Brazil),
Bond 10-17-06 (R) 10.000 500 430,000
Republic of Argentina, (Argentina),
Floating Rate Bond Ser FRB 03-31-05 6.188 * 940 782,550
Republic of Costa Rica, (Costa Rica),
Deb 05-01-03 (R) 8.000 225 220,500
Republic of Panama, (Panama),
Note Ser REGS 02-13-02 7.875 300 289,500
Republic of South Africa, (South Africa),
Note 06-23-17 8.500 400 316,000
Telefonica de Argentina S.A., (Argentina),
Note 05-07-08 (R) 9.125 300 277,500
United Mexican States, (Mexico),
Global Bond 02-06-01 9.750 1,000 1,020,000
United States Treasury,
Bond 08-15-05 10.750 1,000 1,300,620
Bond 02-15-16 9.250 1,300 1,804,361
Bond 08-15-19 8.125 1,000 1,290,000
Bond 08-15-23 6.250 3,215 3,456,125
Bond 02-15-27 6.625 2,000 2,274,680
<PAGE>
Schedule of Investments
February 19, 1999 (Unaudited)
- --------------------------------------------------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000'S OMITTED)# MARKET VALUE
- ---------------------------------------------------------------- ----------------- ----------------------- -------------------
U.S. Dollar (continued)
Note 08-31-02 6.250% $2,800 $2,903,684
Note 08-15-04 7.250 1,100 1,209,483
Note 08-15-05 6.500 1,300 1,392,014
Note 08-15-07 6.125 1,600 1,695,744
--------------------
21,339,369
--------------------
TOTAL BONDS (94.90%)
(Cost $31,658,057) 31,323,896
--------------------
EXPIRATION
CURRENCY DATE/STRIKE
SOLD PRICE MARKET VALUE
----------------- ----------------------- ------------------
OPTIONS
Japanese Yen USD 5,765,000 March 99/140-150 0
------------------
TOTAL OPTIONS ( 0.00%)
(Premium Paid $50,444) 0
------------------
INTEREST PAR VALUE
RATE (000'S OMITTED)
----------------- -----------------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.99%)
Investment in a joint repurchase
agreement transaction with
Lehman Brothers, Inc. - Dated 02-19-99
due 02-22-99 (Secured by U.S. Treasury
Note, 4.75% due 11-15-08) - Note A 4.600% $1,317 1,317,000
------------------
TOTAL SHORT-TERM INVESTMENTS (3.99%) 1,317,000
------------------
TOTAL INVESTMENTS (98.89%) 32,640,896
------------------
OTHER ASSETS AND LIABILITIES, NET (1.11%) 367,798
------------------
TOTAL NET ASSETS (100.00%) $33,008,694
==================
</TABLE>
<PAGE>
NOTES TO SCHEDULE OF INVESTMENTS
* Represents rate in effect on February 19, 1999.
# Par value of non US$ 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 $1,573,642 or 4.77% of the Fund's net
assets as of February 19, 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.
<PAGE>
John Hancock Funds -- World Bond 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 February 19, 1999 assigned to the
various investment categories.
MARKET VALUE
AS A %
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
------------------
Finance - Services 8.98%
Government - Foreign 27.81
Government - U.S. 52.49
Oil & Gas 1.30
Telecommunications 4.32
Options 0.00
Short-term Investments 3.99
==================
TOTAL INVESTMENTS 98.89%
==================
<PAGE>
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") is an open-end
management investment company, registered under the Investment Company Act of
1940. The Trust consists of six series: John Hancock World Bond Fund (the
"Fund"), John Hancock Global Fund, John Hancock International Fund, John Hancock
Short-Term Strategic Income Fund, John Hancock Growth Fund and John Hancock
Special Opportunities Fund. The other five series of the Trust are reported in
separate financial statements. The investment objective of the Fund was to
achieve a high total investment return, a combination of current income and
capital appreciation, by investing in a global portfolio of government and
corporate debt securities.
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 bore distribution and service expenses under terms
of a distribution plan have exclusive voting rights regarding that distribution
plan.
On February 10, 1999, the shareholders of the Fund approved a plan of
reorganization between the Fund and John Hancock Strategic Income Fund
("Strategic Income Fund") providing for the transfer of substantially all of the
assets and liablilities of the Fund to the Strategic Income Fund in exchange
solely for shares of benefical interest of Strategic Income Fund. After this
transaction and as of the close of business February 19, 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:
VALUATION OF INVESTMENTS Securities in the Fund's 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 had been
translated into U.S. dollars as described in "Foreign Currency Translation". The
Fund could 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,
Inc., may participate in a joint repurchase agreement transaction. 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 Fund's custodian bank received delivery of the underlying
securities for the joint account on the Fund's 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.
<PAGE>
FEDERAL INCOME TAXES The Fund's policy was to comply with the requirements of
the Internal Revenue Code that are applicable to regulated investment companies
and to distribute all its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision was
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.
INTEREST AND DISTRIBUTIONS Interest income on investment securities was recorded
on the accrual basis. Foreign income may be 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 may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares were calculated in the same manner, at the same
time and were in the same amount, except for the effect of expenses that may be
applied differently to each class.
DISCOUNT ON SECURITIES The Fund accreted discount from par value on securities
purchased from either the date of issue or the date of purchase over the life of
the security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) were calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, were 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 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 Fund.
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 require the untimely disposition of securities. These agreements
enabled the Fund to participate with other funds managed by the Adviser in
unsecured lines of credit with banks which permitted borrowings up to $800
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 February 19,
1999.
SECURITIES LENDING The Fund could lend its securities to certain qualified
brokers who pay the Fund negotiated lenders fees. These fees were included in
interest income. The loans were 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. The Fund had
no securities on loan at February 19, 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 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
were translated at the rates prevailing at the dates of the transactions.
<PAGE>
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 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 could 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
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 was 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 involved market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets and
Liabilities. The Fund could also purchase and sell forward contracts to
facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intended to take delivery of the foreign currency.
Such contracts normally involved no market risk if they are offset by the
currency amount of the underlying transaction.
At February 19, 1999, open forward foreign currency exchange contracts were
as follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT MONTH APPRECIATION
- -------- ------------------- ----- ------------
SELLS
British Pound 113,617 APR 99 $2,416
British Pound 509,707 MAY 99 10,921
British Pound 4,548,514 JUN 99 97,037
European Currency Unit 455,649 APR 99 2,714
European Currency Unit 1,790,456 MAY 99 12,314
--------
$125,402
<PAGE>
FINANCIAL FUTURES CONTRACTS The Fund could 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 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 Fund 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 trades. 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 fluctuated. 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 included 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 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 can be affected as a result of futures contracts.
At February 19, 1999, there were no open positions in financial futures
contracts.
OPTIONS The Fund could enter into option 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 price. Upon the writing of a call or put option, an amount equal to
the premium received by the Fund was 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 use option contracts to manage its exposure to the price
volatility of financial instruments. Writing puts and buying calls tended to
increase the Fund's exposure to the underlying instrument and buying puts and
writing calls 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 also arise if counterparties do not perform under the
contract's terms, 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
continuously monitored 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 period ended February
19, 1999.
<PAGE>
NOTE B-
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, to the sum of (a) 0.75% of the first $250,000,000 of the Fund's average
daily net asset value and (b) 0.70% of the Fund's average daily net asset value
in excess of $250,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned
subsidiary of the Adviser acted as distributor for shares of the Fund. For the
period ended February 19, 1999, net sales charges received with regard to sales
of Class A shares amounted to $1,210. Out of this amount, $117 was retained and
used for printing prospectuses, advertising, sales literature and other
purposes, $280 was paid as sales commissions to unrelated broker-dealers and
$813 was paid as sales commissions to sales personnel of Signator Investors,
Inc. ("Signator Investors"), formerly known as John Hancock Distributors, Inc.,
a related broker-dealer. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
Class B shares which were redeemed within six years of purchase were
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from CDSC were paid to JH Funds and were used in whole or in part to defray its
expenses for providing distribution related services to the Fund in connection
with the sale of Class B shares. For the period ended February 19, 1999, the
contingent deferred sales charges received by JH Funds amounted to $26,170.
In addition, to reimburse JH Funds for the services provided as
distributors of shares of the Fund, the Fund had 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 made 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 the 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 had a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), a wholly owned subsidiary of JHMLICo. The
Fund paid transfer agent fee based on the number of shareholder accounts and
certain out-of-pocket expenses.
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., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are 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 its liability for the deferred
compensation. Investments to cover the Fund's 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. At February 19, 1999, the Fund's
investments to cover the deferred compensation liability had unrealized
appreciation of $611.
<PAGE>
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 February 19, 1999, aggregated none and $3,387,685, respectively. Purchases
and proceeds from sales of obligations of the U.S. government its agencies
aggregated $14,061,500 and $13,841,503 respectively, during the period ended
February 19, 1999.
The cost of investments owned at February 19, 1999 (including
short-term investments) for federal income tax purposes was $33,025,501. Gross
unrealized appreciation and depreciation of investments aggregated $589,494 and
$974,099, respectively, resulting in net unrealized depreciation of $384,605.
NOTE D-
RECLASSIFICATION OF ACCOUNTS
During the period ended February 19, 1999, the Fund had reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $551,056,
a decrease in distributions in excess of net investment income of $38,628 and a
decrease in capital paid-in of $589,684. This represented the amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of February 19, 1999. These reclassifications, which had no
impact on the net asset value of the Fund, were primarily attributable to the
treatment of realized gain/loss on foreign currency transactions and 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
excluded these adjustments.
NOTE E-
TAX INFORMATION NOTICE (Unaudited)
For federal income tax purposes, the following information was furnished with
respect ot the taxable distributions of the Fund for the period ended February
19, 1999.
The Fund designated $665,669 as long-term capital gain distributions
during the period ended February 19, 1999. Shareholders will be mailed a 1999
U.S. Treasury Department Form 1099-DIV in January 2000 representing their
proportionate share.
