FINAL REPORT
SHORT-TERM
STRATEGIC INCOME
FUND
John Hancock Funds
October 22, 1999
<PAGE>
John Hancock Funds - Short-Term Strategic Income Fund
Trustees
Dennis S. Aronowitz *
Stephen L. Brown
Richard P. Chapman, Jr.*
William J. Cosgrove
Leland O. Erdahl
Richard A. Farrell
Maureen R. Ford
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
Stephen L. Brown
Chairman
Maureen R. Ford
Vice Chairman and Chief Executive Officer
Anne C. Hodsdon
President,Chief
Operating Officer and
Chief Investment Officer
Osbert M. Hood
Executive 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 - Short-Term Strategic Income Fund
Statement of Assets and Liabilities
October 22, 1999 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $49,924,120) $ 48,694,627
Short-term investments (cost - $164,000) 164,000
-----------------
48,858,627
Cash 263
Receivable for shares sold 10
Interest receivable 845,949
Other assets 6,223
-----------------
Total Assets 49,711,072
--------------------------------------------------------------------------------------
Liabilities:
Payable for forward foreign currency exchange contracts sold - Note A 96,498
Payable for shares repurchased 1,985
Payable to John Hancock Advisers, Inc. and affiliates - Note B 51,109
Accounts payable and accrued expenses 41,791
-----------------
Total Liabilities 191,383
--------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 81,148,547
Accumulated net realized loss on investments, financial futures contracts and
foreign currency transactions (30,396,737)
Net unrealized depreciation of investments and foreign currency transactions (1,324,120)
Undistributed net investment income 91,999
=================
Net Assets $ 49,519,689
======================================================================================
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 - $37,103,528 / 4,786,389 $ 7.75
=======================================================================================================================
Class B - $12,357,813 / 1,594,169 $ 7.75
=======================================================================================================================
Class C ** - $58,348 / 7,527 $ 7.75
=======================================================================================================================
Maximum Offering Price Per Share*
Class A - ($7.75 x 103.09%) $ 7.99
=======================================================================================================================
* 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.
** Class C shares commenced operations on March 1, 1999.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short-Term Strategic Income Fund
Statement of Operations For the period from November 1, 1998 to October 22, 1999
(Unaudited)
- ------------------------------------------------------------------------------------------------------
Investment Income:
Dividends $ 7,367
Interest (including income on securities loaned of $43,049) 4,108,389
--------------------------
4,115,756
--------------------------
Expenses:
Investment management fee - Note B 388,034
Distribution and service fee - Note B
Class A 131,230
Class B 147,004
Class C 303
Transfer agent fee - Note B 120,384
Custodian fee 65,663
Registration and filing fees 41,506
Accounting and legal services fee - Note B 9,653
Printing 8,616
Trustees' fees 3,413
Auditing fee 95
--------------------------
Total Expenses 915,901
----------------------------------------------------------------------------------------
Net Investment Income 3,199,855
----------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments, Financial Futures
Contracts and Foreign Currency Transactions:
Net realized loss on investments sold (1,228,286)
Net realized loss on financial futures contracts (381,723)
Net realized loss on foreign currency transactions (22,870)
Change in net unrealized appreciation/depreciation of investments 394,061
Change in net unrealized appreciation/depreciation of financial futures contracts 106,460
Change in net unrealized appreciation/depreciation of foreign currency transactions (94,221)
----------------------------------------------------------------------------------------
Net Realized and Unrealized Loss on Investments, Financial Futures
Contracts and Foreign Currency Transactions (1,226,579)
----------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $ 1,973,276
========================================================================================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short-Term Strategic Income Fund
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD FROM
NOVEMBER 1, 1998 TO
YEAR ENDED OCTOBER 22, 1999
OCTOBER 31, 1998 (UNAUDITED)
---------------- -------------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $4,578,534 $3,199,855
Net realized loss on investments sold, financial futures contracts
and foreign currency transactions (1,009,513) (1,632,879)
Change in net unrealized appreciation/depreciation of investments
and foreign currency transactions (2,547,088) 406,300
------------ ------------
Net Increase in Net Assets Resulting from Operations 1,021,933 1,973,276
------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.4780 and $0.4236 per share, respectively) (3,22,613) (2,417,652)
Class B - ($0.4230 and $0.3759 per share, respectively) (1,126,678) (780,788)
Class C ** - (none and $0.2282 per share, respectively) - (1,415)
Distributions in excess of net investment income
Class A - ($0.0015 and none per share, respectively) (10,603) -
Class B - ($0.0014 and none per share, respectively) (3,595) -
Distributions from capital paid-in
Class A - ($0.0124 and none per share, respectively) (85,913) -
Class B - ($0.0109 and none per share, respectively) (29,132) -
------------ ------------
Total Distributions to Shareholders (4,578,534) (3,199,855)
------------ ------------
From Fund Share Transactions - Net:* ($15,963,160) (19,701,485)
------------ ------------
Net Assets:
Beginning of period 89,967,514 70,447,753
------------ ------------
End of period (including distributions in excess of net investment
income of $26,708 and undistributed
net investment income of $91,999, respectively) $70,447,753 $49,519,689
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOR THE PERIOD FROM
NOVEMBER 1, 1998 TO
YEAR ENDED OCTOBER 22, 1999
OCTOBER 31, 1998 (UNAUDITED)
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
* Analysis of Fund Share Transactions:
CLASS A
Shares sold 1,724,135 $14,275,885 897,229 $7,024,534
Shares issued to shareholders in reinvestment of distributions 216,155 1,771,929 162,193 1,273,318
------------------------- -----------------------
1,940,290 16,047,814 1,059,422 8,297,861
Less shares repurchased (3,273,385) (26,994,702) (2,645,330) (20,783,073)
------------------------- -----------------------
Net decrease (1,333,095) ($10,946,888) (1,585,908) ($12,485,212)
========================= =======================
CLASS B
Shares sold 937,760 $7,634,236 503,573 $3,985,028
Shares issued to shareholders in reinvestment of distributions 66,168 542,160 45,757 359,756
------------------------- -----------------------
1,003,928 8,176,396 549,330 4,344,784
Less shares repurchased (1,606,600) (13,192,668) (1,472,589) (11,620,479)
------------------------- -----------------------
Net decrease (602,672) ($5,016,272) (923,259) ($7,275,695)
========================= =======================
CLASS C **
Shares sold - - 7,345 $58,007
Shares issued to shareholders in reinvestment of distributions - - 182 1,415
------------------------- -----------------------
Net increase - - 7,527 $59,422
========================= =======================
Class C shares commenced operations on March 1, 1999.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short-Term Strategic Income Fund
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:
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1998
---------------------------------------------- TO OCTOBER 22, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
-------- -------- -------- -------- -------- -------------------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 9.12 $ 8.47 $ 8.41 $ 8.46 $ 8.31 $ 7.92
-------- -------- ------- ------- -------- --------
Net Investment Income 0.76(1) 0.77(1) 0.65 0.61(1) 0.49(1) 0.42(1)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions (0.53) (0.06) 0.05 (0.15) (0.39) (0.17)
-------- -------- ------- ------- -------- --------
Total from Investment Operations 0.23 0.71 0.70 0.46 0.10 0.25
-------- -------- ------- ------- -------- --------
Less Distribution:
Distributions from Net Investment Income (0.62) (0.61) (0.57) (0.52) (0.48) (0.42)
Distributions in Excess of Net Investment Income (0.04) - - (0.08) (0.00)(3) -
Distributions in Excess of Net Realized Gains on Investments Sold (0.12) - - - - -
Distributions from Capital Paid-In (0.10) (0.16) (0.08) (0.01) (0.01) -
-------- -------- ------- ------- -------- --------
Total Distributions (0.88) (0.77) (0.65) (0.61) (0.49) (0.42)
-------- -------- ------- ------- -------- --------
Net Asset Value, End of Period $ 8.47 $ 8.41 $ 8.46 $ 8.31 $ 7.92 $ 7.75
======== ======== ======= ======= ======== ========
Total Investment Return at Net Asset Value (2) 2.64% 8.75% 8.60% 5.55% 1.17% 3.28% (4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $13,091 $ 16,997 $ 49,338 $ 64,059 $ 50,498 $ 37,104
Ratio of Expenses to Average Net Assets 1.26% 1.33% 1.48% 1.43% 1.35% 1.37% (5)
Ratio of Net Investment Income to Average Net Assets 8.71% 9.13% 7.59% 7.22% 5.97% 5.53% (5)
Portfolio Turnover Rate 150% 147% 77% 71% 74% 79%
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short-Term Strategic Income Fund
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:
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1998
---------------------------------------------- TO OCTOBER 22, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
-------- -------- -------- -------- -------- -------------------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 9.11 $ 8.46 $ 8.40 $ 8.45 $ 8.30 $ 7.92
-------- -------- ------- ------- -------- --------
Net Investment Income 0.70(1) 0.70(1) 0.59 0.55(1) 0.44(1) 0.38(1)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions (0.53) (0.06) 0.05 (0.15) (0.38) (0.17)
-------- -------- ------- ------- -------- --------
Total from Investment Operations 0.17 0.64 0.64 0.40 0.06 0.21
-------- -------- ------- ------- -------- --------
Less Distribution:
Distributions from Net Investment Income (0.56) (0.56) (0.52) (0.47) (0.43) (0.38)
Distributions in Excess of Net Investment Income (0.04) - - (0.07) (0.00)(3) -
Distributions in Excess of Net Realized Gains on Investments Sold (0.12) - - - - -
Distributions from Capital Paid-In (0.10) (0.14) (0.07) (0.01) (0.01) -
-------- -------- ------- ------- -------- --------
Total Distributions (0.82) (0.70) (0.59) (0.55) (0.44) (0.38)
-------- -------- ------- ------- -------- --------
Net Asset Value, End of Period $ 8.46 $ 8.40 $ 8.45 $ 8.30 $ 7.92 $ 7.75
======== ======== ======= ======= ======== ========
Total Investment Return at Net Asset Value (2) 1.93% 7.97% 7.89% 4.83% 0.60% 2.65% (4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $98,390 $ 84,601 $ 48,137 $ 25,908 $ 19,950 $ 12,358
Ratio of Expenses to Average Net Assets 1.99% 2.07% 2.12% 2.13% 2.02% 1.99% (5)
Ratio of Net Investment Income to Average Net Assets 8.00% 8.40% 7.07% 6.51% 5.30% 4.90% (5)
Portfolio Turnover Rate 150% 147% 77% 71% 74% 79%
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short-Term Strategic Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the period
indicated, investment return, key ratios and supplemental data are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
MARCH 1, 1999
(COMMENCEMENT OF OPERATION
TO OCTOBER 22, 1999
(UNAUDITED)
-------------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 7.82
---------
Net Investment Income 0.23
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions (0.07)
---------
Total from Investment Operations 0.16
---------
Less Distribution:
Distributions from Net Investment Income (0.23)
Distributions in Excess of Net Investment Income -
Distributions in Excess of Net Realized Gains on Investments Sold -
Distributions from Capital Paid-In -
---------
Total Distributions (0.23)
---------
Net Asset Value, End of Period $ 7.75
=========
Total Investment Return at Net Asset Value (2) 2.04% (4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) 58
Ratio of Expenses to Average Net Assets 2.10% (5)
Ratio of Net Investment Income to Average Net Assets 4.67% (5)
Portfolio Turnover Rate 79%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charge.
(3) Less than $0.01 per share.
(4) Not annualized.
(5) Annualized
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short Term Strategic Income Fund
Schedule of Investments
October 22, 1999 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S OMITTED)# VALUE
- ------------------- ---- ---------------- -----
BONDS
British Pound Sterling (4.43%)
United Kingdom of Great Britain Treasury,
Bond 12-07-00 8.000 % 650 $1,101,766
Bond 06-07-02 7.000 650 1,094,111
------------
2,195,877
------------
Canadian Dollar (6.21%)
Government of Canada,
Bond Ser VR22 03-01-01 7.500 3,000 2,074,375
Bond Ser WE00 09-01-02 5.500 1,500 999,797
------------
3,074,172
------------
U.S. Dollar (87.69%)
AT&T Corp.,
Note 03-15-04 5.625 $2,000 1,897,280
Banco de Galicia y Buenos Aires S.A. de C.V., (Argentina),
Unsub Deb 12-15-00 (R) 10.000 1,500 1,530,000
Calpine Corp.,
Sr Note 02-01-04 9.250 2,000 2,020,000
Cinergy Corp.,
Deb 04-15-04 6.125 500 470,300
CMS Panhandle Holding Co.,
Sr Note 03-15-04 6.125 2,000 1,908,750
Connecticut Light & Power Co./ West Mass Electric,
Sec Note 06-05-03 (R) 8.590 2,300 2,330,383
Conoco, Inc.,
Sr Note 04-15-04 5.900 2,000 1,914,000
Federal Home Loan Mortgage Corp.,
15 Yr Giant Mtg Part Cert Pl 2087 07-01-12 7.000 1,173 1,163,469
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf Pl 453 10-01-12 7.500 3,419 3,442,973
Federative Republic of Brazil, (Brazil),
Floating Rate Bond Ser A 01-01-01 6.000 * 646 632,835
Mack-Cali Realty, L.P.,
Note 03-15-04 7.000 1,000 963,370
Midland Funding Corp. II,
Deb Ser B 07-23-06 13.250 1,000 1,187,060
Niagara Mohawk Power Corp.,
Sr Note Ser D 10-01-02 7.250 1,512 1,511,697
PECO Energy Transition Trust,
Pass Thru Ctf Ser 1999-A Class A-2 03-01-02 5.630 1,000 968,750
PEMEX Finance Ltd., (Cayman Islands),
Note Ser 1A 11-15-03 (R) 5.720 1,000 974,470
Regency Centers, L.P.,
Gtd Note 04-01-04 7.400 500 478,170
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Short Term Strategic Income Fund
Schedule of Investments
October 22, 1999 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S OMITTED)# VALUE
- ------------------- ---- ---------------- -----
Republic of Argentina, (Argentina),
Floating Rate Bond 07-21-03 10.150 %* 1,000 $929,000
Floating Rate Bond Ser FRB 03-31-05 6.873 * 2,640 2,343,000
Republic of Costa Rica, (Costa Rica),
Note 05-01-03 (R) 8.000 700 693,000
Republic of Panama, (Panama),
Floating Rate Note 05-10-02 6.084 * 1,269 1,234,382
Note Ser REGS 02-13-02 7.875 375 363,750
Sprint Capital Corp,
Gtd Note 05-01-04 5.875 2,000 1,898,020
Telecomunicaciones de Puerto Rico,
Sr Note 05-15-02 (R) 6.150 1,000 979,610
United States Treasury,
Note 11-15-00 5.750 2,900 2,899,101
Note 01-31-02 4.500 3,800 3,738,858
Note 11-30-02 5.750 5,000 4,952,350
------------
43,424,578
------------
TOTAL BONDS
(Cost $49,924,120) (98.33%) 48,694,627
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.33%)
Investment in a joint repurchase
agreement transaction with
Barclays Bank PLC - Dated 10-22-99
due 10-25-99 (Secured by U.S. Treasury
Bonds, 7.250% thru 10.625% due 05-15-18 thru
08-15-25) - Note A 5.020 164 164,000
-----------
TOTAL SORT-TERM INVESTMENTS (0.33%) 164,000
-------- -----------
TOTAL INVESTMENTS (98.66%) 48,858,627
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (1.34%) 661,062
-------- -----------
TOTAL NET ASSETS (100.00%) $49,519,689
======== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
NOTES TO SCHEDULE OF INVESTMENTS
* Represents rate in effect on October 22, 1999.
# Par value of non US$ 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 $6,507,463 or 13.14% of
the Fund's net assets as of October 22, 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 -- Short-Term Strategic Income Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by companies and governments of other
countries. The performance of the Fund is closely tied to the economic condition
within the countries in which it invests. The concentration of investments by
currency denomination for individual securities held by the Fund is shown in the
schedule of investments. In addition, concentration of investments can be
aggregated by various investment categories. The table below shows the
percentages of the Fund's investments at October 22, 1999 assigned to the
various investment categories.
MARKET VALUE
AS A %
OF FUNDS
INVESTMENT CATEGORIES NET ASSETS
- --------------------- ------------
Banks-Foreign 3.09%
Finance 1.97
Government-Foreign 23.15
Government-U.S. 23.41
Government-U.S. Agencies 9.30
Oil & Gas 7.72
REIT 2.91
Telecommunications 9.64
Utilities 17.14
Short-term Investments 0.33
--------------
TOTAL INVESTMENTS 98.66%
==============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom Investment
Trust II) is a diversified open-end management investment company, registered
under the Investment Company Act of 1940. The Trust consists of five series:
John Hancock Short-Term Strategic Income Fund (the "Fund"), John Hancock Global
Fund, John Hancock Mid Cap Growth Fund, John Hancock Large Cap Growth Fund and
John Hancock International Fund. The other four series of the Trust are reported
in separate financial statements. Prior to June 1, 1999, John Hancock Mid Cap
Growth Fund was known as John Hancock Special Opportunities Fund and John
Hancock Large Cap Growth Fund was known as John Hancock Growth Fund. The
investment objective of the Fund was a high level of current income.
The Trustees had authorized the issuance of multiple classes of shares
of the Fund, designated as Class A, Class B and Class C shares. The Trustees
authorized the issuance of Class C shares effective March 1, 1999. The shares of
each class represented an interest in the same portfolio of investments of the
Fund and had equal rights to voting, redemptions, dividends and liquidation,
except that certain expenses, subject to the approval of the Trustees, may have
been 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 had exclusive voting rights to that
distribution plan.
On October 13, 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 liabilities of the Fund to the Strategic Income Fund in exchange
solely for shares of beneficial interest of Strategic Income Fund. After this
transaction and as of the close of business October 22, 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 have been
translated into U.S. dollars as described in "Foreign Currency Translation"
below. 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. Aggregate cash balances
were 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 was responsible for ensuring that the agreement is
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 qualified as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision was required. For
federal income tax purposes, at October 22, 1999, the Fund had $30,396,737 of
capital loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforwards were used by the
Fund, no capital gain distribution would be made. The Fund's carryforwards
expired as follows: October 31, 2000 - $16,879,029, October 31, 2001 -
$3,127,414, October 31, 2002 - $2,774,082, October 31, 2003 - $5,103,942,
October 31, 2006 - $1,008,800 and October 31, 2007 - $1,503,470.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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.
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 relative 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 sizes 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. Actual results could differ from these estimates.
DISCOUNT ON SECURITIES The Fund accreted discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
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 fund, based on its
borrowing. 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 October 22, 1999.
SECURITIES LENDING The Fund could lend its securities to certain qualified
brokers who paid 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 bore the risk
of delay of the loaned securities in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. At October
22, 1999, the Fund had no securities on loan.
<PAGE>
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.
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 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 was closed out or offset by a
matching contract. Risks could 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 may 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 involve no market risk if they were offset by the currency amount of
the underlying transaction.
At October 22, 1999, open forward foreign currency exchange contracts
were as follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT DATE DEPRECIATION
- -------- ------------------- ---------- ------------
SELLS
Canadian Dollars 4,656,914 DEC 99 $30,877
Pound Sterling 1,385,800 DEC 99 65,621
-------
$96,498
=======
<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 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 included the possibility that there may
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 can be affected as a result of futures contracts.
At October 22, 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 prices. 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 stock
market. 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 will reflect 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 could have arised if counterparties do 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 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 would continuously monitor the creditworthiness of all its
counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended October
22, 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) 0.65% of the first $500,000,000 of the Fund's average
daily net asset value and (b) 0.60% of the Fund's average daily net asset value
in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, acted as distributors for shares of the Fund. For the period ended
October 22, 1999, net sales charges received with regard to sales of Class A
shares amounted to $20,104. Of this amount, $1,390 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $14,880
was paid as sales commissions to unrelated broker-dealers and $3,834 was paid as
sales commissions to sales personnel of Signator Investors, Inc. ("Signator
Investors"), a related broker dealer (formerly known as John Hancock
Distributors). 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 four years of purchase (three
years for purchases prior to January 1, 1994) were subject to a contingent
deferred sales charge ("CDSC") at declining rates beginning at 3.00% of the
lesser of the current market value at the time of redemption or the original
purchase cost of the shares being redeemed. Proceeds from the CDSC were paid to
JH Funds and were used in whole or in part to defray its expenses related to
providing distribution related services to the Fund in connection with the sale
of Class B shares. For the period ended October 22, 1999, the contingent
deferred sales charges paid to JH Funds amounted to $51,008.
Class C shares which were redeemed within one year of purchase were
subject to a CDSC at a rate of 1.00% of the lesser of the current market value
at the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC 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 C shares. For the period ended
October 22, 1999, there were no contingent deferred sales charges paid to JH
Funds.
In addition, to reimburse the distibutors for the services they
provided as distributors of shares of the Fund, the Fund had adopted
Distribution Plans with respect to Class A, Class B and Class C pursuant to Rule
12b-1 under the Investment Company Act of 1940. Accordingly, the Fund would make
payments to the distributors for distribution and service expenses, at an annual
rate not to exceed 0.30% of Class A average daily net assets and 1.00% of Class
B and Class C average daily net assets to reimburse the distibutors for their
distribution and service costs. Up to a maximum of 0.25% of such payments may be
service fees as defined by the Conduct Rules of the National Association of
Securities Dealers. Under the Conduct Rules, 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"), an indirect subsidiary of JHMLICo. The
Fund paid transfer agent fees 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,
accounting and legal 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.
<PAGE>
Mr. Edward J. Boudreau, Jr., Mr. Stephen L. Brown, Ms. Maureen R. Ford, Ms. Anne
C. Hodsdon and Mr. Richard S. Scipione were directors and/or officers of the
Adviser and/or its affiliates, as well as Trustees of the Fund through December
31, 1999. The compensation of unaffiliated Trustees was borne by the Fund. The
unaffiliated Trustees could elect 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.
NOTE C-
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended October 22, 1999, aggregated $36,047,913 and $13,960,203, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $10,595,711 and $49,014,119, respectively, during the period
ended October 22, 1999.
The cost of investments owned at October 22, 1999 (including short-term
investments) for federal income tax purposes were $50,088,120. Gross unrealized
appreciation and depreciation of investments aggregated $72,001 and $1,301,494,
respectively, resulting in net unrealized depreciation of $1,229,493.
NOTE D-
RECLASSIFICATION OF ACCOUNTS
During the period ended October 22, 1999, the Fund had reclassified amounts to
reflect a decrease in accumulated net realized loss on investments and foreign
currency transactions of $22,949, an increase in undistributed net investment
income of $118,707 and a decrease in capital paid-in of $141,656. This
represents the amount necessary to report these balances on a tax basis,
excluding certain temporary differences, as of October 22, 1999. Additional
adjustments may be needed in subsequent reporting periods. These
reclassifications, which had no impact on the net asset value of the Fund, were
primarily attributable to the treatment of net realized losses on foreign
currency transactions 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.
TAX INFORMATION NOTICE
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended October 22,
1999.
With respect to the distribution paid by the Fund for the fiscal year
ended October 22, 1999, 0.24% of the distributions qualify for the dividends
received deduction available to corporations.
Shareholders will be mailed a 1999 U.S. Treasury Department Form
1099-DIV in January of 2000. This will reflect the total of all distributions
which are taxable for calendar year 1999.
<PAGE>
SHAREHOLDER MEETING
On October 13, 1999, a special meeting of the John Hancock Short-Term Strategic
Income Fund was held.
The shareholders approved an Agreement and Plan of Reorganization
between the Fund and Strategic Income Fund. The shareholder votes were 3,113,693
FOR, 131,680 AGAINST and 248,291 ABSTAINING.
