As filed with the Securities and Exchange Commission on November 13, 1998.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
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Pre-Effective Amendment No. __ /____/
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Post-Effective Amendment No. ___ /____/
(Check appropriate box or boxes)
JOHN HANCOCK STRATEGIC SERIES
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(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
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(Address of principal executive office) Zip Code
(617) 375-1702
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(Registrant's Telephone Number, including Area Code)
Susan S. Newton, Esq.
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199
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(Name and address of agent for service)
Title of Securities Being Registered: shares of beneficial interest of John
Hancock Strategic Series.
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. This Registration Statement relates to shares previously registered
on Form N-1A (File Nos. 33-5186 and 811-4651).
It is proposed that this filing will become effective on December 13, 1998
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
JOHN HANCOCK STRATEGIC SERIES
CROSS-REFERENCE SHEET
Items Required by Form N-14
<TABLE>
<CAPTION>
PART A
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Item No. Item Caption Prospectus Caption
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<S> <C> <C>
1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE OF
Cover Page of Prospectus PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis and Risk Factors OVERVIEW; INVESTMENT RISKS
4. Information About the INTRODUCTION; OVERVIEW; MAIN
Transaction RISKS; INFORMATION CONCERNING THE
MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF REORGANIZATION;
CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Registrant OVERVIEW; ADDITIONAL INFORMATION
ABOUT THE FUNDS' BUSINESSES
6. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Company Being Acquired OVERVIEW; ADDITIONAL INFORMATION
ABOUT THE FUNDS' BUSINESSES
7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS;
SUMMARY; INFORMATION CONCERNING
THE MEETING; VOTING RIGHTS AND
REQUIRED VOTE
8. Interest of Certain Persons EXPERTS
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be
Underwriters
<PAGE>
PART B
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Caption in Statement of
Item No. Item Caption Additional Information
- -------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION ABOUT
About the Registrant STRATEGIC INCOME FUND
13. Additional Information About ADDITIONAL INFORMATION ABOUT
the Company Being Acquired WORLD BOND FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT GOVERNMENT INCOME
FUND; ADDITIONAL INFORMATION ABOUT SOVEREIGN US
GOVERNMENT FUND; PRO FORMA COMBINED FINANCIAL
STATEMENTS
PART C
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Item No. Item Caption
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15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
December 17, 1998
Dear Fellow Shareholder:
I am writing to ask for your vote on an important matter that will affect your
investment in the John Hancock World Bond Fund.
Since its inception in December 1986, your Fund has focused on investments in
foreign bonds as well as bonds isssued by multinational organizations and the
U.S. government. In recent years it has become difficult to post strong returns
with this strategy because of increasing instability in the foreign markets
coupled with the growing strength of the U.S. dollar.
Accordingly, your Fund's Trustees are recommending the merger of your Fund into
the John Hancock Strategic Income Fund, which invests in U.S. government bonds
and high yield U.S. corporate bonds as well as foreign bonds. Through its
broader investment approach, the Strategic Income Fund will allow you to
participate in foreign investments without being as vulnerable to potential
downturns overseas.
This proposed merger has been unanimously approved by your Fund's Board of
Trustees, who believe it will benefit you and your fellow shareholders. The
merger is detailed in the enclosed proxy statement and summarized in the
questions and answers on the following page. I suggest you read both thoroughly
before voting.
Your Vote Makes a Difference!
No matter what the size your investment may be, your vote is critical. I urge
you to review the enclosed materials and to complete, sign and return the
enclosed proxy ballot to us immediately. Your prompt response will help avoid
the need for additional mailings at your Fund's expense. For your convenience,
we have provided a postage-paid envelope.
If you have any questions or need additional information, please contact your
investment professional or call your Customer Service Representative at
1-800-225-5291, Monday through Friday between 8:00 A.M. and 8:00 P.M. Eastern
Time. I thank you for your prompt vote on this matter.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
<PAGE>
Q What are the benefits of merging the World Bond Fund into the Strategic
Income Fund?
A The Strategic Income Fund has a much wider investment scope than the World
Bond Fund. As a Strategic Income Fund shareholder, you can continue to
participate in the international sector while opening your portfolio to a
broad range of opportunities in the U.S. government and corporate high
yield sectors. This diversification will also help to make your investment
less dependent upon the success of international markets.
In addition, the Strategic Income Fund's larger asset base after the merger
is expected to allow for lower operating expenses than your Fund has now.
Following the merger, annual fees are projected to be 0.93% for Class A
shareholders, down from 1.65%, and 1.63% for Class B shareholders, down
from 2.34%. These projected lower expenses should help keep more of your
money invested, which often helps to bolster an investment's total return
over time.
Q How does the Strategic Income Fund's strategy compare with that of the
World Bond Fund?
A The Strategic Income Fund seeks a high level of current income while
your Fund seeks a high total investment return from current income and
capital appreciation. Although both funds invest in foreign bonds as well
as in U.S. government and agency securities, your Fund has traditionally
focused more on international sectors and multinational organizations
than the Strategic Income Fund. The Strategic Income Fund invests in
domestic corporate bonds as well as foreign and U.S. government bonds,
providing greater diversification so investors are less vulnerable to
weakness in any single sector.
The corporate U.S. portion of the Strategic Income Fund's portfolio
typically focuses on corporate high yield bonds. These bonds entail some
credit risk, which the Strategic Income Fund minimizes by applying a
relatively conservative investment approach. This strategy also allows the
Strategic Income Fund to seek higher current income than your Fund.
Q Who manages the Strategic Income Fund?
A The Strategic Income Fund is managed by a team of portfolio managers led
by Frederick L. Cavanaugh, Jr. Mr. Cavanaugh has more than 25 years of
investment experience and has managed the Fund since its inception on
August 18, 1986. Mr. Cavanaugh is also a member of your Fund's portfolio
management team. His expertise includes the high yield bond market and
international economies. With the merger of the World Bond Fund into the
Strategic Income Fund, Mr. Cavanaugh and his team will allocate the Fund's
assets among domestic and foreign bonds, emphasizing bond sectors where
they see the strongest opportunities at any given time.
<PAGE>
Q How has the Strategic Income Fund performed?
A Although past performance does not necessarily guarantee future results,
the Strategic Income Fund has been a steady performer over the years. The
Fund's Class A shares have posted average annual total returns of -0.33%
over the past year, 8.00% over the past five years and 7.97% over the
past ten years at the public offering price as of September 30, 1998. The
Fund's Class B shares have posted an average annual total return of
-1.16% over the past year and 8.39% since inception on October 4, 1993.*
This performance has earned the Strategic Income Fund a **** (4-star)
rating from Morningstar as of September 30, 1998.** To review the Strategic
Income Fund in more detail, please refer to the John Hancock Income Fund
prospectus and the Strategic Income Fund's most recent annual report, each
of which is enclosed.
Q How do I vote?
A Most shareholders typically vote by completing, signing and returning the
enclosed proxy card using the postage-paid envelope provided. If you prefer
to vote in person, you are cordially invited to attend a meeting of
shareholders of your Fund, which will be held at 9:00 A.M. on February 10,
1999 at our 101 Huntington Avenue headquarters in Boston, Massachusetts. If
you vote now, you will help avoid further solicitations at your Fund's
expense.
Q How will the merger happen?
A If the merger is approved, your World Bond Fund shares will be exchanged
for Strategic Income Fund shares, using the Funds' net asset value share
prices, excluding sales charges, as of the close of trading on February 19,
1999. This exchange will not affect the total dollar value of your
investment.
<PAGE>
Q Will the merger have tax consequences?
A Although taxable dividends and capital gains will be paid prior to the
merger, the merger itself is not taxable to you for federal income tax
purposes.
* Performance figures assume all distributions are reinvested and reflect a
maximum sales charge on Class A shares of 4.5% and the applicable contingent
deferred sales charge on Class B shares. The CDSC declines annually between
years 1-6 according to the following schedule: 5,4,3,3,2,1%. No sales charge
will be assessed after the sixth year. The return and principal value of any
mutual fund investment will fluctuate, so that shares, when redeemed, may be
worth more or less than their original cost.
**The Class B shares received a Morningstar proprietary rating of four stars for
the three-year period ended 9/30/98. Class A shares received ratings of four
stars for the three-year period, five stars for the five-year period and two
stars for the ten-year period ended 9/30/98. Ratings reflect risk-adjusted
performance among 1,491; 940; and 346 taxable bond funds, respectively. These
ratings are subject to change every month. Funds with at least three years of
performance history are assigned ratings from the funds' three-, five- and
ten-year average annual returns (when available), and a risk factor that
reflects fund performance relative to three-month Treasury bill monthly returns.
Funds' returns are adjusted for fees and sales loads. Ten percent of the funds
in an investment category receive five stars, 22.5% receive four stars and the
bottom 10% receive one star.
<PAGE>
JOHN HANCOCK WORLD BOND FUND
(a series of John Hancock Investment Trust III)
101 Huntington Avenue
Boston, MA 02199
NOTICE OF MEETING OF SHAREHOLDERS
SCHEDULED FOR FEBRUARY 10, 1999
This is the formal agenda for your fund's shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting, in case you want
to attend in person.
To the shareholders of John Hancock World Bond Fund:
A shareholder meeting for your fund will be held at 101 Huntington Avenue,
Boston, Massachusetts on Wednesday, February 10, 1999 at 9:00 a.m., Eastern
Time, to consider the following:
1. A proposal to approve an Agreement and Plan of Reorganization between
your fund and John Hancock Strategic Income Fund. Under this
Agreement, your fund would transfer all of its assets to Strategic
Income Fund in exchange for shares of Strategic Income Fund. These
shares would be distributed proportionately to you and the other
shareholders of your fund. Strategic Income Fund would also assume
your fund's liabilities. Your board of trustees recommends that you
vote FOR this proposal.
2. Any other business that may properly come before the meeting.
Shareholders of record as of the close of business on December 9, 1998 are
entitled to vote at the meeting and any related follow-up meetings.
Whether or not you expect to attend the meeting, please complete and return the
enclosed proxy card. If shareholders do not return their proxies in sufficient
numbers, your fund will incur the cost of extra solicitations, which is
indirectly borne by you and the other shareholders.
By order of the board of trustees,
Susan S. Newton
Secretary
December 17, 1998
020PX 9/98
1
<PAGE>
PROXY STATEMENT OF
JOHN HANCOCK WORLD BOND FUND
(a series of John Hancock Investment Trust III)
PROSPECTUS FOR
CLASS A AND CLASS B SHARES OF
JOHN HANCOCK STRATEGIC INCOME FUND
(a series of John Hancock Strategic Series)
This proxy statement and prospectus contains the information you should know
before voting on the proposed reorganization of your fund into John Hancock
Strategic Income Fund. Please read it carefully and retain it for future
reference.
How the Reorganization Will Work
o Your fund will transfer all of its assets to Strategic Income Fund.
Strategic Income Fund will assume your fund's liabilities.
o Strategic Income Fund will issue Class A shares to your fund in an
amount equal to the value of your fund's Class A shares. These shares
will be distributed to your fund's Class A shareholders in proportion
to their holdings on the reorganization date.
o Strategic Income Fund will issue Class B shares to your fund in an
amount equal to the value of your fund's Class B shares. These shares
will be distributed to your fund's Class B shareholders in proportion
to their holdings on the reorganization date.
o The reorganization will be tax-free.
o Your fund will be liquidated and you will become a shareholder of
Strategic Income Fund.
Shares of Strategic Income Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution. These
shares are not federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
Shares of Strategic Income Fund have not been approved or disapproved by the
Securities and Exchange Commission. The Securities and Exchange Commission
has not passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
2
<PAGE>
Why Your Fund's Trustees are Recommending the Reorganization
The trustees of your fund believe that reorganizing your fund into a larger fund
with similar investment policies will enable the shareholders of your fund to
benefit from increased diversification, the ability to achieve better net prices
on securities trades and economies of scale that could contribute to a lower
expense ratio. Therefore, the trustees recommend that your fund's shareholders
vote FOR the reorganization.
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Where to Get More Information
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Prospectus of your fund dated June 1, In the same envelope as this proxy
1998 and Strategic Income Fund dated statement and prospectus.
October 1, 1998. Incorporated by reference into this
proxy statement and prospectus.
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Strategic Income Fund's annual report to
shareholders.
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Your fund's annual and semi-annual On file with the Securities and
reports to shareholders. Exchange Commission ("SEC") and
available at no charge by calling
1-800-225-5291. Incorporated by
reference into this proxy statement
and prospectus.
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A statement of additional information
dated December 17, 1998. It contains
additional information about your fund
and Strategic Income Fund.
- ----------------------------------------- --------------------------------------
To ask questions about this proxy Call our toll-free telephone
statement and prospectus. number: 1-800-225-5291
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The date of this proxy statement and prospectus is December 17, 1998.
3
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION 4
SUMMARY 4
INVESTMENT RISKS 15
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION 16
CAPITALIZATION 24
ADDITIONAL INFORMATION ABOUT
THE FUNDS' BUSINESSES 24
BOARDS' EVALUATION AND RECOMMENDATION 25
VOTING RIGHTS AND REQUIRED VOTE 26
INFORMATION CONCERNING THE MEETING 27
OWNERSHIP OF SHARES OF THE FUNDS 29
EXPERTS 29
AVAILABLE INFORMATION 29
EXHIBITS
A - Agreement and Plan of Reorganization between John Hancock World Bond
Fund and John Hancock Strategic Income Fund (attached to this
document).
4
<PAGE>
INTRODUCTION
This proxy statement and prospectus is being used by your fund's board of
trustees to solicit proxies to be voted at a special meeting of your fund's
shareholders. This meeting will be held at 101 Huntington Avenue, Boston,
Massachusetts on Wednesday, February 10, 1999 at 9:00 a.m., Eastern Time. The
purpose of the meeting is to consider a proposal to approve an Agreement and
Plan of Reorganization providing for the reorganization of your fund into John
Hancock Strategic Income Fund. This proxy statement and prospectus is being
mailed to your fund's shareholders on or about December 17, 1998.
Who is Eligible to Vote?
Shareholders of record on December 9, 1998 are entitled to attend and vote at
the meeting or any adjourned meeting. Each share is entitled to one vote. Shares
represented by properly executed proxies, unless revoked before or at the
meeting, will be voted according to shareholders' instructions. If you sign a
proxy but do not fill in a vote, your shares will be voted to approve the
Agreement and Plan of Reorganization. If any other business comes before the
meeting, your shares will be voted at the discretion of the persons named as
proxies.
SUMMARY
The following is a summary of more complete information appearing later in this
proxy statement. You should read the entire proxy statement, Exhibit A and the
enclosed documents carefully, because they contain details that are not in the
summary.
5
<PAGE>
Comparison of World Bond Fund to Strategic Income Fund
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World Bond Strategic Income
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Business: A non-diversified series of A diversified series of John
John Hancock Investment Trust Hancock Strategic Series.
III. The trust is an open-end The trust is an open-end
investment company organized investment company organized
as a Massachusetts business as a Massachusetts business
trust. trust.
- ------------------- ------------------------------- ----------------------------
Net assets as of $42.5 million. $963.4 million.
May 31, 1998:
- ------------------- ------------------------------- ----------------------------
Investment John Hancock Advisers, Inc. John Hancock Advisers, Inc.
adviser and
portfolio In September 1998, Mr. Fredrick L. Cavanaugh, Jr.
managers: Cavanaugh and Mr. Ho joined -Senior vice pres. of adviser
your fund's portfolio -Joined team in 1986
management team: -Joined adviser in 1986
-Began career in 1973
Fredrick L. Cavanaugh, Jr.
-Senior vice pres. of adviser Arthur N. Calavritinos, CFA
-Joined team in 1998 -Vice pres. of adviser
-Joined adviser in 1986 -Joined team in 1995
-Began career in 1973 -Joined adviser in 1988
-Began career in 1986
James K. Ho, CFA
-Exec. vice pres. of adviser Roger C. Hamilton
-Joined team in 1998 -Vice pres. of adviser
-Joined adviser in 1985 -Joined team in 1998
-Began career in 1977 -Joined adviser in 1994
-Began career in 1980
Anthony A. Goodchild
-Senior vice pres. of adviser
-Joined team in 1994
-Joined adviser in 1994
-Began career in 1968
- ------------------- ------------------------------- ----------------------------
6
<PAGE>
- ------------------- ------------------------------- ----------------------------
World Bond Strategic Income
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Investment The fund seeks a high total The fund seeks a high level of
objective/ investment return, a current income. This objective
primary combination of current cannot be changed without
investments: income and capital shareholder approval.
appreciation, by investing
in a global portfolio of The fund invests primarily in
fixed income securities. three sectors:
This objective can be o foreign government and
changed without shareholder corporate debt securities
approval. from developed and
emerging markets;
The fund invests primarily o U.S. Government and
(at least 65% of assets) in: agency securities;
o debt securities issued o U.S. junk bonds rated as
or guaranteed by low as CC/CA and their
foreign governments and unrated equivalents.
companies, including
those in emerging
markets;
o U.S. Government and
agency securities;
o multinational
organizations such as
the World Bank.
The fund normally invests in
issuers in three countries,
potentially including the
U.S.
- ------------------- ------------------------------------------------------------
Foreign debt Each fund may invest in foreign debt securities without any
securities: percentage limit.
- -------------------- ------------------------------ ----------------------------
Junk bonds: The fund may invest up to The fund may invest without
35% of total assets in junk limit in junk bonds rated as
bonds rated as low as low as CC/Ca and their CCC/Caa and
their unrated unrated equivalent.
equivalent.
- ------------------- ------------------------------ -----------------------------
7
<PAGE>
- ------------------- ------------------------------ -----------------------------
Equity Securities: The fund does not invest in The fund may invest up to 10%
equity securities. However, of net assets in U.S. or
the fund may invest in foreign equity securities.
preferred stock and
convertible securities and
other debt securities that
have rights (warrants) to
acquire equity securities.
- ------------------- ------------------------------ -----------------------------
Diversification: The fund is non-diversified The fund is diversified and
and can invest more than 5% cannot invest more than 5% of
of total assets in total assets in securities of
securities of a single a single issuer, except that
issuer. the fund may invest up to 25%
of assets in securities of a
single foreign government.
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Pay-in-kind, Each fund may invest in pay-in-kind, delayed and zero coupon
delayed and zero debt securities.
coupon debt
securities:
- ------------------- ------------------------------------------------------------
Illiquid Each fund may invest up to 15% of net assets in illiquid
securities: securities.
- -------------------- -----------------------------------------------------------
Financial Each fund may invest without limit in financial futures,
futures and options on futures and options on securities and indices.
related options;
options on
securities and
indices:
- -------------------- -----------------------------------------------------------
Currency Each fund may enter into currency contracts for hedging or
Contracts: speculative purposes.
- ------------------- ------------------------------------------------------------
Structured Each fund may invest without limit in structured securities,
securities: which include indexed and/or leveraged mortgage-backed and
other debt securities.
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When-issued and Both funds may purchase when-issued securities and purchase
forward or sell securities in forward commitment transactions.
commitment
transactions:
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8
<PAGE>
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Short-term Neither fund is subject to any limitations on short-term
trading: trading.
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Repurchase Both funds may invest without limitation in repurchase
agreements: agreements.
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Securities The fund may lend portfolio The fund may lend portfolio
lending: securities up to 30% of securities up to 33 1/3% of
total assets. total assets.
- ------------------- ------------------------------ -----------------------------
Short-term The fund may invest up to The fund may invest in
securities 35% of assets in investment-grade short-term
investment-grade short-term securities for liquidity and
securities for liquidity and flexibilityoto a greater
flexibilityomore than 35% in extent in abnormal market
abnormal market conditions conditions as a defensive
as a defensive tactic. tactic.
- ------------------- ------------------------------ -----------------------------
Borrowing and The Fund will not borrow The fund will not enter into
reverse money or enter into reverse reverse repurchase agreements
repurchase repurchase agreements except and other borrowings except
agreements: from banks temporarily for from banks temporarily for
extraordinary or emergency extraordinary or emergency
purposes (not for leveraging purposes (not for leveraging
or investment) and then in or investment) and then in an
an amount not in excess of aggregate amount not in
10% of the value of the excess of 33% of the value of
fundis total assets The the fundis total assets.
fund will not make
additional investments while
borrowings (including
reverse repos) are in excess
of 5% of the fundis total
assets.
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Mortgage-backed Each fund may invest without limit in mortgage-backed and
and asset-backed asset-backed securities.
securities:
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9
<PAGE>
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CLASSES OF SHARES
- ------------------- ------------------------------ -----------------------------
World Bond Strategic Income
- ------------------- ------------------------------------------------------------
Class A sales The Class A shares of both funds have the same
charges and 12b-1 characteristics and fee structure. Class A shares are
fees: offered with front-end sales charges ranging from 2% to
4.5% of each fund's offering price, depending on the amount
invested. Class A shares are subject to a 12b-1 distribution
fee equal to 0.30% annually of average net assets.
o There is no front-end sales charge for investments of
$1 million or more, but there is a contingent deferred
sales charge ranging from 0.25% to 1.00% on shares sold
within one year of purchase.
o Investors can combine multiple purchases of Class A
shares to take advantage of breakpoints in the sales
charge schedule.
o Sales charges are waived for the categories of
investors listed in the funds' prospectuses.
- ------------------- ------------------------------------------------------------
Class B sales The Class B shares of both funds have the same
charges and 12b-1 characteristics and fee structure.
fees: o Class B shares are offered without a front-end sales
charge, but are subject to a contingent deferred sales
charge (CDSC) if sold within six years after purchase.
The CDSC ranges from 1.00% to 5.00% depending on how
long the shares are held. No CDSC is imposed on shares
held more than six years.
o CDSCs are waived for the categories of investors listed
in the funds' prospectus.
o Class B shares are subject to 12b-1 distribution and
service fees equal to 1.00% annually of average net
assets.
o Class B shares automatically convert to Class A shares
after eight years.
- ------------------- ------------------------------------------------------------
Class C sales Strategic Income Fund offers Class C shares, World
charges and 12b-1 Bond Fund does not. Please see Strategic Income Fund's
fees: prospectus dated October 1, 1998 for more information.
- ------------------- ------------------------------------------------------------
10
<PAGE>
- ------------------- ------------------------------------------------------------
12b-1 fees: These fees are paid out of a fund's assets on an
on-going basis. Over time these fees will increase the
cost of investments and may cost more than other types
of sales charges.
- ------------------- ------------------------------------------------------------
- --------------------------------------------------------------------------------
BUYING, SELLING AND EXCHANGING SHARES
- --------------------------------------------------------------------------------
Both World Bond and Strategic Income Funds
- --------------------------------------------------------------------------------
Buying shares: Investors may buy shares at their public offering
price through a financial representative or the funds'
transfer agent, John Hancock Signature Services, Inc. After
December 9, 1998, investors will not be allowed to open new
accounts in World Bond Fund but can add to existing
accounts.
- ------------------- ------------------------------------------------------------
Minimum initial $1,000 for non-retirement accounts and $250 for retirement
Investments: accounts and group investments.
- ------------------- ------------------------------------------------------------
Exchanging shares: Shareholders may exchange their shares at net asset value
with no sales charge for shares of the same class of any
other John Hancock fund.
- ------------------- ------------------------------------------------------------
Selling shares: Shareholders may sell their shares by submitting a proper
written or telephone request to John Hancock Signature
Services, Inc.
- ------------------- ------------------------------------------------------------
Net asset value: All purchases, exchanges and sales are made at a price based
on the next determined net asset value per share (NAV) of
the fund. Both funds' NAVs are determined at the close of
regular trading on the New York Stock Exchange, which is
normally 4:00 p.m. Eastern Time.
- ------------------- ------------------------------------------------------------
The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The first two expense tables appearing below show the expenses for the
twelve-month period ended May 31, 1998, adjusted to reflect any changes. Future
expenses may be greater or less. The examples contained in each expense table
show what you would pay if you invested $10,000 over the various time periods
indicated. Each example assumes that you reinvested all dividends and that the
average annual return was 5%. The examples are for comparison purposes only and
are not a representation of either fund's actual expenses or returns, either
past or future.
11
<PAGE>
World Bond Fund
Shareholder transaction expenses Class A Class B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B
Management fee 0.75% 0.75%
12b-1 fee 0.30% 0.99%
Other expenses 0.62% 0.62%
----- -----
Total fund operating expenses 1.67% 2.36%
Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $612 $953 $1,317 $2,337
Class B shares
Assuming redemption
at end of period $739 $1,036 $1,460 $2,525
Assuming no redemption $239 $736 $1,260 $2,525
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
12
<PAGE>
Strategic Income Fund
Shareholder transaction expenses Class A Class B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B
Management fee 0.40% 0.40%
12b-1 fee 0.30% 1.00%
Other expenses 0.22% 0.22%
----- -----
Total fund operating expenses 0.92% 1.62%
Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $540 $730 $936 $1530
Class B shares
Assuming redemption
at end of period $665 $811 $1,081 $1,733
Assuming no redemption $165 $511 $881 $1,733
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
Pro Forma Expense Table
The following expense table shows the pro forma expenses of Strategic Income
Fund assuming that a reorganization with your fund occurred on May 31, 1997. The
expenses shown in the table are based on fees and expenses incurred during the
twelve months ended May 31, 1997, adjusted to reflect any changes. Strategic
Income Fund's actual expenses after the reorganization may be greater or less
than those shown. The example contained in the pro forma expense table shows
what you would pay on a $10,000 investment if the reorganization had occurred on
May 31, 1998. The example assumes that you reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of Strategic Income Fund's actual expenses or
returns, either past or future.
13
<PAGE>
Strategic Income Fund (PRO FORMA)
(Assuming reorganization with World Bond Fund)
Shareholder transaction expenses Class A Class B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B
Management fee 0.40% 0.40%
12b-1 fee 0.30% 1.00%
Other expenses 0.23% 0.23%
----- -----
Total fund operating expenses 0.93% 1.63%
Pro Forma Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $541 $733 $942 $1,542
Class B shares
Assuming redemption
at end of period $666 $814 $1,087 $1,746
Assuming no redemption $166 $514 $887 $1,746
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern
Time, on February 19, 1999, but may occur on any later date
before August 31, 1999. Your fund will transfer all of its
assets to Strategic Income Fund. Strategic Income Fund will
assume your fund's liabilities. The net asset value of both
funds will be computed as of 5:00 p.m., Eastern time, on the
reorganization date.
14
<PAGE>
o Strategic Income Fund will issue to your fund Class A shares
in an amount equal to the aggregate net asset value of your
fund's Class A shares. These shares will immediately be
distributed to your fund's Class A shareholders in proportion
to their holdings on the reorganization date. As a result,
Class A shareholders of your fund will end up as Class A
shareholders of Strategic Income Fund.
o Strategic Income Fund will issue to your fund Class B shares
in an amount equal to the aggregate net asset value of your
fund's Class B shares. These shares will immediately be
distributed to your fund's Class B shareholders in proportion
to their holdings on the reorganization date. As a result,
Class B shareholders of your fund will end up as Class B
shareholders of Strategic Income Fund.
o After the reorganization is over, your fund will be
terminated.
o The reorganization will be tax-free and will not take place
unless both funds receive a satisfactory opinion concerning
the tax consequences of the reorganization from Hale and Dorr
LLP, counsel to the funds.
15
<PAGE>
The following diagram shows how the reorganization would be carried out.
------------------ ---------------------
World Bond Fund Strategic Income
transfer assets & World Bond Fund Fund receives assets
liabilities to assets and & assumes liabilities
Strategic Income liabilities of World Bond Fund
Fund ---------------
------------------ ---------------------
------------ ------------ ------------ ------------
Class A Class B Issues Class Issues Class
shareholders shareholders B Shares A Shares
------------ ------------ ------------ ------------
Your fund receives Strategic Income Fund
Class B shares and
distributes them to your fund's Class B shareholders
--------------------------------------------------------
Your fund receives Strategic Income Fund
Class A shares and
distributes them to your fund's Class A shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- ----------------------------------------- --------------------- ----------------
Strategic Income
Fund Asset Breakpoints World Bond
- ----------------------------------------- --------------------- ----------------
First $100,000,000 0.75% 0.60%
- ----------------------------------------- --------------------- ----------------
Next $150,000,000 0.75% 0.45%
- ----------------------------------------- --------------------- ----------------
Next $250,000,000 0.70% 0.40%
- ----------------------------------------- --------------------- ----------------
Next $150,000,000 0.70% 0.35%
- ----------------------------------------- --------------------- ----------------
Amount over $650,000,000 0.70% 0.30%
- ----------------------------------------- --------------------- ----------------
Strategic Income Fund's management fee rate of 0.40% and its pro forma
management fee rate of 0.40% are substantially lower than your fund's management
fee rate of 0.75%. Strategic Income Fund's other expenses of 0.22% and its pro
forma other expenses of 0.23% are also substantially lower than your fund's
other expenses of 0.62%. Both funds have the same 12b-1 fees for Class A shares
(0.30%) and the same 12b-1 fees for Class B shares (1.00%) although your fund's
Class B distribution payment last year was 0.99%. Strategic Income Fund's
current annual Class A expense ratio (equal to 0.92% of average net assets) and
its pro forma Class A expense ratio (equal to 0.93% of average net assets) are
substantially lower than your fund's current Class A expense ratio (equal to
1.67% of average net assets). Strategic Income Fund's current annual Class B
expense ratio (equal to 1.62% of average net assets) and its pro forma Class B
expense ratio (equal to 1.63% of average net assets) are also substantially
lower than your fund's current Class B expense ratio (equal to 2.36% of average
net assets).
16
<PAGE>
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table compares the risks
affecting each fund..
- -------------------- ----------------------------- -----------------------------
World Bond Fund Strategic Income Fund
- -------------------- -----------------------------------------------------------
Risks of debt The value of the funds' portfolios will change in response
securities to movements of the bond market. As with any fund that
invests primarily in debt securities, a rise in interest
rates typically causes the value of debt securities and
hence the value of the fund to fall. A fall in interest
rates typically causes the value of debt securities to
rise. Debt securities held by the funds are also subject
to the risk that the issuer of a security will have its
credit rating downgraded, will default or will otherwise
fail to meet its obligations.
- -------------------- -----------------------------------------------------------
Risks of below The value of below investment grade debt securities, also
investment grade called junk bonds, fluctuates more than higher rated debt
debt securities securities and there is a greater risk of loss of principal
and income. Lower ratings reflect a greater possibility of
an adverse change in the financial condition of the
issuer. The market price and liquidity of below investment
grade securities generally respond more to short-term
developments affecting the issuer of below investment grade
debt securities than of higher rated securities because
these developments are perceived to have a closer
relationship to the ability of an issuer to meet its
obligations.
- -------------------- ----------------------------- -----------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Risks of below Your fund may invest up to Strategic Income Fund may
investment grade grade 35% of its assets in investment without limit in
debt securities these securities, has invested these securities. To the
(contd.) in these securities in the extent that the fund invests
past, and has been subject in these securities, it is
to these risks. exposed to these risks.
- -------------------- -----------------------------------------------------------
Risks of equity The market value of equity securities may move up and down,
securities sometimes rapidly and unpredictably. These fluctuations
may cause the stock to be worth less than the price
originally paid for it, or less than it was worth at an
earlier time.
-----------------------------------------------------------
Your fund does not invest Strategic Income Fund may
directly in equity invest up to 10% of its
securities. However, your assets in equity securities.
fund may acquire equity To the extent that the fund
securities as a result of invests in these securities,
investing in convertible it is exposed to these risks.
securities, preferred stock
and other debt instruments
with rights to acquire equity
securities attached. If
the fund acquired equity
securities, it would be
exposed to these risks.
- -------------------- ----------------------------- -----------------------------
Diversification Your fund is The fund is diversified and
risks non-diversified, which not subject to the risk of
means that it can invest non-diversification.
more of its assets in a
single issuer than a fund
that is diversified. To
the extent the fund invests
more of its assets in a
single issuer, the fundis
share price may be
adversely affected by
events affecting that
issuer.
- -------------------- -----------------------------------------------------------
Foreign The funds' investments in foreign securities are subject to
securities and the risks of adverse foreign government actions, political
currency risks instability or a lack of adequate and accurate
information. Also, currency exchange rate movements could
reduce gains or create losses. The risks of international
investing are higher in emerging markets such as those of
Latin America and Southeast Asia.
- -------------------- -----------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Risks of The funds' investments in restricted and illiquid
restricted and securities may be difficult or impossible to sell at a
illiquid securities desirable time or a fair price. Restricted and illiquid
securities also present a greater risk of inaccurate
valuation.
- ------------------- ------------------------------------------------------------
- ------------------- ------------------------------------------------------------
Risks of Unleveraged derivative instruments involve the risk that a
unleveraged rise in interest rates will cause the value of the
derivative instrument to fall. A fall in interest rates will typically
instruments cause the value of these instruments to rise. These
including instruments are also subject to the risk that the issuer
asset-backed and will default or otherwise fail to meet its obligations. In
mortgage-backed addition, mortgage-backed securities are subject to the risk
securities that the life of the security will be extended beyond its
expected repayment time. This typically occurs during
periods of rising interest rates and often reduces the
security's value. During periods of falling interest rates,
unanticipated prepayments may occur which also reduces the
security's value.
- ------------------- ------------------------------------------------------------
Risks of Most derivative instruments involve leverage, which
derivative increases market risks. Leverage magnifies gains and losses
instruments, on derivatives relative to changes in the value of
including underlying assets. If a derivative is used for hedging
financial purposes, changes in the value of the derivative may not
futures, match those of the hedged asset. Over the counter
options on derivatives may be illiquid or hard to value accurately. In
futures, addition, the other party may default on its obligations.
securities and If markets for underlying assets do not move in the right
index options and direction, a fund's performance may be worse than if it had
structured not used derivatives.
securities
- ------------------- ------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a copy
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
19
<PAGE>
o The reorganization is scheduled to occur at 5:00 p.m.,
Eastern time, on February 19, 1998, but may occur on any
later date before August 31, 1999. Your fund will transfer
all of its assets to Strategic Income Fund and Strategic
Income Fund will assume all of your fund's liabilities.
This will result in the addition of your fund's assets to
Strategic Income Fund's portfolio. The net asset value of
both funds will be computed as of 5:00 p.m., Eastern time,
on the reorganization date.
o Strategic Income Fund will issue to your fund Class A shares
in an amount equal to the aggregate net asset value of your
fund's Class A shares. As part of the liquidation of your
fund, these shares will immediately be distributed to Class
A shareholders of record of your fund in proportion to their
holdings on the reorganization date. As a result, Class A
shareholders of your fund will end up as Class A
shareholders of Strategic Income Fund.
o Strategic Income Fund will issue to your fund Class B shares
in an amount equal to the aggregate net asset value of your
fund's Class B shares. As part of the liquidation of your
fund, these shares will immediately be distributed to Class
B shareholders of record of your fund in proportion to their
holdings on the reorganization date. As a result, Class B
shareholders of your fund will end up as Class B
shareholders of Strategic Income Fund.
o After the reorganization is over, the existence of your fund
will be terminated.
Reasons for the Proposed Reorganization
The board of trustees of your fund believes that the proposed reorganization
will be advantageous to the shareholders of your fund for several reasons. The
board of trustees considered the following matters, among others, in approving
the proposal.
First, shareholders may be better served by a fund offering greater
diversification. The Strategic Income Fund has a larger asset size than your
fund and may invest in a broader range of securities including domestic high
yield bonds as well as foreign bonds and government bonds. Combining the funds'
assets into a single investment portfolio will afford greater diversification,
making investors less vulnerable to weakness in any single sector of the bond
market.
20
<PAGE>
Second, Strategic Income Fund Class A shares have performed better than your
fund over the past 1, 3 and 5 year periods and Class B shares have performed
better than your fund over the past 1 and 3 year periods. While past performance
cannot predict future results, the trustees believe that Strategic Income Fund
is better positioned than your fund to continue to generate strong returns,
because of its superior diversification and greater flexibility to choose from
among a broader range of investment opportunities.
Third, a combined fund offers economies of scale that are expected to lead to
better control over expenses than is possible for your fund. Both funds incur
substantial costs for accounting, legal, transfer agency services, insurance,
and custodial and administrative services.
Fourth, investor interest in multi-sector income funds has been larger than that
of funds focused on foreign bonds. Diminished investor demand could hinder your
fund's prospects for asset growth and expense reduction in the future.
Conversely, existing and anticipated demand for multi-sector bond funds should
increase the potential for asset growth and expense reduction.
The board of trustees of Strategic Income Fund considered that the
reorganization presents an excellent opportunity for Strategic Income Fund to
acquire investment assets without the obligation to pay commissions or other
transaction costs that are normally associated with the purchase of securities.
The trustees believe that Strategic Income Fund shareholders will also benefit
from improved diversification as a result of the reorganization. Because
Strategic Income Fund is a larger fund than your fund, the trustees feel that
the addition of your fund's assets will improve the diversification of Strategic
Income Fund's overall portfolio. This opportunity provides an economic benefit
to Strategic Income Fund and its shareholders.
The boards of trustees of both funds also considered that the adviser and the
funds' distributor will also benefit from the reorganization. For example, the
adviser might realize time savings from a consolidated portfolio management
effort and from the need to prepare fewer reports and regulatory filings as well
as prospectus disclosure for one fund instead of two. The trustees believe,
however, that these savings will not amount to a significant economic benefit to
the adviser.
Comparative Fees and Expense Ratios. As discussed above in the Summary, at all
asset levels, the advisory fee rates paid by your fund are higher than the rates
paid by Strategic Income Fund.
21
<PAGE>
Strategic Income Fund's management fee rate of 0.40% and its pro forma
management fee rate of 0.40% are substantially lower than your fund's management
fee rate of 0.75%. Strategic Income Fund's other expenses of 0.22% and its pro
forma other expenses of 0.23% are also substantially lower than your fund's
other expenses of 0.62%. Both funds have the same 12b-1 fees for Class A shares
(0.30%) and the same 12b-1 fees for Class B shares (1.00%), although your fund's
Class B distribution payment last year was 0.99%. Strategic Income Fund's
current annual Class A expense ratio (equal to 0.92% of average net assets) and
its pro forma Class A expense ratio (equal to 0.93% of average net assets) are
substantially lower than your fund's current Class A expense ratio (equal to
1.67% of average net assets). Strategic Income Fund's current annual Class B
expense ratio (equal to 1.62% of average net assets) and its pro forma Class B
expense ratio (equal to 1.63% of average net assets) are also substantially
lower than your fund's current Class B expense ratio (equal to 2.36% of average
net assets).
Your fund has not increased its asset size. The trustees do not believe, given
your fund's current size and historical growth rate, that your fund will grow to
an asset size that would allow your fund to realize the benefits of economies of
scale, including better control over expenses. The trustees also do not believe
that your fund will reach an asset size which will allow your fund to
significantly broaden the diversification of its investment portfolio.
Comparative Performance. The trustees also took into consideration the
relative performance of your fund and Strategic Income Fund.
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------- -------------------------- --------------------------
Average Annual
Total Return World Bond Strategic Income
(without including sales
charges)
-------------------------- --------------------------
------------- ------------ ------------ -------------
Class A Class B Class A Class B
------------- ------------ ------------ -------------
- -------------------------------- ------------- ------------ ------------ -------------
1 year ended 5/31/98 3.03% 2.32% 13.43% 12.64%
- -------------------------------- ------------- ------------ ------------ -------------
- -------------------------------- ------------- ------------ ------------ -------------
3 years ended 5/31/98 4.33% 3.62% 12.60% 11.82%
- -------------------------------- ------------- ------------ ------------ -------------
- -------------------------------- ------------- ------------ ------------ -------------
5 years ended 5/31/98 4.69% 4.04% 10.13% --
- -------------------------------- ------------- ------------ ------------ -------------
- -------------------------------- ------------- ------------ ------------ -------------
10 years ended 5/31/98 4.16%* 5.87% 9.01% 9.34%**
- -------------------------------- ------------- ------------ ------------ -------------
</TABLE>
*Since Class A shares began operations on January 3, 1992.
**Since Class B shares began operations on October 4, 1993.
Your fund's Class A and Class B shares performance has lagged behind the
performance of Strategic Income Fund for all periods shown above.
Unreimbursed Distribution and Shareholder Service Expenses
The boards of trustees of your fund and Strategic Income Fund have determined
that, if the reorganization occurs, unreimbursed distribution and shareholder
service expenses incurred under your fund's Rule 12b-1 Plans will be
reimbursable expenses under Strategic Income Fund's Rule 12b-1 Plans. However,
the maximum amounts payable annually under Strategic Income Fund's Rule 12b-1
Plans (0.30% and 1.00% of average daily net assets attributable to Class A
shares and Class B shares, respectively) will not increase.
The following table shows the actual and pro forma unreimbursed distribution and
shareholder service expenses of Class A and Class B of your fund and Strategic
Income Fund. The table shows both the dollar amount of these expenses and the
percentage of each class' average net assets that they represent.
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------- ------------------------ -----------------------------
Unreimbursed Distribution and
Shareholder Service Expenses World Bond Strategic Income
------------------------ -----------------------------
---------- ------------- -------------- --------------
Class A Class B Class A Class B
---------- ------------- -------------- --------------
- -------------------------------- ---------- ------------- -------------- --------------
Actual expenses as of May 31, $9,931 $5,601,592 $1,512,118 $7,115,503
1998 0.04% 24.12% 0.34% 1.81%
- -------------------------------- ---------- ------------- -------------- --------------
- -------------------------------- -------------- --------------
Pro forma combined expenses as $1,522,049 $12,717,095
of May 31, 1998 0.32% 3.05%
- -------------------------------- ------------------------ -------------- --------------
</TABLE>
23
<PAGE>
If the reorganization had taken place on May 31, 1998, the pro forma combined
unreimbursed expenses of Strategic Income Fund's Class A and Class B shares
would have been higher than if no reorganization had occurred. Nevertheless,
Strategic Income Fund's assumption of your fund's unreimbursed Rule 12b-1
expenses will have no immediate effect upon the payments made under Strategic
Income Fund's Rule 12b-1 Plans. These payments will continue to be 0.30% and
1.00% of average daily net assets attributable to Class A and Class B shares,
respectively.
John Hancock Funds, Inc. hopes to recover unreimbursed distribution and
shareholder service expenses for Class B shares over an extended period of time.
However, if Strategic Income Fund's board terminates either class' Rule 12b-1
Plan, that class will not be obligated to reimburse these distribution and
shareholder service expenses. Accordingly, until they are paid or accrued,
unreimbursed distribution and shareholder service expenses do not and will not
appear as an expense or liability in the financial statements of either fund. In
addition, unreimbursed expenses are not reflected in a fund's net asset value or
the formula for calculating Rule 12b-1 payments. The staff of the SEC has not
approved or disapproved the treatment of the unreimbursed distribution and
shareholder service expenses described in this proxy statement.
Tax Status of the Reorganization
The reorganization will be tax-free for federal income tax purposes and will not
take place unless both funds receive a satisfactory opinion from Hale and Dorr
LLP, counsel to the funds, substantially to the effect that:
o The reorganization described above will be a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986 (the "Code"), and each fund will be "a
party to a reorganization" within the meaning of Section 368
of the Code;
o No gain or loss will be recognized by your fund upon (1) the
transfer of all of its assets to Strategic Income Fund as
described above or (2) the distribution by your fund of
Strategic Income Fund shares to your fund's shareholders;
24
<PAGE>
o No gain or loss will be recognized by Strategic Income Fund
upon the receipt of your fund's assets solely in exchange for
the issuance of Strategic Income Fund shares and the
assumption of all of your fund's liabilities by Strategic
Income Fund;
o The basis of the assets of your fund acquired by Strategic
Income Fund will be the same as the basis of those assets in
the hands of your fund immediately before the transfer;
o The tax holding period of the assets of your fund in the hands
of Strategic Income Fund will include your fund's tax holding
period for those assets;
o The shareholders of your fund will not recognize a gain or a
loss upon the exchange of all their shares of your fund solely
for Strategic Income Fund shares as part of the
reorganization;
o The basis of Strategic Income Fund shares received by your
fund's shareholders in the reorganization will be the same as
the basis of the shares of your fund surrendered in exchange;
and
o The tax holding period of the Strategic Income Fund shares you
receive will include the tax holding period of the shares of
your fund surrendered in the exchange, provided that the
shares of your fund were held as capital assets on the
reorganization date.
Additional Tax Considerations
As of May 31, 1998, World Bond Fund had capital loss carryovers of approximately
$1,621,817, which expire as follows: October 31, 2002--$938,808 and October 31,
2005--$683,009. Capital loss carryovers are used to reduce the amount of
realized capital gains that a fund is required to distribute to its shareholders
in order to avoid paying taxes on undistributed capital gain.
If the reorganization occurs, Strategic Income Fund will be able to use World
Bond Fund's capital loss carryovers to offset future realized capital gains,
subject to limitations that may, in certain circumstances, result in the
expiration of a portion of these carryovers before they can be used.
Additional Terms of Agreement and Plan of Reorganization
25
<PAGE>
Surrender of Share Certificates. If your shares are represented by one or more
share certificates before the reorganization date, you must either surrender the
certificates to your fund or deliver to your fund a lost certificate affidavit,
in the form and accompanied by the surety bonds that your fund may require
(collectively, an "Affidavit"). On the reorganization date, all certificates
that have not been surrendered will be canceled, will no longer evidence
ownership of your fund's shares and will evidence ownership of Strategic Income
Fund shares. Shareholders may not redeem or transfer Strategic Income Fund
shares received in the reorganization until they have surrendered their fund
share certificates or delivered an Affidavit. Strategic Income Fund will not
issue share certificates in the reorganization.
Conditions to Closing the Reorganization. The obligation of your fund to
consummate the reorganization is subject to the satisfaction of certain
conditions, including the performance by Strategic Income Fund of all its
obligations under the Agreement and the receipt of all consents, orders and
permits necessary to consummate the reorganization (see Agreement, paragraph 6).
The obligation of Strategic Income Fund to consummate the reorganization is
subject to the satisfaction of certain conditions, including your fund's
performance of all of its obligations under the Agreement, the receipt of
certain documents and financial statements from your fund and the receipt of all
consents, orders and permits necessary to consummate the reorganization (see
Agreement, paragraph 7).
The obligations of both funds are subject to the approval of the Agreement by
the necessary vote of the outstanding shares of your fund, in accordance with
the provisions of your fund's declaration of trust and by-laws. The funds'
obligations are also subject to the receipt of a favorable opinion of Hale and
Dorr LLP as to the federal income tax consequences of the reorganization. (see
Agreement, paragraph 8).
Termination of Agreement. The board of trustees of either your fund or Strategic
Income Fund may terminate the Agreement (even if the shareholders of your fund
have already approved it) at any time before the reorganization date, if that
board believes that proceeding with the reorganization would no longer be
advisable.
Expenses of the Reorganization. Strategic Income Fund and your fund will each be
responsible for its own expenses incurred in connection with entering into and
carrying out the provisions of the Agreement, whether or not the reorganization
occurs. These expenses are estimated to be approximately $38,075 in total.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of each fund as of May 31,
1998, and the pro forma combined capitalization of both funds as if the
reorganization had occurred on that date. The table reflects pro forma exchange
ratios of approximately 1.0724 Class A Strategic Income Fund shares being issued
for each Class A share of your fund and approximately 1.1347 Class B Strategic
Income Fund shares being issued for each Class B share of your fund. If the
reorganization is consummated, the actual exchange ratios on the reorganization
date may vary from the exchange ratios indicated. This is due to changes in the
market value of the portfolio securities of both Strategic Income Fund and your
fund between May 31, 1998 and the reorganization date, changes in the amount of
undistributed net investment income and net realized capital gains of Strategic
Income Fund and your fund during that period resulting from income and
distributions, and changes in the accrued liabilities of Strategic Income Fund
and your fund during the same period.
MAY 31, 1998
World Bond Strategic Pro Forma
Income
Net Assets $42, 519, 460 $963,403,915 $1,005,923,375
Net Asset Value Per Share
Class A $8.89 $7.84 $7.84
Class B $8.89 $7.84 $7.84
Class C -- $7.84 $7.84
Shares Outstanding
Class A 2,959,980 62,431,106 65,789,795
Class B 1,820,414 60,396,771 62,462,395
Class C -- 76,624 76,624
It is impossible to predict how many Class A shares and Class B shares of
Strategic Income Fund will actually be received and distributed by your fund on
the reorganization date. The table should not be relied upon to determine the
amount of Strategic Income Fund shares that will actually be received and
distributed.
ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES
The following table shows where in each fund's prospectus you can find
additional information about the business of each fund.
27
<PAGE>
- -------------------------- -----------------------------------------------------
Type of Information Headings in Each Prospectus
- -------------------------- -----------------------------------------------------
Organization Fund Details: Business Structure: How the Funds are
and operation Organized
- -------------------------- -----------------------------------------------------
Investment objective and Goal and Strategy, Portfolio Securities, Risk
policies Factors; Fund Details: Business Structure: Portfolio
Trades, Investment Goals, Diversification; More
About Risk
- -------------------------- -----------------------------------------------------
Portfolio Portfolio Management
Management
- -------------------------- -----------------------------------------------------
Investment adviser and Overview: The Management Firm; Fund Details:
distributor Business Structure, How the Funds are Organized,
Sales Compensation
- -------------------------- -----------------------------------------------------
Expenses Investor Expenses
- -------------------------- -----------------------------------------------------
Custodian and Fund Details: Business Structure: How the Funds are
transfer agent Organized
- -------------------------- -----------------------------------------------------
Shares of beneficial Your Account: Choosing a Share Class
interest
- -------------------------- -----------------------------------------------------
Purchase of shares Your Account: Choosing a Share Class, How Sales
Charges are Calculated, Sales Charge Reductions and
Waivers, Opening an Account, Buying Shares;
Transaction Policies; Additional Investor Services
- -------------------------- -----------------------------------------------------
Redemption Your Account: Selling Shares, How Sales Charges are
or sale of shares Calculated; Transaction Policies; Additional
Investor Services; Systematic Withdrawal Plan
- -------------------------- -----------------------------------------------------
Dividends, distributions Dividends and Account Policies
and taxes
- -------------------------- -----------------------------------------------------
BOARDS' EVALUATION AND RECOMMENDATION
For the reasons described above, the board of trustees of your fund, including
the trustees who are not "interested persons" of either fund or the adviser
("independent trustees"), approved the reorganization. In particular, the
trustees determined that the reorganization was in the best interests of your
fund and that the interests of your fund's shareholders would not be diluted as
a result of the reorganization. Similarly, the board of trustees of Strategic
Income Fund, including the independent trustees, approved the reorganization.
They also determined that the reorganization was in the best interests of
Strategic Income Fund and that the interests of Strategic Income Fund's
shareholders would not be diluted as a result of the reorganization.
28
<PAGE>
- --------------------------------------------------------------------------------
The trustees of your fund recommend that the
shareholders of your fund vote for the proposal to
approve the agreement and plan of reorganization.
VOTING RIGHTS AND REQUIRED VOTE
Each share of your fund is entitled to one vote. Approval of the above proposal
requires the affirmative vote of a majority of the shares of your fund
outstanding and entitled to vote. For this purpose, a majority of the
outstanding shares of your fund means the vote of the lesser of
(1) 67% or more of the shares present at the meeting, if the holders of more
than 50% of the shares of the fund are present or represented by proxy, or
(2) more than 50% of the outstanding shares of the fund.
Shares of your fund represented in person or by proxy, including shares that
abstain or do not vote with respect to the proposal, will be counted for
purposes of determining whether there is a quorum at the meeting. Accordingly,
an abstention from voting has the same effect as a vote against the proposal.
However, if a broker or nominee holding shares in "street name" indicates on the
proxy card that it does not have discretionary authority to vote on the
proposal, those shares will not be considered present and entitled to vote on
the proposal. Thus, a "broker non-vote" has no effect on the voting in
determining whether the proposal has been adopted in accordance with clause (1)
above, if more than 50% of the outstanding shares (excluding the "broker
non-votes") are present or represented. However, for purposes of determining
whether the proposal has been adopted in accordance with clause (2) above, a
"broker non-vote" has the same effect as a vote against the proposal because
shares represented by a "broker non-vote" are considered to be outstanding
shares.
If the required approval of shareholders is not obtained, your fund will
continue to engage in business as a separate mutual fund and the board of
trustees will consider what further action may be appropriate.
29
<PAGE>
INFORMATION CONCERNING THE MEETING
Solicitation of Proxies
In addition to the mailing of these proxy materials, proxies may be solicited by
telephone, by fax or in person by the trustees, officers and employees of your
fund; by personnel of your fund's investment adviser, John Hancock Advisers,
Inc. and its transfer agent, John Hancock Signature Services, Inc.; or by
broker-dealer firms. Signature Services, together with a third party
solicitation firm, has agreed to provide proxy solicitation services to your
fund at a cost of approximately $1,500.
Revoking Proxies
A World Bond Fund shareholder signing and returning a proxy has the power to
revoke it at any time before it is exercised:
o By filing a written notice of revocation with your fund's
transfer agent, John Hancock Signature Services, Inc., 1 John
Hancock Way, Suite 1000, Boston, Massachusetts 02217-1000, or
o By returning a duly executed proxy with a later date before
the time of the meeting, or
o If a shareholder has executed a proxy but is present at the
meeting and wishes to vote in person, by notifying the
secretary of your fund (without complying with any
formalities) at any time before it is voted.
Being present at the meeting alone does not revoke a previously executed and
returned proxy.
Outstanding Shares and Quorum
As of December 9, 1998, _______ and _______ Class A and Class B shares of
beneficial interest of your fund were outstanding. Only shareholders of record
on December 9, 1998 (the "record date") are entitled to notice of and to vote at
the meeting. A majority of the outstanding shares of your fund that are entitled
to vote will be considered a quorum for the transaction of business.
Other Business
Your fund's board of trustees knows of no business to be presented for
consideration at the meeting other than the proposal. If other business is
properly brought before the meeting, proxies will be voted according to the best
judgment of the persons named as proxies.
30
<PAGE>
Adjournments
If a quorum is not present in person or by proxy at the time any session of the
meeting is called to order, the persons named as proxies may vote those proxies
that have been received to adjourn the meeting to a later date. If a quorum is
present but there are not sufficient votes in favor of the proposal, the persons
named as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies concerning the proposal. Any adjournment will
require the affirmative vote of a majority of your fund's shares at the session
of the meeting to be adjourned. If an adjournment of the meeting is proposed
because there are not sufficient votes in favor of the proposal, the persons
named as proxies will vote those proxies favoring the proposal in favor of
adjournment, and will vote those proxies against the reorganization against
adjournment.
Telephone Voting
In addition to soliciting proxies by mail, by fax or in person, your fund may
also arrange to have votes recorded by telephone by officers and employees of
your fund or by personnel of the adviser or transfer agent. The telephone voting
procedure is designed to verify a shareholder's identity, to allow a shareholder
to authorize the voting of shares in accordance with the shareholder's
instructions and to confirm that the voting instructions have been properly
recorded. If these procedures were subject to a successful legal challenge,
these telephone votes would not be counted at the meeting. Your fund has not
obtained an opinion of counsel about telephone voting, but is currently not
aware of any challenge.
o A shareholder will be called on a recorded line at the
telephone number in the fund's account records and will be
asked to provide the shareholder's social security number or
other identifying information.
o The shareholder will then be given an opportunity to authorize
proxies to vote his or her shares at the meeting in accordance
with the shareholder's instructions.
o To ensure that the shareholder's instructions have been
recorded correctly, the shareholder will also receive a
confirmation of the voting instructions by mail.
31
<PAGE>
o A toll-free number will be available in case the voting
information contained in the confirmation is incorrect.
o If the shareholder decides after voting by telephone to attend
the meeting, the shareholder can revoke the proxy at that time
and vote the shares at the meeting.
OWNERSHIP OF SHARES OF THE FUNDS
To the knowledge of the fund, as of November 30, 1998, no person owned of record
or beneficially 5% or more of the outstanding Class A and Class B shares of your
fund or of the outstanding Class A shares of Strategic Income Fund. As of
November 30, 1998, the following person owned of record or beneficially 5% or
more of the outstanding Class B shares of Strategic Income Fund.
- ------------------------------------------ ---------------------------
Names and Addresses of Owners of More World Bond Fund
Than 5% of Shares
- ------------------------------------------ ---------------------------
- ------------------------------------------ ---------------------------
Names and Addresses of Owners of More Strategic Income Fund
Than 5% of Shares
- ------------------------------------------ ---------------------------
- ------------------------------------------ ---------------------------
As of August 14, 1998, the trustees and officers of your fund and Strategic
Income Fund, each as a group, owned in the aggregate less than 1% of the
outstanding shares of their respective funds.
EXPERTS
The financial statements and the financial highlights of Strategic Income Fund
as of May 31, 1998 and for the year then ended; and the unaudited financial
statements of the World Bond Fund for the twelve months ended May 31, 1998; are
incorporated by reference into this proxy statement and prospectus. The
financial statements and financial highlights as of October 31, 1997 for World
Bond Fund and as of May 31, 1998 for Strategic Income Fund have been
independently audited by PricewaterhouseCoopers LLP as stated in their reports
appearing in the statement of additional information. These financial statements
and financial highlights have been included in reliance on their reports given
on their authority as experts in accounting and auditing.
32
<PAGE>
AVAILABLE INFORMATION
Each fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 and files reports,
proxy statements and other information with the SEC. These reports, proxy
statements and other information filed by the funds can be inspected and copied
(at prescribed rates) at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C., and at the following regional offices: Chicago
(500 West Madison Street, Suite 1400, Chicago, Illinois); and New York (7 World
Trade Center, Suite 1300, New York, New York). Copies of this material can also
be obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies
of these documents may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
33
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 9th day
of December, 1998, by and between John Hancock Strategic Income Fund (the
"Acquiring Fund"), a series of John Hancock Strategic Series, a Massachusetts
business trust (the "Trust II"), and John Hancock World Bond Fund (the "Acquired
Fund"), a series of John Hancock Investment Trust III, a Massachusetts business
trust (the "Trust") each with their principal place of business at 101
Huntington Avenue, Boston, Massachusetts 02199. The Acquiring Fund and the
Acquired Fund are sometimes referred to collectively herein as the "Funds" and
individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization,"
as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization will consist of the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the
issuance of Class A and Class B shares of beneficial interest of the Acquiring
Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by
the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by
the distribution by the Acquired Fund, on or promptly after the Closing Date
hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation and termination of the Acquired Fund as provided
herein, all upon the terms and conditions set forth in this Agreement.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and
interest receivables, cash and other assets), as set forth in the
statement of assets and liabilities referred to in Paragraph 7.2 hereof
(the "Statement of Assets and Liabilities"), to the Acquiring Fund free
and clear of all liens and encumbrances, except as otherwise provided
herein, in exchange for (i) the assumption by the Acquiring Fund of the
known and unknown liabilities of the Acquired Fund, including the
liabilities set forth in the Statement of Assets and Liabilities (the
"Acquired Fund Liabilities"), which shall be assigned and transferred to
the Acquiring Fund by the Acquired Fund and assumed by the Acquiring
Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund, for
distribution pro rata by the Acquired Fund to its shareholders in
proportion to their respective ownership of Class A and/or Class B shares
of beneficial interest of the Acquired Fund, as of the close of business
on February 19, 1999 (the "Closing Date"), of a number of the Acquiring
Fund Shares having an aggregate net asset value equal, in the case of
each class of Acquiring Fund Shares, to the value of the assets, less
such liabilities (herein referred to as the "net value of the assets")
attributable to
<PAGE>
the applicable class, assumed, assigned and delivered, all determined
as provided in Paragraph 2.1 hereof and as of a date and time as
specified therein. Such transactions shall take place at the closing
provided for in Paragraph 3.1 hereof (the "Closing"). All
computations with respect to the Acquiring Fund shall be provided by
Investors Bank & Trust Company (the "Acquiring Fund's Custodian"), as
custodian and pricing agent for the Acquiring Fund and, and with respect
to the Acquired Fund by State Street Bank and Trust Company (the
"Acquired Fund's Custodian).
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of
execution of this Agreement. The Acquired Fund reserves the right to sell
any of these securities (except to the extent sales may be limited by
representations made in connection with issuance of the tax opinion
provided for in paragraph 8.6 hereof) but will not, without the prior
approval of the Acquiring Fund, acquire any additional securities other
than securities of the type in which the Acquiring Fund is permitted to
invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses
in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record (the "Acquired Fund shareholders"),
determined as of the close of regular trading on the New York Stock
Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund, to open accounts on the share records of the
Acquiring Fund in the names of the Acquired Fund shareholders and
representing the respective pro rata number and class of Acquiring Fund
Shares due such shareholders. Acquired Fund shareholders who own Class A
shares of the Acquired Fund will receive Class A Acquiring Fund Shares
and Acquired Fund shareholders who own Class B shares of the Acquired
Fund will receive Class B Acquiring Fund Shares. The Acquiring Fund shall
not issue certificates representing Acquiring Fund Shares in connection
with such exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the
Acquired Fund may require (collectively, an "Affidavit"), to John Hancock
Signature Services, Inc. prior to the Closing Date. Any Acquired Fund
share certificate which remains outstanding on the Closing Date shall be
deemed to be canceled, shall no longer evidence ownership of shares of
beneficial interest of the Acquired Fund and shall evidence ownership of
Acquiring Fund Shares. Unless and until any such certificate shall be so
surrendered or an Affidavit relating thereto shall be delivered,
dividends and other distributions payable by the Acquiring Fund
subsequent to the Liquidation Date with respect to Acquiring Fund Shares
shall be paid to the holder of such certificate(s), but such shareholders
may not redeem or transfer Acquiring Fund Shares received in the
Reorganization. The Acquiring Fund will not issue share certificates in
the Reorganization.
<PAGE>
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund Shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Trust, including, but not limited to,
the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commissions, and any federal, state
or local tax authorities or any other relevant regulatory authority, is
and shall remain the responsibility of the Trust.
2. VALUATION
2.1 The net asset values of the Class A and Class B Acquiring Fund Shares and
the net values of the assets and liabilities of the Acquired Fund
attributable to its Class A and Class B shares to be transferred shall,
in each case, be determined as of the close of business (4:00 p.m. Boston
time) on the Closing Date. The net asset values of the Class A and Class
B Acquiring Fund Shares shall be computed by the Aquiring Fund's
Custodian in the manner set forth in the Acquiring Fund's Declaration of
Trust as amended and restated (the "Declaration"), or By-Laws and the
Acquiring Fund's then-current prospectus and statement of additional
information and shall be computed in each case to not fewer than four
decimal places. The net values of the assets of the Acquired Fund
attributable to its Class A and Class B shares to be transferred shall be
computed by the Acquired Fund's Custodian by calculating the value of the
assets of each class transferred by the Acquired Fund and by subtracting
therefrom the amount of the liabilities of each class assigned and
transferred to and assumed by the Acquiring Fund on the Closing Date,
said assets and liabilities to be valued in the manner set forth in the
Acquired Fund's then current prospectus and statement of additional
information and shall be computed in each case to not fewer than four
decimal places.
2.2 The number of shares of each class of Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's
assets shall be determined by dividing the value of the Acquired Fund's
assets attributable to a class, less the liabilities attributable to that
class assumed by the Acquiring Fund, by the Acquiring Fund's net asset
value per share of the same class, all as determined in accordance with
Paragraph 2.1 hereof.
2.3 All computations of value shall be made by each Custodian in accordance
with its regular practice as pricing agent for its respective Fund.
<PAGE>
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be February 19, 1999 or such other date on or
before August 31, 1999 as the parties may agree. The Closing shall be
held as of 5:00 p.m. at the offices of the Trust II and the Trust, 101
Huntington Avenue, Boston, Massachusetts 02199, or at such other time
and/or place as the parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name of
the Acquired Fund's Custodian as record holder for the Acquired Fund
shall be presented by the Acquired Fund to the Acquiring Fund's Custodian
for examination no later than five business days preceding the Closing
Date. Portfolio securities which are not held in book-entry form shall be
delivered by the Acquired Fund to the Acquiring Fund's Custodian for the
account of the Acquiring Fund on the Closing Date, duly endorsed in
proper form for transfer, in such condition as to constitute good
delivery thereof in accordance with the custom of brokers, and shall be
accompanied by all necessary federal and state stock transfer stamps or a
check for the appropriate purchase price thereof. Portfolio securities
held of record by the Acquired Fund's Custodian in book-entry form on
behalf of the Acquired Fund shall be delivered to the Acquiring Fund by
the Acquiring Fund's Custodian by recording the transfer of beneficial
ownership thereof on its records. The cash delivered shall be in the form
of currency or by the Acquiring Fund's Custodian crediting the Acquiring
Fund's account maintained with the Acquiring Fund's Custodian with
immediately available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted or (b)
trading or the reporting of trading on said Exchange or elsewhere shall
be disrupted so that accurate appraisal of the value of the net assets of
the Acquiring Fund or the Acquired Fund is impracticable, the Closing
Date shall be postponed until the first business day after the day when
trading shall have been fully resumed and reporting shall have been
restored; provided that if trading shall not be fully resumed and
reporting restored on or before August 31, 1999, this Agreement may be
terminated by the Acquiring Fund or by the Acquired Fund upon the giving
of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding
and nonresident alien withholding status of the Acquired Fund
shareholders and the number of outstanding shares of each class of
beneficial interest of the Acquired Fund owned by each such shareholder,
all as of the close of business on the Closing Date, certified by its
Treasurer, Secretary or other authorized officer (the "Shareholder
List"). The Acquiring Fund shall issue and deliver to the Acquired Fund a
confirmation evidencing the Acquiring Fund Shares to be credited on the
Closing Date, or provide evidence satisfactory to the Acquired Fund that
such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party
shall deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts or other documents as such other party or its
counsel may reasonably request.
<PAGE>
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of the Acquired Fund represents, warrants and
covenants to the Acquiring Fund as follows:
(a) The Trust is a business trust, duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the Trust nor the
Acquired Fund is required to qualify to do business in any jurisdiction
in which it is not so qualified or where failure to qualify would
subject it to any material liability or disability. The Trust has all
necessary federal, state and local authorizations to own all of its
properties and assets and to carry on its business as now being
conducted;
(b) The Trust is a registered investment company classified as a management
company and its registration with the Commission as an investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"), is in full force and effect. The Acquired Fund is a diversified
series of the Trust;
(c) The Trust and the Acquired Fund are not, and the execution, delivery and
performance of their obligations under this Agreement will not result,
in violation of any provision of the Trust's Declaration of Trust, as
amended and restated (the "Trust's Declaration") or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking
to which the Trust or the Acquired Fund is a party or by which it is
bound;
(d) Except as otherwise disclosed in writing and accepted by the Acquiring
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust or the Acquired Fund or any of
the Acquired Fund's properties or assets. The Trust knows of no facts
which might form the basis for the institution of such proceedings, and
neither the Trust nor the Acquired Fund is a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects the Acquired Fund's business
or its ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other commitments (other
than this Agreement or agreements for the purchase of securities entered
into in the ordinary course of business and consistent with its
obligations under this Agreement) which will not be terminated without
liability to the Acquired Fund at or prior to the Closing Date;
(f) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquired Fund as of October 31, 1997 and the
related statement of operations as well as the unaudited financials
dated April 30, 1998 (copies of which have been furnished to the
Acquiring Fund) present fairly in all material respects the financial
condition of the Acquired Fund as of April 30, 1998 and the results of
its operations for the period then ended in accordance with
generally accepted accounting principles consistently applied, and
there were no known actual or contingent liabilities of the Acquired
Fund as of the respective dates thereof not disclosed therein;
<PAGE>
(g) Since April 30, 1998, there has not been any material adverse change in
the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquired Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the Acquiring
Fund;
(h) At the date hereof and by the Closing Date, all federal, state and other
tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge no such return
is currently under audit and no assessment has been asserted with
respect to such returns or reports;
(i)Each of the Acquired Fund and its predecessors has qualified as a
regulated investment company for each taxable year of its operation and
the Acquired Fund will qualify as such as of the Closing Date with
respect to its taxable year ending on the Closing Date;
(j)The authorized capital of the Acquired Fund consists of an unlimited
number of shares of beneficial interest, no par value. All issued and
outstanding shares of beneficial interest of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable by the Trust. All of the issued and
outstanding shares of beneficial interest of the Acquired Fund will, at
the time of Closing, be held by the persons and in the amounts and
classes set forth in the Shareholder List submitted to the Acquiring Fund
pursuant to Paragraph 3.4 hereof. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares of beneficial interest, nor is there
outstanding any security convertible into any of its shares of beneficial
interest;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the assets to be transferred to the Acquiring Fund pursuant to
Paragraph 1.1 hereof, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the Securities
Act of 1933, as amended (the "1933 Act");
(l)The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action on the part of the Trust on behalf of
the Acquired Fund, and this Agreement constitutes a valid and binding
obligation of the Trust and the Acquired Fund enforceable in accordance
with its terms, subject to the approval of the Acquired Fund's
shareholders;
<PAGE>
(m) The information to be furnished by the Acquired Fund to the Acquiring
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations thereunder applicable thereto;
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in Paragraph 5.7
hereof (other than written information furnished by the Acquiring Fund
for inclusion therein, as covered by the Acquiring Fund's warranty in
Paragraph 4.2(m) hereof), on the effective date of the Registration
Statement, on the date of the meeting of the Acquired Fund shareholders
and on the Closing Date, shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of the
Acquired Fund have been offered for sale and sold in conformity with all
applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated June 1, 1998 (the "Acquired
Fund Prospectus"), previously furnished to the Acquiring Fund, does not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were
made, not misleading.
4.2 The Trust II on behalf of the Acquiring Fund represents, warrants and
covenants to the Acquired Fund as follows:
(a) The Trust II is a business trust duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and to carry out
the Agreement. Neither the Trust II nor the Acquiring Fund is required
to qualify to do business in any jurisdiction in which it is not so
qualified or where failure to qualify would subject it to any material
liability or disability. The Trust II has all necessary federal, state
and local authorizations to own all of its properties and assets and to
carry on its business as now being conducted;
(b) The Trust II is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect. The
Acquiring Fund is a diversified series of the Trust II;
<PAGE>
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A and Class B shares of the Acquiring
Fund, each dated October 1, 1998, and any amendments or supplements
thereto on or prior to the Closing Date, and the Registration Statement
on Form N-14 to be filed in connection with this Agreement (the
"Registration Statement") (other than written information furnished by
the Acquired Fund for inclusion therein, as covered by the Acquired
Fund's warranty in Paragraph 4.1(m) hereof) will conform in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act
and the rules and regulations of the Commission thereunder, the
Acquiring Fund Prospectus does not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and the
Registration Statement will not include any untrue statement of material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(d) At the Closing Date, the Trust II on behalf of the Acquiring Fund will
have good and marketable title to the assets of the Acquiring Fund;
(e) The Trust II and the Acquiring Fund are not, and the execution, delivery
and performance of their obligations under this Agreement will not
result, in violation of any provisions of the Trust II's Declaration, or
By-Laws or of any agreement, indenture, instrument, contract, lease or
other undertaking to which the Trust II or the Acquiring Fund is a party
or by which the Trust II or the Acquiring Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the Acquired
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust II or the Acquiring Fund or any
of the Acquiring Fund's properties or assets. The Trust II knows of no
facts which might form the basis for the institution of such
proceedings, and neither the Trust II nor the Acquiring Fund is a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects the
Acquiring Fund's business or its ability to consummate the transactions
herein contemplated;
(g) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquiring Fund as of May 31, 1998 and the related
statement of operations (copies of which have been furnished to the
Acquired Fund) present fairly in all material respects the financial
condition of the Acquiring Fund as of May 31, 1998 and the results of
its operations for the period then ended in accordance with generally
accepted accounting principles consistently applied, and there were no
known actual or contingent liabilities of the Acquiring Fund as of the
respective dates thereof not disclosed therein;
(h) Since May 31, 1998, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Trust II on behalf of the Acquiring
Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as disclosed to and accepted by the
Acquired Fund;
<PAGE>
(i)Each of the Acquiring Fund and its predecessors has qualified as a
regulated investment company for each taxable year of its operation and
the Acquiring Fund will qualify as such as of the Closing Date;
(j)The authorized capital of the Trust II consists of an unlimited number
of shares of beneficial interest, no par value per share. All issued and
outstanding shares of beneficial interest of the Acquiring Fund are, and
at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable by the Trust II. The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for
or purchase any of its shares of beneficial interest, nor is there
outstanding any security convertible into any of its shares of beneficial
interest;
(k) The execution, delivery and performance of this Agreement has been duly
authorized by all necessary action on the part of the Trust II on behalf
of the Acquiring Fund, and this Agreement constitutes a valid and
binding obligation of the Acquiring Fund enforceable in accordance with
its terms;
(l)The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial interest
of the Acquiring Fund and will be fully paid and nonassessable by the
Trust II;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by the Agreement, except for the
registration of the Acquiring Fund Shares under the 1933 Act and the
1940 Act.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Trust on
behalf of the Acquired Fund and the Trust II on behalf of Acquiring Fund,
will operate their respective businesses in the ordinary course between
the date hereof and the Closing Date, it being understood that such
ordinary course of business will include customary dividends and
distributions and any other distributions necessary or desirable to avoid
federal income or excise taxes.
5.2 The Trust will call a meeting of the Acquired Fund shareholders to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated herein.
<PAGE>
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution thereof other than in accordance with the terms
of this Agreement.
5.4 The Trust on behalf of the Acquired Fund will provide such information
within its possession or reasonably obtainable as the Trust II on behalf
of the Acquiring Fund requests concerning the beneficial ownership of the
Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable
to consummate the transactions contemplated by this Agreement.
5.6 The Trust on behalf of the Acquired Fund shall furnish to the Trust II on
behalf of the Acquiring Fund on the Closing Date the Statement of Assets
and Liabilities of the Acquired Fund as of the Closing Date, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by the
Acquired Fund's Treasurer or Assistant Treasurer. As promptly as
practicable but in any case within 60 days after the Closing Date, the
Acquired Fund shall furnish to the Acquiring Fund, in such form as is
reasonably satisfactory to the Trust II, a statement of the earnings and
profits of the Acquired Fund for federal income tax purposes and of any
capital loss carryovers and other items that will be carried over to the
Acquiring Fund as a result of Section 381 of the Code, and which
statement will be certified by the President of the Acquired Fund.
5.7 The Trust II on behalf of the Acquiring Fund will prepare and file with
the Commission the Registration Statement in compliance with the 1933 Act
and the 1940 Act in connection with the issuance of the Acquiring Fund
Shares as contemplated herein.
5.8 The Trust on behalf of the Acquired Fund will prepare a Proxy Statement,
to be included in the Registration Statement in compliance with the 1933
Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the 1940 Act and the rules and regulations thereunder (collectively,
the "Acts") in connection with the special meeting of shareholders of the
Acquired Fund to consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF THE ACQUIRED
FUND
The obligations of the Trust on behalf of the Acquired Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Trust II on behalf of the Acquiring Fund of all the
obligations to be performed by it hereunder on or before the Closing Date, and,
in addition thereto, the following further conditions:
6.1 All representations and warranties of the Trust II on behalf of the
Acquiring Fund contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the
Closing Date with the same force and effect as if made on and as of the
Closing Date; and
<PAGE>
6.2 The Trust II on behalf of the Acquiring Fund shall have delivered to the
Acquired Fund a certificate executed in its name by the Trust II's
President or Vice President and its Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquired Fund and dated as of the
Closing Date, to the effect that the representations and warranties of
the Trust II on behalf of the Acquiring Fund made in this Agreement are
true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Trust on behalf of the Acquired Fund shall
reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE
ACQUIRING FUND
The obligations of the Trust II on behalf of the Acquiring Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Acquired Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1 All representations and warranties of the Acquired Fund contained in this
Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same
force and effect as if made on and as of the Closing Date;
7.2 The Trust on behalf of the Acquired Fund shall have delivered to the
Trust II on behalf of the Acquiring Fund the Statement of Assets and
Liabilities of the Acquired Fund, together with a list of its portfolio
securities showing the federal income tax bases and holding periods of
such securities, as of the Closing Date, certified by the Treasurer or
Assistant Treasurer of the Trust;
7.3 The Trust on behalf of the Acquired Fund shall have delivered to the
Trust II on behalf of the Acquiring Fund on the Closing Date a
certificate executed in the name of the Acquired Fund by a President or
Vice President and a Treasurer or Assistant Treasurer of the Trust, in
form and substance satisfactory to the Trust II on behalf of the
Acquiring Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquired Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Trust II on behalf of the Acquiring Fund shall
reasonably request; and
7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser,
or an affiliate thereof, shall have made all payments, or applied all
credits, to the Acquired Fund required by any applicable contractual
expense limitation.
<PAGE>
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST AND THE TRUST II
The obligations hereunder of the Trust II on behalf of the Acquiring Fund and
the Trust on behalf of the Acquired Fund are each subject to the further
conditions that on or before the Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares
of beneficial interest of the Acquired Fund in accordance with the
provisions of the Trust's Declaration and By-Laws, and certified copies
of the resolutions evidencing such approval by the Acquired Fund's
shareholders shall have been delivered by the Acquired Fund to the Trust
II on behalf of the Acquiring Fund;
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain
or prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits
of federal, state and local regulatory authorities (including those of
the Commission and their "no-action" positions) deemed necessary by the
Trust or the Trust II to permit consummation, in all material respects,
of the transactions contemplated hereby shall have been obtained, except
where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties
of the Acquiring Fund or the Acquired Fund, provided that either party
hereto may waive any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933 Act
and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto,
no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act
or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its shareholders, in a
distribution or distributions qualifying for the deduction for dividends
paid under Section 561 of the Code, all of its investment company taxable
income (as defined in Section 852(b)(2) of the Code determined without
regard to Section 852(b)(2)(D) of the Code) for its taxable year ending
on the Closing Date, all of the excess of (i) its interest income
excludable from gross income under Section 103(a) of the Code over (ii)
its deductions disallowed under Sections 265 and 171(a)(2) of the Code
for its taxable year ending on the Closing Date, and all of its net
capital gain (as such term is used in Sections 852(b)(3)(A) and (C) of
the Code), after reduction by any available capital loss carryforward,
for its taxable year ending on the Closing Date; and
8.6 The parties shall have received an opinion of Hale and Dorr LLP,
satisfactory to the Trust on behalf of the Acquired Fund and the Trust II
on behalf of the Acquiring Fund, substantially to the effect that for
federal income tax purposes:
<PAGE>
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund
Shares to the Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by the Acquiring Fund, followed by the distribution by
the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring
Fund Shares to the shareholders of the Acquired Fund in exchange for
their shares of beneficial interest of the Acquired Fund and the
termination of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a) of the Code, and the Acquired Fund
and the Acquiring Fund will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon (i) the
transfer of all of its assets to the Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund; and (ii) the distribution by the Acquired Fund of such Acquiring
Fund Shares to the shareholders of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
issuance of the Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund;
(d) The basis of the assets of the Acquired Fund acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets in
the hands of the Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the Acquired Fund in the hands
of the Acquiring Fund will, in each instance, include the Acquired
Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize gain or loss
upon the exchange of all of their shares of beneficial interest of the
Acquired Fund solely for Acquiring Fund Shares as part of the
transaction;
(g) The basis of the Acquiring Fund Shares received by the Acquired Fund
shareholders in the transaction will be the same as the basis of the
shares of beneficial interest of the Acquired Fund surrendered in
exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares received by the
Acquired Fund shareholders will include, for each shareholder, the tax
holding period for the shares of the Acquired Fund surrendered in
exchange therefor, provided that the Acquired Fund shares were held as
capital assets on the date of the exchange.
The Trust II and the Trust agree to make and provide representations with
respect to the Acquiring Fund and the Acquired Fund, respectively, which are
reasonably necessary to enable Hale and Dorr LLP to deliver an opinion
substantially as set forth in this Paragraph 8.6. Notwithstanding anything
herein to the contrary, neither the Trust nor the Trust II may waive the
conditions set forth in this Paragraph 8.6.
<PAGE>
9. BROKERAGE FEES AND EXPENSES
9.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of
the Acquired Fund each represent and warrant to the other that there are
no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for
its own expenses incurred in connection with entering into and carrying
out the provisions of this Agreement whether or not the transactions
contemplated hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of
the Acquired Fund agree that neither party has made any representation,
warranty or covenant not set forth herein or referred to in Paragraph 4
hereof and that this Agreement constitutes the entire agreement between
the parties.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Trust II,
on behalf of the Acquiring Fund, and the Trust on behalf of the Acquired
Fund. In addition, either party may at its option terminate this
Agreement at or prior to the Closing Date:
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed at or
prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and which
reasonably appears will not or cannot be met;
(c) by resolution of the Trust II's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interests of the Acquiring
Fund's shareholders; or
(d) by resolution of the Trust's Board of Trustees if circumstances should
develop that, in the good faith opinion of such Board, make proceeding
with the Agreement not in the best interests of the Acquired Fund's
shareholders.
<PAGE>
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Trust II, the Acquiring Fund, the Trust, or
the Acquired Fund, or the Trustees or officers of the Trust II or the
Trust, but each party shall bear the expenses incurred by it incidental
to the preparation and carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust and the Trust II.
However, following the meeting of shareholders of the Acquired Fund held
pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions regarding the method for determining the
number of Acquiring Fund Shares to be received by the Acquired Fund shareholders
under this Agreement to the detriment of such shareholders without their further
approval; provided that nothing contained in this Article 12 shall be construed
to prohibit the parties from amending this Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the Acquiring Fund or to the Acquired
Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
President, and, in either case, with copies to Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109, Attention: Pamela J.
Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made
by any party without the prior written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm or corporation, other than the
parties hereto and their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
14.5 All persons dealing with the Trust or the Trust II must look solely to
the property of the Trust or the Trust II, respectively, for the
enforcement of any claims against the Trust or the Trust II as the
Trustees, officers, agents and shareholders of the Trust or the Trust II
assume no personal liability for obligations entered into on behalf of
the Trust or the Trust II, respectively. None of the other series of the
Trust or the Trust II shall be responsible for any obligations assumed by
on or behalf of the Acquired Fund or the Acquiring Fund, respectively,
under this Agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed as of the date first set forth above by its President or Vice President
and has caused its corporate seal to be affixed hereto.
JOHN HANCOCK STRATEGIC SERIES on behalf of
JOHN HANCOCK STRATEGIC INCOME FUND
By:
-----------------------------------------
Anne C. Hodsdon
President
JOHN HANCOCK INVESTMENT TRUST III on behalf of
JOHN HANCOCK WORLD BOND FUND
By:
------------------------------------------
Susan S. Newton
Vice President and Secretary
<PAGE>
-------------------------------------------------------------------------------
JOHN HANCOCK
Income Funds
[LOGO] Prospectus
October 1, 1998
- --------------------------------------------------------------------------------
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
Bond Fund
Government Income Fund
High Yield Bond Fund
Intermediate Maturity
Government Fund
Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
A fund-by-fund summary Bond Fund 4
of goals, strategies, risks,
performance and expenses. Government Income Fund 6
High Yield Bond Fund 8
Intermediate Maturity Government Fund 10
Strategic Income Fund 12
Policies and instructions for Your account
opening, maintaining and
closing an account in any Choosing a share class 14
income fund. How sales charges are calculated 14
Sales charge reductions and waivers 15
Opening an account 16
Buying shares 17
Selling shares 18
Transaction policies 20
Dividends and account policies 20
Additional investor services 21
Further information on the Fund details
income funds.
Business structure 22
Financial highlights 23
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clipart] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clipart] Main risks The major risk factors associated with the fund.
[Clipart] Past performance The fund's total return, measured year-by-year and
over time.
[Clipart] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
DURATION AND INCOME FUNDS
The concept of duration is useful in assessing the sensitivity of an income fund
to interest rate movements, which are the main source of risk for almost all
income funds. Measured in years, duration is similar to maturity but is a more
sophisticated measurement that takes into account the payback periods for the
debt securities the fund holds. A 1% rise in interest rates will generally cause
a 1% fall in value for every year of an income fund's duration.
The durations given in this prospectus are based on month-end measurements. A
fund's duration may be longer or shorter in the future.
JOHN HANCOCK INCOME FUNDS
These funds seek current income without sacrificing total return. Some of the
funds also invest for stability of principal. Each fund has its own strategy and
its own risk profile.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking a regular stream of income
o are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
o want to diversify their portfolios
o are seeking a mutual fund for the income portion of an asset allocation
portfolio
o are retired or nearing retirement
Income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or endorsed by any bank,
government agency or the FDIC. Because you could lose money by investing in
these funds, be sure to read all risk disclosure carefully before investing.
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $30 billion in assets.
3
<PAGE>
Bond Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
in a diversified portfolio of debt securities. These include corporate bonds,
U.S. government and agency securities and preferred securities. Most of these
securities are investment-grade, although the fund may invest up to 25% of
assets in junk bonds rated as low as CC/Ca and their unrated equivalents.
In managing its portfolio, the fund concentrates on sector allocation, industry
allocation and securities selection: deciding which types of bonds and
industries to emphasize at a given time, and then which individual bonds to buy.
When making its sector and industry allocations, the fund tries to anticipate
shifts in the business cycle, using top-down analysis to determine which sectors
and industries may benefit over the next 12 months.
In choosing individual securities, the fund uses bottom-up research to find
securities that appear comparatively undervalued. The fund looks at bonds of all
different quality levels and maturities from many different issuers, potentially
including foreign governments and corporations.
The fund intends to keep its exposure to interest rate movements generally in
line with that of the markets it invests in. The fund may use certain
derivatives (contracts whose value is based on indices or other securities),
especially in managing its exposure to interest rate risk, although it does not
intend to use them extensively.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these cases, the fund might
not achieve its goal.
================================================================================
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
9.85% 12.13% 6.68% 16.59% 8.19% 11.69% -2.74% 19.46% 4.05% 9.64%
Total return for first six months of 1998: 3.97%
Best quarter: up 6.57%, second quarter 1995
Worst quarter: down 2.71%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 4.70% 3.90% -- 3.36%
5 years 7.17% -- -- 7.72%
10 years 8.89% -- -- 9.16%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of fixed-income
securities that are similar, but not identical, to those in the fund's
portfolio.
(1) Class C shares began operations on October 1, 1998.
PORTFOLIO MANAGERS
James K. Ho, CFA
- --------------------------------------------------------------------------------
Executive vice president of adviser
Joined team in 1988
Joined adviser in 1985
Began career in 1977
Anthony A. Goodchild
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1968
Benjamin Matthews
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1995
Began career in 1970
4
<PAGE>
MAIN RISKS
[Clipart] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices fall; the higher the fund's
duration, the more sensitive it is to this risk. For the 12 months ended
8/31/98, the fund's duration ranged from approximately 5.1 to 5.7 years.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to market
or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could be hurt.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
YOUR EXPENSES
[Clipart] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.28% 0.28% 0.28%
Total fund operating expenses 1.08% 1.78% 1.78%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $555 $778 $1,019 $1,708
Class B - with redemption $681 $860 $1,164 $1,908
- without redemption $181 $560 $ 964 $1,908
Class C - with redemption $281 $560 $ 964 $2,095
- without redemption $181 $560 $ 964 $2,095
FUND CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHNBX
CUSIP 410223101
Newspaper BondA
SEC number 811-2402
Class B
- --------------------------------------------------------------------------------
Ticker JHBBX
CUSIP 410223309
Newspaper BondB
SEC number 811-2402
Class C
- --------------------------------------------------------------------------------
Ticker --
CUSIP 410223200
Newspaper --
SEC number 811-2402
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
5
<PAGE>
Government Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income consistent with
preservation of capital. Maintaining a stable share price is a secondary goal.
In pursuing these goals, the fund normally invests at least 80% of assets in
U.S. government and agency securities.
The fund may invest in higher-risk securities, including dollar-denominated
foreign government securities and asset-backed securities. It may also invest up
to 10% of assets in foreign governmental high-yield securities (junk bonds)
rated as low as B and their unrated equivalents.
In managing its portfolio, the fund considers interest rate trends to determine
which types of bonds to emphasize at a given time. The fund typically favors
mortgage-related securities when it anticipates that interest rates will be
relatively stable, and favors U.S. Treasuries at other times. Because high-yield
bonds often respond to market movements differently from US government bonds,
the fund may use them to manage volatility.
The fund intends to keep its exposure to interest rate movements generally in
line with that of the markets it invests in. The fund may use certain
derivatives (contracts whose value is based on indices or other securities),
especially in managing its exposure to interest rate risk, although it does not
intend to use them extensively.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in high-quality short-term securities. In these cases, the fund might not
achieve its goal.
================================================================================
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997
10.55% 6.98% 15.78% 5.30% 7.65% -5.29% 17.71% 1.29% 8.67%
Total return for first six months of 1998: 3.41%
Best quarter: up 6.57%, third quarter 1991
Worst quarter: down 3.52%, first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index
1 year 4.55% 3.67% 9.57%
5 years -- 5.43% 7.33%
10 years -- -- 8.87%
Index: Lehman Brothers Treasury Composite Index, an unmanaged index of
fixed-income securities that are similar, but not identical, to those in the
fund's portfolio.
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Dawn Baillie
- --------------------------------------------------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
6
<PAGE>
MAIN RISKS
[Clipart] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices fall; the higher the fund's duration, the more
sensitive it is to this risk. For the 12 months ended 8/31/98, the fund's
duration ranged from approximately 5.3 to 6.1 years. A fall in worldwide demand
for U.S. government securities could also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could be hurt.
o Junk bonds and foreign securities could make the fund more sensitive to
market or economic shifts in the U.S. and abroad.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any governmental guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
YOUR EXPENSES
[Clipart] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.64% 0.64%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.21% 0.21%
Total fund operating expenses 1.10% 1.85%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $557 $784 $1,029 $1,730
Class B - with redemption $688 $882 $1,201 $1,971
- without redemption $188 $582 $1,001 $1,971
FUND CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHGIX
CUSIP 41014P854
Newspaper GvIncA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSGIX
CUSIP 41014P847
Newspaper GvIncB
SEC number 811-3006
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
7
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
[Clipart] The fund seeks to maximize current income without assuming undue risk.
Capital appreciation is a secondary goal. In pursuing these goals, the fund
normally invests at least 65% of assets in U.S. and foreign bonds rated BBB/Baa
or lower and their unrated equivalents. The fund may invest up to 30% of assets
in junk bonds rated CC/Ca and their unrated equivalents.
In managing its portfolio, the fund concentrates on industry allocation and
securities selection: deciding which types of industries to emphasize at a given
time, and then which individual bonds to buy. The fund uses top-down analysis to
determine which industries may benefit from current and future changes in the
economy.
In choosing individual securities, the fund uses bottom-up research to find
securities that appear comparatively undervalued. The fund looks at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves.
The fund also looks at companies' financing cycles to determine which types of
securities (for example, bonds, preferred stocks or common stocks) to favor. The
fund typically invests in a broad range of industries, although it may invest up
to 40% of assets in electric utilities and telecommunications companies.
The fund may use certain higher-risk investments, including derivatives
(contracts whose value is based on indices or other securities) and restricted
or illiquid securities, and may invest up to 20% of net assets in U.S. and
foreign stocks.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these cases, the fund might
not achieve its goal.
================================================================================
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
6.87% -5.05% -6.57% 33.84% 13.33% 21.40% -6.06% 14.53% 15.13% 16.88%
Total return for first six months of 1998: 5.10%
Best quarter: up 13.37%, first quarter 1991
Worst quarter: down 4.20%, fourth quarter 1990
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 12.46% 11.88% -- 12.76%
5 years -- 11.70% -- 11.64%
10 years -- 9.72% -- 11.65%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of fixed-income
securities that are similar, but not identical, to those in the fund's
portfolio.
(1) Class C shares began operations on May 1, 1998.
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
Frederick L. Cavanaugh, Jr.
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1988
Joined adviser in 1986
Began career in 1973
Janet L. Clay, CFA
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
8
<PAGE>
MAIN RISKS
[Clipart] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices fall; the higher the fund's
duration, the more sensitive it is to this risk. For the 12 months ended
8/31/98, the fund's duration ranged from approximately 3.6 to 4.5 years.
Credit risk depends largely on the perceived financial health of bond issuers.
In general, lower-rated bonds have higher credit risks. Junk bond prices can
fall on bad news about the economy, an industry or a company. Share price, yield
and total return may fluctuate more than with less aggressive bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain industries or investments don't perform as the
fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals.
o If interest rate movements cause the fund's callable securities to be paid
off substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o If the fund concentrates its investments in telecommunications or electric
utilities, its performance could be tied more closely to those industries
than to the market as a whole.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
YOUR EXPENSES
[Clipart] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.52% 0.52% 0.52%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.20% 0.20% 0.20%
Total fund operating expenses 0.97% 1.72% 1.72%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $545 $745 $ 962 $1,586
Class B - with redemption $675 $842 $1,133 $1,830
- without redemption $175 $542 $ 933 $1,830
Class C - with redemption $275 $542 $ 933 $2,030
- without redemption $175 $542 $ 933 $2,030
FUND CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHHBX
CUSIP 41014P839
Newspaper HiYldA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSHYX
CUSIP 41014P821
Newspaper HiYldB
SEC number 811-3006
Class C
- --------------------------------------------------------------------------------
Ticker --
CUSIP 41014P813
Newspaper --
SEC number 811-3006
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
9
<PAGE>
Intermediate Maturity Government Fund
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income consistent with
preservation of capital and maintenance of liquidity. In pursuing this goal, the
fund normally invests at least 80% of assets in U.S. government and agency
securities. Although the fund may invest in bonds of any maturity, it maintains
a dollar-weighted average maturity of between three and ten years. The fund
generally keeps its overall duration between two and five years.
In managing its portfolio, the fund considers interest rate trends to determine
which types of bonds to emphasize at a given time. The fund typically favors
mortgage-related securities when it anticipates that interest rates will be
relatively stable, and favors U.S. Treasuries at other times. The fund also
invests in non-Treasury securities to enhance its current yields.
The fund may use certain derivatives (contracts whose value is based on indices
or other securities), especially in managing its exposure to interest rate risk.
It may also invest up to 20% of assets in asset-backed or corporate debt
securities in the highest credit category (those rated AAA/Aaa and their unrated
equivalents). However, it does not intend to use any of these investments
extensively.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in high-quality short-term securities. In these cases, the fund might not
achieve its goal.
================================================================================
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with broad-based market
indices for reference). This information may help provide an indication of the
fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
6.56% 3.95% 1.07% 10.27% 3.32% 8.79%
Total return for first six months of 1998: 3.37%
Best quarter: up 3.25%, fourth quarter 1995
Worst quarter: down 1.35%, first quarter 1996
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index 1 Index 2
1 year 5.52% 4.97% 8.52% 7.72%
5 years 4.78% 4.72% 6.22% 6.39%
10 years -- -- N/A 8.13%
Index 1: Lipper Intermediate U.S. Government Index, an equally weighted
unmanaged index that measures the performance of funds with at least 65% of
their assets in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, with dollar-weighted average maturities of five
to ten years.
Index 2: Lehman Brothers Government Bond Index, an unmanaged index that measures
the performance of U.S. Treasury bonds and U.S. government agency bonds.
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Dawn Baillie
- --------------------------------------------------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
10
<PAGE>
MAIN RISKS
[Clipart] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices fall; the higher the fund's duration, the more
sensitive it is to this risk. For the 12 months ended 8/31/98, the fund's
duration ranged from approximately 4.2 to 4.4 years. A fall in worldwide demand
for U.S. government securities could also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could be hurt.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
YOUR EXPENSES
[Clipart] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 3.00% none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 3.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.51% 0.51%
Total fund operating expenses 1.16% 1.91%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $415 $657 $ 919 $1,667
Class B - with redemption $494 $800 $1,032 $1,775
- without redemption $194 $600 $1,032 $1,775
FUND CODES
Class A
- --------------------------------------------------------------------------------
Ticker TAUSX
CUSIP 41014P102
Newspaper IntGvA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSUSX
CUSIP 41014P201
Newspaper --
SEC number 811-3006
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
11
<PAGE>
Strategic Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income. In pursuing this goal,
the fund invests primarily in the following types of securities:
o foreign government and corporate debt securities from developed and emerging
markets
o U.S. government and agency securities
o U.S. junk bonds rated as low as CC/Ca and their unrated equivalents
The fund generally intends to keep its average credit quality in the
investment-grade range.
In managing its portfolio, the fund uses top-down analysis to allocate assets
among the three major sectors mentioned above. Although it could invest all
assets in one sector, it generally expects to remain diversified among all
three.
Within the foreign sector, the fund uses a combination of bottom-up research and
macroeconomic analysis to select individual securities from a range of regions,
countries and industries. These securities may be rated as low as CC/Ca and
their unrated equivalents.
Within the U.S. government sector, the fund selects investments primarily for
current yield and total return.
Within the junk bond sector, the fund uses bottom-up research to select
individual securities from a wide range of industries.
The fund may use certain higher-risk investments, including derivatives
(contracts whose value is based on indices or other securities), restricted or
illiquid securities, and may invest up to 10% of net assets in U.S. or foreign
stocks.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short- term securities. In these cases, the fund might not
achieve its goal.
================================================================================
PAST PERFORMANCE
[Clipart] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks and potential rewards. The average annual figures reflect sales
charges; the year-by-year figures do not, and would be lower if they did. All
figures assume dividend reinvestment. Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
13.74% -0.41% -9.83% 33.58% 7.68% 13.93% -3.02% 18.73% 11.63% 12.67%
Total return for first six months of 1998: 4.59%
Best quarter: up 15.09%, first quarter 1991
Worst quarter: down 6.68%, third quarter 1990
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
1 year 7.60% 6.89% -- 7.87%
5 years 9.52% -- -- 6.67%
10 years 8.75% -- -- 8.34%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index that
measures the performance of U.S. government bonds, U.S. corporate bonds and
Yankee bonds.
(1) Class C shares began operations on May 1,1998.
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1986
Joined adviser in 1986
Began career in 1973
Arthur N. Calavritinos, CFA
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
Roger C. Hamilton
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1980
12
<PAGE>
MAIN RISKS
[Clipart] The fund's risk profile depends on its sector allocation. In general,
investors should expect fluctuations in share price, yield and total return that
are above average for bond funds.
When interest rates rise, bond prices fall; the higher the fund's duration, the
more sensitive it is to this risk. For the 12 months ended 8/31/98, the fund's
duration ranged from approximately 4.6 to 6.4 years.
A fall in worldwide demand for U.S. government securities could lower the prices
of these securities. The fund could lose money if any bonds it owns are
downgraded in credit rating or go into default. In general, lower-rated bonds
have higher credit risks, and their prices can fall on bad news about the
economy, an industry or a company. If certain allocation strategies or certain
industries or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially unfavorable
currency exchange rates, inadequate or inaccurate financial information and
social or political upheavals. These risks are greater in emerging markets.
o If interest rate movements cause the fund's callable securities to be paid
off substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any governmental guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
YOUR EXPENSES
[Clipart] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.22% 0.22% 0.22%
Total fund operating expenses 0.92% 1.62% 1.62%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A $540 $730 $ 936 $1,530
Class B - with redemption $665 $811 $1,081 $1,733
- without redemption $165 $511 $ 881 $1,733
Class C - with redemption $265 $511 $ 881 $1,922
- without redemption $165 $511 $ 881 $1,922
FUND CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHFIX
CUSIP 410227102
Newspaper StrIncA
SEC number 811-4651
Class B
- --------------------------------------------------------------------------------
Ticker STIBX
CUSIP 410227300
Newspaper StrIncB
SEC number 811-4651
Class C
- --------------------------------------------------------------------------------
Ticker --
CUSIP 410227888
Newspaper --
SEC number 811-4651
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, allowing you to choose the one that
best meets your requirements. Your financial representative can help you decide.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o Front-end sales charges, as described at right.
o Distribution and service (12b-1) fees of 0.25% (0.30% for Bond and Strategic
Income).
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00%.
o A deferred sales charge, as described on following page.
o Automatic conversion to Class A shares after either five years (Intermediate
Maturity Government) or eight years (all other funds), thus reducing future
annual expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
Currently available only on Bond, High Yield Bond and Strategic Income.
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00%.
o A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at the
Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, Class B and Class C
shareholders could end up paying more expenses over the long term than if they
had paid a sales charge.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Sales charges - Intermediate Maturity Government
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Sales charges - all other funds
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments - all funds
- --------------------------------------------------------------------------------
Your investment CDSC on shares
being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the last day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
14 YOUR ACCOUNT
<PAGE>
Class B and Class C Shares are offered at their net asset value per share,
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares you sell within a certain time after you
bought them, as described in the tables below. There is no CDSC on shares
acquired through reinvestment of dividends. The CDSC is based on the original
purchase cost or the current market value of the shares being sold, whichever is
less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges - all funds
- --------------------------------------------------------------------------------
Years after CDSC on Intermediate CDSC on all
purchase Maturity Government other fund shares
shares being sold being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year none 2.00%
6th year none 1.00%
After 6 years none none
- --------------------------------------------------------------------------------
Class C deferred charges - all applicable funds
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1 year none
For purposes of these CDSCs, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge. Retirement plans investing $1 million in Class
B shares may add that value to Class A purchases to calculate charges.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services, or consult the SAI (see the
back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial investments must
total at least $250), and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell,
the CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
o to purchase a John Hancock Declaration annuity
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
YOUR ACCOUNT 15
<PAGE>
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee benefit plan into a John
Hancock fund
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 eligible employees
(one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI (see the back cover of this prospectus).
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in John
Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any purchase, exchange or sale of
shares.
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
- --------------------------------------------------------------------------------
By check
- --------------------------------------------------------------------------------
[Clipart] o Make out a check for the o Make out a check for the
investment amount, payable investment amount payable
to "John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to investment slip from an
your financial account statement. If no
representative, or mail to slip is available, include
Signature Services (address a note specifying the fund
below). name, your share class,
your account number and the
name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail to
Signature Services (address
below).
- --------------------------------------------------------------------------------
By exchange
- --------------------------------------------------------------------------------
[Clipart] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
- --------------------------------------------------------------------------------
By wire
- --------------------------------------------------------------------------------
[Clipart] o Deliver your completed o Instruct your bank to wire
application to your the amount of your
financial representative, investment to:
or mail it to Signature First Signature Bank & Trust
Services. Account # 900000260
Routing # 211475000
o Obtain your account number
by calling your financial Specify the fund name, your
representative or Signature share class, your account
Services. number and the name(s) in
which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your charge a fee to wire funds.
investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may
charge a fee to wire funds.
- --------------------------------------------------------------------------------
By phone
- --------------------------------------------------------------------------------
[Clipart] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the
"Invest-By-Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your
account.
o Tell the Signature Services
representative the fund
name, your share class,
your account number, the
name(s) in which the
account is registered and
the amount of your
investment.
- -----------------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative for
instructions and assistance.
- -----------------------------------------------
To open or add to an account using the Monthly Automatic
Accumulation Program, see "Additional investor services."
YOUR ACCOUNT 17
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
- --------------------------------------------------------------------------------
By letter
- --------------------------------------------------------------------------------
[Clipart] o Accounts of any type. o Write a letter of
instruction or complete a
o Sales of any amount. stock power indicating the
fund name, your share
class, your account number,
the name(s) in which the
account is registered and
the dollar value or number
of shares you wish to sell.
o Include all signatures and
any additional documents
that may be required (see
next page).
o Mail the materials to
Signature Services.
o A check will be mailed to
the name(s) and address in
which the account is
registered, or otherwise
according to your letter of
instruction.
- --------------------------------------------------------------------------------
By phone
- --------------------------------------------------------------------------------
[Clipart] o Most accounts. o For automated service 24
hours a day using your
o Sales of up to $100,000. touch-tone phone, call the
EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John
Hancock Funds, call
Signature Services between
8 A.M. and 4 P.M. Eastern
Time on most business days.
- --------------------------------------------------------------------------------
By wire or electronic funds transfer (EFT)
- --------------------------------------------------------------------------------
[Clipart] o Requests by letter to sell o Fill out the "Telephone
any amount (accounts of any Redemption" section of your
type). new account application.
o Requests by phone to sell o To verify that the
up to $100,000 (accounts telephone redemption
with telephone redemption privilege is in place on an
privileges). account, or to request the
forms to add it to an
existing account, call
Signature Services.
o Amounts of $1,000 or more
will be wired on the next
business day. A $4 fee will
be deducted from your
account.
o Amounts of less than $1,000
may be sent by EFT or by
check. Funds from EFT
transactions are generally
available by the second
business day. Your bank may
charge a fee for this
service.
- --------------------------------------------------------------------------------
By exchange
- --------------------------------------------------------------------------------
[Clipart] o Accounts of any type. o Obtain a current prospectus
for the fund into which you
o Sales of any amount. are exchanging by calling
your financial
representative or Signature
Services.
o Call your financial
representative or Signature
Services to request an
exchange.
- --------------------------------------------------------------------------------
By check
- --------------------------------------------------------------------------------
[Clipart] o Government Income, o Request checkwriting on
Intermediate Maturity your account application.
Government, and Strategic
Income only. o Verify that the shares to
be sold were purchased more
o Any account with than 10 days earlier or
checkwriting privileges. were purchased by wire.
o Sales of over $100. o Write a check for any
amount over $100.
18 YOUR ACCOUNT
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clipart]
- --------------------------------------------------------------------------------
Owners of individual, joint, sole o Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general partner o On the letter, the signatures and
accounts. titles of all persons authorized to
sign for the account, exactly as the
account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or association o Letter of instruction.
accounts.
o Corporate resolution, certified
within the past 12 months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o Provide a copy of the trust document
certified within the past 12 months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor,
certified within the past 12 months.
o Signature guarantee if applicable
(see above).
Administrators, conservators, guardians o Call 1-800-225-5291 for
and other sellers or account types not instructions.
listed above.
- -----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- -----------------------------------------
To sell shares through a systematic withdrawal plan, see
"Additional investor services."
YOUR ACCOUNT 19
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
transactions are not permitted on accounts whose names or addresses have changed
within the past 30 days. Proceeds from telephone transactions can only be mailed
to the address of record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B shares
will continue to age from the original date and will retain the same CDSC rate
as they had before the exchange, except that the rate will change to the new
fund's rate if that rate is higher. A CDSC rate that has increased will drop
again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to
have certificates for your shares, please write to Signature Services.
Certificated shares can only be sold by returning the certificates to Signature
Services, along with a letter of instruction or a stock power and a signature
guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Capital gains, if any, are distributed annually, typically after the end of a
fund's fiscal year. Most of these funds' dividends are income dividends. Your
dividends begin accruing the day after payment is received by the fund and
continue through the day your shares are actually sold.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
20 YOUR ACCOUNT
<PAGE>
Taxability of dividends Dividends you receive from a fund, whether reinvested
or taken as cash, are generally considered taxable. Dividends from a fund's
long-term capital gains are taxable as capital gains; dividends from other
sources are generally taxable as ordinary income. Some dividends paid in January
may be taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
Year 2000 compliance The adviser and the funds' service providers are taking
steps to address any year 2000-related computer problems. However, there is some
risk that these problems could disrupt the funds' operations or financial
markets generally.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Signature Services,
Inc." Deliver your check and application to your financial representative or
Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and there
is no limit to the number of payees you may have, as long as they are all on
the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial representative
or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including traditional, Roth and Education IRAs, SIMPLE plans, SEPs, 401(k) plans
and other pension and profit-sharing plans. Using these plans, you can invest in
any John Hancock fund (except tax-free income funds) with a low minimum
investment of $250 or, for some group plans, no minimum investment at all. To
find out more, call Signature Services at 1-800-225-5291.
YOUR ACCOUNT 21
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the John Hancock
income funds. Each fund's board of trustees oversees the fund's business
activities and retains the services of the various firms that carry out the
fund's operations.
The trustees of the Government Income, High Yield Bond and Intermediate Maturity
Government funds have the power to change these funds' respective investment
goals without shareholder approval.
Management fees The management fees paid to the investment adviser by the John
Hancock income funds last year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
Bond 0.50%
Government Income 0.64%
High Yield Bond 0.52%
Intermediate Maturity Government 0.40%
Strategic Income 0.40%
[The following information was represented as a flow chart in the printed
material.]
-----------------
Shareholders
-----------------
Distribution and
shareholder services
-------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-------------------------------------------------
-------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
Handles shareholder services, including record-
keeping and statements, distribution of dividends
and processing of buy and sell requests.
------------------------------------------------------
Asset
management
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank and Trust Co.
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Supervise the funds' activities.
------------------------------------
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
These tables detail the performance of each fund's share classes, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Bond Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95 12/96 5/97(1) 5/98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.29 $15.53 $13.90 $15.40 $14.90 $14.78
Net investment income (loss) 1.14 1.12 1.12 1.09 0.44 1.05(2)
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.62 (1.55) 1.50 (0.50) (0.12) 0.47
Total from investment operations 1.76 (0.43) 2.62 0.59 0.32 1.52
Less distributions:
Dividends from net investment income (1.14) (1.12) (1.12) (1.09) (0.44) (1.05)
Distributions from net realized gain on
investments sold and financial futures contracts (0.38) (0.08) -- -- -- --
Total distributions (1.52) (1.20) (1.12) (1.09) (0.44) (1.05)
Net asset value, end of period $15.53 $13.90 $15.40 $14.90 $14.78 $15.25
Total investment return at net asset value(3) (%) 11.80 (2.75) 19.40 4.11 2.22(4) 10.54
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204 1,416,116 1,361,924 1,327,728
Ratio of expenses to average net assets (%) 1.41 1.26 1.13 1.14 1.11(5) 1.08
Ratio of net investment income (loss) to
average net assets (%) 7.18 7.74 7.58 7.32 7.38(5) 6.90
Portfolio turnover rate (%) 107 85 103(6) 123 58 198
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93(7) 12/94 12/95 12/96 5/97(1) 5/98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.90 $15.52 $13.90 $15.40 $14.90 $14.78
Net investment income (loss) 0.11 1.04 1.02 0.98 0.40 0.95(2)
Net realized and unrealized gain (loss) on
investments and financial futures contracts -- (1.54) 1.50 (0.50) (0.12) 0.47
Total from investment operations 0.11 (0.50) 2.52 0.48 0.28 1.42
Less distributions:
Dividends from net investment income (0.11) (1.04) (1.02) (0.98) (0.40) (0.95)
Distributions from net realized gain on
investments sold and financial futures contracts (0.38) (0.08) -- -- -- --
Total distributions (0.49) (1.12) (1.02) (0.98) (0.40) (0.95)
Net asset value, end of period $15.52 $13.90 $15.40 $14.90 $14.78 $15.25
Total investment return at net asset value(3) (%) 0.90(4) (3.13) 18.66 3.38 1.93(4) 9.78
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112 132,885 165,983
Ratio of expenses to average net assets (%) 1.63(5) 1.78 1.75 1.84 1.81(5) 1.78
Ratio of net investment income (loss) to
average net assets (%) 0.57(5) 7.30 6.87 6.62 6.68(5) 6.18
Portfolio turnover rate (%) 107 85 103(6) 123 58 198
</TABLE>
(1) Effective May 31, 1997, the fiscal year end changed from December 31 to May
31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) Portfolio turnover rate excludes merger activity.
(7) Class B shares began operations on November 23, 1993.
FUND DETAILS 23
<PAGE>
Government Income Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 10/96 5/97(3) 5/98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.85 $8.75 $9.32 $9.07 $8.93
Net investment income (loss) 0.06 0.72 0.65(4) 0.37(4) 0.62(4)
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.25) (0.14) 0.32
Total from investment operations (0.04) 1.29 0.40 0.23 0.94
Less distributions:
Dividends from net investment income (0.06) (0.72) (0.65) (0.37) (0.62)
Net asset value, end of period $8.75 $9.32 $9.07 $8.93 $9.25
Total investment return at net asset value(5) (%) (0.45)(6,7) 15.32(7) 4.49 2.57(6) 10.82
Total adjusted investment return at net asset value(5) (%) (0.46)(6) 15.28 -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 223 470,569 396,323 359,758 339,572
Ratio of expenses to average net assets(7) (%) 0.12(6) 1.19 1.17 1.13(8) 1.10
Ratio of net investment income (loss) to average net assets(7) (%) 0.71(6) 7.38 7.10 7.06(8) 6.79
Portfolio turnover rate (%) 92 102(9) 106 129 106
Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- -- --
Average daily debt outstanding during the period (000s omitted)(10) ($) 349 N/A N/A N/A N/A
Average monthly shares outstanding during the period (000s omitted) 28,696 N/A N/A N/A N/A
Average daily debt outstanding per share during the period(10) ($) 0.01 N/A N/A N/A N/A
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2) 10/96 5/97(3) 5/98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.83 $10.05 $8.75 $9.32 $9.08 $8.93
Net investment income (loss) 0.70 0.65 0.65 0.58(4) 0.33(4) 0.55(4)
Net realized and unrealized gain (loss) on investments 0.24 (1.28) 0.57 (0.24) (0.15) 0.32
Total from investment operations 0.94 (0.63) 1.22 0.34 0.18 0.87
Less distributions:
Dividends from net investment income (0.72) (0.65) (0.65) (0.58) (0.33) (0.55)
Distributions from net realized gain on investments sold -- (0.02) -- -- -- --
Total distributions (0.72) (0.67) (0.65) (0.58) (0.33) (0.55)
Net asset value, end of period $10.05 $8.75 $9.32 $9.08 $8.93 $9.25
Total investment return at net asset value(5) (%) 9.86(7) (6.42)(7) 14.49(7) 3.84 2.02(6) 10.01
Total adjusted investment return at net asset value(5) (%) 9.85 (6.43) 14.47 -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 293,413 241,061 226,954 178,124 153,390 117,830
Ratio of expenses to average net assets (%) 2.00(7) 1.93(7) 1.89(7) 1.90 1.86(8) 1.85
Ratio of net investment income (loss) to average net
assets (%) 7.06(7) 6.98(7) 7.26(7) 6.37 6.32(8) 6.05
Portfolio turnover rate (%) 138 92 102(9) 106 129 106
Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- -- -- --
Average daily debt outstanding during the period
(000s omitted)(10) ($) 503 349 N/A N/A N/A N/A
Average monthly shares outstanding during the period
(000s omitted) 26,378 28,696 N/A N/A N/A N/A
Average daily debt outstanding per share during the
period(10) ($) 0.02 0.01 N/A N/A N/A N/A
</TABLE>
(1) Class A shares began operations on September 30, 1994.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Excludes interest expense, which equalled 0.01% and 0.04% for Class A for
the years ended October 31, 1994, and 1995 respectively, and 0.01%, 0.01%
and 0.02% for Class B for the years ended October 31, 1993, 1994 and 1995,
respectively.
(8) Annualized.
(9) Portfolio turnover rate excludes merger activity.
(10) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
24 FUND DETAILS
<PAGE>
High Yield Bond Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A -- period ended: 10/93(1) 10/94 10/95(2) 10/96 5/97(3) 5/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.10 $8.23 $7.33 $7.20 $7.55 $7.87
Net investment income (loss) 0.33 0.80(4) 0.72 0.76(4) 0.45 0.78(4)
Net realized and unrealized gain (loss)
on investments 0.09 (0.83) (0.12) 0.35 0.32 0.51
Total from investment operations 0.42 (0.03) 0.60 1.11 0.77 1.29
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73) (0.76) (0.45) (0.78)
Distributions from net realized gain on
investments sold -- (0.05) -- -- -- (0.12)
Total distributions (0.29) (0.87) (0.73) (0.76) (0.45) (0.90)
Net asset value, end of period $8.23 $7.33 $7.20 $7.55 $7.87 $8.26
Total investment return at net asset value(5) (%) 4.96(6) (0.59) 8.83 16.06 10.54(6) 17.03
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 52,792 97,925 273,277
Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16 1.10 1.05(7) 0.97
Ratio of net investment income (loss) to average
net assets (%) 12.89(7) 10.14 10.23 10.31 10.19(7) 9.33
Portfolio turnover rate (%) 204 153 98 113 78 100
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class B -- period ended: 10/93 10/94 10/95(2) 10/96 5/97(3) 5/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.43 $8.23 $7.33 $7.20 $7.55 $7.87
Net investment income (loss) 0.80 0.74(4) 0.67 0.70(4) 0.42 0.71(4)
Net realized and unrealized gain (loss)
on investments 0.75 (0.83) (0.13) 0.35 0.32 0.51
Total from investment operations 1.55 (0.09) 0.54 1.05 0.74 1.22
Less distributions:
Dividends from net investment income (0.75) (0.76) (0.67) (0.70) (0.42) (0.71)
Distributions from net realized gain on
investments sold -- (0.05) -- -- -- (0.12)
Total distributions (0.75) (0.81) (0.67) (0.70) (0.42) (0.83)
Net asset value, end of period $8.23 $7.33 $7.20 $7.55 $7.87 $8.26
Total investment return at net asset value(5) (%) 21.76 (1.33) 7.97 15.24 10.06(6) 16.16
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586 242,944 379,024 798,170
Ratio of expenses to average net assets (%) 2.08 1.91 1.89 1.82 1.80(7) 1.72
Ratio of net investment income (loss) to average
net assets (%) 10.07 9.39 9.42 9.49 9.45(7) 8.62
Portfolio turnover rate (%) 204 153 98 113 78 100
</TABLE>
FUND DETAILS 25
<PAGE>
High Yield Bond Fund continued
- ----------------------------------------------------------------------------
Class C - period ended: 5/98(8)
- ----------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $8.45
Net investment income (loss)(4) 0.06
Net realized and unrealized gain (loss) on investments (0.19)
Total from investment operations (0.13)
Less distributions:
Dividends from net investment income (0.06)
Distributions from net realized gain on investments sold --
Total distributions (0.06)
Net asset value, end of period $8.26
Total investment return at net asset value(5) (%) (1.59)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,195
Ratio of expenses to average net assets (%) 1.72(7)
Ratio of net investment income (loss) to average net assets (%) 6.70(7)
Portfolio turnover rate (%) 100
(1) Class A shares began operations on June 30, 1993.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) Class C shares began operations on May 1, 1998.
26 FUND DETAILS
<PAGE>
Intermediate Maturity Government Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/94 3/95(1) 3/96 3/97 5/97(2) 5/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.05 $9.89 $9.79 $9.69 $9.37 $9.46
Net investment income (loss) 0.41 0.49 0.62 0.67 0.11(3) 0.62(3)
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.08) (0.25) 0.09 0.26
Total from investment operations 0.25 0.38 0.54 0.42 0.20 0.88
Less distributions:
Dividends from net investment income (0.41) (0.48) (0.64) (0.66) (0.11) (0.62)
Distributions from net realized gain on investments sold -- -- -- (0.08) -- --
Total distributions (0.41) (0.48) (0.64) (0.74) (0.11) (0.62)
Net asset value, end of period $9.89 $9.79 $9.69 $9.37 $9.46 $9.72
Total investment return at net asset value(4) (%) 2.51 3.98 5.60 4.56 2.13(6) 9.56
Total adjusted investment return at net asset value(4,5) (%) 2.27 3.43 4.83 4.19 1.93(6) 9.49
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 24,310 12,950 29,024 22,043 22,755 163,358
Ratio of expenses to average net assets (%) 0.75(7) 0.80(7) 0.75(7) 0.75 0.75(8) 1.09
Ratio of adjusted expenses to average net assets(9) (%) 0.99(7) 1.35(7) 1.45(7) 1.12 1.92(8) 1.16
Ratio of net investment income (loss) to average net assets (%) 4.09 4.91 6.49 6.99 7.07(8) 6.43
Ratio of adjusted net investment income (loss) to
average assets(9) (%) 3.85 4.36 5.79 6.62 5.90(8) 6.36
Fee reduction per share(3) ($) 0.02 0.05 0.07 0.04 0.02 0.01
Portfolio turnover rate (%) 244 341 423(10) 427 77 250(10)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/94 3/95(1) 3/96 3/97 5/97(2) 5/98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.05 $9.89 $9.79 $9.69 $9.37 $9.46
Net investment income (loss) 0.34 0.43 0.57 0.60 0.10(3) 0.55(3)
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.10) (0.24) 0.09 0.26
Total from investment operations 0.18 0.32 0.47 0.36 0.19 0.81
Less distributions:
Dividends from net investment income (0.34) (0.42) (0.57) (0.60) (0.10) (0.55)
Distributions from net realized gain on investments sold -- -- -- (0.08) -- --
Total distributions (0.34) (0.42) (0.57) (0.68) (0.10) (0.55)
Net asset value, end of period $9.89 $9.79 $9.69 $9.37 $9.46 $9.72
Total investment return at net asset value(4) (%) 1.85 3.33 4.92 3.84 2.01(6) 8.74
Total adjusted investment return at net asset value(4,5) (%) 1.61 2.78 4.15 3.47 1.81(6) 8.67
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 11,626 9,506 8,532 6,779 6,451 19,113
Ratio of expenses to average net assets (%) 1.40(7) 1.45(7) 1.40(7) 1.43 1.50(8) 1.84
Ratio of adjusted expenses to average net assets(9) (%) 1.64(7) 2.00(7) 2.10(7) 1.80 2.67(8) 1.91
Ratio of net investment income (loss) to average net assets (%) 3.44 4.26 5.80 6.30 6.04(8) 5.66
Ratio of adjusted net investment income (loss) to
average net assets(9) (%) 3.20 3.71 5.10 5.93 4.87(8) 5.59
Fee reduction per share(3) ($) 0.02 0.05 0.07 0.04 0.02 0.01
Portfolio turnover rate (%) 244 341 423(10) 427 77 250(10)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective May 31, 1997, the fiscal year end changed from March 31 to May 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Not annualized.
(7) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
fund plus expenses incurred indirectly from John Hancock Adjustable U.S.
Government Fund (the "Portfolio"), the mutual fund in which the fund
invested all of its assets. The expenses used in the ratios for the fiscal
year ended March 31, 1996 include the expenses of the Portfolio through
September 22, 1995.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover rate excludes merger activity.
FUND DETAILS 27
<PAGE>
Strategic Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/94 5/95 5/96 5/97 5/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.55 $7.17 $7.15 $7.27 $7.54
Net investment income (loss) 0.68 0.64 0.66(1) 0.64(1) 0.64(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.33) (0.02) 0.12 0.27 0.34
Total from investment operations 0.35 0.62 0.78 0.91 0.98
Less distributions:
Dividends from net investment income (0.58) (0.55) (0.66) (0.64) (0.64)
Distributions in excess of net investment income (0.05) -- -- -- --
Distributions from net realized gain on investments sold -- -- -- -- (0.04)
Distributions from capital paid-in (0.10) (0.09) -- -- --
Total distributions (0.73) (0.64) (0.66) (0.64) (0.68)
Net asset value, end of period $7.17 $7.15 $7.27 $7.54 $7.84
Total investment return at net asset value(2) (%) 4.54 9.33 11.37 12.99 13.43
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 335,261 327,876 369,127 416,916 489,375
Ratio of expenses to average net assets (%) 1.32 1.09 1.03 1.00 0.92
Ratio of net investment income (loss) to average net assets (%) 8.71 9.24 9.13 8.61 8.20
Portfolio turnover rate (%) 91 55 78 132 112
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/94(3) 5/95 5/96 5/97 5/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.58 $7.17 $7.15 $7.27 $7.54
Net investment income (loss) 0.40 0.60(1) 0.61(1) 0.59 0.59(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12 0.27 0.34
Total from investment operations (0.01) 0.58 0.73 0.86 0.93
Less distributions:
Dividends from net investment income (0.32) (0.52) (0.61) (0.59) (0.59)
Distributions in excess of net investment income (0.03) -- -- -- --
Distributions from net realized gain on investments sold -- -- -- -- (0.04)
Distributions from capital paid-in (0.05) (0.08) -- -- --
Total distributions (0.40) (0.60) (0.61) (0.59) (0.63)
Net asset value, end of period $7.17 $7.15 $7.27 $7.54 $7.84
Total investment return at net asset value(2) (%) (0.22)(4) 8.58 10.61 12.21 12.64
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751 328,487 473,428
Ratio of expenses to average net assets (%) 1.91(5) 1.76 1.73 1.70 1.62
Ratio of net investment income (loss) to average net assets (%) 8.12(5) 8.55 8.42 7.90 7.50
Portfolio turnover rate (%) 91 55 78 132 112
</TABLE>
28 FUND DETAILS
<PAGE>
- ----------------------------------------------------------------------------
Class C - period ended: 5/98(6)
- ----------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $7.87
Net investment income (loss) 0.05(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.03)(7)
Total from investment operations 0.02
Less distributions:
Dividends from net investment income (0.05)
Net asset value, end of period $7.84
Total investment return at net asset value(2) (%) 0.23(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 601
Ratio of expenses to average net assets (%) 1.62(5)
Ratio of net investment income (loss) to average net assets (%) 7.34(5)
Portfolio turnover rate (%) 112
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Class B shares began operations on October 4, 1993.
(4) Not annualized.
(5) Annualized.
(6) Class C shares began operations on May 1, 1998.
(7) The amount shown for a share outstanding does not correspond with the
aggregate net gain (loss) on investments for the period ended May 31, 1998,
due to the timing of purchases and redemptions of fund shares in relation to
fluctuating market values of the fund's investments.
FUND DETAILS 29
<PAGE>
<PAGE>
<PAGE>
For more information
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, as well as the
auditors' report (in annual report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature
Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA02217-1000
By phone: 1-800-225-5291
By EASI-Line: 1-800-338-8080
By TDD: 1-800-544-6713
On the Internet: www.jhancock.com/funds
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public
Reference Room in Washington, DC
By phone: 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts
02199-7603
(C) 1998 John Hancock Funds, Inc.
INCPN 10/98
<PAGE>
[PHOTO OMITTED]
ANNUAL Report
Strategic Income Fund
MAY 31, 1998
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President and Chief Operating Officer
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, Massachusetts 02110
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After
such a long and remarkable performance, many began this year wondering what the
market would do for an encore in 1998. The answer so far has been more of the
same, even with the recent increase in volatility caused by tremors from Asia.
This achievement continues to bolster many investors' convictions that the
market will produce these results forever, or, in the worst case, that market
declines will always be short-lived. While the economy remains solid and the
environment favorable, history and reason tell us it's a highly unlikely
scenario.
- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
- --------------------------------------------------------------------------------
This doesn't mean we know what the market will do next, or that it's riding for
a fall. But after such a run, even in this "new era" of strong economic growth
with low inflation, we believe it would be wise for investors to set more
realistic expectations. As weOve said before, markets do indeed move in two
directions. Over the long term, the marketOs historical results have been more
in the 10% per year range, which is still a solid result, considering it has
been produced despite wars, depressions and other social upheavals along the
way.
In addition to adjusting, or at least re-examining, expectations, now could also
be a good time to review with your investment professional how your assets are
diversified, perhaps with an eye toward a more conservative approach. Stocks,
especially with their outsized gains of the last three years, might have grown
to represent a larger piece of your portfolio than you had originally intended,
given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial objectives
and maintain wealth. One way we can do that is by helping you keep your feet on
the ground as you pursue your dreams.
Sincerely,
/s/Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
By Frederick Cavanaugh, Portfolio Manager
John Hancock
Strategic Income Fund
High-yield corporate bonds soar while
emerging-market bonds stumble
The performance of bond markets around the world diverged significantly over the
past 12 months. U.S. corporate high-yield bonds continued to post strong gains,
thanks to low interest rates and a healthy domestic economy. Despite a
near-record amount of new high-yield corporate bonds coming to market in the
first quarter of 1998, demand for them remained red-hot and further boosted
their prices. Western European bonds surprised some observers by gaining
significant ground despite uncertainty over the move to a unified European
currency. Back at home, the U.S. Treasury market was marked by falling yields
and rising prices as inflation fears subsided in the first half of the year.
Later, it was boosted by economic and currency turmoil in South-east Asia, which
impacted most bond markets, some for the worse and some for the better. When
Asias financial crisis erupted last fall, Latin American bonds floundered along
"...bond markets around the world diverged significantly..."
with their Southeast Asian cousins, with most bond markets in both regions
suffering negative returns. In search of a "safe haven" against rapidly
declining emerging markets, investors gravitated toward the relative safety and
stability of the U.S. Treasury market, further sending yields lower and prices
higher.
Performance review Against a mixed backdrop, we're pleased with both the
Fund's absolute and relative performance. For the year ended May 31, 1998, John
Hancock Strategic Income Fund's Class A and Class B shares posted total returns
of 13. 43% and 12.64%, respectively, at net asset value. Class C shares, which
were introduced on May 1, 1998, returned 0.23% from inception to May 31, 1998.
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Fund management
team memebrs: Standing (l-r): Lee Crockett, Roger Hamilton, Ted Hines, and
Carolee Bongiovi. Seated (l-r): Beverly Cleathero and Fred Cavanaugh.]
- --------------------------------------------------------------------------------
3
<PAGE>
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
[" Chart with the heading Top Five Bond Sectors number 1 through 5. The first
one represents U.S. Treasury and Government Agencies 22%. The second represents
Telecommunications 19%. The third one represents Media 8%. The fourth represents
Foreign Governments 8%. The fifth represents Leisure 5%. A footnote at the
bottom reads As a percentage of net assets on May 31, 1998."]
- --------------------------------------------------------------------------------
Keep in mind that your net asset value return will be different from this
performance if you were not invested in the Fund for the entire period and did
not reinvest all distributions. Those returns outpaced the average multi-sector
income fund, which returned 8.94% for the same 12-month period, according to
Lipper Analytical Services, Inc.1 Please see pages six and seven for longer-term
performance information. Our relatively large stake in high-yield corporate
bonds was the main contributor to our outperformance. We saw particular strength
among our telecommunications holdings, including Nextel Communications, a
combination cellular/paging/dispatch company, and Crown Castle International,
which builds communications towers. Despite the tarnish of being issued in an
emerging market, Colombian cellular company Occidente Y Caribe Cellular also
posted strong gains. In that country, cellular phone service is quickly gaining
market share from traditional wire-line phone systems, and the
"Our relatively large stake in high-yield corporate bonds was the main
contributor..."
government has erected barriers to prevent further competition. Nextel
subsidiary Nextel International also benefited from the growth in wireless
communications services in Latin America. But the high-yield sector also handed
us several of our bigger disappointments. Australian cable company Australis
Media filed for bankruptcy after one of its planned strategic alliances fell
through. Printing press maker Goss Graphic Systems' bonds also suffered losses,
despite having a record-breaking backlog for its products, when the company
posted weaker-than-expected financial results due to a one-time charge for
closing its French operations.
Focus on quality
Another factor that helped our performance was our reduced stake in
emerging-market debt. Going back to last summer before the problems surfaced,
the Fund had as much as 20% of its assets invested in emerging markets. At the
time, these bonds were a positive for the Fund's performance because they
offered relatively attractive yields. By the end of October, however, we had
pared our emerging-market holdings back to about 14% of assets. While we weren't
able to sidestep all of the region's damage, we did dodge a fair amount of the
price declines that came in late 1997 and so far this year. More recently, we
continued to cut emerging-market holdings, mainly by eliminating Brazilian
bonds. Inflation is sky-high in that country and there is quite a bit of
uncertainty surrounding the upcoming presidential election. In contrast, we
- --------------------------------------------------------------------------------
["Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance...and what's behind the numbers. The first listing is Nextel
followed by an up arrow and the phrase "Continued strong subscriber growth". The
second listing is Occidente Y Caribe followed by a up arrow with the phrase
"Strong celluar demand in Columbia". The third listing is Goss Graphic Systems
followed by a down arrow with the phrase "Weaker results due to closing of
European operation". Footnote at the bottom states See "Schedule of
Investments." Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
4
<PAGE>
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 3% with the 15% at the top and 3% at the bottom. The
first represents the 13.43% total return for John Hancock Strategic Income Fund:
Class A. The second represents the 12.64% total return for John Hancock
Strategic Income Fund: Class B. The third represents the 0.23% total return for
John Hancock Strategic Income Fund: Class C. The fourth represents the 8.94%
total return for Average multi-sector income fund. A Footnote below reads "
Total returns for John Hancock Strategic Income Fund are at net asset value with
all distributions reinvested. The average multi-sector income fund is tracked by
Lipper Analytical Services, Inc. See the following two pages for historical
performance information. * From inception May 1, 1998 to May 31, 1998"]
- --------------------------------------------------------------------------------
maintained holdings in Argentina and Mexico, which have reasonable economic
growth and manageable inflation rates. By the end of the period, our stake in
emerging-market debt fell to 6%, bringing our holdings in foreign debt to 26% of
net assets.
We also eliminated our stake in New Zealand bonds, although it's not
considered an emerging market. After a recent visit there, we were convinced
that the country's currency may be poised for further weakness. And while we
believe that interest rates can fall and bond prices can rise (in New Zealand
dollar terms) in response, the costs of hedging back into U.S. dollars would
likely wipe out any yield advantage the bonds offer. We held on to our
Australian bonds, however, because we believe they can do well as interest rates
fall there, and the costs of hedging into U.S. dollars were minimal.
Given our view that the U.S. economy could experience slower growth in the
second half of 1998, we've also reduced our high-yield U.S. corporate stake
somewhat. We did this by selling lower-quality companies that we think could be
vulnerable to
"...continued weakness in Asia will mute economic growth in the U.S. ..."
declining profitability during an economic slowdown. We redeployed the proceeds,
along with those from our sales of emerging-market and New Zealand debt into
U.S. Treasuries. At the end of the period, our stake in U.S. Treasuries stood at
19%, up from 16% a year ago.
Outlook
In our view, the financial crisis in Asia will continue to plague the emerging
markets. Although emerging-market bond prices have fallen dramatically, we don't
yet see many compelling values arising in either Southeast Asia or Latin
America. Until we do, we'll likely keep our emerging-market holdings at a low
level. We believe that continued weakness in Asia will mute economic growth in
the U.S., although we think a recession is unlikely. Slower economic growth, in
turn, will probably mean that inflation should remain subdued. If a weaker U.S.
economy does materialize and the demand for high-yield corporate debt slows,
we'll probably reduce our stake in high-yield bonds in favor of further
increasing our stake in U.S. securities.
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
International investing involves special risks such as political and currency
risks and differences in accounting standards and financial reporting.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
John Hancock Funds - Strategic Income Fund
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Strategic Income Fund. Total return measures
the change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Prior to September 28, 1989, different sales charge schedules
were in effect for Class A shares and are not reflected in the performance
information.
Class B performance reflects a maximum contingent deferred sales charge (maximum
5% and declining to 0% over six years).
Class C shares became effective May 1, 1998, and do not have a cumulative total
return or an average annual total return as of March 31, 1998.
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. For a discussion of risks
associated with international investing and high-yield bonds, please see the
Fund's prospectus.
CLASS A
For the period ended March 31, 1998
One Five TEN
Year Years YEARS
---- ----- -----
Cumulative Total Returns 11.95% 56.01% 127.45%
Average Annual Total Returns 11.95% 9.30% 8.56%
CLASS B
For the period ended March 31, 1998
SINCE
One INCEPTION
Year (10/4/93)
------ ---------
Cumulative Total Returns 11.41% 48.84%
Average Annual Total Returns 11.41% 9.27%
YIELDS
As of May 31, 1998
SEC 30-DAY
YIELD
----------
John Hancock Strategic Income Fund: Class A 7.07%
John Hancock Strategic Income Fund: Class B 6.69%
John Hancock Strategic Income Fund: Class C 6.69%
6
<PAGE>
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Strategic Income Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, weOve shown the same $10,000
investment in the Lehman Brothers Government/Corporate Bond Index N an unmanaged
index that measures the performance of U.S. government bonds, U.S. corporate
bonds and Yankee bonds.
Assuming all distributions were reinvested for the same period indicated, a
$10,000 investment in the Fund's Class C shares at inception on May 1, 1998,
would be worth $10,023 without sales charge and $9,923 with maximum sales
charge. For com-parison, the same $10,000 investment in the Lehman Brothers
Government/ Corporate Bond Index would be worth $10,108. Past performance is not
indicative of future results.
- --------------------------------------------------------------------------------
Strategic Income Fund
Class A shares
Line chart with the heading Strategic Income Fund Class A representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Lehman
Government/Corporate Bond Index and is equal to $24,182 as of May 31, 1998. The
second line represents the value of the hypothetical $10,000 investment made in
the Strategic Income Fund on August 18, 1986 before sales charge, and is equal
to $23,764 as of May 31, 1998. The third line represents the Strategic Income
Fund, after sales charge, and is equal to $22,694 as of May 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Strategic Income Fund
Class B shares
Line chart with the heading Strategic Income Fund Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Strategic
Income Fund, before sales charge, and is equal to $15,156 as of May 31, 1998.
The second line represents the value of the hypothetical $10,000 investment made
in the Strategic Income Fund, after sales charge, on October 4, 1993, and is
equal to $14,956 as of May 31, 1998. The third line represents the value of the
Lehman Government/Corporate Bond Index, and is equal to $13,362 as of May 31,
1998.
- --------------------------------------------------------------------------------
7
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
Statement of Assets and Liabilities
May 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value -D Note C:
Bonds (cost-D $817,906,369) ..................... $844,544,766
Common and preferred stocks and warrants
(cost - $69,034,676) ............................ 84,374,849
Joint repurchase agreement (cost - $14,893,000).. 14,893,000
Corporate savings account ....................... 206
------------
943,812,821
Foreign currency, at value (cost - $419)......... 428
Receivable for investments sold ................. 6,146,581
Receivable for foreign currency exchange
contracts sold- Note A ......................... 2,276,633
Receivable for shares sold ...................... 4,363,645
Dividends receivable ............................ 156,263
Interest receivable ............................ 17,307,169
Receivable for futures variation
margin- Note A ................................. 43,750
Other assets .................................... 35,626
------------
Total Assets ............ 974,142,916
------------------------------------------------
Liabilities:
Payable for investments purchased ............... 8,927,192
Payable for foreign currency exchange
contracts purchased- Note A ..................... 130,337
Payable for shares repurchased .................. 541,309
Dividend payable ................................ 296,047
Payable to John Hancock Advisers,
Inc. and affiliates- Note B ..................... 540,567
Accounts payable and accrued expenses ........... 303,549
------------
Total Liabilities ....... 10,739,001
------------------------------------------------
Net Assets:
Capital paid-in ................................. 937,612,328
Accumulated net realized loss on investments,
financial futures contracts and foreign
currency transactions .......................... (21,565,217)
Net unrealized appreciation of investments,
financial futures contracts and foreign
currency transactions ......................... 44,001,500
Undistributed net investment income ............. 3,355,304
------------
Net Assets .............. $963,403,915
------------------------------------------------
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 -
$489,374,853/62,431,106 ......................... $7.84
========================================================================
Class B- $473,428,435/60,396,771 ................ $7.84
========================================================================
Class C**- $600,627/76,624 ...................... $7.84
========================================================================
Maximum Offering Price Per Share*
Class A - ($7.84 x 104.71%) ..................... $8.21
========================================================================
* 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 May 1, 1998.
The Statement of Assets and Liabilities is the FundOs balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1998. YouOll also
find the net asset value and the maximum offering price per share as of that
date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
Statement of Operations
Year ended May 31, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest ........................................ $71,733,261
Dividends (net of foreign withholding
taxes of $11,001) ............................... 5,159,820
------------
76,893,081
------------
Expenses:
Investment management fee- Note B ............... 3,388,285
Distribution and service fee- Note B
Class A ...................................... 1,352,618
Class B ...................................... 3,944,240
Class C ...................................... 207
Transfer agent fee- Note B ...................... 1,166,382
Custodian fee ................................... 230,206
Financial services fee- Note B .................. 150,061
Registration and filing fees .................... 121,113
Trustees' fees .................................. 50,419
Printing ....................................... 42,554
Auditing fee .................................... 42,000
Miscellaneous ................................... 19,143
Legal fees ...................................... 9,234
------------
Total Expenses .......... 10,516,462
------------------------------------------------
Net Investment Income ... 66,376,619
------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions:
Net realized loss on investments sold ......... (2,653,036)
Net realized gain on financial futures
contracts ..................................... 2,734,331
Net realized gain on foreign currency
transactions .................................. 9,085,480
Change in net unrealized appreciation/
depreciation of investments .................. 22,544,808
Change in net unrealized appreciation/
depreciation of financial futures contracts ... 4,688
Change in net unrealized appreciation/
depreciation of foreign currency transactions.. 2,161,246
------------
Net Realized and Unrealized Gain
on Investments, Financial Futures
Contracts and Foreign Currency
Transactions ............ 33,877,517
------------------------------------------------
Net Increase in Net Assets
Resulting from
Operations .............. $100,254,136
================================================
The Statement of Operations summarizes the FundOs investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED MAY 31,
--------------------
1997 1998
---------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................... $54,938,521 $66,376,619
Net realized gain on investments
sold, financial futures contracts
and foreign currency transactions ....................... 12,369,401 9,166,775
Change in net unrealized appreciation/
depreciation of investments, financial
futures contracts and foreign currency transactions ..... 11,444,907 24,710,742
----------- -----------
Net Increase in Net Assets Resulting from
Operations ............................................ 78,752,829 100,254,136
----------- -----------
Distributions to Shareholders:
Dividends from net investment income
Class A- ($0.6371 and $0.6408 per share,
respectively) ......................................... (33,759,527) (36,925,773)
Class B- ($0.5854 and $0.5860 per share,
respectively) ......................................... (21,178,937) (29,451,246)
Class C**- (none and $0.0477 per share,
respectively) ......................................... - (1,205)
Distributions from net realized gain on investments sold
Class A- (none and $0.0400 per share,
respectively) ......................................... - (2,270,669)
Class B- (none and $0.0400 per share,
respectively) ......................................... - (2,027,424)
----------- -----------
Total Distributions to Shareholders ................... (54,938,464) (70,676,317)
----------- -----------
From Fund Share Transactions - Net:* .................. 145,710,146 188,423,596
----------- -----------
Net Assets:
Beginning of period .................................... 575,877,989 745,402,500
----------- -----------
End of period (including undistributed
net investment income of $6,971,225 and
$3,355,304, respectively) .............................. $745,402,500 $963,403,915
============ ============
* Analysis of Fund Share Transactions:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------
1997 1998
------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ --------- --------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .............................. 25,714,330 $191,363,563 16,444,399 $128,645,376
Shares issued to shareholders in
reinvestment of distributions ............ 2,756,450 20,478,423 3,159,528 24,637,005
------------ ------------ ----------- ------------
28,470,780 211,841,986 19,603,927 153,282,381
Less shares repurchased .................. (23,946,698) (178,382,670) (12,444,274) (97,186,849)
------------ ------------ ----------- ------------
Net increase ............................. 4,524,082 $33,459,316 7,159,653 $56,095,532
============ ============ =========== ============
CLASS B
Shares sold .............................. 26,203,914 $194,709,218 24,192,186 $189,153,319
Shares issued to shareholders in
reinvestment of distributions ............ 1,314,586 9,776,167 1,943,551 15,161,471
------------ ------------ ----------- ------------
27,518,500 204,485,385 26,135,737 204,314,790
Less shares repurchased ................. (12,396,576) (92,234,555) (9,287,224) (72,587,321)
------------ ------------ ----------- ------------
Net increase ............................. 15,121,924 $112,250,830 16,848,513 $131,727,469
============ ============ =========== ============
CLASS C**
Shares sold .............................. - - 76,535 $599,897
Shares issued to shareholders in
reinvestment of distributions ............ - - 89 698
---------- -----------
- - 76,624 600,595
Less shares repurchased .................. - - - -
------------ ------------- ---------- -----------
Net increase ............................. - - 76,624 $600,595
============ ============= ========== ===========
</TABLE>
** Class C shares commenced operations on May 1, 1998.
The Statement of Changes in Net Assets shows how the value of the FundOs net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last two periods, along with
the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
YEAR ENDED MAY 31,
---------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............. $7.55 $7.17 $7.15 $7.27 $7.54
-------- -------- -------- -------- --------
Net Investment Income ............................ 0.68 0.64 0.66(2) 0.64(2) 0.64(2)
Net Realized and Unrealized Gain (Loss)
on Investments,
Financial Futures Contracts and Foreign
Currency Transactions ........................... (0.33) (0.02) 0.12 0.27 0.34
-------- -------- -------- -------- --------
Total from Investment Operations ................. 0.35 0.62 0.78 0.91 0.98
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ............. (0.58) (0.55) (0.66) (0.64) (0.64)
Distributions in Excess of Net
Investment Income ................................ (0.05) - - - -
Distributions from Net Realized Gain
on Investments Sold .............................. - - - - (0.04)
Distributions from Capital Paid-In ............... (0.10) (0.09) - - -
-------- -------- -------- -------- --------
Total Distributions ................................ (0.73) (0.64) (0.66) (0.64) (0.68)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ..................... $7.17 $7.15 $7.27 $7.54 $7.84
======== ======== ======== ======== ========
Total Investment Return at Net Asset
Value(3) ........................................... 4.54% 9.33% 11.37% 12.99% 13.43%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)......... $335,261 $327,876 $369,127 $416,916 $489,375
Ratio of Expenses to Average Net Assets .......... 1.32% 1.09% 1.03% 1.00% 0.92%
Ratio of Net Investment Income to Average
Net Assets ....................................... 8.71% 9.24% 9.13% 8.61% 8.20%
Portfolio Turnover Rate ......................... 91% 55% 78% 132% 112%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the FundOs net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- ---------------------------------------------------------------------------------
YEAR ENDED MAY 31,
PERIOD ENDED ------------------------------------
MAY 31, 1994 1995 1996 1997 1998
------------ ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
CLASS B(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period ................ $7.58 $7.17 $7.15 $7.27 $7.54
------- -------- -------- -------- --------
Net Investment Income ............................... 0.40 0.60(2) 0.61(2) 0.59 0.59(2)
Net Realized and Unrealized Gain (Loss)
on Investments,
Financial Futures Contracts and
Foreign Currency Transactions ...................... (0.41) (0.02) 0.12 0.27 0.34
------- -------- -------- -------- --------
Total from Investment Operations ................... (0.01) 0.58 0.73 0.86 0.93
------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .............. (0.32) (0.52) (0.61) (0.59) (0.59)
Distributions in Excess of Net
Investment Income ................................. (0.03) - - - -
Distributions from Net Realized Gain
on Investments Sold ............................... - - - - (0.04)
Distributions from Capital Paid-in ................ (0.05) (0.08) - - -
------- -------- -------- -------- --------
Total Distributions ................................. (0.40) (0.60) (0.61) (0.59) (0.63)
------- -------- -------- -------- --------
Net Asset Value, End of Period ...................... $7.17 $7.15 $7.27 $7.54 $7.84
======= ======== ======== ======== ========
Total Investment Return at Net Asset Value(3)........ (0.22%)(4) 8.58% 10.61% 12.21% 12.64%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)............. $77,691 $134,527 $206,751 $328,487 $473,428
Ratio of Expenses to Average Net Assets ............. 1.91%(5) 1.76% 1.73% 1.70% 1.62%
Ratio of Net Investment Income to Average
Net Assets .......................................... 8.12%(5) 8.55% 8.42% 7.90% 7.50%
Portfolio Turnover Rate ............................. 91% 55% 78% 132% 112%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS)
TO MAY 31, 1998
-----------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period .............. $7.87
-------------
Net Investment Income ............................. 0.05(2)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign
Currency Transactions ........................... (0.03)(6)
-------------
Total from Investment Operations ................ 0.02
-------------
Less Distributions:
Dividends from Net Investment Income ....... (0.05)
-------------
Net Asset Value, End of Period .................... $7.84
=============
Total Investment Return at Net Asset Value (3)..... 0.23%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)........... $601
Ratio of Expenses to Average Net Assets ........... 1.62%(5)
Ratio of Net Investment Income to Average
Net Assets ........................................ 7.34%(5)
Portfolio Turnover Rate ........................... 112%
(1) Class B shares commenced operations on October 4, 1993.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) The amount shown for a share outstanding does not correspond with the
aggregate net gain/(loss) on investments for the period ended May 31, 1998,
due to the timing of purchases and redemptions of Fund shares in relation to
fluctuating market values of the investments of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Strategic Income Fund on May 31, 1998. It has three main categories: bonds,
common and preferred stocks and warrants, and short-term investments. The bonds
are further broken down by industry groups. Under each industry group is a list
of bonds owned by the Fund. Short-term investments, which represent the FundOs
"cash" position, are listed last.
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
BONDS
Advertising (0.44%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 ............................... 9.375% B 4,000 $4,220,000
-----------
Aerospace (0.20%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R).......... 10.910 BBB- 1,500 1,957,800
-----------
Banks - Foreign (2.05%)
International Bank for Reconstruction & evelopment,
Sr Note (South Africa) 07-21-98# .................... 15.000 AAA 32,000 6,170,919
Landeskreditbank Baden- Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) ..................... 7.625 AAA 11,900 13,620,978
-----------
19,791,897
-----------
Banks - United States (0.26%)
CSBI Capital Trust I,
Sec Co. Gtd Bond 06-06-27 (R) ....................... 11.750 B- 2,340 2,527,200
-----------
Beverages (0.21%)
Pepsi-Gemex, S.A. de C.V.,
Sr Note Ser B (Mexico) 03-30-04 (Y) .................. 9.750 BB 2,000 2,060,000
-----------
Building (0.43%)
Associated Materials, Inc.,
Sr Sub Note 03-01-08 ................................ 9.250 B 2,000 2,050,000
Kevco, Inc.,
Gtd Sr Sub Note 12-01-07 ........................... 10.375 B- 2,000 2,080,000
-----------
4,130,000
-----------
Business Services - Misc (0.42%)
Spin Cycle, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.750%, 05-01-01) 05-01-05 (A), (R) ............... Zero CCC+ 3,625 2,573,750
Wesco International, Inc.,
Sr Disc Note, Step Coupon (11.125%,
06-01-03) 06-01-08 (A), (R) + ...................... 11.125 B 2,500 1,459,375
-----------
4,033,125
-----------
Chemicals (0.63%)
AEP Industries, Inc.,
Sr Sub Note 11-15-07 ............................... 9.875 B 4,000 4,120,000
PCI Chemicals Canada, Inc.,
Sec Note (Canada) 10-15-07 (Y)....................... 9.250 B+ 2,000 1,980,000
-----------
6,100,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Computers (0.98%)
Unisys Corp.,
Sr Note 10-15-04 ................................... 11.750% BB- $8,150 $9,413,250
-----------
Consumer Products - Misc. (0.10%)
iamond Brands Operating Corp.,
Sr Sub Note 04-15-08 (R)............................ 10.125 CCC+ 1,000 1,010,000
Containers (0.99%)
Berry Plastics Corp.,
Sr Sub ote 04-15-04 ................................ 12.250 B3 4,000 4,360,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest
Cert) 04-01-02 ...................................... 12.250 B- 5,000 5,137,500
----------
9,497,500
----------
Cosmetics & Personal Care (0.32%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) ............................... 11.000 B+ 3,150 3,087,000
iversified Operations (0.65%)
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y)............ 11.250 B 4,000 4,330,000
Intertek Finance Plc,
Sr Sub Note, Ser B (United Kingdom) 11-01-06 (Y)..... 10.250 B 1,850 1,942,500
----------
6,272,500
----------
Electronics (0.83%)
Communications Instruments, Inc.,
Gtd Sr Sub Note Ser B 09-15-04 ..................... 10.000 B- 2,900 2,972,500
Viasystems, Inc.,
Sr Sub Note 06-01-07 ............................... 9.750 B- 2,500 2,531,250
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) ........................... 9.500 B 3,150 2,551,500
----------
8,055,250
----------
Energy (0.46%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) ........................... 9.625 B 4,300 4,402,125
----------
Finance (1.66%)
AEI Holding Co.,
Sr Note 11-15-07 (R) ............................... 10.000 B- 4,130 4,150,650
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) ....................... 9.750 BB- 3,000 3,000,000
Maxxam Group Holdings, Inc.,
Sr Sec Note Ser B 08-01-03 ......................... 12.000 CCC+ 3,000 3,247,500
Niantic Bay Fuel Trust,
Bond 06-04-03 (R) + ................................. 8.590 B+ 2,300 2,300,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
<TABLE>
<CAPTION>
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Finance (continued)
William Hill Finance Plc,
Sr Sub Note (United Kingdom) 04-30-08 (R)# .......... 10.625% B- $2,000 $3,263,500
----------
15,961,650
----------
Food (0.63%)
Archibald Candy Corp.,
Sr Sec Note 07-01-04 ............................... 10.250 B 2,000 2,130,000
Mastellone Hermanos S.A.,
Sr Bond (Argentina) 04-01-08 (R), (Y) ............... 11.750 B+ 3,900 3,958,500
----------
6,088,500
----------
Glass Products (0.28%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R), (Y)............... 11.375 B+ 2,500 2,675,000
----------
Government - Foreign (8.24%)
Australia, Commonweath of,
Government Bond (Australia) 08-15-08# ............... 8.750 AAA 45,000 35,495,626
South Africa, Republic of,
Government Bond (South Africa) 06-23-17 (Y) ......... 8.500 Baa3 7,000 6,746,250
Government Bond (South Africa) 10-17-06 (Y).......... 8.375 BB+ 2,500 2,575,000
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 07-16-07# .......... 8.500 Aaa 8,000 15,546,498
Government Bond (United Kingdom) 06-07-21# .......... 8.000 Aaa 5,000 10,616,573
Government Bond (United Kingdom) 11-06-01# .......... 7.000 Aaa 5,000 8,439,207
----------
79,419,154
----------
Government - U.S. (19.35%)
United States Treasury,
Bond 08-15-05 ...................................... 10.750 AAA 10,000 12,965,600
Bond 02-15-16 ...................................... 9.250 AAA 11,000 15,058,010
Bond 08-15-19 ...................................... 8.125 AAA 61,500 77,835,630
Bond 02-15-27 ...................................... 6.625 AAA 19,000 20,947,500
Bond 11-15-27 ...................................... 6.125 AAA 10,100 10,552,884
Note 11-15-98 ...................................... 8.875 AAA 8,000 8,121,280
Note 08-15-04 ...................................... 7.250 AAA 10,000 10,842,200
Note 08-31-02 ...................................... 6.250 AAA 20,000 20,465,600
Note 08-15-07 ...................................... 6.125 AAA 9,300 9,596,391
----------
186,385,095
-----------
Government - U.S. Agencies (2.33%)
Federal Home Loan Mortgage Corp.,
REMIC 44-E 11-15-19 ................................ 9.000 AAA 643 665,863
Federal National Mortgage Assn.,
Global Bond (United Kingdom) 06-07-02# ............. 6.875 AAA 5,000 8,313,366
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 ........................ 7.500 AAA 13,050 13,449,940
-----------
22,429,169
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Leisure (5.43%)
Casino America, Inc.,
Sr Sec Note 08-01-03 ............................... 12.500% B+ $5,000 $5,625,000
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 ......................... 9.625 B 4,000 4,160,000
Sr Sub Note Ser 08-01-08 .......................... 9.625 B2 1,000 1,030,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 ............................... 10.500 B 4,000 4,400,000
Grand Casinos, Inc.,
Gtd Sr Note Ser B 10-15-04 ......................... 9.000 B+ 3,000 3,120,000
Hedstrom Corp.,
Gtd Sr Sub Note 06-01-07 ........................... 10.000 B- 4,000 4,100,000
Horseshoe Gaming LLC,
Gtd Sr Sub Note Ser B 06-15-07 ..................... 9.375 B 2,500 2,662,500
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 ......................... 13.500 BB+ 5,900 7,522,500
Production Resource Group LLC,
Sr Sub Note 01-15-08 (R) ........................... 11.500 B- 3,000 2,940,000
Showboat Marina Casino Partnership/Finance Corp.,
1st Mtg Note Ser B 03-15-03 ........................ 13.500 BB- 5,000 5,850,000
Showboat, Inc.,
Sr Sub Note 08-01-09 ............................... 13.000 B 3,000 3,660,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07(Y)............... 8.625 B+ 2,000 2,060,000
Waterford Gaming LLC,
Sr Note 11-15-03 ................................... 12.750 B+ 4,729 5,225,545
----------
52,355,545
----------
Machinery (1.34%)
Clark Material Handling Co.,
Gtd Sr Note 11-15-06 ............................... 10.750 B+ 2,250 2,407,500
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 (R) ........................... 8.500 B 5,000 4,925,000
Elgar Holdings, Inc.,
Sr Note 02-01-08 (R) ............................... 9.875 B2 1,500 1,500,000
Newcor, Inc.,
Sr Sub Note 03-01-08 (R) ........................... 9.875 B- 4,000 4,050,000
----------
12,882,500
----------
Manufacturing (1.10%)
Coty, Inc.,
Sr Sub Note 05-01-05 ............................... 10.250 B+ 6,000 6,420,000
Scovill Fasteners, Inc.,
Sr Note Ser B 11-30-07 ............................. 11.250 B 4,000 4,130,000
----------
10,550,000
----------
Media (8.43%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 ............................ 9.250 B3 3,500 3,596,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Media (continued)
Australis Media Ltd.,
Gtd Sr Sec isc Note, Step Coupon, Payment-in-Kind
(PIK) (15.75%, 05-15-00)
(Australia) 05-15-03 (A), (Y) ....................... 1.75% D $164 $8,177
Unit (Sr Sub Disc Note & Warrant), Step Coupon,
PIK (15.75%, 05-15-00)
(Australia) 05-15-03 (A), (Y) ....................... 1.75 D 2,000 100,000
Capstar Broadcasting Partners, Inc.,
Sr Disc Note, Step Coupon (12.75%, 02-01-02)
02-01-09 (A) ........................................ Zero B- 2,750 2,048,750
CF Cable TV, Inc.
Sr Note (Canada) 02-15-05 (Y) ....................... 11.625 BBB- 2,000 2,257,240
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07............................ 10.500 Ba3 3,000 3,345,000
Sub Deb 01-15-09 ................................... 12.000 B 1,059 1,291,736
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 ............................... 10.250 B- 2,000 2,190,000
Comcast Corp.,
Sr Sub Deb 01-15-08 ................................ 9.500 BB+ 4,000 4,286,080
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(United Kingdom) 11-15-07 (A), (Y) .................. Zero B- 4,000 3,290,000
CSC Holdings, Inc.,
Sr Sub Deb 02-15-13 ................................ 9.875 BB- 4,000 4,370,000
Digital Television Services, Inc.
Gtd Sr Sub Note Ser B 08-01-07 ...................... 12.500 CCC 3,000 3,450,000
Falcon Holding Group L.P./Falcon Funding Corp.,
Sr Deb 04-15-10 (R) ................................ 8.375 B 5,000 4,937,500
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 ............................... 12.375 B- 5,000 5,550,000
Garden State ewspapers, Inc.,
Sr Sub Note Ser B 10-01-09 ......................... 8.750 B+ 3,500 3,552,500
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 (R) ........................... 8.875 B- 2,000 2,000,000
Intermedia Capital Partners,
Sr Note 08-01-06 ................................... 11.250 B 5,048 5,641,140
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ....................... 10.625 Ba3 1,250 1,369,713
Radio One, Inc.,
Gtd Sr Sub Note Ser B, Step Coupon (12.00%,
05-15-00) 05-15-04 (A)*** ........................... 7.000 B- 2,000 2,040,000
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) ................. 10.000 BB+ 3,000 3,315,000
Sr Sec Deb (Canada) 01-15-14# ....................... 9.650 BB+ 2,000 1,585,799
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) ................... 7.250 B 2,390 2,736,550
SFX Entertainment, Inc.,
Sr Sub Note 02-01-08 (R) ........................... 9.125 CCC+ 5,000 4,875,000
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ............................... 11.000 B- 2,785 3,056,538
Sullivan Broadcasting,
Sr Sub Note 12-15-05 ............................... 10.250 B- 3,000 3,240,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Media (continued)
Supercanal Holdings S.A. / Supercanal S.A.,
Sr Note (Argentina) 05-15-05 (R), (Y) ............... 11.500% B $4,000 $3,920,000
TeleWest Communications Plc,
Sr Disc Deb, Step Coupon (11.00%, 10-01-01) (United
Kingdom) 10-01-07 (A), (Y) .......................... Zero B+ 4,000 3,210,000
----------
81,262,973
----------
Medical (0.61%)
Everest Healthcare Services Corp.,
Sr Sub Note 05-01-08 (R) ........................... 9.750 B- 1,250 1,267,188
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security 02-01-08 (R) .......... 7.875 B+ 2,600 2,596,750
MEIQ/PR Life Support Services, Inc.,
Sr Sub Note 06-01-08 (R) ........................... 11.000 B- 2,000 2,040,000
----------
5,903,938
----------
Metal (1.75%)
Centaur Mining & Exploration Ltd.,
Gdt Sr Note (Australia) 12-01-07 (R), (Y) ........... 11.000 B+ 2,500 2,606,250
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 (R), (Y) ............... 8.875 BB 5,100 5,068,125
GS Technologies Operating Co.,
Sr Note 10-01-05 .................................. 12.250 B 4,000 4,570,000
Kaiser Aluminum & Chemical Corp.,
Sr Sub Note 02-01-03 ............................... 12.750 CCC+ 3,388 3,620,925
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 ........................... 9.875 B- 1,000 1,025,000
----------
16,890,300
----------
Office (0.16%)
United Stationer Supply,
Sr Sub Note 05-01-05 ............................... 12.750 B 1,334 1,520,760
Oil & Gas (2.19%)
Canadian Forest Oil Ltd.,
Gtd Sr Sub Note (Canada) 09-15-07 (Y) ............... 8.750 B 2,900 2,863,750
Cliffs Drilling Co.,
Gtd Sr Sec Note Ser B 05-15-03 ..................... 10.250 B+ 2,250 2,424,375
Comp Nav Perez Companc,
Bond (Argentina) 01-30-04 (R), (Y)................... 9.000 Ba3 3,000 3,000,000
Cross Timbers Oil Co.,
Sr Sub Note Ser B 11-01-09 ......................... 8.750 B 1,500 1,496,250
Great Lakes Carbon Corp.,
Sr Sub Note 05-15-08 (R) ........................... 10.250 B- 1,800 1,827,000
Kelly Oil & Gas Partners Ltd.,
Deb 04-01-00 ....................................... 8.500 B- 1,100 1,087,625
Newpark Resources, Inc.,
Gtd Sr Sub Note 12-15-07 ........................... 8.625 B+ 1,500 1,522,500
Parker Drilling Corp.,
Gtd Sr Note Ser B 11-15-06 ......................... 9.750 B+ 1,000 1,047,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Oil & Gas (continued)
Petroleos Mexicanos,
Bond (Mexico) 09-15-07 (Y) .......................... 8.850% BB $1,000 $987,500
Universal Compression, Inc.,
Sr Disc Note, Step Coupon (9.875%, 02-15-03)
02-15-08 (A), (R) ................................... Zero B 2,650 1,696,000
Vintage Petroleum, Inc.,
Sr Sub Note 12-15-05 ............................... 9.000 B+ 3,000 3,105,000
----------
21,057,500
----------
Paper & Paper Products (1.22%)
Copamex Industrias, S.A. de C.V.,
Sr Note Ser B (Mexico) 04-30-04 (Y) ................. 11.375 B1 1,950 2,096,250
Repap ew Brunswick, Inc.,
Sr Note (Canada) 04-15-05 (Y) ....................... 10.625 CCC+ 4,000 4,100,000
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 ......................... 12.000 B+ 5,000 5,537,500
----------
11,733,750
----------
Pollution Control (0.26%)
American Eco Corp.,
Gtd Sr Note Ser A 05-15-08 (R) ..................... 9.625 BB- 2,500 2,518,750
Printing - Commercial (0.66%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 ............................... 12.000 B 3,000 3,187,500
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 ............................... 12.750 B- 3,000 3,135,000
----------
6,322,500
----------
Retail (0.36%)
Disco S.A.,
Note (Argentina) 05-15-08 (R), (Y) .................. 9.875 BB 2,000 1,927,500
United Stationers, Inc.,
Sr Sub Note 04-15-08 (R) ........................... 8.375 B 1,500 1,500,000
----------
3,427,500
----------
Steel (1.64%)
Ameristeel Corp.,
Sr Note 04-15-08 (R) ............................... 8.750 B+ 4,100 4,120,500
Bayou Steel Corp.,
1st Mtg Bond 05-15-08 (R)........................... 9.500 B 3,000 2,981,250
Haynes International, Inc.,
Sr Note 09-01-04 ................................... 11.625 B- 2,500 2,825,000
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) ....................... 11.500 B+ 3,525 3,890,719
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 ........................ 11.500 B- 1,875 1,940,625
----------
15,758,094
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications (18.85%)
Advanced Radio Telecom Corp.,
Unit (Sr Note & Warrants) 02-15-07.................. 14.000% CCC+ $5,000 $5,150,000
Allegiance Telecom, Inc.,
Sr Disc Note, Step Coupon (11.75%,
02-15-03) 02-15-08 (A), (R) ........................ Zero B 3,500 1,925,000
American Mobile Satellite Corp./AMSC
Acquisition Co. Inc.,
Unit (Sr Note & Warrant) 04-01-08 (R) .............. 12.250 B- 3,000 2,985,000
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.40%,
05-15-03) (Canada) 05-15-08# ........................ Zero B3 6,500 2,675,104
Cellular Communications International, Inc.,
Sr Disc Note, Step Coupon (9.50%, 04-01-03)
04-01-05 (A), (R) ................................... Zero B- 4,750 3,727,624
COLT Telecom Group Plc,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.00%, 12-15-01) (United Kingdom)
12-15-06 (A), (Y) .................................. Zero B 5,000 3,962,500
Sr Note (United Kingdom) 11-30-07# .................. 10.125 B 1,425 2,540,329
Compagnie De Radiocomunicaciones Moviles S.A.,
Bond (Argentina) 05-08-08 (R), (Y) .................. 9.250 BBB- 2,500 2,418,750
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A), (Y) ........................ Zero B3 5,000 3,875,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%,
11-01-02) 11-15-07 (A), (R) ........................ Zero B 5,000 3,387,500
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants), Step
Coupon (12.625%, 03-01-03) 03-01-08 (A), (R)....... Zero B- 5,165 2,737,450
Dolphin Telecom Plc,
Sr Disc Note, Step Coupon (11.50%,
06-01-03) (United Kingdom) 06-01-08 (A), (R), (Y).... Zero B- 4,400 2,541,000
DTI Holdings, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.50%, 03-01-03) 03-01-08 (A), (R) ................ Zero B- 4,600 2,622,000
e.spire Communications, Inc.,
Sr Note 07-15-07 ................................... 13.750 B- 6,000 6,900,000
Echostar BS Corp.,
Gtd Sr Sec Note 07-01-02 ........................... 12.500 B- 5,000 5,612,500
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) ............... 11.500 B- 1,550 1,643,000
Facilicom International,
Sr Note 01-15-08 (R) ............................... 10.500 B- 4,350 4,328,250
FLAG Ltd.,
Sr Note (Bermuda) 01-30-08 (R), (Y) ................. 8.250 B+ 3,500 3,552,500
Fonorola, Inc.,
Gtd Sr Sec Note (Canada) 08-15-02 (Y) ............... 12.500 BB- 4,000 4,470,000
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 (R) ............................... 9.625 B 1,500 1,545,000
Globalstar L.P./Globalstar Capital Corp.,
Sr Note 06-01-05 (R) ............................... 11.500 B 1,900 1,876,250
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 ............................... 13.250 B 5,000 5,750,000
Hermes Europe Railtel B.V.,
Sr Note (etherlands) 08-15-07 (Y) ................... 11.500 B 3,750 4,237,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications (continued)
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 (Y) ....................... 12.875% B- $3,000 $3,157,500
Intercel, Inc.,
Unit (Sr iscount ote & Warrant), Step
Coupon (12.00%, 02-01-01) 02-01-06 (A) .............. Zero B 4,100 3,239,000
Intermedia Communications Inc.,
Sr Disc Note, Ser B, Step Coupon
(11.25%, 07-01-02) 07-15-07 (A) ..................... Zero B 3,000 2,205,000
Sr Disc Note, Step Coupon (12.50%,
05-15-01) 05-15-06 (A) .............................. Zero B 3,000 2,452,500
International Wireless Communications, Inc.,
Sr Sec Disc Note 08-15-01 .......................... Zero B- 3,000 1,200,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A), (Y) .................. Zero Caa3 6,000 1,620,000
Sr Note (United Kingdom) 08-15-06 (Y)................ 13.500 Caa3 1,000 660,000
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 ......................... 13.000 B- 4,150 4,461,250
IXC Communications, Inc.,
Sr Sub Note 04-15-08 (R) ........................... 9.000 CCC+ 1,900 1,897,625
McCaw International Ltd.,
Sr Disc Note, Step Coupon (13.00%, 04-15-02)
04-15-07 (A) ........................................ Zero CCC+ 7,000 4,637,500
McLeodUSA, Inc.,
Sr Note 03-15-08 (R)................................ 8.375 B+ 1,350 1,350,000
Sr Note 07-15-07 .................................. 9.250 B+ 3,000 3,131,250
Metroet Communications Corp.,
Sr Discount Note, Step Coupon (10.75%,
11-01-02) (Canada) 11-01-07 (A), (Y) ................ Zero B 3,000 2,040,000
Sr Note (Canada) 08-15-07 (Y) ....................... 12.000 B 2,250 2,587,500
Microcell Telecommunications, Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%,
10-15-02) (Canada) 10-15-07 (A)# .................... Zero B- 2,500 1,098,309
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%, 02-15-99)
08-15-04 (A) ........................................ Zero CCC+ 11,000 10,642,500
NEXTLIK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%, 04-15-03)
04-15-08 (A), (R) ................................... Zero B3 4,000 2,450,000
Sr Note 10-01-07 ................................... 9.625 B 1,500 1,530,000
TL, Inc.,
Sr Note 04-01-08 (R) ............................... 9.500 B- 1,680 2,741,340
Occidente Y Caribe Cellular SA,
Sr Disc Note and Warrant Ser B , Step Coupon
(14.00%, 03-15-01) (Colombia)
03-15-04 (A), (Y) ................................... Zero B 4,000 3,520,000
Orion Network Systems,
Sr Note 01-15-07 ................................... 11.250 B+ 5,000 5,650,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 ............................. 10.875 B+ 4,410 5,060,475
RC Corp.,
Sr Note 10-15-07 ................................... 10.000 B3 4,600 4,830,000
Satelites Mexicanos S.A. de C.V.,
Sr Note (Mexico) 11-01-04 (R), (Y) .................. 10.125 B- 5,000 4,987,500
Sprint Spectrum L.P.,
Sr Note 08-15-06 ................................... 11.000 B+ 3,750 4,321,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications (continued)
Teleport Communications Group, Inc.,
Sr Disc Note, Step Coupon (11.125%, 07-01-01)
07-01-07 (A) ........................................ Zero% B+ $4,000 $3,485,000
Teletrac, Inc.,
Sr Note Ser B 08-01-07 .............................. 14.000 B- 2,000 2,000,000
Teligent, Inc.,
Sr Note 12-01-07 .................................... 11.500 CCC 5,000 5,087,500
Viatel, Inc.,
Unit (Sr Note & Preferred Stock) 04-15-08 (R)........ 11.250 Caa1 1,500 1,560,000
Videotron Holdings Plc,
Sr Disc Note, Step Coupon (11.125%, 07-01-99)
(United Kingdom) 07-01-04 (A), (Y) .................. Zero BBB+ 4,000 3,909,120
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon (14.00%, 10-15-00)
10-15-05 (A) ........................................ Zero Caa1 2,600 2,106,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 .............................. 12.500 B3 1,400 1,568,000
-----------
181,649,001
-----------
Transport (0.66%)
Enterprises Shipholding Corp.,
Sr Note (Greece) 05-01-08 (R), (Y) .................. 8.875 BB 3,400 3,383,000
Pacific & Atlantic Holding Inc.,
1st Mtg Note (Greece) 05-30-08 (R), (Y) ............. 11.500 B 3,000 2,977,500
-----------
6,360,500
-----------
Utilities (1.54%)
Calpine Corp.,
Sr Note 02-01-04 ................................... 9.250 BB- 2,000 2,055,000
Midland Funding Corp. II,
Deb Ser A 07-23-05 ................................. 11.750 B 4,000 4,800,400
Deb Ser B 07-23-06 ................................. 13.250 B 4,000 5,152,040
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R), (Y) .............. 9.625 BB 2,900 2,827,500
-----------
14,834,940
-----------
TOTAL BONDS
(Cost $817,906,369) (87.66%) 844,544,766
------- -----------
NUMBER OF
SHARES MARKET
OR WARRANTS VALUE
----------- ------
COMMO A PREFERRE STOCKS A WARRATS
Advanced Radio Telecom Corp., Warrant** ..................... 60,000 780,000
Allegiance Telecom, Inc., Warrant** ......................... 3,500 -
American Radio Systems Corp., 11.375%, Ser B,
Preferred Stock ............................................. 47,376 5,590,368
American Telecasting, Inc., Warrant** ....................... 4,000 400
AVI Holdings, Inc., Warrant (R)** .......................... 1,500 9,000
California Federal Bank, Ser B, 10.625%,
Preferred Stock ............................................. 6,667 724,203
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
OR WARRANTS VALUE
---------- ------
<S> <C> <C>
COMMO A PREFERRE STOCKS A WARRATS (continued)
California Federal Bank, 11.50%, Preferred Stock............. 5,000 $552,500
Capstar Broadcasting Partners, Inc., 12.00%,
Preferred Stock ............................................. 14,266 1,478,314
Chancellor Media Corp., 7.00%, Convertible,
Preferred Stock ............................................. 20,000 2,637,500
COLT Telecom Plc, Warrant (United Kingdom) (R)** ............ 5,000 925,000
Comunicacion Celular S.A. Warrant (Colombia) (Y)** .......... 50,000 350,000
Core Cap, Inc., Common Stock (r)** .......................... 45,000 900,000
Core Cap, Inc. Ser A/I, 10.00%, Preferred Stock (r).......... 45,000 1,125,000
Credit Lyonnais Capital S.C.A., American epositary Receipt (AR),
9.50% Ser TC Preferred Stock (France) (R), (Y)............... 100,000 2,525,000
ecorative Home Accents, Inc., Common Stock** ................ 1,000 10
Earthwatch, Inc., 12.00%, Ser C, Conv Preferred
Stock (R) ................................................. 200,000 1,400,000
EchoStar Communications Corp., 12.125%, Ser B,
Preferred Stock ............................................. 1,061 1,185,668
Finlay Enterprises Inc., Common Stock** ..................... 4,000 102,500
Granite Broadcasting Corp., 12.75%, Preferred Stock.......... 45,263 5,295,720
Hyperion Telecommunications, Inc., 12.875%, Ser B,
Preferred Stock ............................................. 3,097 3,483,632
ICF Kaiser International Inc., Warrant (r)** ................ 12,000 3,000
ICG Holdings, Inc., 14.00%, Preferred Stock ................. 2,297 2,755,998
Intermedia Communications, Inc., 13.50%,
Ser B, Preferred Stock ...................................... 1,727 2,081,512
Intermedia Communications, Inc., Common Stock** ............. 15,000 1,111,875
International Wireless Inc., Warrant** ...................... 3,000 30
Ionica Plc, Warrant (United Kingdom) (R) #** ................ 8,500 552,500
IRT Property Co., Real Estate Investment Trust (REIT)........ 75,000 853,125
Kelley Oil & Gas Corp., $2.625, Preferred Stock ............. 40,000 1,020,000
KLM Royal utch Air Lines .V., Common Stock (etherlands)...... 25,000 973,437
Lasmo Plc, 10.00%, Ser A, American epositary Shares
(AS), Preferred Stock (United Kingdom) (Y) .................. 50,000 1,331,250
Loral Space & Communications Ltd., Warrant** ................ 5,000 50,000
Maxus Energy Corp., $2.50, Preferred Stock .................. 40,000 1,025,000
McCaw International Ltd., Warrant** ......................... 7,000 26,250
Metroet Communications Corp., Warrant
(Canada) (R)** .............................................. 2,250 108,000
extel Communications, Inc., 13.00%, Ser,
Preferred Stock ............................................. 2,195 2,458,400
Nextel Communications, Inc., 11.125%, Ser E,
Preferred Stock (R) ........................................ 1,716 1,819,433
Nextel Communications, Inc. (Class A),
Common Stock** .............................................. 12,394 292,034
Nextlink Communications, Inc., Warrant (R)** ................ 30,000 -
Nextlink Communications, Inc., 14.00%, Preferred Stock....... 100,500 5,979,750
Nrthwest Airlines Corp. (Class A), Common Stock** ........... 150,000 6,759,375
NTL, Inc., 13.00%, Ser B, Preferred Stock ................... 4,406 5,220,519
PG&E Corp., Common Stock .................................... 25,622 807,093
Powertel, Inc., Warrant** ................................... 2,880 27,360
PRIMEIA, Inc., 8.625%, Preferred Stock (R) .................. 25,000 2,475,000
Qualcomm Financial Trust, 5.75%, Preferred Stock ............ 60,000 2,910,000
Quantas Airways Ltd., AS, Common Stock (Australia)
(R), (Y) .................................................... 13,800 213,497
RC Corp., Common Stock** .................................... 40,000 860,000
Renaissance Cosmetics, Warrant** ............................ 4,000 4,000
Rite Aid Corp., Common Stock ................................ 14,820 530,741
Rural Cellular Corp., 11.375%, Preferred Stock (R)........... 1,750 1,758,750
SFX Broadcasting, Inc., 6.50%, Ser , Conv Preferred
Stock (R) ................................................... 25,000 2,093,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
OR WARRANTS VALUE
---------- ------
<S> <C> <C>
COMMON A PREFERRED STOCKS AND WARRANTS (continued)
SFX Broadcasting, Inc., 12.625%, Ser E,
Preferred Stock ............................................. 9,568 1,129,024
SFX Entertainment, Inc. (Class A), Common Stock** ........... 27,467 $1,215,415
Station Casinos, Inc., 7.00%, Conv
Preferred Stock ............................................. 5,000 256,250
Teletrac, Inc., Warrant** ................................... 2,000 -
Time Warner, Inc., 10.25%, Ser M,
Preferred Stock ............................................ 3,576 4,058,760
TLC Beatrice International Holdings,
(Class A), Common Stock (r)** ............................. 20,000 1,040,000
Valero Energy Corp., Common Stock ........................... 46,250 1,508,906
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $69,034,676) (8.76%) 84,374,849
-------- -----------
PAR VALUE
INTEREST (000s
RATE OMITTED)
---- --------
SHORT-TERM IVESTMENTS
Joint Repurchase Agreement (1.55%)
Investment in a joint repurchase agreement
transaction with Toronto ominion, dated 05-29-98,
due 06-01-98 (secured by U.S. Treasury Notes, 5.125%
thru 9.25%, due 08-15-98 thru 11-15-05 and U.S.
Treasury Bonds, 6.00% thru 12.00%, due 08-15-13
thru 08-15-27)- Note A .............................. 5.570% $14,893 14,893,000
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% .................................. 206
------------
TOTAL SHORT-TERM INVESTMETS (1.55%) 14,893,206
-------- ------------
TOTAL INVESTMETS (97.97%) 943,812,821
-------- ------------
OTHER ASSETS A LIABILITIES, NET (2.03%) 19,591,094
-------- ------------
TOTAL NET ASSETS (100.00%)$963,403,915
======== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
FINANCIAL STATEMENTS
John Hanock Funds - Strategic Income Fund
NOTES TO THE SCHEULE OF IVESTMETS
* Credit ratings are unaudited and rated by Moody's Investors Service or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
** Non-income producing security.
***Represents rate in effect on May 31, 1998.
# Par value of foreign bonds is expressed in local currency, as shown
parenthetically in security description.
+ These securities having an aggregate value of $3,759,375 or 0.39% of the
FundOs net assets, have been purchased on a when-issued basis. The purchase
price and the interest rate of such securities are fixed at trade date, although
the Fund does not earn any interest on such securities until settlement date.
The Fund has instructed its Custodian Bank to segregate assets with a current
value at least equal to the amount of its when-issued commitments. Accordingly,
the market value of $4,809,356 of U.S. Treasury Bond, 8.125%, due 08-15-19 has
been segregated to cover the when-issued commitments.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(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 $169,913,932 or 17.64% of the Fund's net assets as of May
31, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of foreign issuer; however, security is U.S. dollar
denominated.
(r) Direct placement securities are restricted to resale. They have been valued
at fair value by the Trustees after considerations of restrictions as to resale,
financial condition and prospects of the issuer, general market conditions and
pertinent information in accordance with the Fund's By-Laws and the Investment
Company Act of 1940, as amended. The Fund has limited rights to registration
under the Securities Act of 1933 with respect to these restricted securities.
Additional information on each restricted security is as follows:
<TABLE>
<CAPTION>
MARKET
VALUE AS A
PERCENTAGE MARKET
ACQUISITION ACQUISITION OF FUND'S VALUE AS OF
DATE COST NET ASSETS MAY 31, 1998
---- ---- ---------- ------------
<S> <C> <C> <C> <C>
Core Cap, Inc., Common Stock 10-31-97 $900,000 0.09% $900,000
Core Cap, Inc., Ser A/1, 10.00%,
Preferred Stock 10-31-97 1,125,000 0.12 1,125,000
ICF Kaiser International Inc., Warrant 01-04-94 15,000 0.00 3,000
TLC Beatrice International Holdings
(Class A), Common Stock 11-25-87 1,006,000 0.11 1,040,000
</TABLE>
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
26
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
Portfolio Concentration
May 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Strategic Income Fund invests primarily in securities issued in the United
States of America. The performance of this Fund is closely tied to the economic
and financial conditions within the countries in which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the schedule of investments. In addition, the
concentration of investments can be aggregated by various countries. The table
below shows the percentages of the Fund's investments at May 31, 1998 assigned
to country categories.
MARKET VALUE
AS A PERCETAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
Argentina ................................ 1.89%
Australia ................................ 4.51
Bahamas ................................ 0.21
Bermuda ................................ 0.37
Canada ................................ 3.56
Colombia ................................ 0.80
France ................................ 0.26
Germany ................................ 1.41
Greece ................................ 0.66
Luxembourg ................................ 0.28
Mexico ................................ 1.95
etherlands ................................ 0.54
South Africa .............................. 1.61
United Kingdom ............................ 8.16
United States ............................ 71.76
-------
TOTAL IVESTMETS 97.97%
=======
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
MARKET VALUE
AS A PERCETAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- -------------------- ----------
AAA ................................ 31.01%
BBB ................................ 1.79
BB ................................ 7.78
B ................................ 41.23
CCC ................................ 5.84
0.01
-------
TOTAL BONDS 87.66%
=======
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
NOTES TO FINANCIALS STATEMENTS
John Hancock Funds - Strategic Income Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series of portfolios: John Hancock Strategic Income Fund (the "Fund") and
John Hancock Sovereign U.S. Government Income Fund. The other series of the
Trust is reported in separate financial statements. The investment objective of
the Fund is a high level of current income.
The Trustees have 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 May 1, 1998. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS
Securities in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services or at fair value as
determined in good faith in accordance with procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized cost
which approximates market value. All portfolio transactions initially expressed
in terms of foreign currencies have been translated into U.S. dollars as
described in "Foreign Currency Translation" below. The Fund may invest in
indexed securities whose value is linked either directly or inversely to changes
in foreign currencies, interest rates, commodities, indices or other reference
instruments. Indexed securities may be more volatile than the reference
instrument itself, but any loss is limited to the amount of the original
investment.
JOINT REPURCHASE AGREEMENT
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with other registered investment companies having a management
contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned
subsidiary of The Berkeley Financial Group, Inc., may participate in a joint
repurchase agreement transaction. Aggregate cash balances are 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 receives
delivery of the underlying securities for the joint account on the Fund's
behalf. The Adviser is responsible for ensuring that the agreement is fully
collateralized at all times.
INVESTMENT TRANSACTIONS
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are determined
on the identified cost basis. Capital gains realized on some foreign securities
are subject to foreign taxes and are accrued, as applicable.
FEDERAL INCOME TAXES
The Fund's policy is to comply with the requirements of the Internal Revenue
Code which are applicable to regulated investment companies. It will not be
subject to federal income tax on taxable earnings which are distributed to
shareholders. For federal income tax purposes, net currency exchange gains and
losses from sales of foreign debt securities may be treated as ordinary income
even though such items are capital gains and losses for accounting purposes. The
Fund has $20,120,825 of capital loss carryforwards available, to the extent
provided by regulations, to offset future net realized capital gains. To the
extent that such carryforwards are used by the Fund, no capital gains
distributions will be made. The carryforwards expire as follows: May 31, 2003 -
$19,853,817 and May 31, 2004 - $267,008. Additionally, net capital losses of
$541,663 attributable to security transactions incurred after October 31, 1997
are treated as arising on the first day (June 1, 1998) of the Fund's next
taxable year.
DIVIDENDS, INTEREST AND DISTRIBUTIONS
Dividend income on investment securities is recorded on the
ex-dividend date or, in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Interest income on
investment securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable. The Fund
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
records all distributions to shareholders from net investment income and
realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
CLASS ALLOCATIONS
Income, common expenses and realized and unrealized gains (losses) are
calculated at the Fund level and allocated daily to each class of shares based
on the appropriate net assets of the respective classes. Distribution and
service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
EXPENSES
The majority of the expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific fund
are allocated in such a manner as deemed equitable, taking into consideration,
among other things, the nature and type of expense and the relative sizes of the
funds.
DISCOUNT ON SECURITIES
The Fund accretes discount from par value on securities from either the date of
issue or the date of purchase over the life of the security, as required by the
Internal Revenue Code.
USE OF ESTIMATES
The preparation of these financial statements in accordance with generally
accepted accounting principles incorporates estimates made by management in
determining the reported amounts of assets, liabilities, revenues and expenses
of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS
The Fund is permitted to have bank borrowings for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. These agreements enable the Fund
to participate with other funds managed by the Adviser in unsecured lines of
credit with banks which permit borrowings up to $800 million, collectively.
Interest is charged to each fund, based on its borrowing, at a rate equal to
0.50% over the Fed Funds Rate. In addition, a commitment fee, at rates ranging
from 0.070% to 0.075% per annum based on the average daily unused portion of the
line of credit, is allocated among the participating funds. The Fund had no
borrowing activity for the year ended May 31, 1998.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities initially expressed in terms of foreign currencies
are translated into U.S. dollars based on London currency exchange quotations as
of 5:00 p.m., London time, on the date of any determination of the net asset
value of the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates prevailing
at the dates of the transactions. The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. Reported net realized foreign exchange
gains or losses arise from sales of foreign currency, currency gains or losses
realized between the trade and settlement dates on securities transactions and
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of
the amounts actually received or paid. Net unrealized foreign exchange gains or
losses arise from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from changes in the
exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts as a hedge
against the effect of fluctuations in currency exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date at a set price. The aggregate principal amounts of the
contracts are marked to market daily at the applicable foreign currency exchange
rates. Any resulting unrealized gains and losses are included in the
determination of the Fund's daily net assets. The Fund records realized gains
and losses at the time the forward foreign currency contract is closed out or
offset by a matching contract. Risks may arise upon entering these contracts
from potential inability of counterparties to meet the
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
terms of the contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. The Fund
may also purchase and sell forward contracts to facilitate the settlement of
foreign currency denominated portfolio transactions, under which it intends to
take delivery of the foreign currency. Such contracts normally involve no market
risk if they are offset by the currency amount of the underlying transaction.
Open forward foreign currency exchange contracts at May 31, 1998 were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION/
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ----- --------------
BUYS
Australian Dollar 6,118,000 JUNE 98 ($277,353)
Deutsche Mark 7,800,000 JUNE 98 147,016
----------
($130,337)
==========
SELLS
Australian Dollar 6,118,000 JUNE 98 $242,083
Australian Dollar 10,701,000 JULY 98 340,848
Australian Dollar 46,838,000 AUG 98 895,849
British Pound 11,785,000 JUNE 98 377,128
British Pound 13,562,000 JULY 98 373,867
British Pound 6,819,000 AUG 98 178,063
Deutsche Mark 7,800,000 JUNE 98 (68,775)
European Currency Unit 3,057,000 JULY 98 (62,430)
-----------
$2,276,633
===========
FINANCIAL FUTURES CONTRACTS
The Fund may buy and sell financial futures contracts for speculative purposes
and/or to hedge against the effects of fluctuations in interest rates, currency
exchange rates and other market conditions. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. At the time the Fund enters into a financial futures contract, it
will be required to deposit with its custodian a specified amount of cash or
U.S. government securities, known as "initial margin," equal to a certain
percentage of the value of the financial futures contract being traded. Each
day, the futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange on which it trades. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
Daily variation margin adjustments, arising from this "mark to market," will be
recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the Fund's
gains and/or losses can be affected as a result of futures contracts.
At May 31, 1998, open positions in financial futures contracts were as follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
SEPT 98 200 U.S. TREASURY BONDS LONG $4,688
=======
At May 31, 1998, the Fund had deposited in a segregated account, $400,000, par
value of U.S. Treasury Bond, 9.25%, 02-15-16 to cover margin requirements on
open financial futures contracts.
OPTIONS
Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked to market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the stock market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's terms
("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk may
involve amounts in excess of those reflected in the Fund's period-end Statement
of Assets and Liabilities. There were no written option transactions for the
year ended May 31, 1998.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.60% of the first $100,000,000 of the Fund's
average daily net asset value, (b) 0.45% of the next $150,000,000, (c) 0.40% of
the next $250,000,000, (d) 0.35% of the next $150,000,000, and (e) 0.30% of the
Fund's average daily net asset value in excess of $650,000,000.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended May 31,
1998, net sales charges received with regard to sales of Class A shares amounted
to $2,351,277. Out of this amount, $279,714 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $1,177,631 was
paid as sales commissions to unrelated broker-dealers and $893,932 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be subject
to a contingent deferred sales charge ("CDSC")at declining rates beginning at
5.00% 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 are
paid to JH Funds and are used in whole or in part to defray its expenses related
to providing distribution related services to the Fund in connection with the
sale of Class B shares. For the year ended May 31, 1998, contingent deferred
sales charges paid to JH Funds amounted to $938,449.
Class C shares which are redeemed within one year of purchase will be 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 are paid to JH Funds and are used in whole or in part to
defray its expenses related to providing distribution related services to the
Fund in connection with the sale of Class C shares. For the year ended May 31,
1998, there were no contingent deferred sales charges paid to JH Funds.
In addition, to reimburse JH Funds for the services it provides as the
distributor of shares of the Fund, the Fund has 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 will make
31
<PAGE>
NOTES TO FINANCIALS STATEMENTS
John Hancock Funds - Strategic Income Fund
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 and
Class C average daily net assets to reimburse JH Funds for its distribution and
service costs. Up to a maximum of 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays a
transfer agent fee based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C. Hodsdon are
trustees and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund will make investments into other John Hancock funds,
as applicable, to cover its liability for the deferred compensation. Investments
to cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $3,524.
NOTE C-
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended May 31, 1998, aggregated $771,661,529 and $649,411,255, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $331,703,148 and $271,211,516, respectively, during the year
ended May 31, 1998.
The cost of investments owned at May 31, 1998 (including the joint repurchase
agreement) for federal income tax purposes was $902,627,612. Gross unrealized
appreciation and depreciation of investments aggregated $52,659,234 and
$11,474,231 respectively, resulting in net unrealized appreciation of
$41,185,003.
NOTE -D
RECLASSIFICATIONS OF CAPITAL ACCOUNTS
During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
an increase in accumulated net realized loss on investments of $3,615,892 and a
decrease in undistributed net investment income of $3,614,316 and a decrease in
capital paid-in of $1,666. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of May 31,
1998. Additional adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of the
Fund, are primarily attributable to the treatment of foreign currency gains and
losses in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles.
32
<PAGE>
John Hancock Funds - Strategic Income Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Strategic Income Fund
and the Trustees of John Hancock Strategic Series
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments (except for S&P ratings), and the related statements
of operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of John Hancock
Strategic Income Fund (the "Fund") (a portfolio of John Hancock Strategic
Series) at May 31, 1998, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and the significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at May 31, 1998 by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 9, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during the fiscal year ended May 31,
1998.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the tax character of all distributions for
calendar year 1998.
With respect to the Fund's ordinary taxable income for the fiscal year ended May
31, 1998, 7.26% of the distributions qualify for the dividends received
deduction available to corporations.
33
<PAGE>
NOTES
John Hancock Funds - Strategic Income Fund
35
<PAGE>
NOTES
John Hancock Funds - Strategic Income Fund
35
<PAGE>
---------------
[LOGO] JOHN HANCOCK FUNDS BULK RATE
A Global Investment Management Firm U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
INTERNET: www.jhancock.com/funds Permit NO. 75
---------------
This report is for the information of shareholders of the John Hancock Strategic
Income Fund. It may be used as sales literature when preceded or accompanied
by the prospectus, which details charges, investment objectives and operating
policies.
9100A 5/98
7/98
[LOGO] Printed on Recycled Paper
<PAGE>
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK WORLD BOND FUND
SPECIAL MEETING OF SHAREHOLDERS - FEBRUARY 10, 1999
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Susan S. Newton and James J. Stokowski, with full power of
substitution in each, to vote all the shares of beneficial interest of John
Hancock World Bond Fund ("World Bond Fund") which the undersigned is (are)
entitled to vote at the Special Meeting of Shareholders (the "Meeting") of World
Bond Fund to be held at 101 Huntington Avenue, Boston, Massachusetts, on
February 10, 1999 at 9:00 a.m., Boston time, and at any adjournment(s) of the
Meeting. All powers may be exercised by a majority of all proxy holders or
substitutes voting or acting, or, if only one votes and acts, then by that one.
Receipt of the Proxy Statement dated December 17, 1998 is hereby acknowledged.
If not revoked, this proxy shall be voted for the proposal.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Date ___________________,
NOTE: Signature(s) should agree with the
the name(s) printed herein. When signing
as attorney, executor, administrator,
trustee or guardian, please give your
full name as such. If a corporation,
please sign in full corporate name by
president or other authorized officer. If
a partnership, please sign in partnership
name by authorized person.
---------------------------------
---------------------------------
Signature(s)
<PAGE>
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO SPECIFICATION IS
MADE BELOW. AS TO ANY OTHER MATTER, THE PROXY OR PROXIES SHALL VOTE IN
ACCORDANCE WITH THEIR BEST JUDGEMENT.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW.
(1) To approve an Agreement and Plan of Reorganization between World
Bond Fund and John Hancock Strategic Income Fund ("Strategic Income
Fund"). Under this Agreement, World Bond Fund would transfer all of its
assets to Strategic Income Fund in exchange for shares of Strategic
Income Fund. These shares will be distributed proportionately to you
and the other shareholders of World Bond Fund. Strategic Income Fund
will also assume World Bond Fund's liabilities.
FOR |_| AGAINST |_| ABSTAIN |_|
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE>
Part B
Statement of Additional Information
JOHN HANCOCK STRATEGIC INCOME FUND
(a series of John Hancock Strategic Series)
December 17, 1998
This Statement of Additional Information provides information and is not a
prospectus. It should be read in conjunction with the related proxy statement
and prospectus that is also dated December 14, 1998. This Statement of
Additional Information provides additional information about John Hancock
Strategic Income Fund and the Fund that it is acquiring, John Hancock World Bond
Fund. Please retain this Statement of Additional Information for future
reference. A copy of the proxy statement and prospectus can be obtained free of
charge by calling John Hancock Signature Services, Inc., at 1-800-225-5291.
Table Of Contents
Page
Introduction 3
Additional Information about Strategic Income Fund 3
General Information and History 3
Investment Objective and Policies 3
Management of Strategic Income Fund 3
Control Persons and Principal Holders of Shares 3
Investment Advisory and Other Services 3
Brokerage Allocation 3
Capital Stock and Other Securities 3
Purchase, Redemption and Pricing of Strategic Income Fund Shares 3
Tax Status 3
Underwriters 4
Calculation of Performance Data 4
Financial Statements 4
Additional Information about World Bond Fund 4
General Information and History 4
Investment Objective and Policies 4
Management of World Bond Fund 4
Investment Advisory and Other Services 4
Brokerage Allocation 4
Capital Stock and Other Securities 4
Purchase, Redemption and Pricing of World Bond Fund 4
Tax Status 4
Underwriters 5
Calculation of Performance Data 5
Financial Statements 5
<PAGE>
Exhibits
A - Statement of Additional Information, dated October 1, 1998, of John
Hancock Strategic Income Fund including audited financial statements as
of May 31, 1998.
B - Statement of Additional Information, dated June 1, 1998, of John
Hancock World Bond Fund including audited financial statements as of
October 31,1997.
C - Pro forma combined financial statements as of May 31, 1998, assuming
the reorganization of John Hancock World Bond Fund and John Hancock
Strategic Income occurred on that date.
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a proxy statement and prospectus dated December 17,
1998. The proxy statement and prospectus has been sent to the shareholders of
World Bond Fund in connection with the solicitation by the Trustees of World
Bond Fund of proxies to be voted at the special meeting of shareholders of World
Bond Fund to be held on February 10, 1999. This Statement of Additional
Information incorporates by reference the Statement of Additional Information of
Strategic Income Fund, dated October 1, 1998, and the Statement of Additional
Information of World Bond Fund, dated June 1, 1998. The Strategic Income Fund
SAI and the World Fund SAI are included with this Statement of Additional
Information.
Additional Information About Strategic Income Fund
General Information and History
For additional information about Strategic Income Fund generally and its
history, see "Organization of the Trust" in Strategic Income Fund SAI.
Investment Objective and Policies
For additional information about Strategic Income Fund's investment objective,
policies and restrictions, see "Investment Objective and Policies" and
"Investment Restrictions" in the Strategic Income Fund SAI.
Management of Strategic Income Fund
For additional information about the Strategic Income Fund's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in the
Strategic Income Fund SAI.
Control Persons and Principal Holders of Shares
For additional information about control persons of Strategic Income Fund and
principal holders of shares of Strategic Income Fund, see "Those Responsible for
Management" in the Strategic Income Fund SAI.
Investment Advisory and Other Services
For additional information about Strategic Income Fund's investment adviser,
custodian, transfer agent and independent accountants, see "Investment Advisory
and Other Services", "Distribution Contracts", "Transfer Agent Services",
"Custody of Portfolio" and "Independent Auditors" in the Strategic Income Fund
SAI.
Brokerage Allocation and Other Practices
For additional information about Strategic Income Fund's brokerage allocation
practices, see "Brokerage Allocation" in the Strategic Income Fund SAI.
Capital Stock and Other Securities
For additional information about the voting rights and other characteristics of
Strategic Income Fund's shares of beneficial interest, see "Description of the
Fund's Shares" in the Strategic Income Fund SAI.
Purchase, Redemption and Pricing of Strategic Income Fund Shares
For additional information about the determination of net asset value, see "Net
Asset Value" in the Strategic Income Fund SAI.
Tax Status
For additional information about the tax status of Strategic Income Fund, see
"Tax Status" in the Strategic Income Fund SAI.
<PAGE>
Underwriters
For additional information about Strategic Income Fund's principal underwriter
and the distribution contract between the principal underwriter and Strategic
Income Fund, see "Distribution Contracts" in the Strategic Income Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of Strategic Income
Fund, see "Calculation of Performance" in the Strategic Income Fund SAI.
Financial Statements
Audited financial statements of Strategic Income Fund at May 31, 1998 are
attached to the Strategic Income Fund SAI.
Pro forma combined financial statements as of May 31, 1998 are attached to
this Statement of Additional Information.
Additional Information About World Bond Fund
General Information and History
For additional information about World Bond Fund generally and its history, see
"Organization of the Fund" in the World Bond Fund SAI.
Investment Objective and Policies
For additional information about World Bond Fund's investment objective,
policies and restrictions, see "Investment Objective and Policies" and
"Investment Restrictions" in the World Bond Fund SAI.
Management of World Bond Fund
For additional information about the World Bond Fund's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in the
World Bond Fund SAI.
Investment Advisory and Other Services
For additional information about World Bond Fund's investment adviser,
custodian, transfer agent and independent accountants, see "Investment Advisory
and Other Services", "Distribution Contracts", "Transfer Agent Services",
"Custody of Portfolio" and "Independent Auditors" in the World Bond Fund SAI.
Brokerage Allocation and Other Practices
For additional information about World Bond Fund's brokerage allocation
practices, see "Brokerage Allocation" in the World Bond Fund SAI.
Capital Stock and Other Securities
For additional information about the voting rights and other characteristics of
World Bond Fund's shares of beneficial interest, see "Description of the Fund's
Shares" in the World Bond Fund SAI.
Purchase, Redemption and Pricing of World Bond Fund Shares
For additional information about the net asset value of World Bond Fund, see
"Net Asset Value" in the World Bond Fund SAI.
Tax Status
For additional information about the tax status of World Bond Fund, see "Tax
Status" in the World Bond Fund SAI.
<PAGE>
Underwriters
For additional information about World Bond Fund's principal underwriter and the
distribution contract between the principal underwriter and World Bond Fund, see
"Distribution Contracts" in the World Bond Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of World Bond Fund,
see "Calculation of Performance" in the World Bond Fund SAI.
Financial Statements
Audited financial statements of World Bond Fund at October 31, 1997 are attached
to the World Bond Fund SAI.
<PAGE>
JOHN HANCOCK STRATEGIC INCOME FUND
Class A, Class B and Class C Shares
Statement of Additional Information
October 1, 1998
This Statement of Additional Information provides information about John Hancock
Strategic Income Fund (the "Fund") in addition to the information that is
contained in the combined Income Funds' Prospectus dated October 1, 1998 (the
"Prospectus"). The Fund is a diversified series portfolio of John Hancock
Strategic Series (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
Table of Contents
Page
Organization of the Fund 2
Investment Objective and Policies 2
Investment Restrictions 17
Those Responsible for Management 19
Investment Advisory and Other Services 28
Distribution Contracts 30
Sales Compensation 32
Net Asset Value 33
Initial Sales Charge on Class A Shares 34
Deferred Sales Charge on Class B and Class C Shares 36
Special Redemptions 40
Additional Services and Programs 40
Description of the Fund's Shares 42
Tax Status 43
Calculation of Performance 47
Brokerage Allocation 49
Transfer Agent Services 51
Custody of Portfolio 51
Independent Auditors 51
Appendix A-Description of Investment Risk A-1
Appendix B-Description of Bond Ratings B-1
Financial Statements F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. The Fund was organized in April 1986.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix B contains further
information describing investment risks. There is no assurance that the Fund
will achieve its investment objective. The investment objective is fundamential
and may only be change with shareholder approval.
The investment objective of the Fund is a high level of current income. The Fund
will seek to achieve its investment objective by investing primarily in: (i)
foreign government and corporate debt securities, (ii) U.S. Government
securities and (iii) lower-rated high yield high risk debt securities.
The Fund may invest in all types of debt securities. The debt securities in
which the Fund may invest include bonds, debentures, notes (including variable
and floating rate instruments), preferred and preference stock, zero coupon
bonds, payment-in-kind securities, increasing rate note securities,
participation interest, multiple class pass through securities, collateralized
mortgage obligations, stripped debt securities, other mortgage-backed
securities, asset-backed securities and other derivative debt securities. Under
normal circumstances, the Fund's assets will be invested in each of the
foregoing three sectors. However, from time to time the Fund may invest up to
100% of its total assets in any one sector. The Fund may also invest up to 10%
of net assets in U.S. or foreign equities.
Lower Rated Securities. The higher yields and high income sought by the Fund are
generally obtainable from high yield risk securities in the lower rating
categories of the established rating services. These securities are rated below
Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB by Standard &
Poor's Ratings Group ("Standard & Poor's"). The Fund may invest in securities
rated as low as Ca by Moody's or CC by Standard & Poor's, which may indicate
that the obligations are speculative to a high degree and in default. Lower
rated securities are generally referred to as junk bonds. See Appendix B
attached to this Statement of Additional Information for a description of the
characteristics of the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the minimum ratings noted above. The credit ratings of Moody's
and Standard & Poor's (the "Rating Agencies"), such as those ratings described
in this Statement of Additional Information, may not be changed by the Rating
Agencies in a timely fashion to reflect subsequent economic events. The credit
ratings of securities do not evaluate market risk. The Fund may also invest in
unrated securities which, in the opinion of the Adviser, offer comparable yields
and risks to the rated securities in which the Fund may invest.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to
2
<PAGE>
pay principal and interest and general economic trends. Appendix B contains
further information concerning the rating of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund.
Debt securities that are rated in the lower rating categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the ability of the issuer to make
payments of interest and principal. The market price and liquidity of lower
rated fixed income securities generally respond to short-term corporate and
market developments to a greater extent than the price and liquidity of higher
rated securities, because these developments are perceived to have a more direct
relationship to the ability of an issuer of lower rated securities to meet its
ongoing debt obligations. Although the Adviser seeks to minimize these risks
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions, there can be no
assurance that the Adviser will be successful in limiting the Fund's exposure to
the risks associated with lower rated securities. Because the Fund invests in
securities in the lower rated categories, the achievement of the Fund's goals is
more dependent on the Adviser's ability than would be the case if the Fund were
investing in securities in the higher rated categories.
The Fund's investments in debt securities may include increasing rate note
securities, zero coupon bonds and payment-in-kind bonds. Zero coupon bonds have
a determined interest rate, but payment of the interest is deferred until
maturity of the bonds. Payment- in-kind securities pay interest in either cash
or additional securities, at the issuer's option, for a specified period. The
market prices of zero coupon and payment-in-kind bonds are affected to a greater
extent by interest rate changes, and thereby tend to be more volatile than
securities which pay interest periodically and in cash. Increasing rate note
securities are typically refinanced by the issuers within a short period of
time.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the Fund
intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates during periods of high interest rates.
Reduced volume and liquidity in the high yield high risk bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the Fund's investments in high yield high risk securities and to value
accurately these assets. The reduced availability of reliable, objective data
may increase the Fund's reliance on management's judgment in valuing high yield
high risk bonds. In addition, the Fund's investments in high yield high risk
securities may be susceptible to adverse publicity and investor perceptions,
whether or not justified by fundamental factors. The Fund's investments, and
consequently its net asset value, will be subject to the market fluctuations and
risk inherent in all securities.
Foreign Securities. The Fund may invest in debt obligations (which may be
denominated in the U.S. dollar or in non-U.S. currencies) issued or guaranteed
by foreign corporations, certain supranational entities (such as the World
Bank), and foreign governments (including political subdivisions having taxing
authority) or their agencies or instrumentalities. The Fund may also
3
<PAGE>
invest in debt securities that are issued by U.S. corporations and denominated
in non-U.S. currencies. No more than 25% of the Fund's total assets, at the time
of purchase, will be invested in government securities of any one foreign
country.
The Fund may also invest in American Depository Receipts ("ADRs"). ADRs
(sponsored and unsponsored) are receipts typically issued by an American bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation, and are designed for trading in United States securities
markets. Issuers of unsponsored ADRs are not contractually obligated to disclose
material information in the United States, and, therefore, there may not be a
correlation between that information and the market value of an unsponsored ADR.
The percentage of the Fund's assets that will be allocated to foreign securities
will vary depending on the relative yields of foreign and U.S. securities, the
economies of foreign countries, the condition of such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currency to the U.S. dollar. These factors are judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status and economic policies)
as well as technical and political data. The Fund may invest in any country
where the Adviser believes there is a potential to achieve the Fund's investment
objective. Investments in securities of issuers in non-industrialized countries
generally involve more risk and may be considered highly speculative.
The value of portfolio securities denominated in foreign currencies may increase
or decrease in response to changes in currency exchange rates. The Fund will
incur costs in connection with converting between currencies.
Foreign Currency Transactions. The Fund may enter into forward foreign currency
contracts involving currencies of the different countries in which it will
invest as a hedge against possible variations in the foreign exchange rate
between these currencies as well as to enhance return or as a substitute for the
purchase or sale of currency. The foreign currency transactions of the Fund may
be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. Forward foreign
currency contracts are contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables for payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities denominated
in foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in such
foreign currencies. The Fund will not attempt to hedge all of its foreign
portfolio positions and will enter into such transactions only to the extent, if
any, deemed appropriate by the Adviser.
If the Fund enters into a forward contract requiring it to purchase foreign
currency, its custodian bank will segregate cash or liquid securities in a
separate account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. Those assets will
be valued at market daily and if the value of the assets in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated
4
<PAGE>
that the Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
There is no limitation on the value of the Fund's assets that may be committed
to forward contracts or on the term of a forward contract. In addition to the
risks described above, forward contracts are subject to the following additional
risks: (1) that a Fund's performance will be adversely affected by unexpected
changes in currency exchange rates; (2) that the counterparty to a forward
contract will fail to perform its contractual obligations; (3) that a Fund will
be unable to terminate or dispose of its position in a forward contract; and (4)
with respect to hedging transactions in forward contracts, that there will be
imperfect correlation between price changes in the forward contract and price
changes in the hedged portfolio assets.
The cost to the Fund of engaging in foreign currency transactions varies with
such factors as that currency involved, the length of the contract period and
the market conditions then prevailing. Since transactions in foreign currency
are usually conducted on a principal basis, no fees or commissions are involved.
Global Risks. Investments in foreign securities may involve certain risks not
present in domestic investments due to exchange controls, less publicly
available information, more volatile or less liquid securities markets, and the
possibility of expropriation, confiscatory taxation or political, economic or
social instability. There may be difficulty in enforcing legal rights outside
the United States. Some foreign companies are not subject to the same uniform
financial reporting requirements, accounting standards and governmental
supervision as domestic companies, and foreign exchange markets are regulated
differently from the U.S. stock market. Security trading practices abroad may
offer less protection to investors such as the Fund. In addition, foreign
securities may be denominated in the currency of the country in which the issuer
is located. Consequently, changes in the foreign exchange rate will affect the
value of the Fund's shares and dividends. Finally, you should be aware that the
expense ratios of international funds generally are higher than those of
domestic funds, because there are greater costs associated with maintaining
custody of foreign securities and the increased research necessary for
international investing results in a higher advisory fee.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominately based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in these countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
The Fund may acquire other restricted securities including securities for which
market quotations are not readily available. These securities may be sold only
in privately negotiated transactions
5
<PAGE>
or in public offerings with respect to which a registration statement is in
effect under the 1933 Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair market value as determined in good
faith by the Fund's Trustees.
Repurchase Agreements. In a repurchase agreement the Fund would buy a security
for a relatively short period (usually not more than 7 days) subject to the
obligation to sell it back to the issuer at a fixed time and price plus accrued
interest. The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with "primary dealers" in U.S. Government
securities. The Adviser will continuously monitor the creditworthiness of the
parties with whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. The Fund will not enter into reverse repurchase
agreements and other borrowings exceeding in the aggregate 33% of the market
value of its total assets. The Fund will enter into reverse repurchase
agreements only with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Board of Trustees.
Under procedures established by the Board of Trustees, the Adviser will monitor
the creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 act.
However, the Fund will not invest more than 15% of its net assets in illiquid
investments. If the Trustees determines, based upon a continuing review of the
trading markets for specific Section 4(2) paper or Rule 144A securities, that
they are liquid, they will not be subject to the 15% limit in illiquid
investments. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining and monitoring the liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's liquidity and availability of information. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund if qualified institutional buyers become for a time uninterested in
purchasing these restricted securities.
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Options on Securities, Securities Indices and Currency. The Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or on any
currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account with a value at least equal to the Fund's obligation under the option,
(ii) entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. The Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's
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portfolio securities or the currencies in which they are denominated. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities or currencies which it does
not own. The Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities or currency decreased below the exercise
price sufficiently to cover the premium and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of put options may be offset by countervailing
changes in the value of the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
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Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
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When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. The Fund
may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are quoted or denominated) that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase.
The Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities (or assets denominated in the related currency) in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
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To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Fund than if
it had not entered into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss. In addition, it is not possible to hedge fully or protect against
currency fluctuations affecting the value of securities denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when- issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets
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in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Borrowing. The Fund may borrow money in an amount that does not exceed 33% of
its total assets. Borrowing by the Fund involves leverage, which may exaggerate
any increase or decrease in the Fund's investment performance and in that
respect may be considered a speculative practice. The interest that the Fund
must pay on any borrowed money, additional fees to maintain a line of credit or
any minimum average balances required to be maintained are additional costs
which will reduce or eliminate any potential investment income and may offset
any capital gains. Unless the appreciation and income, if any, on the asset
acquired with borrowed funds exceed the cost of borrowing, the use of leverage
will diminish the investment performance of the Fund.
Short Sales. The Fund may engage in short sales in order to profit from an
anticipated decline in the value of a security. The Fund may also engage in
short sales to attempt to limit its exposure to a possible market decline in the
value of its portfolio securities through short sales of securities which the
Adviser believes possess volatility characteristics similar to those being
hedged. To effect such a transaction, the Fund must borrow the security sold
short to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. Until the security is replaced, the Fund is required to pay to the
lender any accrued interest or dividends and may be required to pay a premium.
The Fund may only make short sales "against the box," meaning that the Fund, by
virtue of its ownership of other securities, has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions.
The Fund will realize a gain if the security declines in price between the date
of the short sale and the date on which the Fund replaces the borrowed security.
On the other hand, the Fund will incur a loss as a result of the short sale if
the price of the security increases between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of any
premium or interest or dividends the Fund may be required to pay in connection
with a short sale. The successful use of short selling as a hedging device may
be adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
Under applicable guidelines of the staff of the SEC, if the Fund engages in
short sales, it must put in a segregated account (not with the broker) an amount
of cash or U.S. Government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
will equal the current market value of the securities sold short.
Short selling may produce higher than normal portfolio turnover which may result
in increased transaction costs to the Fund and may result in gains from the sale
of securities deemed to have been held for less than three months, which gains
must be less than 30% of the Fund's gross income for a taxable year in order for
the Fund to qualify as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code") for that year.
U.S. Governmental Securities. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and Government National Mortgage Association
mortgage-backed certificates ("Ginnie Maes"), are supported by the full faith
and credit of the United States. Certain other U.S. Government securities,
issued or guaranteed by Federal agencies or
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government sponsored enterprises, are not supported by the full faith and credit
of the United States, but may be supported by the right of the issuer to borrow
from the U.S. Treasury. These securities include obligations of
instrumentalities such as the Federal Home Loan Mortgage Corporation ("Freddie
Macs"), the Federal National Mortgage Association ("Fannie Maes") and the
Student Loan Marketing Association ("Sallie Maes"). No assurance can be given
that the U.S. Government will provide financial support to these Federal
agencies, authorities, instrumentalities and government sponsored enterprises in
the future.
Mortgage-Backed Securities. Ginnie Maes, Freddie Macs and Fannie Maes are
mortgage-backed securities which provide monthly payments that are, in effect, a
"pass- through" of the monthly interest and principal payments (including any
pre-payments) made by the individual borrowers on the pooled mortgage loans.
Collateralized Mortgage Obligations ("CMOs"), in which the Fund may also invest,
are securities issued by a U.S. Government instrumentality that are
collateralized by a portfolio of mortgages or mortgage-backed securities. During
periods of declining interest rates, principal and interest on mortgage-backed
securities may be prepaid at faster-than-expected rates. The proceeds of these
prepayments typically can only be invested in lower-yielding securities.
Therefore, mortgage-backed securities may be less effective at maintaining
yields during periods of declining interest rates than traditional debt
securities of similar maturity. U.S. Government agencies and instrumentalities
include, but are not limited to, Federal Farm Credit Banks, Federal Home Loan
Banks, the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association, and the Federal National Mortgage Association. Some obligations
issued by an agency or instrumentality may be supported by the full faith and
credit of the U.S. Treasury.
A real estate mortgage investment conduit, or REMIC, is a private entity formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property, and of issuing multiple classes of interests therein to investors
such as the Fund. The Fund may consider REMIC securities as possible investments
when the mortgage collateral is insured, guaranteed or otherwise backed by the
U.S. Government or one or more of its agencies or instrumentalities. The Fund
will not invest in "residual" interests in REMIC's because of certain tax
disadvantages for regulated investment companies that own such interests.
Risks of Mortgage-Backed Securities. Different types of mortgage-backed
securities are subject to different combinations of prepayment, extension,
interest rate and/or other market risks. Conventional mortgage pass-through
securities and sequential pay CMOs are subject to all of these risks, but are
typically not leveraged. PACs, TACs and other senior classes of sequential and
parallel pay CMOs involve less exposure to prepayment, extension and interest
rate risk than other mortgage-backed securities, provided that prepayment rates
remain within expected prepayment ranges or "collars."
The value of mortgage-backed securities may also change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage-backed securities market as a whole.
Non-government mortgage-backed securities may offer higher yields than those
issued by government entities, but also may be subject to greater price changes
than government issues.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's
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borrowing and other senior securities. For financial reporting and tax purposes,
the Fund treats mortgage dollar rolls as two separate transactions; one
involving the purchase of a security and a separate transaction involving a
sale. The Fund does not currently intend to enter into mortgage dollar roll
transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 15% limitation on investments
in illiquid securities.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
14
<PAGE>
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of interest-
bearing securities and are likely to respond to a grater degree to changes in
interest rates than interest-bearing securities having similar maturities and
credit quality. The Fund's investments in pay-in-kind, delayed and zero coupon
bonds may require the Fund to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Tax Status."
Brady Bonds. The Fund may invest in so-called "Brady Bonds" and other sovereign
debt securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities described as part of a restructuring plan created by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally, commercial bank
debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan facilitate the exchange of commercial bank debt for newly
issued (known as Brady Bonds). The World Bank and IMF provide funds pursuant to
loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements IMF debtor nations are required to implement
of certain domestic monetary and fiscal reforms. These reforms have included the
liberalization of trade and foreign investment, the privatization of state-owned
enterprises and the setting of targets for public spending and borrowing. These
policies and programs promote the debtor country's ability to service its
15
<PAGE>
external obligations and promote its economic growth and development. The Brady
Plan only sets forth general guiding principles for economic reform and debt
reduction, emphasizing that solutions must be negotiated on a case-by-case basis
between debtor nations and their creditors. The Adviser believes that economic
reforms undertaken by countries in connection with the issuance of Brady Bonds
make the debt of countries which have issued or have announced plans to issue
Brady Bonds an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January, 1, 1997, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
Time Deposits. The Securities and Exchange Commission ("SEC") considers time
deposits with periods of greater than seven days to be illiquid, subject to the
restriction that illiquid securities are limited to no more than 15% of the
Fund's net assets.
16
<PAGE>
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments or to take advantage of yield disparities between fixed income
securities in order to realize capital gains or improve income. Short-term
trading may have the effect of increasing portfolio turnover rate. A high rate
of portfolio turnover (100% or greater) involves correspondingly greater
brokerage expenses. The Fund's portfolio rate is set forth in the table under
the caption "Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval of the lesser of (1) the holders of
67% or more of the shares represented at a meeting if by more than 50% of the
Fund's outstanding shares are present in person or by proxy at that meeting or
(2) more than 50% of the Fund's outstanding shares.
The Fund observes the fundamental restrictions listed in item (1) through (9)
below. The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and
(7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
foreign currency exchange contracts, forward commitments and repurchase
agreements entered into in accordance with the Fund's investment policies,
and the pledge, mortgage or hypothecation of the Fund's assets within the
meaning of paragraph (3) below, are not deemed to be senior securities.
(2) Borrow money in amounts exceeding 33% of the Fund's total assets
(including the amount borrowed) taken at market value. Interest paid on
borrowing will reduce income available to shareholders.
(3) Pledge, mortgage or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 33 1/3% of the fund's total
assets taken at market value.
(4) Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate or any interest therein, except that the Fund
may invest in securities of corporate or governmental entities secured by
real estate or marketable interests therein or securities issued by
companies that invest in real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of publicly distributed debt
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or
not the purchase is made upon the original issuance of the securities.
17
<PAGE>
(7) Buy or sell commodity contracts, except futures contracts on securities,
securities indices and currency and options on such futures, forward
foreign currency exchange contracts, forward commitments, and repurchase
agreements entered into in accordance with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the
value of its investments in such industry would exceed 25% of its total
assets taken at market value at the time of each investment. This
limitation does not apply to investments in obligations of the U.S.
Government or any of its agencies or instrumentalities.
(9) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if
(i) more than 5% of the Fund's total assets taken at market value would be
invested in the securities of such issuer, except that up to 25% of the
Fund's total assets may be invested in securities issued or guaranteed by
any foreign government or its agencies or instrumentalities, or,
(ii) such purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Fund.
In connection with the lending of portfolio securities under item (6) above,
such loans must at all times be fully collateralized and the Fund's custodian
must take possession of the collateral either physically or in book entry form.
Securities used as collateral must be marked to market daily.
Nonfundamental Investment Restrictions. The following investment restrictions
are designated as nonfundamental and may be changed by the Trustees without
shareholder approval.
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the management
of the Adviser to save commissions or to average prices among them is not
deemed to result in a joint securities trading account.
(b) Purchase securities on margin (except that it may obtain such short-term
credits as may be necessary for the clearance of transactions in
securities and forward foreign currency exchange contracts and may make
margin payments in connection with transactions in futures contracts and
options on futures) or make short sales of securities unless by virtue of
its ownership of other securities, the Fund has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions.
(c) Purchase a security if, as a result, (i) more than 10% of the Fund's total
assets would be invested in the securities of other investment companies,
(ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the
Fund's total assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the investment
of cash collateral, received by the Fund in connection with lending the
Fund's portfolio securities, in the securities of open-end investment
companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject to
the above percentage limitations, the Fund may, in connection with the
John Hancock Group
18
<PAGE>
of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock
Group of Funds.
(d) Invest for the purpose of exercising control over or management of any
company.
(e) Invest more than 15% of its net assets in illiquid securities.
In addition, the Fund complies with the following nonfundamental limitation on
its investments:
Exercise any conversion, exchange or purchase rights associated with corporate
debt securities in the portfolio if, at the time, the value of all equity
interests would exceed 10% of the Fund's total assets taken at market value.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the values or the total costs of the Fund's
assets will not be considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of the Adviser, or officers and directors of the
Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
19
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Edward J. Boudreau, Jr. * Trustee, Chairman and Chairman, Director and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer,
Boston, MA 02199 (1, 2) the Adviser; Chairman,
October 1944 Director and Chief
Executive Officer, The
Berkeley Financial Group,
Inc. ("The Berkeley
Group"); Chairman and
Director, NM Capital
Management, Inc. ("NM
Capital"), John Hancock
Advisers International
Limited ("Advisers
International") and
Sovereign Asset Management
Corporation ("SAMCorp");
Chairman, Chief Executive
Officer and President,
John Hancock Funds, Inc.
("John Hancock Funds");
Chairman, First Signature
Bank and Trust Company;
Director, John Hancock
Insurance Agency, Inc.
("Insurance Agency,
Inc."), John Hancock
Advisers International
(Ireland) Limited
("International Ireland"),
John Hancock Capital
Corporation and New
England/Canada Business
Council; Member,
Investment Company
Institute Board of
Governors; Director, Asia
Strategic Growth Fund,
Inc.; Trustee, Museum of
Science; Director, John
Hancock Freedom Securities
Corporation (until
September 1996); Director,
John Hancock Signature
Services, Inc. ("Signature
Services") (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
20
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dennis S. Aronowitz Trustee Professor of Law,
1216 Falls Boulevard Emeritus, Boston
Fort Lauderdale, FL 33327 University School of Law
June 1931 (as of 1997); Trustee,
Brookline Savings Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline
160 Washington Street Savings Bank; Director,
Brookline, MA 02147 Federal Home Loan Bank
February 1935 of Boston (lending);
Director, Lumber
Insurance Companies
(fire and casualty
insurance); Trustee,
Northeastern University
(education); Director,
Depositors Insurance
Fund, Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior
20 Buttonwood Place Banker and Senior Credit
Saddle River, NJ 07458 Officer, Citibank, N.A.
January 1933 (retired September
1991); Executive Vice
President, Citadel Group
Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until
October 1993); Trustee,
the Hudson City Savings
Bank (since 1995).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
21
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Douglas M. Costle Trustee (1) Director, Chairman of
RR2 Box 480 the Board and
Woodstock, VT 05091 Distinguished Senior
July 1939 Fellow, Institute for
Sustainable Communities,
Montpelier, Vermont (since
1991); Dean Vermont Law
School (until 1991);
Director, Air and Water
Technologies Corporation
(environmental services
and equipment), Niagara
Mohawk Power Company
(electric services) and
Mitretek Systems
(governmental consulting
services).
Leland O. Erdahl Trustee Vice President, Chief
8046 Mackenzie Court Financial Officer and
Las Vegas, NV 89129 Director of Amax Gold,
December 1928 Inc.; Director, Santa Fe
Ingredients Company of
California, Inc. and
Santa Fe Ingredients
Company, Inc. (private
food processing
companies), Uranium
Resources Corporation;
Freeport-McMoRan Copper
& Gold Company, Inc.,
Hecla Mining Company,
Canyon Resources
Corporation and Original
Sixteen to One Mines,
Inc. (1984-1987 and
1991-1995) (management
consultant).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard A. Farrell Trustee President of Farrell,
Venture Capital Partners Healer & Co., (venture
160 Federal Street capital management firm)
23rd Floor (since 1980); Prior to
Boston, MA 02110 1980, headed the venture
November 1932 capital group at Bank of
Boston Corporation.
Gail D. Fosler Trustee Vice President and Chief
3054 So. Abingdon Street Economist, The
Arlington, VA 22206 Conference Board
December 1947 (non-profit economic and
business research);
Director, Unisys Corp.;
and H.B. Fuller Company.
William F. Glavin Trustee President Emeritus,
120 Paget Court - John's Babson College (as of
Island 1997); Vice Chairman,
Vero Beach, FL 32963 Xerox Corporation (until
March 1932 June 1989); Director,
Caldor Inc., Reebok,
Inc. (since 1994) and
Inco Ltd.
Anne C. Hodsdon * Trustee and President President, Chief
101 Huntington Avenue (1,2) Operating Officer and
Boston, MA 02199 Director, the Adviser;
April 1953 President, COO and
Director, The Berkeley
Group; Director, John
Hancock Funds, Advisers
International, Insurance
Agency, Inc. and
International Ireland;
President and Director,
SAMCorp. and NM Capital;
Executive Vice
President, the Adviser
(until December 1994);
Director, Signature
Services (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
23
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee President and Chief
Institute for Evaluating Executive Officer,
Health Risks Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since
Washington, DC 20006-1602 September 1989).
February 1939
Patti McGill Peterson Trustee Executive Director,
Council for International Council for
Exchange of Scholars International Exchange
3007 Tilden Street, N.W., of Scholars (since
Suite 5L January 1998), Vice
Washington, DC 20008-3009 President, Institute of
May 1943 International Education
(since January 1998);
Cornell Institute of
Public Affairs, Cornell
University (until December
1997); President Emeritus
of Wells College and St.
Lawrence University;
Director, Niagara Mohawk
Power Corporation
(electric utility) and
Security Mutual Life
(insurance).
John W. Pratt Trustee Professor of Business
2 Gray Gardens East Administration at
Cambridge, MA 02138 Harvard University
September 1931 Graduate School of
Business Administration
(since 1961).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
24
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John
John Hancock Place Hancock Life Company;
P.O. Box 111 Director, the Adviser,
Boston, MA 02117 Advisers International,
August 1937 John Hancock Funds, John
Hancock Distributors,
Inc., Insurance Agency,
Inc., John Hancock
Subsidiaries, Inc.,
SAMCorp. and NM Capital;
Director, The Berkeley
Group; Director, JH
Networking Insurance
Agency, Inc.; Director,
Signature Services
(until January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat
259C Commercial Bld. Marwick LLP (retired
Ft. Lauderdale, FL 33308 June 1990).
November 1932
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the
Boston, MA 02199 Adviser; Director, the
July 1938 Adviser, Advisers
International, John
Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank
Fund and NM Capital;
Director and Senior Vice
President, The Berkeley
Group; President, the
Adviser (until December
1994); Director, Signature
Services (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
25
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Senior Vice President,
101 Huntington Avenue Chief Financial Officer the Adviser, The
Boston, MA 02199 Berkeley Group, John
February 1935 Hancock Funds.
John A. Morin Vice President Vice President and
101 Huntington Avenue Secretary, the Adviser,
Boston, MA 02199 The Berkeley Group,
July 1950 Signature Services and
John Hancock Funds;
Secretary, NM Capital and
SAMCorp.; Clerk, Insurance
Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until
February 1996), and Vice
President of John Hancock
Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Vice President, the
101 Huntington Avenue Secretary Adviser; John Hancock
Boston, MA 02199 Funds, Signature
March 1950 Services and The
Berkeley Group, NM
Capital; Vice President,
John Hancock
Distributors, Inc.
(until April 1994).
James J. Stokowski Vice President and Vice President, the
101 Huntington Avenue Treasurer Adviser.
Boston, MA 02199
November 1946
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
26
<PAGE>
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Boudreau and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates and receive no compensation from the Fund for their services.
Total Compensation From
All Funds in John
Aggregate Compensation Hancock Fund Complex to
Independent Trustees From the Fund(1) Trustees(2)
- -------------------- ---------------- -----------
Dennis S. Aronowitz $ 3,821 $72,000
Richard P. Chapman, Jr.* 3,980 75,000
William J. Cosgrove* 3,821 72,000
Douglas M. Costle 3,980 75,000
Leland O. Erdahl 3,821 72,000
Richard A. Farrell 3,981 75,000
Gail D. Fosler 3,821 72,000
William F. Glavin* 3,821 72,000
John A. Moore* 3,821 72,000
Patti McGill Peterson 3,899 72,000
John W. Pratt 3,821 72,000
Edward J. Spellman 3,981 75,000
----- ------
Total $46,568 $876,000
(1) Compensation is for the fiscal year ended May 31, 1998.
(2) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1997.
As of that, date there were sixty-one funds in the John Hancock Fund
Complex, with each of these Independent Trustees serving on sixteen funds.
*As of May 31, 1998 the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for
Mr. Chapman was $69,148 and for Mr. Cosgrove was $167,829 and Mr. Glavin
was $193,514 and for Dr. Moore was $84,315 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
27
<PAGE>
As of September 1, 1998, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders beneficially owned 5% of or more of the
outstanding shares of the Funds listed below:
Percentage of Total
Name and Address of Class of Outstanding Shares of the
Shareholders Shares Class of the Fund
- ------------ ------ -----------------
MLPF&S For The Sole B 13.22%.
Benefit of Its Customers
Attn Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
Paine Webber for the Benefit C 5.50%
of George A. Gordon &
Margaret M. Gordon Co. TTEE
FBO
1354 Phillips Street
Vista, CA
MLPF&S For The Sole C 24.01%
Benefit of Its Customers
Attn Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,400,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of $100 billion,
the Life Company is one of the ten largest life insurance companies in the
United States, and carries high ratings from Standard & Poor's and A.M. Best.
Founded in 1862, the Life Company has been serving clients for over 130 years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser, which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies, expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses
28
<PAGE>
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts, maintaining a committed line of
credit and calculating the net asset value of shares; fees and expenses of
transfer agents and dividend disbursing agents; legal, accounting, financial,
management, tax and auditing fees and expenses of the Fund (including an
allocable portion of the cost of the Adviser's employees rendering such services
to the Fund); the compensation and expenses of Trustees who are not otherwise
affiliated with the Trust, the Adviser or any of their affiliates; expenses of
Trustees' and shareholders' meetings; trade association membership; insurance
premiums; and any extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee, based on a stated percentage of the average of the daily
net assets the Fund as follows:
Net Asset Value Annual Rate Annual Rate
- --------------------------- -----------
First $100,000,000 0.60%
Next $150,000,000 0.45%
Next $250,000,000 0.40%
Next $150,000,000 0.35%
Amount over $650,000,000 0.30%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to re-impose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
For the years ended May 31, 1996, 1997 and 1998 the Adviser received a fee of
$2,313,339, $2,830,885 and $3,388,285, respectively.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one of
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made insofar as feasible for
the respective funds or clients in a manner deemed equitable to all of them. To
the extent that transactions on behalf of more than one client of the Adviser or
its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to its Advisory Agreement, the Adviser is not liable to the Fund or its
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the non-exclusive right to use the name "John Hancock"
29
<PAGE>
or any similar name to any other corporation or entity, including but not
limited to any investment company of which the Life Company or any subsidiary or
affiliate thereof or any successor to the business of any subsidiary or
affiliate thereof shall be the investment adviser.
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement and the
Distribution Agreement will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both Agreements may be terminated on 60 days
written notice by either party or by vote of a majority of the outstanding
voting securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended May 31, 1996, 1997 and 1998,
respectively, the Fund paid the Adviser $33,524, $132,910 and $150,061 for
services under this Agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACT
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class on behalf of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with John Hancock Funds. John Hancock Funds accepts orders for
the purchase of the shares of the Fund which are continually offered at net
asset value next determined, plus any applicable sales charge, if any. In
connection with the sale of Fund shares, John Hancock Funds and Selling Brokers
receive compensation from a sales charge imposed, in the case of Class A shares
at the time of sale. In the case of Class B or Class C shares, the broker
receives compensation immediately but John Hancock Funds is compensated on a
deferred basis.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended May 31, 1996, 1997 and 1998 were $2,095,227, $2,275,918 and
$2,351,277, respectively. Of such amounts, $232,623, $266,508 and $279,714,
respectively, were retained by John Hancock Funds in 1996, 1997 and 1998. The
remainder of the underwriting commissions were reallowed to selling brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B
and Class C shares of the Fund's average daily net assets attributable to shares
of that class. However, the service fee will not exceed 0.25% of the Fund's
average daily net assets attributable to each class of shares. The distribution
fees will be used to reimburse John Hancock Funds for its distribution expenses,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Brokers and others engaged in the sale of Fund shares, (ii) marketing,
promotional and overhead expenses incurred in connection with the
30
<PAGE>
distribution of Fund shares, and (iii) with respect to Class B and Class C
shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event that
John Hancock Funds is not fully reimbursed for payments it makes or expenses it
incurs under the Class A Plan, these expenses will not be carried beyond one
year from the date they were incurred. Unreimbursed expenses under the Class B
and Class C Plans will be carried forward together with interest on the balance
of these unreimbursed expenses. The Fund does not treat unreimbursed expenses
under Class B and Class C Plans as a liability of the Fund, because the Trustees
may terminate the Class B and/or Class C Plans at any time. For the period ended
May 31, 1998 an aggregate of $7,115,503 of distribution expenses or 1.81% of the
average net assets of the Class B shares of the Fund was not reimbursed or
recovered by John Hancock Funds through the receipt of deferred sales charges or
12b-1 fees in prior periods. Class C shares did not commence operations until
May 1, 1998; therefore, there are no unreimbursed expenses to report.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plans (the "Independent Trustees"), by votes
cast in person at meetings called for the purpose of voting on each these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by a vote of a majority of the Independent Trustees, or (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class in
each case upon 60 days' written notice to John Hancock Funds and (c)
automatically in the event of assignment. The Plans further provide that they
may not be amended to increase the maximum amount of the fees for the services
described therein without the approval of a majority of the outstanding shares
of the class of the Fund which has voting rights with respect to the Plan. Each
Plan provides that no material amendment to the Plans will be effective unless
it is approved by a majority vote of the Trustees and the Independent Trustees
of the Fund. The holders of Class A, Class B and Class C shares have exclusive
voting rights with respect to the Plan applicable to their respective class of
shares. In adopting the Plans, the Trustees concluded that, in their judgment,
there is a reasonable likelihood that the Plans will benefit the holders of the
applicable class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended May 31, 1998, the Fund paid John Hancock Funds the
following amounts of expenses in connection with their services for the Fund.
Class C shares did not commence operations until May 1, 1998; therefore, there
are no expenses to report.
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<PAGE>
Expense Items
Printing and Interest
Mailing of Expense of Carrying
Prospectus to Compensation John or Other
New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
Class A Shares $212,862 $ 6,369 $ 580,583 $ 552,804 --
Class B Shares $767,506 $24,042 $1,161,782 $1,990,910 $0
SALES COMPENSATION
As part of their business strategies, each of the John Hancock funds, along with
John Hancock Funds, pay compensation to financial services firms that sell the
funds' shares. These firms typically pass along a portion of this compensation
to your financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets. The sales charges and 12b-1
fees paid by investors are detailed in the prospectus and under "Distribution
Contracts: in this Statement of Additional Information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Whenever you make an investment in the fund, the financial services firm
receives either a reallowance from the initial sales charge or a commission, as
described below. The firm also receives the first year's service fee at this
time. Beginning with the second year after an investment is made, the financial
services firm receives an annual service fee of 0.25% of its total eligible net
assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
<TABLE>
<CAPTION>
Sales charge
paid by Maximum
investors reallowance First year
(% of or commission service fee Maximum
offering (% of offering (% of net total compensation (1)
Class A investments price) price) investment) (% of offering price)
------ ------ ----------- ---------------------
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 4.00%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments
of $1 million or more
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1M - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Maximum First year
reallowance service fee Maximum
or commission (% of net total compensation (1)
Class B investments (% of offering price) investment) (% of offering price)
--------------------- ----------- ---------------------
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
<CAPTION>
Maximum First year
reallowance service fee Maximum
or commission (% of net total compensation (1)
Class C investments (% of offering price) investment) (% of offering price)
--------------------- ----------- ---------------------
<S> <C> <C> <C>
All amounts 0.75% 0.25% 1.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m. London time (12:00 noon,
New York time) on the date of any determination of a Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's
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<PAGE>
close with the current day's exchange rate. Trading of foreign securities may
take place on Saturdays and U.S. business holidays on which the Fund's NAV is
not calculated. Consequently, the Fund's portfolio securities may trade and the
NAV of the Fund's redeemable securities may be significantly affected on days
when a shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive a Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining the reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares
of the Fund, the investor is entitled to accumulate current purchases with the
greater of the current value (at offering price) of the Class A shares of the
Fund owned by the investor, or, if John Hancock Signature Services, Inc.
("Signature Services") is notified by the investor's dealer or the investor at
the time of the purchase, the cost of the Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales representatives
of any of the foregoing; retired officers, employees or Directors of any
of the foregoing; a member of the immediate family (spouse, children,
grandchildren, mother, father, grandparents, sister, brother,
mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew,
grandparents and same-sex domestic partner) of any of the foregoing; or
any fund, pension, profit sharing or other benefit plan for the
individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into a signed agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any or
all of his or her plan distributions directly to the Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees at
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
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<PAGE>
o Pension plans transferring assets from a John Hancock variable annuity
contract to the Fund pursuant to an exemptive application approved by the
Securities Exchange Commission.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed
retirement plans with at least 100 eligible employees at the inception of
the Fund account. Each of these investors may purchase Class A shares with
no initial sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the purchase was made,
a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares of the Fund may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. The reduced sales charges are also applicable to
investments in shares made over a specified period pursuant to a Letter of
Intention (the "LOI"), which should be read carefully prior to its execution by
an investor. The Fund offers two options regarding the specified period for
making investments under the LOI. All investors have the option of making their
investments over a specified period of thirteen (13) months. Investors who are
using the Fund as a funding medium for a retirement plan, however, may opt to
make the necessary investments called for by the LOI over a forty-eight (48)
month period. These retirement plans include Traditional, Roth and Education
IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs),
35
<PAGE>
SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and Section
457 plans. Non-qualified and qualified retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including renvested dividends) must
aggregate $100,000 or more invested during the specified period from the date of
the LOI or from a date within ninety (90) days prior thereto, upon written
request to Signature Services. The sales charge applicable to all amounts
invested under the LOI is computed as if the aggregate amount intended to be
invested had been invested immediately. If such aggregate amount is not actually
invested, the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However, for
the purchases actually made within the specified period (either 13 or 48 months)
the sales charge applicable will not be higher than that which would have
applied (including accumulations and combinations) had the LOI been for the
amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Signature Services to act as his attorney-in-fact
to redeem any escrowed Class A shares and adjust the sales charge, if necessary.
A LOI does not constitute a binding commitment by an investor to purchase, or by
the Fund to sell, any additional Class A shares and may be terminated at any
time.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for the purpose of determining the number of
years from the time of any payment for the purchase of both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C or those you acquired through dividend and capital
gain reinvestment, and next from the shares you have held the longest during the
six-year period for Class B shares. For this purpose, the amount of any increase
in a
36
<PAGE>
share's value above its initial purchase price is not regarded as a share exempt
from CDSC. Thus, when a share that has appreciated in value is redeemed during
the CDSC period, a CDSC is assessed only on its initial purchase price.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to CDSC (dividend
reinvestment) (120.00)
-------
o Amount subject to CDSC $ 280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to selected
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and Class C shares and of Class A shares that are
subject to CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust accounts
unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions where the proceeds are used to purchase a John Hancock
Declaration Variable Annuity.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or advisors
for advisory services, as long as your annual redemptions do not exceed
12% of your account value, including reinvested
37
<PAGE>
dividends, at the time you established your periodic withdrawal plan and
12% of the value of subsequent investments (less redemptions) in that
account at the time you notify Investor Services. (Please note, this
waiver does not apply to periodic withdrawal plan redemptions of Class A
or Class C shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See you Merrill Lynch financial
consultant for further information.
* Redemptions by Class A or Class C shares by retirement plans that invested
through the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under section 401(a) (such as
Money Purchase Pension Plans and Profit-Sharing/401(k) Plans), 457 and 408
(SEPs and SIMPLE IRAs of the Internal Revenue Code
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
38
<PAGE>
CDSC Waiver Matrix for Class B and Class C
<TABLE>
<CAPTION>
=============================================================================================
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), MPP, Rollover
PSP)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ---------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually
account in
value periodic
annually in payments
periodic
payments.
- ---------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually
account in
value periodic
annually in payments
periodic
payments.
- ---------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
(Class B only) annuity annuity annuity annuity account
payments (72t) payments payments payments value
or 12% of (72t) or (72t) or 12% (72t) or annually
account value 12% of of account 12% of in
annually in account value account periodic
periodic value annually in value payments
payments. annually in periodic annually in
periodic payments. periodic
payments. payments.
- ---------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ---------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ---------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
=============================================================================================
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
39
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in readily marketable
portfolio securities as prescribed by the Trustees. When the shareholder sells
portfolio securities received in this fashion, the shareholder will incur a
brokerage charge. Any such securities would be valued for the purposes of making
such payment at the same value as used in determining net asset value. The Fund
has, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Fund must redeem its shares for cash except to the
extent that the redemption payments to any shareholder during any 90-day period
would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time
that a Systematic Withdrawal Plan is in effect. The Fund reserves the right to
modify or discontinue the Systematic Withdrawal Plan of
40
<PAGE>
any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program (MAAP). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any check is not honored by your bank. The bank
shall be under no obligation to notify the shareholder as to the non-payment of
any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the order date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel the reinvestment privilege at any time.
A redemption or exchange of shares of the Fund is a taxable transaction for
Federal income tax purposes, even if the reinvestment privilege is exercised,
and any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "TAX STATUS."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B share, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
41
<PAGE>
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized shares of the Fund and one other
series. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Fund, or any new series of the Fund, into one or
more classes. As of the date of this Statement of Additional Information, the
Trustees have authorized the issuance of three classes of shares of the Fund,
designated as Class A, Class B and Class C.
The shares of the Fund represent an equal proportionate interest in the
aggregate net assets attributed to that class of the Fund. Holders of each class
of shares each have certain exclusive voting rights on matters relating to their
respective Rule 12b-1 distribution plans. The different classes of the Fund may
bear different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class will be borne exclusively
by that class; (ii) Class B and Class C shares will pay higher distribution and
service fees than Class A shares; and (iii) each class of shares will bear any
class expenses properly allocable to that class of shares, subject to the
conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares, and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which the
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
42
<PAGE>
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid.Information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate entity
for tax purposes. The Fund has qualified as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and intends to continue to so qualify for each taxable year. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its taxable income
(including net realized capital gains) which is distributed to shareholders in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than those gains and losses included in
computing net capital gain, after reduction by deductible expenses.) Some
distributions may be paid in January but may be taxable to shareholders as if
they had been received on December 31 of the previous year. The tax treatment
described above will apply without regard to whether distributions are received
in cash or reinvested in additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward contracts, foreign
currencies, or payables or receivables denominated in a
43
<PAGE>
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Transactions
in foreign currencies that are not directly related to the Fund's investment in
stock or securities, including speculative currency positions could under future
Treasury regulations produce income not among the types of "qualifying income"
from which the Fund must derive at least 90% of its gross income for each
taxable year. If the net foreign exchange loss for a year treated as ordinary
loss under Section 988 were to exceed the Fund's investment company taxable
income computed without regard to such loss, the resulting overall ordinary loss
for such year would not be deductible by the Fund or its shareholders in future
years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes"), paid by the Fund, subject to certain holding period
requirements and limitations contained in the Code, if the Fund so elects. If
more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Fund
may file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to (i) include in ordinary gross
income (in addition to taxable dividends and distributions actually received)
their pro rata shares of qualified foreign taxes paid by the Fund even though
not actually received by them, and (ii) treat such respective pro rata portions
as qualified foreign income taxes paid by them.
If the Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign income tax credit for such
foreign taxes may be required to treat a portion of dividends received from the
Fund as a separate category of income for purposes of computing the limitations
on the foreign tax credit. Tax-exempt shareholders will ordinarily not benefit
from this election. Each year (if any) that the Fund files the election
described above, its shareholders will be notified of the amount of (i) each
shareholder's pro rata share of qualified foreign income taxes paid by the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund does not satisfy the 50% requirement described above or
otherwise does not make the election, the Fund will deduct the foreign taxes it
pays in determining the amount it has available for distribution to
shareholders, and shareholders will not include these foreign taxes in their
income, nor will they be entitled to any tax deductions or credits with respect
to such taxes.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engage in options, futures or forward transactions
that will generate capital gains or engage in certain other transactions or
derivatives. At the time of an investor's purchase of Fund shares, a portion of
the purchase price is often attributable to realized or unrealized appreciation
in the Fund's portfolio or undistributed taxable income of the Fund.
Consequently, subsequent distributions on those shares from such appreciation or
income may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
44
<PAGE>
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. A sales charge paid in purchasing Class A
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent Class A shares of the Fund or another John Hancock fund
are subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as capital gain
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
realized capital loss in any year to offset net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $20,120,825 of capital loss carryforwards
available, to the extent provided by regulations, to offset future net realized
capital gains. These carryforwards expire at various amounts and times from 2003
through 2004.
Only a small portion, if any, of the distributions from the Fund may qualify for
the dividends- received deduction for corporations, subject to the limitations
applicable under the Code. The qualifying portion is limited to properly
designated distributions attributed to dividend income (if any) the Fund
receives from certain stock in U.S. domestic corporations and the deduction is
subject to holding period requirements and debt-financing limitations under the
Code.
Investment in debt obligations that are at risk of or in default presents
special tax issues for any fund that holds these obligations. Tax rules are not
entirely clear about issues such as when the
45
<PAGE>
Fund may cease to accrue interest, original issue discount or market discount,
when and to what extent deductions may be taken for bad debts or worthless
securities, how payments received on obligations in default should be allocated
between principal and income, and whether exchanges of debt obligations in a
workout context are taxable. These and other issues will be addressed by the
Fund if it acquires such obligations in order to reduce the risk of distributing
insufficient income to preserve its status as a regulated investment company and
to seek to avoid becoming subject to Federal income or excise tax.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The Fund is required to accrue income on any debt securities that have more than
a de minimus amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market or constructive sale rules applicable to certain options, futures,
forwards, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
46
<PAGE>
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into options, future, foreign currency
positions, and foreign currency forward contracts.
Certain options, futures and forward foreign currency contracts undertaken by
the Fund may cause the Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short- term (or, in the case of foreign currency
contracts, as ordinary income or loss) and timing of some gains and losses
realized by the Fund. Additionally, the Fund may be required to recognize gain,
but not loss, if an option, short sale or other transaction is treated as a
constructive sale of an appreciated financial position in the Fund's portfolio.
Also, certain of the Fund's losses on its transactions involving options,
futures or forward contracts and/or offsetting or successor portfolio positions
may be deferred rather than being taken into account currently in calculating
the Fund's taxable income or gains. Certain of such transactions may also cause
the Fund to dispose of investments sooner than would otherwise have occurred.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options, futures and forward contracts in order to seek to minimize any
potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended May 31, 1998, the Fund's annualized yields for Class
A, Class B and Class C shares of the Fund were 7.07%, 6.69% and 6.69%,
respectively. The average annual
47
<PAGE>
total returns on Class A shares of the Fund for the 1 year, 5 year and 10 year
period ended May 31, 1998 were 8.32%, 9.12% and 8.51%, respectively.
The average total returns for the 1-year and since inception on October 4, 1993
periods for Class B shares were 7.64% and 9.02%, respectively. Class C shares of
the Fund commenced operations on May 1, 1998; therefore, there is no average
annual total return to report.
The Fund advertises yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge) on the
last day of the period and annualizing the result. While this is the standard
accounting method for calculating yield, it does not reflect the fund's actual
bookkeeping; as a result, the income reported or paid by the Fund may be
different. The Fund's yield is computed according to the following standard
formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of Fund shares outstanding during the period
that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period (NAV
where applicable).
The average total return is computed by finding the average annual compounded
rate of return over the 1-year and life-of-fund periods that would equate the
initial amount invested to the ending redeemable value according to the
following formula:
T = ((ERV/P)^(1/n)) - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1-year and life-of-fund periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC applied at the end of the period, respectively. This calculation assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative
48
<PAGE>
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a series of
redemptions, over any time period. Total returns may be quoted with or without
taking the Fund's sales charge on Class A shares or the CDSC on Class B or Class
C shares into account. Excluding the Fund's sales charge on Class A shares and
the CDSC on Class B or Class C shares from a total return calculation produces a
higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well as the Russell and Wilshire Indices. Comparisons may also be
made to bank certificates of deposit ("CD's") which differ from mutual funds,
such as the Fund, in several ways. The interest rate established by the
sponsoring bank is fixed for the term of a CD. There are penalties for early
withdrawal from CDs, and the principal on a CD is insured.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S may also be
utilized.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the officers of the Fund
pursuant to recommendations made by an investment committee of the Adviser,
which consists of officers and directors of the Adviser and affiliates, and
officers and Trustees who are interested persons of the Fund. Orders for
purchases and sales of securities are placed in a manner which, in the opinion
of the officers of the Fund, will offer the best price and market for the
execution of each such transaction. Purchases from underwriters of portfolio
securities may include a commission or commissions paid by the issuer, and
transactions with dealers serving as market maker reflect a "spread." Debt
securities are generally traded on a net basis through dealers acting for their
own account as principals and not as brokers; no brokerage commissions are
payable on such transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such
49
<PAGE>
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Fund's officers will be primarily responsible for
the allocation of the Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the years ended on May 31, 1996, 1997 and
1998, the Fund paid negotiated brokerage commissions in the amount of $11,500,
$4,000 and $34,000, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended May 31, 1998,
the Fund directed no commissions to compensate brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), a broker-dealer
("Distributors" or Affiliated Broker"). Pursuant to procedures determined by the
Trustees and consistent with the above policy of obtaining best net results, the
Fund may execute portfolio transactions with or through Affiliated Brokers.
During the year ending May 31, 1998, 1997 and 1996, the Fund did not execute any
portfolio transactions with Affiliated Brokers.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another firm, and any customers of the Affiliated
Broker not comparable to the Fund as determined by a majority of the Trustees
who are not interested persons (as defined in the Investment Company Act) of the
Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is
affiliated with the Affiliated Brokers, has, as an investment adviser to the
Fund, the obligation to provide investment management services, which include
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Brokers as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
50
<PAGE>
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder account, $22.50
for each Class B shareholder account and $20.50 for each Class C shareholder
account. The Fund pays certain out-of-pocket expenses and these expenses are
aggregated and charged to the Fund and allocated to each class on the basis of
their relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, MA 02116. Under the custodian agreement, Investors Bank & Trust Company
performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP audits and
renders an opinion on the Fund's annual financial statements, and reviews the
Fund's annual Federal income tax return.
51
<PAGE>
APPENDIX-A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees
- --certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them, with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., currency contracts, futures and related options,
options on securities and indices, swaps, caps, floors and collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g., non- investment-grade debt securities, borrowing; reverse
repurchase agreements, covered mortgage dollar roll transactions, repurchase
agreements, securities lending, brady bonds, foreign debt securities, in-kind,
delayed and zero coupon debt securities, asset-backed securities,
mortgage-backed securities, participation interest, options on securities,
structured securities and swaps, caps floors and collars).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.(e.g., foreign debt
securities, currency contracts, swaps, caps, floors and collars).
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.(e.g. mortgage-backed securities and
structured securities).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.,
non-investment-grade debt securities, covered mortgage dollar roll transactions,
brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt
securities, asset-backed securities, mortgage-backed securities, participation
interest, swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements,
A-1
<PAGE>
covered mortgage dollar roll transactions, when-issued securities and forward
commitments, currency contracts, financial futures and options; securities and
index options, structured securities, swaps, caps, floors and collars).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance. (e.g. non-investment-grade debt securities, restricted and illiquid
securities, mortgage-backed securities, participation interest, currency
contracts, futures and related options; securities and index options, structured
securities, swaps, caps, floors and collars).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them. (e.g. covered
mortgage dollar roll transactions, short-term trading, when-issued securities
and forward commitments, brady bonds, foreign debt securities, in-kind, delayed
and zero coupon debt securities, restricted and illiquid securities, rights and
warrants, financial futures and options; and securities and index options,
structured securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.(e.g. covered mortgage dollar roll transactions, when-issued
securities and forward commitments, currency contracts, financial futures and
options; securities and securities and index options).
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
(e.g., brady bonds and foreign debt securities).
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
(e.g., mortgage backed securities).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for. (e.g., non-investment-grade debt
securities, participation interest, structured securities, swaps, caps, floors
and collars).
A-2
<PAGE>
APPENDIX-B
As described in the Statement of Additional Information, the debt securities
offering the high current income sought by the Fund are ordinarily in the lower
rating categories (that its, rated Baa or lower by Moody's or BBB or lower by
Standard & Poor's, or are unrated).
Moody's describes its lower ratings for corporate bonds as follows:
Bonds that are rated Baa are considered as medium grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
Debt rated BBB is regarded as having adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Debt rated BB, B, CCC, or CC is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well-established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal
B-1
<PAGE>
cash generation; and (5) well established access to a range of financial markets
and assured sources of alternate liquidity.
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
B-2
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1998 Annual
Report to Shareholders for the year ended May 31, 1998 (filed electronically on
July 30, 1998, accession number 0001010521-98-000297) and are included in and
incorporated by reference into Part B of this Registration Statement for John
Hancock Strategic Income Fund (file nos. 811-4651 and 33-5186 and are included
and incorporated by reference into Part B of this Registration Statement of John
Hancock Strategic Income Fund.
John Hancock Strategic Series
John Hancock Strategic Income Fund
Statement of Assets and Liabilities as of May 31, 1998.
Statement of Operations of the year ended May 31, 1998.
Statement of Changes in Net Asset for each of the periods indicated therein.
Financial Highlights for each of the years in the period ended May 31, 1998.
Schedule of Investments as of May 31, 1998.
Notes to Financial Statements.
Report of Independent Auditors.
F-1
<PAGE>
Supplement to the John Hancock International/Global Funds Prospectus
dated June 1, 1998
On pages 16 and 18, the "Portfolio Management" section has been changed as
follows:
John Hancock Short-Term Strategic Income Fund
Fred Cavanaugh, Jr., Arthur N. Calavritinos, CFA and Roger C. Hamilton lead the
fund's management team. Mr. Cavanaugh, senior vice president, has been in the
investment business since 1973 and joined the Adviser in 1986. Mr. Calavritinos,
vice president, has been in the investment business since 1986 and joined the
Adviser in 1988 and Mr. Hamilton, vice president, has been in the investment
business since 1980 and joined the Adviser in 1994.
John Hancock World Bond Fund
Fred Cavanaugh, Jr., James K. Ho, CFA and Anthony A. Goodchild lead the fund's
portfolio management team. Mr. Cavanaugh and Mr. Ho have been members of the
team since 1998 and Mr. Goodchild since 1994. Mr. Cavanaugh, senior vice
president, has been in the investment business since 1973 and joined the Adviser
in 1986. Mr. Ho, executive vice president, has been in the investment business
since 1977 and joined the Adviser in 1985. Mr. Goodchild, senior vice president,
has been in the investment business since 1968 and joined the Adviser in 1994.
John Hancock Global Rx Fund
The name of John Hancock Global Rx Fund has been changed to John Hancock Global
Health Sciences Fund, effective October 1, 1998. The Fund can be found in the
newspaper under the follow listings:
Global Health Sciences Class A GlHSciA
Global Health Sciences-Class B GlHSciB
September 25, 1998
GLIPS 9/98
<PAGE>
JOHN HANCOCK
International/
Global Funds
[LOGO]
- --------------------------------------------------------------------------------
Prospectus
June 1, 1998*
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or government agency
o are not guaranteed to achieve their goal(s)
Short-Term Strategic Income Fund may invest up to 67% in junk bonds; read risk
information carefully.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
*March 1, 1998 for European Equity Fund, Global Rx Fund, Global Technology Fund
and Pacific Basin Equities Fund.
Growth
European Equity Fund
Global Fund
Global Rx Fund
Global Technology Fund
International Fund
Pacific Basin Equities Fund
Income
Short-Term Strategic Income Fund
World Bond Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
A fund-by-fund look at o Growth
goals, strategies,
risks, expenses and European Equity Fund 4
financial history. Global Fund 6
Global Rx Fund 8
Global Technology Fund 10
International Fund 12
Pacific Basin Equities Fund 14
o Income
Short-Term Strategic Income Fund 16
World Bond Fund 18
Policies and instructions Your account
for opening, maintaining
and closing an account in any Choosing a share class 20
international/global fund. How sales charges are calculated 20
Sales charge reductions and waivers 21
Opening an account 22
Buying shares 23
Selling shares 24
Transaction policies 26
Dividends and account policies 26
Additional investor services 27
Details that apply to the Fund details
international/global funds
as a group. Business structure 28
Sales compensation 29
More about risk 31
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Portfolio securities The primary types of securities in which the
fund invests. Secondary investments are described in "More about risk" at the
end of the prospectus.
[Clip Art] Risk factors The major risk factors associated with the fund.
[Clip Art] Portfolio management The individual or group (including subadvisers,
if any) designated by the investment adviser to handle the fund's day-to-day
management.
[Clip Art] Expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
[Clip Art] Financial highlights A table showing the fund's financial performance
for up to ten years, by share class. A bar chart showing total return allows you
to compare the fund's historical risk level to those of other funds.
GOAL OF THE INTERNATIONAL/GLOBAL FUNDS
John Hancock international/global funds invest in foreign and U.S. securities.
Most of the funds invest primarily in stocks and seek long-term growth of
capital. Two funds invest primarily in bonds and seek current income or maximum
total return. Each fund has its own strategy and own risk/reward profile.
Because you could lose money by investing in these funds, be sure to read all
risk disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking to diversify a portfolio of domestic investments
o are seeking access to markets that can be less accessible to individual
investors
o are seeking funds for the growth or income portion of an asset allocation
portfolio
o are investing for goals that are many years in the future
International/global funds may NOT be appropriate if you:
o are investing with a shorter time horizon in mind
o are uncomfortable with an investment whose value may vary substantially
o want to limit your exposure to foreign securities
THE MANAGEMENT FIRM
All John Hancock international/global funds are managed by John Hancock
Advisers, Inc. Founded in 1968, John Hancock Advisers is a wholly owned
subsidiary of John Hancock Mutual Life Insurance Company and manages more than
$30 billion in assets.
<PAGE>
European Equity Fund
REGISTRANT NAME:
JOHN HANCOCK WORLD FUND TICKER SYMBOL CLASS A: N/A CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of European companies. Under normal
circumstances, the fund invests at least 80% of assets in companies that earn
more than half of their revenue from European operations, are organized under
European law or are principally traded on European stock exchanges.
The fund has not established limitations on the allocation of investments among
the European countries. However, the fund will invest principally in countries
with established economies and securities markets.
The fund may also invest in stocks of European companies that are traded on
emerging market stock exchanges.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in common stock, warrants and convertible
securities. The fund may also invest in investment-grade debt securities issued
by European or U.S. companies and governments.
For liquidity and flexibility, the fund may place up to 20% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities and engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on one
region, investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, natural event, information and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are described in "More about risk" starting on page 31. The risks of
international investing may be higher in emerging markets, a category that
includes some European countries.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Under the supervision of John Hancock Advisers, Inc., a team of
portfolio managers at Indocam International Investment Services, the fund's
subadviser, is responsible for the fund's day-to-day investment management.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show estimated expenses for the fiscal year ending October 31,
1998. Actual expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.81% 0.81%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.79% 0.79%
Total fund operating expenses (after limitation)(3) 1.90% 2.60%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $68 $107 $148 $261
Class B shares
Assuming redemption
at end of period $76 $111 $158 $276
Assuming no redemption $26 $81 $138 $276
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's agreement to limit expenses. Without this
limitation, management fees would be 0.90% for each class and total fund
operating expenses would be 1.99% for Class A and 2.69% for Class B. The
adviser may terminate this limitation in the future.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
4 GROWTH - EUROPEAN EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below cover the period from the commencement of
operations on March 2, 1998 to April 30, 1998 for Class A shares. These figures
are unaudited.
[The following table was represented by a bar graph in the printed materials.]
Volatility, as indicated by Class A 7.10(4)
year-by-year total investment return (%) two
(scale varies from fund to fund) months
- --------------------------------------------------------------------------------
Class A - period ended: 4/98(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income(2) 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.70
Total from investment operations 0.71
Net asset value, end of period $10.71
Total investment return at net asset value(3)(%) 7.10(4)
Total adjusted investment return at net asset value(3,5)(%) 6.79(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,478
Ratio of expenses to average net assets (%) 1.90(6)
Ratio of adjusted expenses to average net assets(7)(%) 3.83(6)
Ratio of net investment income to average net assets (%) 0.49(6)
Ratio of adjusted net investment (loss) to
average net assets(7)(%) (1.44)(6)
Portfolio turnover rate (%) 4
Fee reduction per share(2)($) 0.03
Average brokerage commission rate ($) 0.0239
- --------------------------------------------------------------------------------
Class B - period ended: 4/98(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period --
Net investment income --
Net realized and unrealized gain (loss) on
investments and foreign currency transactions --
Total from investment operations --
Net asset value, end of period --
Total investment return at net asset value (%) --
Total adjusted investment return at net asset value (%) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) --
Ratio of expenses to average net assets (%) --
Ratio of adjusted expenses to average net assets (%) --
Ratio of net investment income to average net assets (%) --
Ratio of adjusted net investment income to
average net assets (%) --
Portfolio turnover rate (%) --
Fee reduction per share ($) --
Average brokerage commission rate ($) --
(1) Class A shares commenced operations on March 2, 1998. There were no Class B
shares outstanding during the period ended April 30, 1998.
(2) Based on the average of shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
GROWTH - EUROPEAN EQUITY FUND 5
<PAGE>
Global Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL CLASS A: JHGAX CLASS B: FGLOX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in common stocks of foreign and U.S. companies. The fund
maintains a diversified portfolio of company and government securities from
around the world. Under normal circumstances, the fund expects to invest in the
securities markets of at least three countries at any one time, potentially
including the U.S.
The fund does not maintain a fixed allocation of assets, either with respect to
securities type or to geography.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 65% of assets
in common stocks and convertible securities, but may invest in virtually any
type of security, foreign or domestic, including preferred and convertible
securities, warrants and investment-grade debt securities. Not counting
short-term securities, the fund generally expects that no more than 5% of assets
will be invested in debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements.
Because it invests internationally, the fund carries additional risks, including
currency, information, natural event and political risks. These risks, which may
make the fund more volatile than a comparable domestic growth fund, are defined
in "More about risk" starting on page 31. The risks of international investing
are higher in emerging markets such as those of Latin America, Southeast Asia
and Eastern Europe.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Miren Etcheverry, John L.F. Wills, and Gerardo J. Espinoza lead the
portfolio management team. Ms. Etcheverry and Mr. Espinoza are senior vice
presidents and joined John Hancock Funds in December 1996, having been in the
investment business since 1978 and 1979, respectively. Mr. Wills is a senior
vice president of the adviser and managing director of the subadviser, John
Hancock Advisers International Limited. He joined John Hancock Funds in 1987 and
has been in the investment business since 1969.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee(3) 0.88% 0.88%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.56% 0.56%
Total fund operating expenses 1.74% 2.44%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $67 $102 $140 $245
Class B shares
Assuming redemption
at end of period $75 $106 $150 $260
Assuming no redemption $25 $76 $130 $260
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Includes a subadviser fee equal to 0.70% of the fund's net assets.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 GROWTH - GLOBAL FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 7.05 30.22 (10.42) 14.04 (3.85) 34.95 7.97 (1.01) 9.10 8.67
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.31 $10.55 $14.30 $14.16 $12.67 $12.97
Net investment income (loss)(2) (0.04) (0.10) (0.07) (0.03) (0.02) (0.05)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.72) 3.85 1.24 (0.13) 1.20 1.21
Total from investment operations (0.76) 3.75 1.17 (0.16) 1.18 1.16
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- -- (1.31) (1.33) (0.88) (1.19)
Net asset value, end of period $10.55 $14.30 $14.16 $12.67 $12.97 $12.94
Total investment return at net asset value(3) (%) (6.72)(4) 35.55 8.64 (0.37) 9.87 9.36
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 76,980 90,787 100,973 93,597 94,746 92,127
Ratio of expenses to average net assets (%) 2.47(5) 2.12 1.98 1.87 1.88 1.81(6)
Ratio of net investment income (loss) to average
net assets (%) (0.60)(5) (0.86) (0.54) (0.23) (0.19) (0.36)
Portfolio turnover rate (%) 69 108 61 60 98 81
Average brokerage commission rate(7) ($) N/A N/A N/A N/A 0.0221 0.0216
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/88 10/89 10/90 10/91 10/92 10/93
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.42 $10.67 $13.58 $9.94 $10.92 $10.50
Net investment income (loss) 0.01 (0.10) (0.02) (0.01)(2) (0.12)(2) (0.15)(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.69 3.25 (1.12) 1.35 (0.30) 3.82
Total from investment operations 0.70 3.15 (1.14) 1.34 (0.42) 3.67
Less distributions:
Distributions from net investment income -- (0.01) -- -- -- --
Distributions from net realized gain on investments
sold and foreign currency transactions (0.45) (0.23) (2.50) (0.36) -- --
Total distributions (0.45) (0.24) (2.50) (0.36) -- --
Net asset value, end of period $10.67 $13.58 $9.94 $10.92 $10.50 $14.17
Total investment return at net asset value(3) (%) 7.05 30.22 (10.42) 14.04 (3.85) 34.95
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 34,380 35,596 33,281 28,686 11,475 19,340
Ratio of expenses to average net assets (%) 2.55 2.30 2.46 2.60 2.68 2.49
Ratio of net investment income (loss) to average
net assets (%) 0.09 (0.47) (0.59) (0.12) (1.03) (1.25)
Portfolio turnover rate (%) 142 138 58 106 69 108
Average brokerage commission rate(7) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95 10/96 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.17 $13.93 $12.36 $12.54
Net investment income (loss) (0.15)(2) (0.11)(2) (0.10)(2) (0.14)(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.22 (0.13) 1.16 1.18
Total from investment operations 1.07 (0.24) 1.06 1.04
Less distributions:
Distributions from net investment income -- -- -- --
Distributions from net realized gain on investments
sold and foreign currency transactions (1.31) (1.33) (0.88) (1.19)
Total distributions (1.31) (1.33) (0.88) (1.19)
Net asset value, end of period $13.93 $12.36 $12.54 $12.39
Total investment return at net asset value(3) (%) 7.97 (1.01) 9.10 8.67
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 31,822 24,570 27,599 28,007
Ratio of expenses to average net assets (%) 2.59 2.57 2.54 2.49(6)
Ratio of net investment income (loss) to average
net assets (%) (1.12) (0.89) (0.83) (1.04)
Portfolio turnover rate (%) 61 60 98 81
Average brokerage commission rate(7) ($) N/A N/A 0.0221 0.0216
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
(7) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
GROWTH - GLOBAL FUND 7
<PAGE>
Global Rx Fund
REGISTRANT NAME: JOHN HANCOCK WORLD FUND
TICKER SYMBOL CLASS A: JHGRX CLASS B: JHRBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of foreign and U.S. health care companies. The
fund defines health care companies as those deriving at least half of their
gross revenues, or committing at least half of their gross assets, to health
care-related activities. Under normal circumstances, the fund invests at least
65% of assets in these companies, including small- and medium-sized companies.
The fund expects to invest in the securities markets of at least three countries
at any one time, potentially including the U.S. Because the fund is
non-diversified, it may invest more than 5% of assets in securities of a single
issuer.
The fund has an independent advisory board composed of scientific and medical
experts to provide advice and consultation on health care developments.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in foreign and domestic common stocks, and
may invest in warrants, preferred stocks and convertible debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on a single
sector (health care), and because this sector has historically been volatile,
investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are defined in "More about risk" starting on page 31.
To the extent that the fund invests in smaller-capitalization companies or
utilizes higher-risk securities and practices, it takes on further risks that
could adversely affect its performance. Please read "More about risk" carefully
before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Linda I. Miller, CFA, leader of the fund's portfolio management team
since January 1996, is a vice president of the adviser. She joined John Hancock
Funds in November 1995 and has been in the investment business with a focus on
the health care industry since 1980.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.80% 0.80%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.58% 0.58%
Total fund operating expenses 1.68% 2.38%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $66 $100 $137 $239
Class B shares
Assuming redemption
at end of period $74 $104 $147 $254
Assuming no redemption $24 $74 $127 $254
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 GROWTH - GLOBAL RX FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 33.40(5) 0.30 23.39 30.89 18.39 (1.26)(5) 26.63
(scale varies from fund to fund) two months
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/92(1) 8/93 8/94 8/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.34 $13.38 $16.51
Net investment income (loss) (0.03) (0.23) (0.32) (0.36)(3)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 3.37 0.27 3.45 5.46
Total from investment operations 3.34 0.04 3.13 5.10
Less distributions:
Distributions from net realized gain on investments sold and
foreign currency transactions -- -- -- --
Net asset value, end of period $13.34 $13.38 $16.51 $21.61
Total investment return at net asset value(4) (%) 33.40(5) 0.30 23.39 30.89
Total adjusted investment return at net asset value(4,6) (%) 32.11(5) 0.04 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 14,702 15,647 18,643 24,394
Ratio of expenses to average net assets (%) 1.98(7) 2.50 2.55 2.56
Ratio of adjusted expenses to average net assets(8) (%) 3.39(7) 2.76 -- --
Ratio of net investment income (loss) to average net assets (%) (0.51)(7) (1.67) (2.01) (1.99)
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (1.92)(7) (1.93) -- --
Portfolio turnover rate (%) 48 93 52 38
Fee reduction per share ($) 0.085 0.035 -- --
Average brokerage commission rate(9) ($) N/A N/A N/A N/A
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $21.61 $25.43 $25.11
Net investment income (loss) (0.19)(3) (0.05)(3) (0.19)(3)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 4.15 (0.27) 6.56
Total from investment operations 3.96 (0.32) 6.37
Less distributions:
Distributions from net realized gain on investments sold and
foreign currency transactions (0.14) -- (1.23)
Net asset value, end of period $25.43 $25.11 $30.25
Total investment return at net asset value(4) (%) 18.39 (1.26)(5) 26.63
Total adjusted investment return at net asset value(4,6) (%) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 42,405 42,618 53,122
Ratio of expenses to average net assets (%) 1.80 1.92(7) 1.68
Ratio of adjusted expenses to average net assets(8) (%) -- -- --
Ratio of net investment income (loss) to average net assets (%) (0.75) (1.04)(7) (0.71)
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) -- -- --
Portfolio turnover rate (%) 68 24 57
Fee reduction per share ($) -- -- --
Average brokerage commission rate(9) ($) 0.0181 0.0726 0.0749
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/94(1) 8/95 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.29 $16.46 $21.35 $24.94 $24.60
Net investment income (loss)(3) (0.17) (0.55) (0.34) (0.08) (0.37)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.66) 5.44 4.07 (0.26) 6.40
Total from investment operations (0.83) 4.89 3.73 (0.34) 6.03
Less distributions:
Distributions from net realized gain on investments sold and
foreign currency transactions -- -- (0.14) -- (1.23)
Net asset value, end of period $16.46 $21.35 $24.94 $24.60 $29.40
Total investment return at net asset value(4) (%) (4.80)(5) 29.71 17.53 (1.36)(5) 25.76
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,071 6,333 36,591 37,521 53,436
Ratio of expenses to average net assets (%) 3.34(7) 3.45 2.42 2.62(7) 2.38
Ratio of net investment income (loss) to average net assets (%) (2.65)(7) (2.91) (1.33) (1.74)(7) (1.41)
Portfolio turnover rate (%) 52 38 68 24 57
Average brokerage commission rate(9) ($) N/A N/A 0.0181 0.0726 0.0749
</TABLE>
(1) Class A and Class B shares commenced operations on October 1, 1991 and
March 7, 1994, respectively.
(2) Effective October 31, 1996, the fiscal year end changed from August 31 to
October 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
(9) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
GROWTH - GLOBAL RX FUND 9
<PAGE>
Global Technology Fund
REGISTRANT NAME: JOHN HANCOCK SERIES TRUST
TICKER SYMBOL CLASS A: NTTFX CLASS B: FGTBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of foreign and U.S. companies that rely
extensively on technology in their product development or operations. Under
normal circumstances, the fund invests at least 65% of assets in these
companies, and expects to invest in the securities markets of at least three
countries at any one time, potentially including the U.S. Income is a secondary
goal.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in foreign and domestic common stocks, and
may invest in warrants, preferred stocks and convertible debt securities. The
fund may invest up to 10% of assets in debt securities of any maturity. These
may include securities rated as low as CC/Ca and their unrated equivalents.
Bonds rated lower than BBB/Baa are considered junk bonds.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, including restricted securities, and
may engage in other investment practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on a single
sector (technology), and because this sector has historically been volatile,
investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are defined in "More about risk" starting on page 31. The risks of international
investing are higher in emerging markets such as those of Latin America, Asia
and Eastern Europe. To the extent that the fund invests in
smaller-capitalization companies or junk bonds, it further increases the chances
for fluctuations in share price and total return. Please read "More about risk"
carefully before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Barry J. Gordon and Marc H. Klee lead the fund's management team, as
they have since the fund's inception in 1983. They are principals of American
Fund Advisors, Inc. (AFA), which was the fund's adviser until 1991. Since 1991,
AFA has been the fund's subadviser.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee(3) 0.79% 0.79%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.42% 0.42%
Total fund operating expenses 1.51% 2.21%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $65 $95 $128 $221
Class B shares
Assuming redemption
at end of period $72 $99 $138 $237
Assuming no redemption $22 $69 $118 $237
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Includes a subadviser fee that will not exceed 0.35% of the fund's net
assets.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 GROWTH - GLOBAL TECHNOLOGY FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below for the one-year period ended October 31, 1997 have
been audited by the fund's independent auditors, Ernst & Young LLP. Figures for
previous years were audited by another independent auditor.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 2.84 10.48 16.61 (18.46) 33.05 5.70 32.06 9.62 46.53 5.22(4) 21.90
(scale varies from fund to fund) ten months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/87 12/88 12/89 12/90 12/91 12/92
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $13.80 $13.98 $15.31 $16.93 $12.44 $15.60
Net investment income (loss) 0.15 0.15 0.10 (0.04) 0.05 (0.15)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.26 1.32 2.43 (3.09) 4.11 1.00
Total from investment operations 0.41 1.47 2.53 (3.13) 4.16 0.85
Less distributions:
Dividends from net investment income (0.23) (0.14) (0.13) -- (0.04) --
Distributions from net realized gain on
investments and foreign currency transactions -- -- (0.78) (1.36) (0.96) (1.51)
Total distributions (0.23) (0.14) (0.91) (1.36) (1.00) (1.51)
Net asset value, end of period $13.98 $15.31 $16.93 $12.44 $15.60 $14.94
Total investment return at net asset value(3) (%) 2.84 10.48 16.61 (18.46) 33.05 5.70
Total adjusted investment return at net asset value(3,5) -- -- -- -- -- 5.53
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 44,224 38,594 40,341 28,864 31,580 32,094
Ratio of expenses to average net assets (%) 1.63 1.75 1.90 2.36 2.32 2.05
Ratio of adjusted expenses to average net assets(7) (%) -- -- -- -- -- 2.22
Ratio of net investment income (loss) to average
net assets (%) 0.75 0.89 0.60 (0.28) 0.34 (0.88)
Ratio of adjusted net investment income (loss) to
average net assets(7) (%) -- -- -- -- -- (1.05)
Portfolio turnover rate (%) 9 12 30 38 67 76
Fee reduction per share ($) -- -- -- -- -- 0.03
Average brokerage commission rate(8) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95 10/96(1) 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.94 $17.45 $17.84 $24.51 $25.79
Net investment income (loss) (0.21) (0.22)(2) (0.22)(2) (0.14)(2) (0.27)(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 4.92 1.87 8.53 1.42 5.76
Total from investment operations 4.71 1.65 8.31 1.28 5.49
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized gain on
investments and foreign currency transactions (2.20) (1.26) (1.64) -- (1.23)
Total distributions (2.20) (1.26) (1.64) -- (1.23)
Net asset value, end of period $17.45 $17.84 $24.51 $25.79 $30.05
Total investment return at net asset value(3) (%) 32.06 9.62 46.53 5.22(4) 21.90
Total adjusted investment return at net asset value(3,5) -- -- 46.41 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 41,749 52,193 155,001 166,010 184,048
Ratio of expenses to average net assets (%) 2.10 2.16 1.67 1.57(6) 1.51
Ratio of adjusted expenses to average net assets(7) (%) -- -- 1.79 -- --
Ratio of net investment income (loss) to average
net assets (%) (1.49) (1.25) (0.89) (0.68)(6) (0.95)
Ratio of adjusted net investment income (loss) to
average net assets(7) (%) -- -- (1.01) -- --
Portfolio turnover rate (%) 86 67 70 64 104
Fee reduction per share ($) -- -- 0.02(2) -- --
Average brokerage commission rate(8) ($) N/A N/A N/A 0.0685 0.0628
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(9) 12/95 10/96(1) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.24 $17.68 $24.08 $25.20
Net investment income (loss)(2) (0.35) (0.39) (0.28) (0.45)
Net realized and unrealized gain (loss) on investments 2.05 8.43 1.40 5.60
Total from investment operations 1.70 8.04 1.12 5.15
Less distributions:
Distributions from net realized gain on investments sold (1.26) (1.64) -- (1.23)
Net asset value, end of period $17.68 $24.08 $25.20 $29.12
Total investment return at net asset value(3) (%) 10.02 45.42 4.65(4) 21.04
Total adjusted investment return at net asset value(3,5) -- 45.30 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,324 35,754 50,949 65,851
Ratio of expenses to average net assets (%) 2.90(6) 2.41 2.27(6) 2.21
Ratio of adjusted expenses to average net assets(7) (%) -- 2.53 -- --
Ratio of net investment income (loss) to average net assets (%) (1.98)(6) (1.62) (1.38)(6) (1.65)
Ratio of adjusted net investment income (loss) to
average net assets(7) (%) -- (1.74) -- --
Portfolio turnover rate (%) 67 70 64 104
Fee reduction per share ($) -- 0.03(2) -- --
Average brokerage commission rate(8) ($) N/A N/A 0.0685 0.0628
</TABLE>
(1) Effective October 31, 1996, the fiscal year end changed from December 31
to October 31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(9) Class B shares commenced operations on January 3, 1994.
GROWTH - GLOBAL TECHNOLOGY FUND 11
<PAGE>
International Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL
CLASS A: FINAX CLASS B: FINBX CLASS C: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of foreign companies. Under normal
circumstances, the fund invests at least 65% of assets in these companies. The
fund maintains a diversified portfolio of company and government securities from
around the world, and generally expects that at any one time it will invest in
the securities markets of at least three non-U.S. countries.
The fund does not maintain a fixed allocation of assets, either with respect to
securities type or to geography. The fund looks for companies of any size whose
earnings show strong growth or that appear to be undervalued.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests primarily in common
stocks and other equity securities, but may invest in almost any type of
security, foreign or domestic, including preferred and convertible securities,
warrants and investment-grade debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements.
Because it invests internationally, the fund carries additional risks, including
currency, information, natural event and political risks. These risks, which may
make the fund more volatile than a comparable domestic growth fund, are defined
in "More about risk" starting on page 31. The risks of international investing
are higher in emerging markets such as those of Latin America, Asia and Eastern
Europe.
To the extent that the fund invests in smaller-capitalization companies or
utilizes higher-risk securities and practices, it takes on further risks that
could adversely affect its performance. Please read "More about risk" carefully
before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Miren Etcheverry, John L.F. Wills, and Gerardo J. Espinoza lead the
fund's portfolio management team. Ms. Etcheverry and Mr. Espinoza are senior
vice presidents and joined John Hancock Funds in December 1996, having been in
the investment business since 1978 and 1979, respectively. Mr. Wills is a senior
vice president of the adviser and managing director of the subadviser, John
Hancock Advisers International Limited. He joined John Hancock Funds in 1987 and
has been in the investment business since 1969.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past fiscal year, adjusted to
reflect any changes. Because no Class C shares were outstanding during the past
year, Class C expenses are based on Class B expenses. Future expenses may be
greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none none
Maximum sales charge imposed on
reinvested dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense
limitation)(3,4) 0.00% 0.00% 0.00%
12b-1 fee(5) 0.30% 1.00% 1.00%
Other expenses (after limitation)(3) 1.43% 1.43% 1.43%
Total fund operating expenses
(after limitation)(3) 1.73% 2.43% 2.43%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $67 $102 $139 $244
Class B shares
Assuming redemption
at end of period $75 $106 $150 $259
Assuming no redemption $25 $76 $130 $259
Class C shares
Assuming redemption
at end of period $35 $76 $130 $277
Assuming no redemption $25 $76 $130 $277
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's agreement to limit expenses (except for 12b-1 and
transfer agent expenses). Without this limitation, management fees would
be 1.00% for each class, other expenses would be 1.73% for each class and
total fund operating expenses would be 3.03% for Class A and 3.73% for
Class B and Class C. The adviser may terminate this limitation at any
time.
(4) Includes a subadviser fee equal to 0.70% of the fund's net assets.
(5) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 GROWTH - INTERNATIONAL FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
Volatility, as indicated by Class A
year-by-year total investment return (%) 1.77(4) (4.96) 6.88 (3.22)
(scale varies from fund to fund)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $8.65 $8.14 $8.70
Net investment income (loss) 0.07(2) 0.04 0.06(2) (0.02)(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.08 (0.47) 0.50 (0.26)
Total from investment operations 0.15 (0.43) 0.56 (0.28)
Less distributions:
Dividends from net investment income -- (0.03) -- (0.01)
Distributions from net realized gain on investments
sold and foreign currency transactions -- (0.05) -- --
Total distributions -- (0.08) -- (0.01)
Net asset value, end of period $8.65 $8.14 $8.70 $8.41
Total investment return at net asset value(3) (%) 1.77(4) (4.96) 6.88 (3.22)
Total adjusted investment return at net asset value(3,5) (%) (0.52)(4) (8.12) 5.33 (4.52)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,426 4,215 5,098 4,965
Ratio of expenses to average net assets (%) 1.50(6) 1.64 1.75 1.73(7)
Ratio of adjusted expenses to average net assets(8) (%) 3.79(6) 4.80 3.30 3.03(7)
Ratio of net investment income (loss) to average net assets (%) 1.02(6) 0.56 0.68 (0.16)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.27)(6) (2.60) (0.87) (1.46)
Portfolio turnover rate (%) 50 69 83 169
Fee reduction per share(2) ($) 0.16 0.25 0.14 0.12
Average brokerage commission rate(9) ($) N/A N/A 0.0192 0.0186
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94(1) 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $8.61 $8.05 $8.55
Net investment income (loss) 0.02(2) (0.03) 0.00(2,10) (0.08)(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.09 (0.48) 0.50 (0.25)
Total from investment operations 0.11 (0.51) 0.50 (0.33)
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- (0.05) -- --
Net asset value, end of period $8.61 $8.05 $8.55 $8.22
Total investment return at net asset value(3) (%) 1.29(4) (5.89) 6.21 (3.86)
Total adjusted investment return at net asset value(3,5) (%) (1.00)(4) (9.05) 4.66 (5.16)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,948 3,990 8,175 8,713
Ratio of expenses to average net assets (%) 2.22(6) 2.52 2.45 2.43(7)
Ratio of adjusted expenses to average net assets(8) (%) 4.51(6) 5.68 4.00 3.73(7)
Ratio of net investment income (loss) to average net assets (%) 0.31(6) (0.37) 0.02 (0.88)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.98)(6) (3.53) (1.53) (2.18)
Portfolio turnover rate (%) 50 69 83 169
Fee reduction per share(2) ($) 0.16 0.25 0.14 0.12
Average brokerage commission rate(9) ($) N/A N/A 0.0192 0.0186
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 cents per share.
(8) Unreimbursed, without fee reduction.
(9) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(10) Less than $0.01 per share.
GROWTH - INTERNATIONAL FUND 13
<PAGE>
Pacific Basin Equities Fund
REGISTRANT NAME: JOHN HANCOCK WORLD FUND
TICKER SYMBOL CLASS A: JHWPX CLASS B: FPBBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in a diversified portfolio of stocks of Pacific Basin
companies. The Pacific Basin includes countries bordering the Pacific Ocean.
Under normal circumstances, the fund invests at least 65% of assets in these
companies, with the balance invested in equities of companies not in the Pacific
Basin countries and in investment-grade debt securities of U.S., Japanese,
Australian and New Zealand issuers.
The fund does not maintain a fixed allocation of assets. The fund may at times
invest less than 65% of assets in Pacific Basin equities.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests primarily in common
stocks and other equity securities, but may invest in virtually any type of
security, foreign or domestic, including preferred and convertible securities,
warrants and investment-grade debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on one
region, investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are defined in "More about risk" starting on page 31. The risks of international
investing are higher in emerging markets, a category that includes many Pacific
Basin countries.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
MANAGEMENT/SUBADVISERS
[Clip Art] The fund's management is carried out jointly by the adviser's
international equities portfolio management team and two subadvisers, Indocam
Asia Advisers Limited and John Hancock Advisers International Limited. Indocam
is majority owned by Caisse Nationale de Credit Agricole, a French banking
institution.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee(3) 0.80% 0.80%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.96% 0.96%
Total fund operating expenses 2.06% 2.76%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $70 $111 $155 $277
Class B shares
Assuming redemption
at end of period $78 $116 $166 $292
Assuming no redemption $28 $86 $146 $292
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Includes a subadviser fee equal to 0.35% of the fund's net assets.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
14 GROWTH - PACIFIC BASIN EQUITIES FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class
A year-by-year total investment return (%) (3.61)(6) 18.06 (0.44) (2.15) (1.99) 49.61 22.82 (7.65) 4.47 (1.83)(6) (19.03)
(scale varies from fund to fund) two
months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/88(1) 8/89 8/90 8/91 8/92 8/93
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.61 $11.10 $10.34 $9.05 $8.87
Net investment income (loss) 0.01 (0.02) (0.04) (0.01) (0.07)(3) (0.11)(3)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.37) 1.75 0.11 (0.33) (0.11) 4.51
Total from investment operations (0.36) 1.73 0.07 (0.34) (0.18) 4.40
Less distributions:
Dividends from net investment income (0.03) (0.01) -- -- -- --
Distributions from net realized gain on
investments sold and foreign
currency transactions -- (0.23) (0.83) (0.95) -- --
Total distributions (0.03) (0.24) (0.83) (0.95) -- --
Net asset value, end of period $9.61 $11.10 $10.34 $9.05 $8.87 $13.27
Total investment return at net asset
value(5) (%) (3.61)(6) 18.06 (0.44) (2.15) (1.99) 49.61
Total adjusted investment return at net
asset value(5,7) (%) (8.05)(6) 15.12 (2.86) (5.19) (5.57) 48.31
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,771 5,116 4,578 4,065 3,222 14,568
Ratio of expenses to average net assets (%) 1.75(8) 1.75 2.45 2.75 2.73 2.94
Ratio of adjusted expenses to average
net assets(9) (%) 6.19(8) 4.69 4.89 5.79 6.31 4.24
Ratio of net investment income (loss) to
average net assets (%) 0.04(8) (0.15) (0.28) (0.06) (0.82) (0.98)
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) (4.40)(8) (3.09) (2.70) (3.10) (4.40) (2.28)
Portfolio turnover rate (%) 148 227 154 151 179 171
Fee reduction per share ($) 1.15 0.39 0.31 0.24 0.31(3) 0.14(3)
Average brokerage commission rate(10) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/94 8/95 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $13.27 $15.88 $14.11 $14.74 $14.47
Net investment income (loss) (0.10)(3) 0.02(3,4) (0.02)(3) (0.02)(3) (0.07)(3)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 3.12 (1.24) 0.65 (0.25) (2.66)
Total from investment operations 3.02 (1.22) 0.63 (0.27) (2.73)
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized gain on
investments sold and foreign
currency transactions (0.41) (0.55) -- -- (0.11)
Total distributions (0.41) (0.55) -- -- (0.11)
Net asset value, end of period $15.88 $14.11 $14.74 $14.47 $11.63
Total investment return at net asset
value(5) (%) 22.82 (7.65) 4.47 (1.83)(6) (19.03)
Total adjusted investment return at net
asset value(5,7) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 50,261 37,417 41,951 38,694 21,109
Ratio of expenses to average net assets (%) 2.43 2.05 1.97 2.21(8) 2.06
Ratio of adjusted expenses to average
net assets(9) (%) -- -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) (0.66) 0.13(4) (0.15) (0.83)(8) (0.49)
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) -- -- -- -- --
Portfolio turnover rate (%) 68 48 73 15 118
Fee reduction per share ($) -- -- -- -- --
Average brokerage commission rate(10) ($) N/A N/A 0.0183 0.0221 0.0076
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/94(1) 8/95 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.11 $15.84 $13.96 $14.49 $14.20
Net investment income (loss) (3) (0.09) (0.09) (0.13) (0.04) (0.18)
Net realized and unrealized gain (loss)
on investments and
foreign currency transactions 0.82 (1.24) 0.66 (0.25) (2.59)
Total from investment operations 0.73 (1.33) 0.53 (0.29) (2.77)
Less distributions:
Distributions from net realized gain on
investments sold and foreign currency
transactions -- (0.55) -- -- (0.11)
Net asset value, end of period $15.84 $13.96 $14.49 $14.20 $11.32
Total investment return at net asset value(5) (%) (4.83)(6) (8.38) 3.80 (2.00)(6) (19.67)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,480 14,368 32,342 30,147 17,320
Ratio of expenses to average net assets (%) 3.00(8) 2.77 2.64 2.90(8) 2.76
Ratio of net investment income (loss) to
average net assets (%) (1.40)(8) (0.66) (0.86) (1.52)(8) (1.19)
Portfolio turnover rate (%) 68 48 73 15 118
Average brokerage commission rate(10) ($) N/A N/A 0.0183 0.0221 0.0076
</TABLE>
(1) Class A and Class B shares commenced operations on September 8, 1987 and
March 7, 1994, respectively.
(2) Effective October 31, 1996, the fiscal year end changed from August 31 to
October 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) May not accord to amounts shown elsewhere in the financial statements due
to the timing of sales and repurchases of fund shares in relation to
fluctuating market values of the investments of the fund.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
GROWTH - PACIFIC BASIN EQUITIES FUND 15
<PAGE>
Short-Term Strategic Income Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL
CLASS A: JHSAX CLASS B: FRSWX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income. To pursue this goal,
the fund invests primarily in debt securities issued or guaranteed by:
o foreign governments and companies including those in emerging markets
o the U.S. Government, its agencies or instrumentalities
o U.S. companies
Under normal circumstances, the fund invests assets in all three of these
sectors, but may invest up to 100% in any one sector. The fund maintains an
average portfolio maturity of three years or less.
PORTFOLIO SECURITIES
[Clip Art] The fund may invest in all types of debt securities. The fund's U.S.
Government securities may include mortgage-backed securities. The fund may
invest up to 67% of assets in securities rated as low as B and their unrated
equivalents. Bonds rated lower than BBB/Baa are considered junk bonds. However,
the fund maintains an average portfolio quality rating of A, which is an
investment-grade rating.
Because the fund is non-diversified, it may invest more than 5% of assets in
securities of a single issuer, but no more than 25% of assets in the securities
of any one foreign government. The fund also may invest in certain other
investments, including derivatives, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] The value of your investment in the fund will fluctuate with changes
in currency exchange rates as well as interest rates. Typically, a rise in
interest rates causes a decline in the market value of fixed-income securities.
International investing, particularly in emerging markets, carries additional
risks, including currency, information, natural event and political risks. Junk
bonds may carry above-average credit and market risks and mortgage-backed
securities may carry extension and prepayment risks. These risks are defined in
"More about risk" starting on page 31.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Anthony A. Goodchild and Lawrence J. Daly lead the portfolio
management team. Messrs. Goodchild and Daly are senior vice presidents and
joined John Hancock Funds in July 1994, having been in the investment business
since 1968 and 1972, respectively.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.65% 0.65%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.48% 0.48%
Total fund operating expenses 1.43% 2.13%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $44 $74 $106 $196
Class B shares
Assuming redemption
at end of period $52 $87 $114 $204
Assuming no redemption $22 $67 $114 $204
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
16 INCOME - SHORT-TERM STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 8.85(4) 0.64 5.98 1.93 7.97 7.89 4.83
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.86 $9.32 $9.12 $8.47 $8.41 $8.46
Net investment income (loss) 0.65 0.83(2) 0.76(2) 0.77(2) 0.65 0.61(2)
Net realized and unrealized gain (loss) on
investments and
foreign currency transactions (0.55) (0.20) (0.53) (0.06) 0.05 (0.15)
Total from investment operations 0.10 0.63 0.23 0.71 0.70 0.46
Less distributions:
Dividends from net investment income (0.64) (0.83) (0.62) (0.61) (0.57) (0.52)
Distributions in excess of net investment income -- -- (0.04) -- -- (0.08)
Distributions in excess of net realized gain on
investments sold -- -- (0.12) -- -- --
Distributions from capital paid-in -- -- (0.10) (0.16) (0.08) (0.01)
Total distributions (0.64) (0.83) (0.88) (0.77) (0.65) (0.61)
Net asset value, end of period $9.32 $9.12 $8.47 $8.41 $8.46 $8.31
Total investment return at net asset value(3) (%) 1.16(4) 6.78 2.64 8.75 8.60 5.55
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 20,468 11,130 13,091 16,997 49,338 64,059
Ratio of expenses to average net assets (%) 1.37(4) 1.21 1.26 1.33 1.48 1.43
Ratio of net investment income (loss) to average
net assets (%) 8.09(4) 8.59 8.71 9.13 7.59 7.22
Portfolio turnover rate (%) 86 306 150 147 77 71
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/91(1) 10/92 10/93 10/94 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.01 $9.31 $9.11 $8.46 $8.40 $8.45
Net investment income (loss) 0.76 0.87 0.75(2) 0.70(2) 0.70(2) 0.59 0.55(2)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.01 (0.80) (0.20) (0.53) (0.06) 0.05 (0.15)
Total from investment operations 0.77 0.07 0.55 0.17 0.64 0.64 0.40
Less distributions:
Dividends from net investment income (0.76) (0.77) (0.75) (0.56) (0.56) (0.52) (0.47)
Distributions in excess of net
investment income -- -- -- (0.04) -- -- (0.07)
Distributions in excess of net realized
gain on investments sold -- -- -- (0.12) -- -- --
Distributions from capital paid-in -- -- -- (0.10) (0.14) (0.07) (0.01)
Total distributions (0.76) (0.77) (0.75) (0.82) (0.70) (0.59) (0.55)
Net asset value, end of period $10.01 $9.31 $9.11 $8.46 $8.40 $8.45 $8.30
Total investment return at net asset
value(3) (%) 8.85(4) 0.64 5.98 1.93 7.97 7.89 4.83
Total adjusted investment return at net
asset value(3,5) (%) 8.81(4) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 218,562 236,059 142,873 98,390 84,601 48,137 25,908
Ratio of expenses to average net assets (%) 1.89(4) 2.07 2.01 1.99 2.07 2.12 2.13
Ratio of adjusted expenses to average net
assets(6) (%) 1.93(4) -- -- -- -- -- --
Ratio of net investment income to average
net assets (%) 8.72(4) 8.69 7.81 8.00 8.40 7.07 6.51
Ratio of adjusted net investment income
to average net assets(6) (%) 8.68(4) -- -- -- -- -- --
Portfolio turnover rate (%) 22 86 306 150 147 77 71
Fee reduction per share ($) 0.0039 -- -- -- -- -- --
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1992 and
December 28, 1990, respectively.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
INCOME - SHORT-TERM STRATEGIC INCOME FUND 17
<PAGE>
World Bond Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL
CLASS A: FGLAX CLASS B: FGLIX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks a high total investment return -- a combination of
current income and capital appreciation. To pursue this goal, the fund invests
at least 65% of assets in debt securities issued or guaranteed by:
o foreign governments and companies including those in emerging markets
o multinational organizations such as the World Bank
o the U.S. Government, its agencies or instrumentalities
Under normal circumstances, the fund expects to invest in the securities markets
of at least three countries at any one time, potentially including the U.S. The
fund does not maintain a fixed allocation of assets.
PORTFOLIO SECURITIES
[Clip Art] The fund may invest in all types of debt securities of any maturity,
including preferred and convertible securities. Less than 35% of assets may be
invested in junk bonds rated as low as CCC/Caa, or equivalent.
Because the fund is non-diversified, it may invest more than 5% of assets in
securities of a single issuer, but no more than 25% of assets in the securities
of any one foreign government.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain other investments, including derivatives, and may engage in
other investment practices.
RISK FACTORS
[Clip Art] As with most bond funds, the value of your investment in the fund
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of fixed income securities.
International investing, particularly in emerging markets, carries additional
risks, including currency, information, natural event and political risks. Junk
bonds may carry above-average credit and market risks and mortgage-backed
securities may carry extension and prepayment risks. These risks are defined in
"More about risk" starting on page 31.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Anthony A. Goodchild and Lawrence J. Daly lead the portfolio
management team. Messrs. Goodchild and Daly are senior vice presidents and
joined John Hancock Funds in July 1994, having been in the investment business
since 1968 and 1972, respectively.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.75% 0.75%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.63% 0.63%
Total fund operating expenses 1.68% 2.38%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $61 $96 $132 $235
Class B shares
Assuming redemption
at end of period $74 $104 $147 $254
Assuming no redemption $24 $74 $127 $254
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
18 INCOME - WORLD BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 20.09 5.47 11.84 10.44 1.72 6.77 (1.88) 11.51 4.78 2.43
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.57 $9.76 $9.62 $8.85 $9.30 $9.28
Net investment income (loss) 0.64 0.76 0.64(2) 0.57(2) 0.51(2) 0.53(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.74) (0.10) (0.78) 0.48 (0.02) (0.25)
Total from investment operations (0.10) 0.66 (0.14) 1.05 0.49 0.28
Less distributions:
Dividends from net investment income (0.71) (0.38) (0.11) (0.59) (0.50) (0.25)
Distributions in excess of net investment
income -- (0.04) -- -- -- (0.02)
Distributions from capital paid-in -- (0.38) (0.52) (0.01) (0.01) (0.26)
Total distributions (0.71) (0.80) (0.63) (0.60) (0.51) (0.53)
Net asset value, end of period $9.76 $9.62 $8.85 $9.30 $9.28 $9.03
Total investment return at net asset
value(3) (%) (0.88)(4) 7.14 (1.30) 12.25 5.48 3.15
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 12,880 12,882 8,949 35,334 27,537 28,959
Ratio of expenses to average net assets (%) 1.41(4) 1.46 1.59 1.48 1.58 1.68(5)
Ratio of net investment income (loss)
to average net assets (%) 7.64(4) 7.89 7.00 6.43 5.54 5.84
Portfolio turnover rate (%) 476 363 174 263 214 153
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/88 10/89 10/90 10/91 10/92 10/93 10/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.32 $10.98 $10.21 $10.38 $10.44 $9.74 $9.62
Net investment income (loss) 0.67 0.83 0.85 0.90 0.78 0.72 0.59(2)
Net realized and unrealized gain
(loss) on investments
and foreign currency transactions 1.31 (0.27) 0.28 0.13 (0.59) (0.09) (0.78)
Total from investment operations 1.98 0.56 1.13 1.03 0.19 0.63 (0.19)
Less distributions:
Dividends from net investment income (0.68) (0.84) (0.85) (0.73) (0.89) (0.33) (0.06)
Distributions from net realized gain
on investments (0.64) (0.49) -- (0.24) -- -- --
Distributions in excess of net
investment income -- -- -- -- -- (0.04) --
Distributions from capital paid-in -- -- (0.11) -- -- (0.38) (0.52)
Total distributions (1.32) (1.33) (0.96) (0.97) (0.89) (0.75) (0.58)
Net asset value, end of period $10.98 $10.21 $10.38 $10.44 $9.74 $9.62 $8.85
Total investment return at net
asset value(3) (%) 20.09 5.47 11.84 10.44 1.72 6.77 (1.88)
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 174,833 255,214 186,524 192,687 199,102 197,166 114,656
Ratio of expenses to average net
assets (%) 1.74 1.75 1.82 1.90 1.91 1.91 2.17
Ratio of net investment income
(loss) to average net assets (%) 6.04 8.07 8.67 8.74 7.59 7.45 6.41
Portfolio turnover rate (%) 364 333 186 159 476 363 174
<CAPTION>
- --------------------------------------------------------------------------------
Class B - period ended: 10/95 10/96 10/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.85 $9.30 $9.28
Net investment income (loss) 0.55(2) 0.45(2) 0.47(2)
Net realized and unrealized gain
(loss) on investments
and foreign currency transactions 0.44 (0.02) (0.25)
Total from investment operations 0.99 0.43 0.22
Less distributions:
Dividends from net investment income (0.53) (0.44) (0.23)
Distributions from net realized gain
on investments -- -- --
Distributions in excess of net
investment income -- -- (0.01)
Distributions from capital paid-in (0.01) (0.01) (0.23)
Total distributions (0.54) (0.45) (0.47)
Net asset value, end of period $9.30 $9.28 $9.03
Total investment return at net
asset value(3) (%) 11.51 4.78 2.43
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 65,600 45,897 24,082
Ratio of expenses to average net
assets (%) 2.16 2.25 2.38(5)
Ratio of net investment income
(loss) to average net assets (%) 6.03 4.87 5.13
Portfolio turnover rate (%) 263 214 153
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Annualized.
(5) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
INCOME - WORLD BOND FUND 19
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock international/global funds offer two classes of shares, Class A
and Class B. In addition, Class C shares are available for International Fund.
Each class has its own cost structure as outlined below, allowing you to choose
the one that best meets your requirements. For more details, see "How sales
charges are calculated." Your financial representative can help you decide which
share class is best for you.
- --------------------------------------------------------------------------------
Class A - for all funds
- --------------------------------------------------------------------------------
o Front-end sales charges. There are several ways to reduce these
charges, described under "Sales charge reductions and waivers" on the
following page.
o Lower annual expenses than Class B and Class C shares.
- --------------------------------------------------------------------------------
Class B - for all funds
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right
away.
o Higher annual expenses than Class A shares.
o A contingent deferred sales charge that declines from 5% over six
years (3% over four years for Short-Term Strategic Income Fund).
o Automatic conversion to Class A shares after eight years, thus
reducing future annual expenses.
- --------------------------------------------------------------------------------
Class C - for International Fund
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right
away.
o Higher annual expenses than Class A shares.
o A 1% contingent deferred sales charge on shares sold within one year
of purchase.
o No automatic conversion to Class A shares, so the fund's annual
expenses continue at the same level throughout the life of your
investment.
For actual past expenses of Class A and Class B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges - Short-Term Strategic Income
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - World Bond
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - growth funds
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $49,999 5.00% 5.26%
$50,000 - $99,999 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments (all funds)
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
20 YOUR ACCOUNT
<PAGE>
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) on shares you sell within a certain time after you bought them, as
described in the table below. There is no CDSC on shares acquired through
reinvestment of dividends. The CDSC is based on the original purchase cost or
the current market value of the shares being sold, whichever is less. The longer
the time between the purchase and the sale of shares, the lower the rate of the
CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on Short-Term CDSC on all
purchase Strategic Income other fund shares
shares being sold being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
Class C Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% on shares you sell within one year of purchase. There is no
CDSC on shares acquired through reinvestment of dividends. The CDSC is based on
the original purchase cost or the current market value of the shares being sold,
whichever is less.
CDSC calculations are based on the number of shares involved, not on the value
of your account. Each time you place a request to sell shares we will first sell
any shares in your account that carry no CDSC.
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge. Retirement plans investing $1 million in
Class B shares may add that value to Class A purchases to calculate sales
charges.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, contact your
financial representative or Signature Services or consult the SAI (see the back
cover of this prospectus).
Group Investment Program A group may be treated as a single purchase under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial investments must
total at least $250) and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
o to purchase a John Hancock Declaration annuity
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
YOUR ACCOUNT 21
<PAGE>
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee benefit plan with John
Hancock Funds into an individual account in a John Hancock fund
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 eligible
employees (one-year CDSC applies)
o clients of AFA, when their funds are transferred directly to Global
Technology Fund from accounts managed by AFA
o certain former shareholders of John Hancock National Aviation & Technology
Fund and Nova Fund (applies to Global Technology Fund only)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The
minimum initial investments for the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in John
Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to add
privileges later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any purchase, exchange or sale of
shares.
22 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail them to Signature Services slip is available, include
(address below). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
them to Signature Services
(address below).
By exchange
[Clip art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clip art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clip art] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
- ----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone number
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
YOUR ACCOUNT 23
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip art] o Accounts of any type. o Write a letter of instruction
or complete a stock power
o Sales of any amount. indicating the fund name, your
share class, your account
number, the name(s) in which
the account is registered and
the dollar value or number of
shares you wish to sell.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clip art] o Most accounts. o For automated service 24 hours
a day using your touch-tone
o Sales of up to $100,000. phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clip art] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clip art] o Accounts of any type. o Obtain a current prospectus for
the fund into which you are
o Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
By check
[Clip art] o Short-Term Strategic Income o Request checkwriting on your
Fund only. account application.
o Any account with o Verify that the shares to be
checkwriting privileges. sold were purchased more
than 10 days earlier or were
o Sales of over $100. purchased by wire.
o Write a check for any amount
over $100.
----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
----------------------------------------
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
24 YOUR ACCOUNT
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
The signature guarantee must be from a member of the Signature Guarantee
Medallion Program (generally, a broker or securities dealer). We may refuse any
other source. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip art]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o If the names of all trustees are
not registered on the account,
please also provide a copy of the
trust document certified within the
past twelve months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
YOUR ACCOUNT 25
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is received by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Signature Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are taken, Signature Services is not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B and Class
C shares will continue to age from the original date and will retain the same
CDSC rate as they had before the exchange, except that the rate will change to
the new fund's rate if that rate is higher. A CDSC rate that has increased will
drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
Foreign currencies Purchases must be made in U.S. dollars. Purchases in foreign
currencies must be converted, which may result in a fee and delayed execution.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The income funds generally declare income dividends daily and pay them
monthly. These income dividends begin accruing the day after payment is received
by the fund and continue through the day your shares are actually sold. The
growth funds pay income dividends, if any, annually. All funds distribute
capital gains, if any, annually.
26 YOUR ACCOUNT
<PAGE>
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive from the growth funds.
Dividends may include a return of capital.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Signature Services,
Inc." Deliver your check and application to your financial representative or
Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and there
is no limit to the number of payees you may have, as long as they are all on
the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial representative
or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including Traditional and Roth IRAs, SIMPLE IRAs, SIMPLE 401(k)s, SEPs, 401(k)s,
money purchase pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund (except tax-free income funds) with a low
minimum investment of $250 or, for some group plans, no minimum investment at
all. To find out more, call Signature Services at 1-800-225-5291.
YOUR ACCOUNT 27
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock international/global fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock international/global
funds may include individuals who are affiliated with the investment adviser.
However, the majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[The following information was represented as a flow chart in the printed
material.]
-----------------
Shareholders
-----------------
Distribution and
shareholder services
-------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-------------------------------------------------
-------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Handles shareholder services, including record-
keeping and statements, distribution of dividends
and processing of buy and sell requests.
------------------------------------------------------
-------------------------------
Subadvisers
American Fund Advisors, Inc.
1415 Kellum Place
Garden City, NY 11530
John Hancock Advisers
International Limited
34 Dover Street
London, UK W1X 3RA
Indocam Asia Advisers Limited
One Exchange Square
Hong Kong
Indocam International
Investment Services
90 Boulevard Pasteur
Paris, France 75015
Provide portfolio management
to certain funds
-------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodians
Investors Bank & Trust Co.
200 Clarendon Street
Boston, MA 02116
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Hold the funds' assets, settle all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
Asset
management
------------------------------------
Trustees
Supervise the funds' activities.
------------------------------------
28 FUND DETAILS
<PAGE>
Accounting compensation The funds (except for Global Technology) compensate the
adviser for performing tax and financial management services. Annual
compensation is not expected to exceed 0.02% of each fund's average net assets.
Global Technology pays a $100,000 administration fee to the adviser.
Portfolio trades In placing portfolio trades, the adviser or subadvisers may use
brokerage firms that market the fund's shares or are affiliated with John
Hancock Mutual Life Insurance Company or subadvisers, but only when the adviser
believes no other firm offers a better combination of quality execution (i.e.,
timeliness and completeness) and favorable price.
Investment goals Except for European Equity Fund, Global Rx Fund, International
Fund and World Bond Fund, each fund's investment goal is fundamental and may
only be changed with shareholder approval.
Diversification Except for Global Rx Fund, Short-Term Strategic Income Fund and
World Bond Fund, all of the international/global funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation authorizing annual fees of this type). The 12b-1 fee rates
vary by fund and by share class, according to Rule 12b-1 plans adopted by the
funds. The sales charges and 12b-1 fees paid by investors are detailed in the
fund-by-fund information. The portions of these expenses that are reallowed to
financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B and Class C
shares, interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
European Equity Fund N/A N/A
Global $ 795,893 2.56%
Global Rx $ 466,209 1.06%
Global Technology $ 1,198,204 2.00%
International $ 460,399 4.90%
Pacific Basin Equities $ 1,045,211 3.85%
Short-Term Strategic Income $ 2,554,608 7.17%
World Bond $ 5,324,432 15.75%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Class C Class C shares began operations after the 1997 fiscal year. Therefore,
there are no unreimbursed expenses to report.
Initial compensation Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
Annual compensation Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
FUND DETAILS 29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Short-Term Strategic Income Fund
Up to $99,999 3.00% 2.26% 0.25% 2.50%
$100,000 - $499,999 2.50% 2.01% 0.25% 2.25%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
World Bond Fund
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Growth funds
Up to $49,999 5.00% 4.01% 0.25% 4.25%
$50,000 - $99,999 4.50% 3.51% 0.25% 3.75%
$100,000 - $249,999 3.50% 2.61% 0.25% 2.85%
$250,000 - $499,999 2.50% 1.86% 0.25% 2.10%
$500,000 - $999,999 2.00% 1.36% 0.25% 1.60%
Regular investments of
$1 million or more (all funds)
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
Waiver investments(2) -- 0.00% 0.25% 0.25%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
Short-Term Strategic Income Fund
All amounts 2.25% 0.25% 2.50%
All other funds
All amounts 3.75% 0.25% 4.00%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class C investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 0.75% 0.25% 1.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition. For European
Equity Fund, John Hancock Funds may allow an amount up to the full
applicable sales charge.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
30 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and practices, along with the risks associated with them. The funds
follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the performance of a John
Hancock international/global fund will be positive over any period of time --
days, months or years. However, international markets have performed better over
the past two decades than domestic markets.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Information risk The risk that key information about a security or market is
inaccurate or unavailable.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another security
or index) is used as a hedge against an opposite position that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than it was worth at an earlier time. Market risk may affect a
single issuer, industry, sector of the economy or the market as a whole. Common
to all stocks and bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
Year 2000 risk The risk that the funds' operations could be disrupted by the
year 2000-related computer system problems. Although the adviser and the funds'
service providers are taking steps to address this issue, there may still be
some risk of adverse effects. Common to all mutual funds.
FUND DETAILS 31
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices
- --------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semiannual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
o Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
European Pacific Short-Term
Equity Global Global Inter- Basin Strategic World
Fund Global RX Technology national Equities Income Bond
- ----------------------------------------------------------------------------------------------------------------------------------
Investment practices
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing; reverse repurchase agreements
The borrowing of money from banks or through
reverse repurchase agreements.
Leverage, credit risks. 33.3 10 33.3 10 33.3 33.3 10 10
Currency trading The direct trading or
holding of foreign currencies as an asset.
Currency risk. * * * * * * * *
Repurchase agreements The purchase of a
security that must later be sold back
to the issuer at the same price plus interest.
Credit risk. * * * * * * * *
Securities lending The lending of securities
to financial institutions, which provide cash
or government securities as collateral.
Credit risk. 33.3 10 33.3 33.3 33.3 33.3 30 30
Short sales The selling of securities which
have been borrowed on the expectation that
the market price will drop.
o Hedged. Hedged leverage, market,
correlation, liquidity, opportunity risks. o -- o -- o o -- --
o Speculative. Speculative leverage, market,
liquidity risks. -- -- o -- o -- -- --
Short-term trading Selling a security soon
after purchase. A portfolio engaging
in short-term trading will have higher
turnover and transaction expenses.
Market risk. * * * * * * * *
When-issued securities and forward commitments
The purchase or sale of securities for
delivery at a future date; market value may
change before delivery. Market, opportunity,
leverage risks. * * * * * * * *
- --------------------------------------------------------------------------------------------------------------------------------
Conventional securities
Foreign debt securities Debt securities
issued by foreign governments or
companies. Credit, currency, interest rate,
market, political risks. 20 5 35(1) 10(2) 35(1) 35(1) *(1) *(1)
Non-investment-grade debt securities Debt
securities rated below BBB/Baa are considered
junk bonds. Credit, market, interest rate,
liquidity, valuation, information risks. -- -- 35 10(2) -- -- 67 35
Restricted and illiquid securities.
Securities not traded on the open market.
May include illiquid Rule 144A securities.
Liquidity, valuation, market risks. 15 15 15 15 15 15 15 15
- --------------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Asset-backed securities Securities backed
by unsecured debt, such as credit card
debt; these securities are often
guaranteed or over-collateralized to
enhance their credit quality. Credit,
interest rate risks. -- o o o o o * *
Mortgage-backed securities Securities
backed by pools of mortgages, including
pass-through certificates, PACs, TACs
and other senior classes of
collateralized mortgage obligations
(CMOs). Credit, extension, prepayment,
liquidity, interest rate risks. -- o o o o o * *
Participation interests Securities
representing an interest in another
security or in bank loans. Credit,
interest rate, liquidity,
valuation risks. -- -- -- 10(2) -- -- 15(3) 15(3)
</TABLE>
32 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Higher-risk securities and practices (cont'd)
- ----------------------------------------------------------------------------------------------------------------------------------
European Pacific Short-Term
Equity Global Global Inter- Basin Strategic World
Fund Global RX Technology national Equities Income Bond
- ----------------------------------------------------------------------------------------------------------------------------------
Leveraged derivative securities
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Currency contracts Contracts involving
the right or obligation to buy or sell
a given amount of foreign currency at
a specified price and future date.
o Hedged. Currency, hedged leverage,
correlation, liquidity, opportunity
risks. * * * * * * * *
o Speculative. Currency, speculative
leverage, liquidity risks. * o o o o o o o
Financial futures and options;
securities and index options Contracts
involving the right or obligation to
deliver or receive assets or money
depending on the performance of one or
more assets or an economic index.
o Futures and related options.
Interest rate, currency, market,
hedged or speculative leverage,
correlation, liquidity, opportunity
risks. * * * o * * * *
o Options on securities and indices.
Interest rate, currency, market,
hedged or speculative leverage,
correlation, liquidity, credit,
opportunity risks. * o o o o o o o
Structured securities Indexed
and/or leveraged mortgage-backed
and other debt securities, including
principal-only and interest-only
securities, leveraged floating rate
securities and others. These securities
tend to be highly sensitive to interest
rate movements and their performance
may not correlate to these movements
in a conventional fashion. Credit,
interest rate, extension, prepayment,
market, speculative leverage,
liquidity, valuation risks. -- * * 10(2) * * * *
</TABLE>
(1) No more than 25% of the fund's assets will be invested in securities of
any one foreign government.
(2) Included in the 10% limitation on debt securities.
(3) Included in the 15% limitation on illiquid securities.
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
[The table below was represented by a bar chart in the printed materials.]
<TABLE>
<CAPTION>
Quality rating Short-Term Strategic Quality rating World Bond
(S&P/Moody's)(2) Income Fund (S&P/Moody's)(2) Fund
<S> <C> <C> <C> <C> <C>
Invest- AAA/Aaa 40.8% Invest- AAA/Aaa 70.2%
ment- AA/Aa 0.0% ment- AA/Aa 0.0%
Grade A/A 5.4% Grade A/A 0.4%
Bonds BBB/Baa 8.0% Bonds BBB/Baa 0.3%
- ------------------------------------------------------------------------------------------------------
Junk BB/Ba 32.0% Junk BB/Ba 17.9%
Bonds B/B 9.9% Bonds B/B 8.3%
CCC/Caa 0.0% CCC/Caa 0.0%
CC/Ca 0.0% CC/Ca 0.0%
C/C 0.0% C/C 0.0%
D 0.0% D 0.0%
% of portfolio in bonds 96.1% % of portfolio in bonds 97.1%
</TABLE>
o Rated by Standard & Poor's or Moody's Rated by the adviser
(1) Average weighted quality distribution for the most recent fiscal year.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
FUND DETAILS 33
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
international/global funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/semiannual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus). You may visit
the Securities and Exchange Commission's Internet website (www.sec.gov) to view
the SAI, material incorporated by reference and other information.
To request a free copy of the current annual/semiannual report or SAI, please
write or call:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
Internet: www.jhancock.com/funds
[LOGO] John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock(R) (C) 1996 John Hancock Funds, Inc.
GLIPN 6/98
<PAGE>
JOHN HANCOCK GLOBAL FUND
JOHN HANCOCK WORLD BOND FUND
Class A and Class B Shares
Statement of Additional Information
June 1, 1998
This Statement of Additional Information provides information about John Hancock
Global Fund ("Global Fund") and John Hancock World Bond Fund ("World Bond Fund")
(collectively, the "Funds") in addition to the information that is contained in
the combined International/Global Funds' Prospectus dated June 1, 1998 (the
"Prospectus"). The Funds are a diversified (Global Fund) and a non-diversified
(World Bond Fund) series of John Hancock Investment Trust III (the "Trust"),
formerly Freedom Investment Trust II.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Funds 2
Investment Objectives and Policies 2
Investment Restrictions 16
Those Responsible for Management 19
Investment Advisory and Other Services 27
Distribution Contracts 30
Net Asset Value 32
Initial Sales Charge on Class A Shares 33
Deferred Sales Charge on Class B Shares 35
Special Redemptions 39
Additional Services and Programs 39
Description of the Funds' Shares 41
Tax Status 42
Calculation of Performance 47
Brokerage Allocation 50
Transfer Agent Services 53
Custody of Portfolio 53
Independent Auditors 53
Appendix A A-1
Financial Statements F-1
1
<PAGE>
ORGANIZATION OF THE FUNDS
The Fund are series of the Trust, an open-end investment management company
organized as a Massachusetts business trust on March 31, 1986 under the laws of
The Commonwealth of Massachusetts. The Funds commenced operations on March 31,
1986 (Global Fund) and on July 31, 1986 (World Bond Fund).
John Hancock Advisers, Inc. (the "Adviser") is the Funds' investment adviser.
John Hancock Advisers International Limited ("JH Advisers International") is the
sub-Adviser for Global Fund. The Adviser is an indirect wholly-owned subsidiary
of John Hancock Mutual Life Insurance Company (the "Life Company"), a
Massachusetts life insurance company chartered in 1862, with national
headquarters at John Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's investment
objectives and policies in the Prospectus. There is no assurance that either
Fund will achieve its investment objective.
Global Fund
The Global Fund's investment objective is to achieve long-term growth of capital
primarily through investment in common stocks of companies domiciled in foreign
countries and in the United States. Any income received on the Fund's
investments will be incidental to the Fund's objective of long-term growth of
capital. Normally, the Fund will invest in the securities markets of at least
three countries, including the United States.
Under normal circumstances, at least 65% of the Global Fund's total assets will
consist of common stocks and securities convertible into common stock. However,
if deemed advisable by the Adviser, the Fund may invest in any other type of
security including preferred stocks, warrants, bonds, notes and other debt
securities (including Eurodollar securities) or obligations of domestic or
foreign governments and their political subdivisions. The Fund will only invest
in investment grade debt securities, which are securities rated within the four
highest rating categories of Standard & Poor's Rating Group ("S&P") (AAA, AA, A,
BBB) or Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, Baa).
Investments in the lowest investment grade rating category may have speculative
characteristics and therefore may involve higher risks. Investment grade debt
securities are subject to market fluctuations and changes in interest rates;
however, the risk of loss of income and principal is generally expected to be
less than with lower quality debt securities. In the event a debt security is
downgraded below investment grade, the Adviser will consider this event in its
determination of whether the Fund should continue to hold the security. See
Appendix A to this Statement of Additional Information for a description of the
various ratings of investment grade debt securities. The global allocation of
assets is not fixed, and will vary from time to time based on the judgment of
the Adviser and JH Advisers International. Global Fund will maintain a flexible
investment policy and will invest in a diversified portfolio of securities of
companies and governments located throughout the world. In making the allocation
of assets among various countries and geographic regions, the Adviser and JH
Advisers International ordinarily consider such factors as prospects for
relative economic growth between foreign countries; expected levels of inflation
2
<PAGE>
and interest rates; government policies influencing business conditions; and
other pertinent financial, tax, social, political, currency and national factors
all in relation to the prevailing prices of the securities in each country or
region.
When the Adviser believes that adverse market conditions are present, for
temporary defensive purposes, the Fund may hold or invest all or part of its
assets in cash and in domestic and foreign money market instruments, including
but not limited to, governmental obligations, certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate debt securities and
repurchase agreements.
Any income received on the Fund's investments will be incidental to the Fund's
objective of long-term growth of capital.
World Bond Fund
The World Bond Fund's investment objective is to achieve a high total investment
return, a combination of current income and capital appreciation, by investing
in a global portfolio of fixed income securities. Normally, the Fund will invest
in fixed income securities denominated in at least three currencies or
multi-currency units, including the U. S. Dollar.
Under normal circumstances, World Bond Fund will invest primarily (at least 65%
of total assets) in fixed income securities issued or guaranteed by: (i) the
U.S. Government, its agencies or instrumentalities; (ii) foreign governments
(including foreign states, provinces and municipalities) or their political
subdivisions, authorities, agencies or instrumentalities; (iii) international
organizations backed or jointly owned by more than one national government, such
as the International Bank for Reconstruction and Development, European
Investment Bank, Asian Development Bank, European Coal and Steel Community and
Inter-American Development Bank; and (iv) foreign corporations or financial
institutions. The term "fixed income securities" includes debt obligations of
all types, including bonds, debentures and notes, and certain stocks such as
preferred stocks. A fixed income security may itself be convertible into or
exchangeable for equity securities, or may carry with it the right to acquire
equity securities evidenced by warrants attached to the security or acquired as
part of a unit with a security. The Fund has registered as a "non-diversified"
fund so that it will be able to invest more than 5% of its assets in obligations
of a single foreign government or other issuer. The Fund will not invest more
than 25% of its total assets in securities issued by any one foreign government.
World Bond Fund may invest less than 35% of its total assets in fixed income
securities which are high yield, high risk securities in the lower rating
categories of the established rating services. These securities are rated below
Baa by Moody's or below BBB by S&P. The Fund may invest in securities rated as
low as Caa by Moody's or CCC by S&P, which may indicate that the obligations are
speculative to a high degree and in default. These securities are generally
referred to as "emerging market" or "junk" bonds. See the Appendix attached to
this Statement of Additional Information for a description of the
characteristics of the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the minimum ratings noted above. The credit ratings of Moody's
and S&P (the "Rating Agencies") may not be changed by the Rating Agencies in a
timely fashion to reflect subsequent economic events. These credit ratings
evaluate credit risk but not general market risk. The Fund may also invest in
unrated securities which, in the opinion of the Adviser, offer comparable yields
and risks to the rated securities in which the Fund may invest.
3
<PAGE>
Debt securities that are rated in the lower ratings categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the ability of the issuer to make
payments of interest and principal. The market price and liquidity of lower
rated fixed income securities generally respond to short-term corporate and
market developments to a greater extent than the price and liquidity of higher
rated securities, because these developments are perceived to have a more direct
relationship to the ability of an issuer of lower rated securities to meet its
ongoing debt obligations. Although the Adviser seeks to minimize these risks
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions, there can be no
assurance that the Adviser will be successful in limiting the Fund's exposure to
the risks associated with lower rated securities. Because the World Bond Fund
may invest in securities in the lower rated categories, the achievement of the
Fund's goals is more dependent on the Adviser's ability than would be the case
if the Fund were investing in securities in the higher rated categories.
Reduced volume and liquidity in the high yield high risk bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the World Bond Fund's investments in high yield high risk securities and to
value accurately these assets. The reduced availability of reliable, objective
data may increase the Fund's reliance on management's judgment in valuing high
yield high risk bonds. In addition, the Fund's investments in high yield high
risk securities may be susceptible to adverse publicity and investor
perceptions, whether or not justified by fundamental factors. The Fund's
investments, and consequently its net asset value, will be subject to the market
fluctuations and risk inherent in all securities.
World Bond Fund may invest in fixed income securities denominated in any
currency or a multi-national currency unit. The European Currency Unit ("ECU")
is a composite currency consisting of specified amounts of each of the
currencies of ten member countries of the European Economic Community. The Fund
may also invest in fixed income securities denominated in the currency of one
country although issued by a governmental entity, corporation or financial
institution of another country. For example, the Fund may invest in a Japanese
yen-denominated fixed income security issued by a United States corporation.
This type of investment involves credit risks associated with the issuer and
currency risks associated with the currency in which the obligation is
denominated.
World Bond Fund will maintain a flexible investment policy and its portfolio
assets may be shifted among fixed income securities denominated in various
foreign currencies that the Adviser believes will provide relatively high rates
of income or potential capital appreciation in U.S. Dollars. As with all debt
securities, the prices of the Fund's portfolio securities will generally
increase when interest rates decline and decrease when interest rates rise.
Similarly, if the foreign currency in which a portfolio security is denominated
appreciates against the U.S. Dollar, the total investment return from that
security will be enhanced further. Conversely, if the foreign currency in which
a portfolio security is denominated depreciates against the U.S. Dollar, total
investment return from that security will be adversely affected.
With respect to the international organizations described above, the
governmental members of such organizations, or "stockholders," usually make
initial capital contributions to the organization and in many cases are
committed to make additional capital contributions if the organization is unable
to repay its borrowings. In accordance with guidelines promulgated by the Staff
of the Securities and Exchange Commission (the "SEC"), the Fund will consider as
an industry any category of international organizations designated by the SEC.
4
<PAGE>
The Fund may invest in corporate and commercial obligations, such as medium-term
notes and commercial paper, which may be indexed to foreign currency exchange
rates.
In selecting fixed income securities for World Bond Fund's portfolio, the
Adviser ordinarily considers such factors as the strengths and weaknesses of the
currencies in which the securities are denominated; expected levels of inflation
and interest rates; government policies influencing business conditions; the
financial condition of the issuer; and other pertinent financial, tax, social,
political and national factors. The average maturity of the Fund's portfolio
securities will vary based upon the Adviser's assessment of economic and market
conditions.
When the Adviser determines that adverse market conditions are present, for
temporary defensive purposes, the Fund may hold or invest all or part of its
assets in cash and in domestic and foreign money market instruments, including
but not limited to governmental obligations, certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate debt securities and
repurchase agreements.
World Bond Fund is a "non-diversified" fund in order to permit more than 5% of
its assets to be invested in the obligations of any one issuer. Since a
relatively high percentage of the Fund's assets may be invested in the
obligations of a limited number of issuers, the value of the Fund's shares may
be more susceptible to a single economic, political or regulatory event, and to
the credit and market risks associated with a single issuer.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Fund as initial criteria for the selection of portfolio securities. Among
the factors which will be considered are the long-term ability of the issuer to
pay principal and interest and general economic trends. Appendix A contains
further information concerning the rating of Moody's and S&P and their
significance. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated, or its rating may be reduced below minimum required for
purchase by the Fund.
Neither of these events will require the sale of the securities by the Fund.
Time Deposits. The Funds' time deposits are non-negotiable deposits maintained
for a stated period of time at a stated interest rate. If the Fund purchases
time deposits maturing in seven days or more, it will treat those longer-term
time deposits as illiquid.
Investments in Foreign Securities. The Funds may invest in the securities of
foreign issuers including securities in the form of sponsored or unsponsored
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or
other securities convertible into securities of corporations domiciled in
foreign countries. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets
and EDRs, in bearer form, are designed for use in European securities markets.
ADRs are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying securities. EDRs are European receipts
evidencing a similar arrangement.
Foreign Currency Transactions. The foreign currency transactions of each Fund
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. Each Fund may also
enter into forward foreign currency contracts involving currencies of the
5
<PAGE>
different countries in which it will invest either as a hedge against possible
variations in the foreign exchange rate between these currencies, for
speculative purposes, as a substitute for investing in securities denominated in
that currency or in order to create a synthetic position consisting of a
security issued in one country and denominated in the currency of another
country. Forward foreign currency contracts involve contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. Transaction hedging is the purchase or sale of
forward foreign currency contracts with respect to specific receivables for
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities denominated in foreign currencies. Portfolio hedging is the
use of forward foreign currency contracts to offset portfolio security positions
denominated or quoted in such foreign currencies. The Funds will not attempt to
hedge all of their foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by the Adviser, in
the case of Global Fund or the Adviser or JH Advisers International, in the case
of World Bond Fund. There is no limitation on the value of a Fund's assets that
may be committed to forward contracts or on the term of a forward contract.
If the Fund enters into a forward contract requiring it to purchase foreign
currency, its custodian bank will segregate cash or liquid securities, of any
type or maturity, in a separate account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of such forward
contract. Those assets will be valued at market daily and if the value of the
assets in the separate account declines, additional cash or liquid assets will
be placed in the account so that the value of the account will equal the amount
of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
When the Adviser or JH Advisers International believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, a Fund may enter into a forward contract to sell or buy the
amount of the former foreign currency approximating the value of some or all of
that Fund's portfolio securities denominated in such foreign currency. This
second investment practice is generally referred to as "cross-hedging". The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
It is impossible to forecast the market value of a particular portfolio security
at the expiration of the contract. Accordingly, it may be necessary for a Fund
to purchase additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount of
foreign currency that the Fund is obligated to deliver and if a decision is made
to sell the security and make delivery of the foreign currency.
The cost to the Fund of engaging in foreign currency transactions varies with
such factors as that currency involved, the length of the contract period and
the market conditions then prevailing. Since transactions in foreign currency
are usually conducted on a principal basis, no fees or commissions are involved.
6
<PAGE>
Although the Funds value their assets daily in terms of United States dollars,
neither Fund intends to convert its holdings of foreign currencies into United
States dollars on a daily basis. A Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell the currency to the dealer.
Risks in Foreign Securities. Investments in foreign securities may involve
certain risks not present in domestic securities. Because of the following
considerations, shares of the Global Fund and the World Bond Fund should not be
considered a complete investment program. There is generally less publicly
available information about foreign companies and other issuers comparable to
reports and ratings that are published about issuers in the United States. There
may be difficulty in enforcing legal rights outside the United States. Foreign
issuers are also generally not subject to uniform accounting and auditing and
financial reporting standards, practices and requirements comparable to those
applicable to United States issuers.
Security trading practices abroad may offer less protection to investors such as
the Funds. It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Similarly, volume
and liquidity in most foreign bond markets is less than in the United States and
at times, volatility of price can be greater than in the United States. Fixed
commissions on foreign exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed issuers than in the United States. In addition, foreign
securities may be denominated in the currency of the country in which the issuer
is located. Consequently, changes in the foreign exchange rate will affect the
value of the Funds' shares and dividends.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of a
Fund, political or social instability, or diplomatic developments which could
affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The dividends and interest payable on certain of the Funds' foreign portfolio
securities (and, in some cases, capital gains) may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income
available for distribution to each Fund's shareholders. See "TAX STATUS".
Investors should understand that the expense ratio of each Fund will be higher
than that of investment companies investing in domestic securities since the
expenses of the Funds, such as the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Funds, are higher.
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These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens,
inflation rates or currency exchange rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. The Funds may be required to establish special
custodial or other arrangements before making certain investments in those
countries. Securities of issuers located in these countries may have limited
marketability and may be subject to more abrupt or erratic price movements
Repurchase Agreements. The Funds may invest in repurchase agreements. In a
repurchase agreement a Fund buys a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the
issuer at a fixed time and price, plus accrued interest. A Fund will enter into
repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in U.S. Government securities. The Adviser or Advisers,
as appropriate, will continuously monitor the creditworthiness of the parties
with whom a Fund enters into repurchase agreements.
Each Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, a Fund could experience delays in liquidating
the underlying securities during the period in which the Fund seeks to enforce
its rights thereto, possible subnormal levels of income decline in value of the
underlying securities or lack of access to income during this period and the
expense of enforcing its rights.
Reverse Repurchase Agreements. Each Fund may also enter into reverse purchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. A Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. To minimize various risks associated with
reverse repurchase agreements, a Fund will establish and maintain with the
Fund's custodian a separate account consisting of liquid securities, of any type
or maturity, in an amount at least equal to the repurchase prices of the
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securities (plus any accrued interest thereon) under such agreements. In
addition, a Fund will not borrow money or enter into reverse repurchase
agreements from banks temporarily for extraordinary or emergency purposes (not
leveraging or investment) and then in an aggregate amount not in excess of 10%
of the value of a Fund's total assets at the time of such borrowing, provided
that the Fund will not purchase securities for investment while borrowing
equaling 5% or more of the Fund's total assets outstanding. A Fund will enter
into reverse repurchase agreements only with federally insured banks which are
approved in advance as being creditworthy by the of Trustees. Under the
procedures established by the of Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Restricted Securities. Each Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. A Fund will not invest more than 15% of its net assets
in illiquid investments. If the Trustees determine, based upon a continuing
review of the trading markets for specific Section 4(2) paper or Rule 144A
securities that they are liquid, they will not be subject to the 15% limit on
illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser or Advisers, as appropriate, the daily function of determining and
monitoring the liquidity of restricted securities. The Trustees, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor a Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
A Fund may acquire other restricted securities including securities for which
market quotations are not readily available. These securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the 1933 Act. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time a Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair market value as determined in good faith by the Funds' Trustees.
Options on Securities, Securities Indices and Currency. The Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or on any
currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
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settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the Fund's custodian with a value at least equal to the
Fund's obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the Fund's net
exposure on its written option position. A written call option on securities is
typically covered by maintaining the securities that are subject to the option
in a segregated account. The Fund may cover call options on a securities index
by owning securities whose price changes are expected to be similar to those of
the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities or currencies which it does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities or currency decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
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facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
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Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
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market to be less favorable than prices that are currently available. The Fund
may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are quoted or denominated) that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase.
The Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities (or assets denominated in the related currency) in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
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transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Fund than if
it had not entered into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Lending of Securities. The Funds may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Funds may reinvest any cash collateral in short-term securities and money market
funds. When the Funds lend portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Funds may incur a loss or, in the event of the borrower's
bankruptcy, the Funds may be delayed in or prevented from liquidating the
collateral. It is a fundamental policy of each of Global Fund and World Bond
Fund not to lend portfolio securities having a total value exceeding 10% and
30%, respectively, of its total assets.
Rights and Warrants. The Funds may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
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exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
Forward Commitment and When-Issued Securities. The Funds may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in a Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Structured or Hybrid Notes. Each Fund may invest in "structured" or "hybrid"
notes, bonds or debentures. The distinguishing feature of a structured or hybrid
note, bond or debenture is that the amount of interest and/or principal payable
on the security is based on the performance of a benchmark asset or market other
than fixed income securities or interest rates. Examples of these benchmark
include stock prices, currency exchange rates and physical commodity prices.
Investing in a structured note allows a Fund to gain exposure to the benchmark
market while fixing the maximum loss that the Fund may experience in the event
that market does not perform as expected. Depending on the terms of the
security, the Fund may forego all or part of the interest and principal that
would be payable on a comparable conventional note, bond or debenture; a Fund's
loss cannot exceed this foregone interest and/or principal. An investment in
structured or hybrid notes involves risks similar to those associated with a
direct investment in the benchmark asset.
Asset-Backed Securities. Each Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Funds' ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
15
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certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Participation Interests (World Bond Fund only). Participation interests, which
may take the form of interests in, or assignments of certain loans, are acquired
from banks who have made these loans or are members of a lending syndicate. The
Fund's investments in participation interests are subject to its 15% limitation
on investments in illiquid securities.
Short-Term Trading and Portfolio Turnover. Each Fund may attempt to maximize
current income through short-term portfolio trading. This will involve selling
portfolio instruments and purchasing different instruments to take advantage of
yield disparities in different segments of the market for government
obligations. Short-term trading may have the effect of increasing portfolio
turnover rate. A high rate of portfolio turnover (100% or greater) involves
correspondingly greater brokerage expenses. The Funds' portfolio turnover rate
is set forth in the table under the caption "Financial Highlights" in the
Prospectus .
The World Bond Fund's portfolio turnover rate may vary widely from year to year
and may be higher than that of many other mutual funds with similar investment
objectives. For example, if the World Bond Fund writes a substantial number of
call options and the market prices of the underlying securities appreciate, or
if it writes a substantial number of put options and the market prices of the
underlying securities depreciate, there may be a very substantial turnover of
the portfolio. While the Fund will pay commissions in connection with its
options transactions, government securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission. Nevertheless, high portfolio turnover may involve correspondingly
greater commissions and other transaction costs, which will be borne directly by
the Fund.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of a Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information, means the approval by the lesser of (1) the holders of 67% or more
of the Fund's shares represented at a meeting if more than 50% of the Fund's
outstanding shares are present in person or by proxy at that meeting or (2) more
than 50% of the Fund's outstanding shares.
A Fund may not:
1. Purchases on Margin and Short Sales. Purchase securities on margin
or sell short, except that a Fund may obtain such short term credits as are
necessary for the clearance of securities transactions. The deposit or payment
16
<PAGE>
by a Fund of initial or maintenance margin in connection with futures contracts
or related options transactions is not considered the purchase of a security on
margin.
2. Borrowing. Borrow money, except from banks temporarily for
extraordinary or emergency purposes (not for leveraging or investment) and then
in an aggregate amount not in excess of 10% of the value of the Fund's total
assets at the time of such borrowing, provided that the Fund will not purchase
securities for investment while borrowings equaling 5% or more of the Fund's
total assets are outstanding.
3. Underwriting Securities. Act as an underwriter of securities of
other issuers, except to the extent that it may be deemed to act as an
underwriter in certain cases when disposing of restricted securities.
4. Senior Securities. Issue senior securities except as appropriate to
evidence indebtedness which a Fund is permitted to incur, provided that, to the
extent applicable, (i) the purchase and sale of futures contracts or related
options, (ii) collateral arrangements with respect to futures contracts, related
options, forward foreign currency exchange contracts or other permitted
investments of a Fund as described in the Prospectus, including deposits of
initial and variation margin, and (iii) the establishment of separate classes of
shares of a Fund for providing alternative distribution methods are not
considered to be the issuance of senior securities for purposes of this
restriction.
5. Warrants. Invest more than 5% of the Fund's total assets in
warrants, whether or not the warrants are listed on the New York or American
Stock Exchanges, or more than 2% of the value of the Fund's total assets in
warrants which are not listed on those exchanges. Warrants acquired in units or
attached to securities are not included in this restriction.
6. Single Issuer Limitation/Diversification. Purchase securities of any
one issuer, except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, if immediately after such purchase more than 5%
of the value of a Fund's total assets would be invested in such issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
such issuer; provided, however, that with respect to each Fund, up to 25% of the
value of the Fund's total assets may be invested without regard to these
limitations. This restriction does not apply to World Bond Fund, which is a
non-diversified fund under the 1940 Act.
7. Real Estate. Purchase or sell real estate although a Fund may
purchase and sell securities which are secured by real estate, mortgages or
interests therein, or issued by companies which invest in real estate or
interests therein; provided, however, that no Fund will purchase real estate
limited partnership interests.
8. Commodities; Commodity Futures; Oil and Gas Exploration and
Development Programs. Purchase or sell commodities or commodity futures
contracts or interests in oil, gas or other mineral exploration or development
programs, except a Fund may engage in such forward foreign currency contracts
and/or purchase or sell such futures contracts and options thereon as described
in the Prospectus.
9. Making Loans. Make loans, except that a Fund may purchase or hold
debt instruments and may enter into repurchase agreements (subject to
Restriction 12) in accordance with its investment objectives and policies and
make loans of portfolio securities provided that as a result, no more than 10%
17
<PAGE>
of the Global Fund's total assets and 30% of the total assets of the World Bond
Fund, taken at current value would be so loaned.
10. Industry Concentration. Purchase any securities which would cause
more than 25% of the market value of a Fund's total assets at the time of such
purchase to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that there is no
limitation with respect to investments in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. With respect to World
Bond Fund, this restriction will apply to obligations of a foreign government
unless the Securities and Exchange Commission permits their exclusion.
Non-fundamental Investment Restrictions. The following restrictions are
designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
A Fund may not:
(a) Options Transactions. Write, purchase, or sell puts, calls or
combinations thereof except that a Fund may write, purchase or sell puts and
calls on securities as described in this Statement of Additional Information,
and the World Bond Fund may purchase or sell puts and calls on foreign
currencies as described in this Statement of Additional Information.
(b) Invest more than 15% of its net assets in illiquid securities.
(c) Acquisition for Control Purposes. Purchase securities of any issuer
for the purpose of exercising control or management, except in connection with a
merger, consolidation, acquisition or reorganization.
(d) Joint Trading Accounts. Participate on a joint or joint and several
basis in any trading account in securities (except for a joint account with
other funds managed by the Adviser for repurchase agreements permitted by the
Securities and Exchange Commission pursuant to an exemptive order).
(e) Securities of Other Investment Companies. Purchase a security if,
as a result, (i) more than 10% of the Fund's total assets would be invested in
the securities of other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one investment company, or
(iii) more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not apply to (a)
the investment of cash collateral, received by the Fund in connection with
lending the Fund's portfolio securities, in the securities of open-end
investment companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject to the
above percentage limitations, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will not be considered a violation
of any of the foregoing restrictions.
18
<PAGE>
The World Bond Fund has registered as a "non-diversified" investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). However, the Fund intends to limit its investments to the extent required
by the diversification requirements of the Code. See "Taxes".
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of the Adviser or officers and Directors of the
Funds' principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 Executive Officer, The Berkeley
Financial Group ("The Berkeley
Group"); Chairman and Director, NM
Capital Management, Inc. ("NM
Capital"), John Hancock Advisers
International Limited ("Advisers
International") and Sovereign Asset
Management Corporation ("SAMCorp");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds");
Chairman, First Signature Bank and
Trust Company; Director, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Advisers International
(Ireland) Limited ("International
Ireland"), John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science;
Director, John Hancock Freedom
Securities Corporation (until
September 1996); Director, John
Hancock Signature Services, Inc.
("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
Freeport-McMoRan Copper & Gold
Company, Inc., Hecla Mining Company,
Canyon Resources Corporation and
Original Sixteen to One Mines, Inc.
(1984-1987 and 1991-1995)
(management consultant).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Boudreau and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Funds,
are interested persons of the Adviser are compensated by the Adviser and receive
no compensation from the Fund for their services.
26
<PAGE>
Aggregate Compensation (1)
Total Compensation
From the Funds and
Global World Bond John Hancock Fund
Independent Trustee Fund(1) Fund (1) Complex to Trustee(2)
------------------- ------- -------- ---------------------
Dennis S. Aronowitz $814 $455 $ 72,000
Richard P. Chapman, Jr. 847 471 75,000
William J. Cosgrove 814 454 72,000
Douglas M. Costle 847 471 75,000
Leland O. Erdahl 814 454 72,000
Richard A. Farrell 847 471 75,000
Gail D. Fosler 814 454 72,000
William F. Glavin 176 454 72,000
Dr. John A. Moore 48 455 72,000
Patti McGill Peterson 814 455 72,000
John W. Pratt 814 455 72,000
Edward J. Spellman 847 471 75,000
------- ------- ----------
Totals $8,496 $5,520 $876,000
1Compensation is for the fiscal year ended October 31, 1997.
2Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex with each of these Independent Trustees
served thirty-two.
(+)As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $69,148, Mr. Cosgrove was $167,829, Mr. Glavin was $193,514 and for
Dr. Moore was $84,315 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of April 27, 1998, the officers and trustees of the Trust as a group owned
less than 1% of the outstanding shares of each class of each of the Funds. As of
that date, no person of record owned beneficially 5% or more of the outstanding
shares of the John Hancock World Bond Fund. As of that date, MLPF & S for the
Sold Benefit of its Customers, 4800 Deer Lake Drive East, Jacksonville, FL of
record owned 9.52% of the outstanding securities of the John Hancock Global
Fund-Class B.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
27
<PAGE>
in its capacity as investment adviser to the Funds and the other mutual funds
and publicly traded investment companies in the John Hancock group of funds
having a combined total of over 1,400,000 shareholders. The Adviser is an
affiliate of the Life Insurance Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of more than $100 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries high ratings from
Standard & Poor's and A.M. Best's. Founded in 1862, the Life Company has been
serving clients for over 130 years.
The Funds have entered into investment management contracts (the "Advisory
Agreements") with the Adviser, which were approved by the Funds' shareholders.
Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuously
an investment program for each of the Funds and determine, subject to the
overall supervision and review of the Trustees, which investments should be
purchased, held, sold or exchanged, and (b) provide supervision over all aspects
of each Fund's operations except those which are delegated to a custodian,
transfer agent or other agent.
The Funds bear all costs of their organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plans of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Funds (including an allowable portion of the cost of the
Adviser's employees rendering such services to the Funds); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreements, the Adviser
receives from each Fund a fee computed and paid monthly based upon the following
annual rates: (a) for Global Fund, 0.90% on the first $100 million of average
daily net assets of the Fund, 0.80% on the next $200 million of average daily
net assets, 0.75% on the next $200 million of average daily net assets and
0.625% of average daily net assets in excess of $500 million; and (b) for World
Bond Fund, 0.75% on the first $250 million of average daily net assets, and
0.70% of average daily net assets in excess of $250 million.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by the Funds may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made insofar as feasible, for
the respective funds or clients in a manner deemed equitable to all of them. To
28
<PAGE>
the extent that transactions on behalf of more than one client of the Adviser or
its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable to the Funds or
its shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Funds may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Funds (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and the Distribution Agreement
(discussed below) was approved by all Trustees. Each Advisory Agreement and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by vote of a majority to the outstanding voting
securities of the Fund and will terminate automatically if assigned.
The Global Fund and the Adviser have entered into a sub-investment management
contract with JH Advisers International under which JH Advisers International,
subject to the review of the Trustees and the overall supervision of the
Adviser, is responsible for providing the Fund with advice with respect to that
portion of the assets invested in countries other than the United States and
Canada. JH Advisers International, with offices located at 34 Dover Street,
London, England W1X 3RA, is a wholly-owned subsidiary of the Adviser formed in
1987 to provide international investment research and advisory services to U.S.
institutional clients. As compensation for its services under the Sub-Advisory
Agreement, JH Advisers International receives from the Adviser a monthly fee
equal to 0.70% on an annual basis of the average daily net asset value of the
Global Fund for each calendar month up to $200 million of average daily net
assets; and 0.6375% on an annual basis of the average daily net asset value over
$200 million. Global Fund is not responsible for paying JH Advisers
International's fee.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Trust paid the
Adviser, on behalf of Global Fund, a fee of $1,169,884, $1,175,079 and
$1,251,029, respectively.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Trust paid the
Adviser, on behalf of World Bond Fund, a fee of $840,527, $645,661 and $462,654,
respectively.
Accounting and Legal Services Agreement. The Trust, on behalf of the Funds, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
29
<PAGE>
to this agreement, the Adviser provides the Funds with certain tax, accounting
and legal services. For the fiscal year ended October 31, 1997, the Global Fund
and World Bond Fund paid the Adviser $24,127 and $11,364, respectively.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser, JH
Advisers International and each Fund have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates. In
the case of the Adviser, some of these restrictions are: pre-clearance for all
personal trades and a ban on the purchase of initial public offerings, as well
as contributions to specified charities of profits on securities held for less
than 91 days. JH Advisers International's restrictions may differ where
appropriate, as long as they maintain the same intent. These restrictions are a
continuation of the basic principle that the interests of the Funds and their
shareholders come first.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares on behalf of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are continually offered at net asset
value next determined, plus any applicable sales charge, if any. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation from a sales charge imposed, in the case of Class A
shares, at the time of sale. In the case of Class B shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
For the fiscal years ended October 31, 1995, 1996 and 1997, the following
amounts reflect (a) the total underwriting commissions for sales of the Funds'
Class A shares and (b) the portion of such amount retained by John Hancock
Funds. The remainder of the underwriting commissions were reallowed to dealers.
Global Fund World Bond Fund
11/1/94-10/31/95 (a)$ 132,895 (b) $19,426 (a)$ 23,002 (b) $1,220
11/1/95-10/31/96 (a) $139,302 (b) $21,673 (a) $16,669 (b) $1,709
11/1/96-10/31/97 (a) $114,878 (b) $18,135 (a) $ 8,851 (b) $ 810
The Funds' Trustees adopted Distribution Plans with respect to Class A and Class
B shares ("the Plans"), pursuant to Rule 12b-1 under the Investment Company Act
of 1940. Under the Plans, each Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% and 1.00%, respectively, of the Funds'
average daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the applicable Fund's average daily net
assets attributable to each class of shares. The distribution fees will be used
to reimburse the John Hancock Funds for their distribution expenses, including
but not limited to: (i) initial and ongoing sales compensation to Selling
Brokers and others (including affiliates of John Hancock Funds) engaged in the
sale of each Fund's shares; (ii) marketing, promotional and overhead expenses
incurred in connection with the distribution of each Fund's shares; and (iii)
with respect to Class B shares only, interest expenses on unreimbursed
distribution expenses. The service fees will be used to compensate Selling
30
<PAGE>
Brokers and others for providing personal and account maintenance services to
shareholders. In the event that the John Hancock Funds are not fully reimbursed
for payments or expenses they incur under the Class A Plan, these expenses will
not be carried beyond twelve months from the date they were incurred.
Unreimbursed expenses under the Class B Plan will be carried forward together
with interest on the balance of these unreimbursed expenses. The Funds do not
treat unreimbursed expenses relating to Class B Plan as a liability of the
Funds, because the Trustees may terminate the Class B Plan at any time. For the
fiscal year ended October 31, 1997, an aggregate of $795,893 and $5,324,432 of
distribution expenses or 2.56% and 15.75%, respectively, of the average net
assets of the Class B shares of each of Global Fund and World Bond Fund were not
reimbursed or recovered by the John Hancock Funds through the receipt of
deferred sales charges or 12b-1 fees in prior periods.
The Plans were approved by a majority of the voting securities of each Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the applicable Fund and who have
no direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, the John Hancock Funds provide the
Funds with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
Each of the Plans provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. Each of the Plans may be terminated without penalty,
(a) by vote of a majority of the Independent Trustees, (b) by a vote of a
majority of the applicable Fund's outstanding shares of the applicable class
upon 60 days' written notice to the John Hancock Funds and (c) automatically in
the event of assignment. Each of the Plans further provides that it may not be
amended to increase the maximum amount of the fees for the services described
therein without the approval of a majority of the outstanding shares of the
class of the applicable Fund which has voting rights with respect to the Plan.
Each of the Plans provides that no material amendment to the Plan will be
effective unless it is approved by a majority vote of the Trustees and the
Independent Trustees of the applicable Fund. The holders of Class A and Class B
shares have exclusive voting rights with respect to the Plan applicable to their
respective class of shares. In adopting the Plans the Trustees concluded that,
in their judgment, there is a reasonable likelihood that the Plans will benefit
the holders of the applicable shares of each Fund.
Amounts paid to John Hancock Funds by any class of shares of the Funds will not
be used to pay the expenses incurred with respect to any other class of shares
of the Funds; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the
During the fiscal year ended October 31, 1997, the Funds paid the John Hancock
Funds the following amounts of expenses in connection with their services for
each of the Funds:
31
<PAGE>
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Expenses of Compen-sation Carrying or
Prospectuses John to Other
to New Hancock Selling Finance
Advertising Shareholder Funds Brokers Charges
----------- ----------- ----- ------- -------
<S> <C> <C> <C> <C>
Global Fund
Class A Shares $26,705 $2,846 $221,945 $ 49,398 $ --
Class B Shares $27,107 $3,076 $129,037 $ 52,365 $94,634
World Bond Fund
Class A Shares $6,752 $1,535 $65,360 $ 9,977 $ --
Class B Shares $7,064 $2,733 $69,114 $ 11,789 $247,425
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned categories for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. If quotations are not readily available or the value
has been materially affected by events occurring after the closing of a foreign
market, assets are valued by a method that the Trustees believe accurately
reflects their value. Any assets or liabilities expressed in terms of foreign
currencies are translated into U.S. dollars by the custodian bank based on
London currency exchange quotations as of 5:00 p.m., London time ( 12:00 noon,
New York time) on the date of any determination of a Fund's NAV.
32
<PAGE>
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable securities may be significantly affected on days when a shareholder
has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Funds are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees of each Fund reserve the right
to change or waive each Fund's minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Adviser such rejection is in the respective Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Funds are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of the Funds, owned by the investor, or if
John Hancock Signature Services, Inc. ("Signature Services") is notified by the
investor's dealer or the investor at the time of the purchase, the cost of the
Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
oA Trustee or officer of the Trust; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, mother, father, sister, brother,
grandparents, mother-in-law, father-in-law, daughter-in-law,
son-in-law, niece, nephew, grandparents and domestic partner) of any of
the foregoing; or any fund, pension, profit sharing or other benefit
plan for the individuals described above.
oA broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement with John
Hancock Funds providing specifically for the use of a Fund's shares in
fee-based investment products or services made available to their
clients.
oA former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan and
transfers any or all of his or her plan distributions directly to a
Fund.
oA member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
33
<PAGE>
oRetirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or 500
eligible employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
oRetirement plans investing through the PruArray Program sponsored by
Prudential Securities.
oExisting full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed retirement plans with at least 100 eligible employees at the
inception of the subject Fund's account. Each of these investors may
purchase Class A shares with no initial sales charge. However, if the
shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts to $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current account value of the Class A shares of
all John Hancock funds which carry a sales charge already held by such person.
Class A shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
34
<PAGE>
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. The Funds offer two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using a Fund as a funding medium for a
retirement plan, however, may opt to make the necessary investments called for
by the LOI over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $100,000 or more with respect to World Bond Fund and $50,000 or more
with respect to Global Fund, in each case invested during the specified period
from the date of the LOI or from a date within ninety (90) days prior thereto,
upon written request to Signature Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount intended
to be invested had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and the
sales charge payable had the LOI not been in effect is due from the investor.
However, for the purchases actually made within the specified period (either 13
or 48 months) the sales charge applicable will not be higher than that which
would have applied (including accumulations and combinations) had the LOI been
for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay the sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Funds to sell, any additional Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so the Funds will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a CDSC at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B shares being redeemed. No CDSC will be
imposed on increases in account value above the initial purchase prices,
including all shares derived from reinvestment of dividends or capital gains
distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
35
<PAGE>
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per share (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Funds in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Funds to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Funds' right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
36
<PAGE>
* Redemptions due to death or disability. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemption of Class B shares where the proceeds are used to purchase a
John Hancock Declaration Variable Annuity.
* Redemptions of Class B shares made under a periodic withdrawal plan,
or redemptions for fees charged by planners or advisors for advisory
services, as long as your annual redemptions do not exceed 12% of
your account value, including reinvested dividends, at the time you
established your periodic withdrawal plan and 12% of the value of
subsequent investments (less redemptions) in that account at the time
you notify Signature Services. (Please note, this waiver does not
apply to periodic withdrawal plan redemptions of Class A shares that
are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch
financial consultant for further information.
* Redemptions of Class A shares by retirement plans that invested
through the PruArray Program sponsored by Prudential Securities.
For retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan,
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
37
<PAGE>
CDSC Waiver Matrix for Class B
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
perodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or (72t) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- -------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
38
<PAGE>
SPECIAL REDEMPTIONS
Although they would not normally do so, the Funds have the right to pay the
redemption price of shares of the Funds in whole or in part in portfolio
securities as prescribed by the Trustees. If the shareholder were to sell
portfolio securities received in this fashion, the shareholder would incur a
brokerage charge. Any such securities would be valued for the purposes of making
such payment at the same value as used in determining net asset value. The Funds
have, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Funds must redeem their shares for cash except to the
extent that the redemption payments to any shareholder during any 90-day period
would exceed the lesser of $250,000 or 1% of the applicable Fund's net asset
value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
Each Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
Each Fund may refuse any exchange order. Each Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. Each Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of shares of the applicable Fund which may result in realization of
gain or loss for purposes of Federal, state and local income taxes. The
maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional Class A or Class B shares could be disadvantageous to a shareholder
because of the initial sales charge payable on such purchases of Class A shares
39
<PAGE>
and the CDSC imposed on redemptions of Class B shares and because redemptions
are taxable events. Therefore, a shareholder should not purchase Class A or
Class B shares at the same time a Systematic Withdrawal Plan is in effect. The
Funds reserve the right to modify or discontinue the Systematic Withdrawal Plan
of any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained in
the Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the same Fund or
another John Hancock fund, subject to the minimum investment limit in that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the same Fund or
in Class A shares of any John Hancock fund. If a CDSC was paid upon a
redemption, a shareholder may reinvest the proceeds from this redemption at net
asset value in additional shares of the class from which the redemption was
made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares.
To protect the interests of other investors in each Fund, each Fund may cancel
the reinvestment privilege of any parties that, in the opinion of each Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, each Fund may refuse any reinvestment
request.
Each Fund may change or cancel its reinvestment policies at any time.
A redemption on exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
40
<PAGE>
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
DESCRIPTION OF THE FUNDS' SHARES
Each series of the Trust, including the Fund, is treated as a separate entity
for tax purposes. The Trustees of the Trust are responsible for the management
and supervision of the Funds. The Declaration of Trust permits the Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
of the Fund, without par value. Under the Declaration of Trust, the Trustees
have the authority to create and classify shares of beneficial interest in
separate series, without further action by shareholders. As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of two classes of shares of the Funds, designated as Class A and Class B.
The shares of each class of a Fund represent an equal proportionate interest in
the aggregate net assets attributable to the classes of the Fund. Holders of
Class A and Class B shares have certain exclusive voting rights on matters
relating to their respective distribution plans. The different classes of a Fund
may bear different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and will be in the same amount,
except for differences resulting from the facts that (i) the distribution and
service fees relating to the Class A and Class B shares will be borne
exclusively by that class, (ii) Class B shares will pay higher distribution and
service fees than Class A shares and (iii) each of Class A and Class B shares
will bear any class expenses properly allocable to that class of shares, subject
to the conditions the Internal Revenue Service imposes with respect to
multiple-class structures. Similarly, the net asset value per share may vary
depending on whether Class A or Class B shares are purchased. No interest will
be paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the applicable Fund available for distribution to
such shareholders. Shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
When issued, shares are fully paid and non-assessable, except as set forth
below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, each Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares, and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a request for a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
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were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts, obligations or affairs of each Fund. The
Declaration of Trust also provides for indemnification out of the Funds' assets
for all losses and expenses of any shareholder held personally liable by reason
of being or having been a shareholder. The Declaration of Trust also provides
that no series of the Trust shall be liable for the liabilities of any other
series. Furthermore, no fund included in the Funds' prospectus shall be liable
for the liabilities of any other John Hancock fund. Liability is therefore
limited to circumstances in which a Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
The Funds reserve the right to reject any application which conflicts with the
Funds' internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. Use of
information provided on the account application may be used by the Funds to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right to
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes. Each
Fund has qualified and elected to be treated as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and intends to continue to qualify for each taxable year. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, each Fund will not be subject to Federal income tax on taxable income
(including net realized capital gains) which is distributed to shareholders in
accordance with the timing requirements of the Code.
Each Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. Each Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from each Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from a Fund's "investment company taxable income,"
they will be taxable as ordinary income; and if they are paid from the Fund's
"net capital gain," they will be taxable as capital gain. (Net capital gain is
the excess (if any) of net long-term capital gain over net short-term capital
loss, and investment company taxable income is all taxable income and capital
gains, other than those gains and losses included in computing net capital gain,
after reduction by deductible expenses.) As a result of federal tax legislation
enacted on August 5, 1997 (the "Act"), gain recognized after May 6, 1997 from
the sale of a capital asset is taxable to individual (noncorporate) investors at
different maximum federal income tax rates, depending generally upon the tax
holding period for the asset, the federal income tax bracket of the taxpayer,
and the dates the asset was acquired and/ or sold. The Treasury Department has
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issued guidance under the Act that enables the Fund to pass through to its
shareholders the benefits of the capital gains rates enacted in the Act.
Shareholders should consult their own tax advisers on the correct application of
these new rules in their particular circumstances. Some distributions may be
paid in January but may be taxable to shareholders as if they had been received
on December 31 of the previous year. The tax treatment described above will
apply without regard to whether distributions are received in cash or reinvested
in additional shares of a Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
If a Fund invests in stock (including an option to acquire stock such as is
inherent in a convertible bond) of certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), that Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from these
passive foreign investment companies or gain from the sale of stock in such
companies, even if all income or gain actually received by the Fund is timely
distributed to its shareholders. The Fund would not be able to pass through to
its shareholders any credit or deduction for such a tax. An election may be
available to ameliorate these adverse tax consequences, but could require the
applicable Fund to recognize taxable income or gain without the concurrent
receipt of cash. These investments could also result in the treatment of
associated capital gains as ordinary income. Each Fund may limit and/or manage
its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
foreign currency futures and options, foreign currency forward contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to a Fund's investment in stock or
securities, including speculative currency positions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed a Fund's investment company taxable income computed without
regard to such loss the resulting overall ordinary loss for such year would not
be deductible by the Fund or its shareholders in future years.
The Funds may be subject to withholding and other taxes imposed by foreign
countries with respect to their investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes"), paid by the Fund, subject to certain provisions and limitations
contained in the Code, if the Fund so elects. If more than 50% of the value of a
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Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as foreign taxes paid by
them.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends received from the Fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that a Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. A Fund that
cannot or does not make this election may deduct such taxes in determining the
amount it has available for distribution to shareholders, and shareholders would
not, in this event, include these foreign taxes in their income, nor would they
be entitled to any tax deductions or credits with respect to such taxes.
For each Fund, the amount of net realized capital gains, if any, in any given
year will vary depending upon the Adviser's current investment strategy and
whether the Adviser believes it to be in the best interest of the Fund to
dispose of portfolio securities or enter into option, futures or forward
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or undistributed
taxable income of the Fund. Consequently, subsequent distributions on those
shares from such appreciation or income may be taxable to such investor even if
the net asset value of the investor's shares is, as a result of the
distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of a Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
Class A shares of a Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent shares of the Fund or another John
Hancock Fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to the automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares. Shareholders should consult their own
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tax advisers regarding their particular circumstances to determine whether a
disposition of Fund shares is properly treated as a sale for tax purposes, as is
assumed in the foregoing discussion. Also, future Treasury Department guidance
issued to implement the Act may contain additional rules for determining the tax
treatment of sales of Fund shares held for various periods, including the
treatment of losses on the sales of shares held for six months or less that are
recharacterized as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, each Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Funds will not in any event distribute net capital
gain realized in any year to the extend that a capital loss is carried forward
from prior years against such gain. To the extent such excess was retained and
not exhausted by the carryforward of prior years' capital losses, it would be
subject to Federal income tax in the hands of a Fund. Upon proper designation of
this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if such Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as capital gain in his return for his taxable year in which the last day
of the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or a refund of, his pro rata share of the taxes paid by the Fund,
and (c) be entitled to increase the adjusted tax basis for his shares in the
Fund by the difference between his pro rata share of such excess and his pro
rata share of such taxes.
For Federal income tax purposes, each Fund is permitted to carry forward a net
capital loss in any year to offset its own net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the applicable Fund, and as noted above, would not be distributed
as such to shareholders. The capital loss carryforwards for each of the Funds
are as follows: (i) Global Fund has no capital loss carryforwards; and (ii)
World Bond Fund has $1,621,817 of which $938,808 will expire October 31, 2002
and $683,009 will expires October 31, 2005.
A Fund is required to accrue income on any debt securities that have more than a
de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market or constructive sale rules applicable to certain options, futures,
forwards or other transactions may also require the Fund to recognize income or
gain without a concurrent receipt of cash. Additionally, some countries restrict
repatriation which may make it difficult or impossible for the Fund to obtain
cash corresponding to its earnings or assets in those countries. However, each
Fund must distribute to shareholders for each taxable year substantially all of
its net income and net capital gains, including such income or gain, to qualify
as a regulated investment company and avoid liability for any federal income or
excise tax. Therefore, the Funds may have to dispose of portfolio securities
under disadvantageous circumstances to generate cash, or may have to leverage by
borrowing the cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) a Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Funds will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although either Fund may in its sole discretion provide relevant
information to shareholders.
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Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Funds may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
For purposes of the dividends received deduction available to corporations,
dividends received by a Fund, if any, from U.S. domestic corporations in respect
of any share of stock held by the Fund, for U.S. Federal income tax purposes,
for at least 46 days (91 days in the case of certain preferred stock) during a
prescribed period extending before and after each such dividend and distributed
and properly designated by the Fund may be treated as qualifying dividends.
Corporate shareholders must meet the holding period requirements stated above
with respect to their shares of the applicable Fund for each dividend in order
to qualify for the deduction and, if they have any debt that is deemed under the
Code directly attributable to such shares, may be denied a portion of the
dividends received deduction. The entire qualifying dividend, including the
otherwise deductible amount, will be included in determining alternative minimum
tax liability, if any. Additionally, any corporate shareholder should consult
its tax adviser regarding the possibility that its tax basis in its shares may
be reduced, for Federal income tax purposes, by reason of "extraordinary
dividends" received with respect to the shares and to the extent such basis
would be reduced below zero, that current recognition of income would be
required.
Investment in debt obligations that are at risk of or in default presents
special tax issues for World Bond Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be taken
for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by World Bond Fund in order to reduce the risk of distributing
insufficient income to preserve its status as a regulated investment company and
seek to avoid becoming subject to Federal income or excise tax.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Limitations imposed by the Code on regulated investment companies like the Funds
may restrict each Fund's ability to enter into options, futures, foreign
currency positions, and foreign currency forward contracts.
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Certain options, futures and forward foreign currency contracts undertaken by a
Fund may cause the Fund to recognize gains or losses from marking to market even
though its positions have not been sold or terminated and affect the character
as long-term or short-term (or, in the case of foreign currency contracts, as
ordinary income or loss) and timing of some capital gains and losses realized by
the Fund. Additionally, the Fund may be required to recognize gain, but not
loss, if an option or other transaction is treated as a constructive sale of an
appreciated financial position in the Fund's portfolio. Also, certain of a
Fund's losses on its transactions involving options, futures or forward
contracts and/or offsetting or successor portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income or gains. Certain of these transactions may also cause a Fund to dispose
of investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of the Fund's distributions to
shareholders. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in a Fund.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that a Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
Total Return. Average annual total return is determined separately for each
class of shares.
Set forth below are tables showing the performance on a total return basis
(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000
investment in the Class A and Class B shares of the Funds. The performance
information for each Fund is stated for the one year and five year periods ended
October 31, 1997 and, with respect to Class A shares of each Fund for the period
from the commencement of operations (indicated by an asterisk). With respect to
Class B shares of each Fund, performance information is also stated for the ten
year period ended October 31, 1997.
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Global Fund
Class A Class A Class B Class B Class B
Shares Shares Class A Shares Shares Shares
One Year Five Years Shares One Years Five Years Ten Years
Ended Ended 1/3/92* to Ended Ended Ended
10/31/97 10/31/97 10/31/97 10/31/97 10/31/97 10/31/97
- -------- ------- -------- -------- -------- --------
3.89% 10.86% 7.95% 3.73% 11.06% 8.85%
World Bond Fund
Class A Class A Class B Class B
Shares Shares Class A Shares Shares Class B
One Year Five Years Shares One Years Five Years Shares
Ended Ended 1/3/92* to Ended Ended 12/17/86* to
10/31/97 10/31/97 10/31/97 10/31/97 10/31/97 10/31/97
- -------- ------- -------- -------- -------- --------
(1.49)% 4.29% 3.54% (2.43)% 4.32% 7.15%
* Commencement of operations.
Total return is computed by finding the average annual compounded rates of
return over the designated periods that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
n ________
T = \ / ERV / P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV= ending redeemable value of a hypothetical
$1,000 investment made at the beginning of
the 1 year, 5 years, and life-of-fund
periods.
The result of the foregoing calculation is an average and is not the same as the
actual year-to-year results.
Because each Fund's class has its own sales charge and fee structure, each
Fund's class have different performance results. This calculation assumes that
the maximum sales charge for Class A shares of 5% for Global Fund and 4.50% for
World Bond Fund is included in the initial investment or, for Class B shares,
the applicable CDSC is applied at the end of the period. This calculation also
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period. The "distribution rate" is
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determined by annualizing the result of dividing the declared dividends of a
Fund during the period stated by the maximum offering price and net asset value
at the end of the period. Excluding a Fund's sales charge from the distribution
rate produces a higher rate.
In addition to average annual total returns, the Funds may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Funds' sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Funds' sales charge on
Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
World Bond Fund
Yield. Yield is determined separately for Class A and Class B shares. The yields
for the Class A and Class B shares of the World Bond Fund for the thirty days
ended October 31, 1997 were 5.27% and 4.81%, respectively.
Yield is computed by dividing the net investment income per share earned during
a specified 30 day period by the maximum offering price per share on the last
day of such period, according to the following formula:
a - b
___ 6
Yield = 2 ( [ ( cd ) + 1 ] - 1 )
Where:
a= dividends and interest earned during the period.
b= net expenses accrued for the period.
c= the average daily number of share outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of the period.
While the foregoing formula reflects the standard accounting method for
calculating yield, it does not reflect the Fund's actual bookkeeping; as a
result, the income reported or paid by the Fund may be different.
To calculate interest earned (for the purpose of "a" above) on debt obligations,
World Bond Fund computes the yield to maturity of each obligation held by the
Fund based on the market value of the obligation (including actual accrued
interest) at the close of last business day of the period, or, with respect to
obligations purchased during the period, the purchase price (plus actual accrued
interest). The yield to maturity is then divided by 360 and the quotient is
multiplied by the market value of the obligation (including actual accrued
interest) to determine the interest income on the obligation for each day of the
subsequent period that the obligation is in the portfolio.
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To calculate interest earned (for the purpose of "a" above) on foreign debt
obligations, the Fund computes the yield to maturity of each obligation based on
the local foreign currency market value of the obligation (including actual
accrued interest) at the beginning of the period, or, with respect to
obligations purchased during the period, the purchase price plus accrued
interest. The yield to maturity is then divided by 360 and the quotient is
multiplied by the current market value of the obligation (including actual
accrued interest in local currency denomination), then converted to U.S. dollars
using exchange rates from the close of the last business day of the period to
determine the interest income on the obligation for each day of the subsequent
period that the obligation is in the portfolio. Applicable foreign withholding
taxes, net of reclaim, are included in the "b" expense component.
Solely for the purpose of computing yield, the Fund recognizes dividend income
by accruing 1/360 of the stated dividend rate of a security each day that a
security is in the portfolio.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter.
All accrued expenses are taken to account as described later herein.
From time to time, in reports and promotional literature, the Funds' total
return and/or yield will be compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly
publication which tracks net assets, total return, and yield on mutual funds in
the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are
also used for comparison purposes, as well as Russell and Wilshire indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MORNINGSTAR, STANGER'S and BARRON'S, etc. may also be utilized. The
Funds' promotional and sales literature may make reference to the Funds' "beta".
Beta is a reflection of the market related risk of the Fund by showing how
responsive the Fund is to the market.
The performance of the Funds is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Funds for
any period in the future. The performance of any Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales, and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Funds' performances.
BROKERAGE ALLOCATION
Each Advisory Agreement authorizes the Adviser (subject to the control of the
Board of Trustees) to select brokers and dealers to execute purchases and sales
of portfolio securities. It directs the Adviser to use its best efforts to
obtain the best overall terms for the Funds, taking into account such factors as
price (including dealer spread), the size, type and difficulty of the
transaction involved, and the financial condition and execution capability of
the broker or dealer.
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The Sub-Advisory Agreement between the Adviser and JH Advisers International
authorizes JH Advisers International (subject to the control of the Trustees of
the Trust) to provide the Global Fund with a continuing and suitable investment
program with respect to investments by the Fund in countries other than the
United States and Canada.
To the extent that the execution and price offered by more than one dealer are
comparable, the Adviser or JH Advisers International, as the case may be, may,
in their discretion, decide to effect transactions in portfolio securities with
dealers on the basis of the dealer's sales of shares of the Funds or with
dealers who provide the Funds, the Adviser or JH Advisers International with
services such as research and the provision of statistical or pricing
information. In addition, the Funds may pay brokerage commissions to brokers or
dealers in excess of those otherwise available upon a determination that the
commission is reasonable in relation to the value of the brokerage services
provided, viewed in terms of either a specific transaction or overall brokerage
services provided with respect to the Funds' portfolio transactions by such
broker or dealer. Any such research services would be available for use on all
investment advisory accounts of the Adviser or JH Advisers International. The
Funds may from time to time allocate brokerage on the basis of sales of their
shares. Review of compliance with these policies, including evaluation of the
overall reasonableness of brokerage commissions paid, is made by the Trustees.
The Adviser places all orders for purchases and sales of portfolio securities of
the Funds. In selecting broker-dealers, the Adviser may consider research and
brokerage services furnished to them. The Adviser may use this research
information in managing the Funds' assets, as well as assets of other clients.
Municipal securities, foreign debt securities and Government Securities are
generally traded on the over-the-counter market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. The World Bond Fund (with respect to Government Securities in its
portfolio) will primarily engage in transactions with these dealers or deal
directly with the issuer. Prices paid to the dealer will generally include a
"spread", which is the difference between the prices at which the dealer is
willing to purchase and sell the specific security at that time.
During the fiscal years ended October 31, 1995, 1996 and 1997, the Trust paid,
$525,839, $706,944 and $38,297 in negotiated brokerage commissions on behalf of
the Global Fund. During the fiscal years ended October 31, 1995, 1996 and 1997,
the Trust paid $24,400, $0 and $0 in brokerage commissions on behalf of the
World Bond Fund.
When a Fund engages in an option transaction, ordinarily the same broker will be
used for the purchase or sale of the option and any transactions in the
securities to which the option relates. The writing of calls and the purchase of
puts and calls by a Fund will be subject to limitations established (and changed
from time to time) by each of the Exchanges governing the maximum number of puts
and calls covering the same underlying security which may be written or
purchased by a single investor or group of investors acting in concert,
regardless of whether the options are written or purchased on the same or
different Exchanges, held or written in one or more accounts or through one or
more brokers. Thus, the number of options which a Fund may write or purchase may
be affected by options written or purchased by other investment companies and
other investment advisory clients of the Adviser and its affiliates or JH
Advisers International. An Exchange may order the liquidation of positions found
to be in violation of these limits, and it may impose certain other sanctions.
51
<PAGE>
In the U.S. Government securities market, securities are generally traded on a
"net" basis with dealers acting as principal for their own account without a
stated commission, although the price of the security usually includes a profit
to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid.
Municipal securities are generally traded on the over-the-counter market on a
"net" basis without a stated commission, through dealers acting for their own
account and not as brokers. Prices paid to a municipal securities dealer will
generally include a "spread", which is the difference between the prices at
which the dealer is willing to purchase and sell the specific security at that
time.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Brokers"). The Trustees have established that any portfolio
transaction for the Funds may be executed through Affiliated Brokers if, in the
judgment of the Adviser or JH Advisers International, as the case may be, the
use of Affiliated Brokers is likely to result in price and execution at least as
favorable as those of other qualified brokers, and if, in the transaction,
Affiliated Brokers charges the Funds a commission rate consistent with those
charged by Affiliated Brokers to comparable unaffiliated customers in similar
transactions. Affiliated Brokers will not participate in commissions in
brokerage given by a Fund to other brokers or dealers and neither will receive
any reciprocal brokerage business resulting therefrom. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
Affiliated Brokers will not receive any brokerage commissions for orders they
execute for a Fund in the over-the-counter market. A Fund will in no event
effect principal transactions with Affiliated Brokers in the over-the-counter
securities in which Affiliated Brokers makes a market.
During the fiscal periods ended October 31, 1995, 1996 and 1997 no brokerage
commissions were paid to Affiliated Brokers in connection with the portfolio
transactions of either the Global Fund or the World Bond Fund.
Other investment advisory clients advised by the Adviser or JH Advisers
International, as the case may be, may also invest in the same securities as a
Fund. When these clients buy or sell the same securities at substantially the
same time, the Adviser or JH Advisers International may average the transactions
as to price and allocate the amount of available investments in a manner which
the Adviser or JH Advisers International believes to be equitable to each
client, including the Funds. In some instances, this investment procedure may
adversely affect the price paid or received by a Fund or the size of the
position obtainable for it. On the other hand, to the extent permitted by law,
the Adviser or JH Advisers International may aggregate the securities to be sold
or purchased for a Fund with those to be sold or purchased for other clients
managed by it in order to obtain best execution.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended October 31,
1997, Global Fund paid $ 532,415 and World Bond Fund paid $0.
52
<PAGE>
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Funds. Global Fund pays Signature
Services an annual fee of $19.00 for each Class A shareholder and of $21.50 for
each Class B shareholder. The World Bond Fund pays Signature Services an annual
fee of $20.00 for each Class A shareholder and $22.50 for each Class B
shareholder. Each Fund also pays certain out-of-pocket expenses and these
expenses are aggregated and charged to each Fund and allocated to each class on
the basis of their relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a custodian agreement
between the Trust and State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Under the custodian agreement, State Street Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts, 02110. Price Waterhouse LLP audits and renders an
opinion on each Fund's annual financial statements and reviews each Fund's
annual Federal income tax return.
53
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS*
Moody's Bond Ratings
Bonds. "Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most likely to impair
the fundamentally strong position of such issues.
"Bonds which are rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of grater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in 'Aaa'
securities
.
"Bonds which are rated 'A' possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Bonds which are rated 'Baa' are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
"Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Bonds which are rated `Caa' are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
"Bonds which are rated `Ca' represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
A-2
<PAGE>
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
- ------------
*As described by the rating companies themselves.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Standard & Poor's Bond Ratings
"AAA. Debt rated 'AAA' has the highest rating by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA. Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A. Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB. Debt rated 'BBB' is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Debt rated "BB," or "B," is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and pay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major risk exposures to adverse conditions.
"CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
"CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
Unrated. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
A-3
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's Commercial Paper Ratings
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
A-4
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1997 Annual
Report to Shareholder's for the year ended October 31, 1997 (filed
electronically on January 5, 1998, accession number 0001010521-98-000018 and are
included in and incorporated by reference into Part B of the Registration
Statement for John Hancock Global Fund and John Hancock World Bond Fund (file
no. 811-4630 and 33-4559).
John Hancock Investment Trust III
John Hancock Global Fund and John Hancock World Bond Fund
Statement of Assets and Liabilities as of October 31, 1997.
Statement of Operations for the year ended of October 31, 1997.
Statement of Changes in Net Asset for the period ended October 31,
1997.
Financial Highlights for the period ended October 31, 1997.
Schedule of Investments as of October 31, 1997.
Notes to Financial Statements.
Report of Independent Auditors.
<PAGE>
ANNUAL REPORT
World Bond
Fund
OCTOBER 31, 1997
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore*
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT AUDITORS
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market in 1997 has been anything but dull. Investors have
been treated to record-breaking performance by the Dow Jones
Industrial Average, but with record-breaking volatility. After two
years of strong advances amid relatively little volatility, the
market's recent sharp drops and enormous rebounds have caused a fair
share of investor concern.
The latest round came in October and was largely due to uncertainty
in foreign markets. Southeast Asia sneezed and the rest of the world
caught a cold. On October 27, the Dow experienced its largest one-day
point decline, dropping 554 points. In percentage terms, however,
that roughly 7% decline didn't even register on the list of 10
largest drops. The next day, the market bounced right back, as the
Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as
investors sorted out the Asian turmoil and its implications on
economic growth, interest rates and corporate earnings.
In the face of such uncertainty, a trusted investment professional
can be your best ally. Now, more than ever, your investment
professional can help you take the emotion out of investment
decisions. At a time when your instincts might have you react to the
heat of the market's moment, your investment professional can serve
as an objective voice to put current events in a longer-term
perspective. He or she can also help you evaluate your investments in
any market environment to ensure that they fit your risk tolerance
and time horizons. On an ongoing basis, your investment professional
is there for you to check out new investment ideas or to get an
informed opinion about current economic and market conditions.
We encourage you to take advantage of this important resource.
Working together, you can draw up a detailed road map to help reach
your financial destination regardless of the conditions along the
way.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and
Chief Executive Officer, flush right, next to first
paragraph.
BY LAWRENCE J. DALY, ANTHONY A. GOODCHILD AND JANET L. CLAY,
CO-PORTFOLIO MANAGERS
John Hancock
World Bond Fund
Flight to quality drives world bond markets
as Southeast Asian currency crisis erupts
World bond markets climbed higher for much of the year, but
volatility -- especially in October -- sent many investors scurrying
for safe havens. Driven by prospects of slower economic growth and
lower inflation, the United States was one of the best performing
bond markets anywhere. But uncertainty about the direction of short-
term interest rates led to recurring bond market jitters. The biggest
hiccup came last March when the Federal Reserve raised short-term
interest rates, and bond prices collapsed. However, they soon
recovered and showed strength throughout the summer and into the
fall.
Bond market results elsewhere were more mixed. Until April, European
bonds did well as yields there moved lower. But the rally ended late
last spring amid signs that the region's recession was ending.
Investors feared interest rates would rise, causing bond prices to
fall. Japan's bond market also faltered, as economic growth there
stalled and 10-year yields hovered below 2%.
By contrast, high-yielding, emerging-market bonds had a banner year
until late October. Despite a brief stumble last April, they
continued to attract huge inflows from investors worldwide. Latin
America led the charge, benefiting from increased political stability
and better economic conditions. Southeast Asian emerging markets --
like Thailand, Indonesia, Malaysia, and the Philippines -- were not
as fortunate. Beginning with Thailand in July, all experienced
widespread currency devaluations, which culminated in the fall with
reverberations felt in financial markets around the globe. A mass
exodus from all emerging Asian markets hurt bond prices as far away
as Latin America.
A 2 1/4" x 3 1/2" photo of fund management team at bottom
right. Caption reads: Anthony Goodchild, Janet Clay and
Lawrence Daly, Co-Portfolio Managers."
"...the
United States
was one
of the best
performing
bond markets
anywhere."
"...Treasuries
accounted
for 55%
of the
Fund's net
assets..."
Pie Chart with the heading "Portfolio Diversification" at top
left hand column. The chart is divided into five sections.
Going from top clockwise: Short-Term Investments & Other 13%;
Latin America 19%; United Stater 56%; Europe 12%. Footnote
below states "As a percentage of net assets on October 31,
1997."
Performance review
Despite this upheaval, the J. P. Morgan Global Government Bond Index
- -- a benchmark for global bond performance -- managed to close up
2.75% for the year ended October 31, 1997. In the same period, John
Hancock World Bond Fund's Class A and Class B shares had total
returns of 3.15% and 2.43%, respectively, at net asset value. By
comparison, the average global income fund had a total return of
4.69%, according to Lipper Analytical Services, Inc.1 Please see
pages six and seven for longer-term performance information.
The Fund benefited from investing in the United States and Latin
America, avoiding Asia, and downplaying Europe. But it lagged its
peer group for a couple reasons. First, we had about 30% of the
Fund's net assets -- near our 35% limit -- in emerging markets at
several points during the year. This stake, which was lower-than-
average for global income funds, held the Fund back for most of the
year, although it protected us from larger losses in the October
debacle. Second, while the Fund's strong bias -- 80% of net assets --
toward U.S. dollar-denominated assets helped performance, we also had
exposure to two other currencies, as mandated by our investment
policy. In this case, we held the German mark and Japanese yen. These
exposures hurt the Fund as the dollar strengthened during the spring
and summer. In the fall, however, the mark became a safe-haven
currency, given the Southeast Asian turmoil.
Shift toward U.S. bonds
During the past year, bond yields fell worldwide. As this happened,
the difference in yields between other countries and the United
States narrowed to minimal levels. Many foreign bonds no longer
offered a significant yield advantage over U.S. Treasuries. With
little prospect that bond prices in these foreign countries would
rise, we shifted our focus toward U.S. government bonds in the five-
year maturity horizon. These bonds benefited as investors chose high
quality over high yields. At the end of October, Treasuries accounted
for 55% of the Fund's net assets, up from about 36% six months
earlier.
We had our stake in emerging-market bonds at 24% of the Fund's net
assets by the end of October. Our focus was on U.S. dollar-
denominated government and corporate bonds from Latin America,
particularly Mexico,Venezuela, Argentina, and Brazil. On the
corporate side, we emphasized high-quality companies in industries
like telecommunications and steel that are central to building the
economies of developing nations. We also added a small stake in
Russian government bonds, which should benefit from improvements in
the country's economic outlook, political stability, and fiscal
situation.
Table entitled "Scorecard" at bottom of left hand column. The
header for the left column is "Investments"; the header for the
right column is "Recent performance ... and what's behind the
numbers." The first listing is U.S. Treasuries followed by an up
arrow and the phrase "Stable interest rates and inflation." The
second listing is U.K. bonds followed by an up arrow and the
phrase "Falling yields." The third listing is Latin American
bonds followed by a down arrow and the phrase "Sell-off from
Asian contagion." Footnote below reads: "See "Schedule of
Investments." Investment holdings are subject to change."
Bar chart with heading "Fund Performance" at top of left hand
column. Under the heading is the footnote: "For the year
ended October 31, 1997." The chart is scaled in increments of
1% from bottom to top, with 5% at the top and 0% at the
bottom. Within the chart there are three solid bars. The
first represents the 3.15% total return for the John Hancock
World Bond Fund: Class A. The second represents the 2.43 %
total return for John Hancock World Bond Fund: Class B. The
third represents the 4.69% total return for the average
general global income fund. A footnote below reads: "Total
returns for John Hancock World Bond Fund are at net asset
value with all distributions reinvested. The average global
income fund is tracked by Lipper Analytical Services, Inc.
(1) See the following two pages for historical performance
information."
Over the summer, we continued to pare back our western European
investments to 8% of net assets, down from 30% at the end of April.
We kept a stake in U.K. bonds because yields there were higher than
the rest of Europe. This past fall, as the newly elected Labor
government signalled its inclination to join the European Economic
and Monetary Union (EMU), U.K. bonds rallied. We believe there's room
for further gains, as U.K. yields come down to align more closely
with countries already expected to join the EMU.
What's ahead
Near term, we expect continued fall-out from the Southeast Asian
crisis. The slowdown of economies in this high growth region could
hurt economic growth worldwide. In addition, currency devaluations in
Thailand, Indonesia, Malaysia, and the Philippines have already
forced investors to sell more liquid assets in other markets. As
larger countries like Korea face similar problems, we expect more
selling. Both slower growth and continued selling could continue to
put downward pressure on financial markets around the globe. The
situation won't improve until Southeast Asian countries begin making
structural changes to put their economies back on track.
For the time being, we plan on maintaining our focus on high-quality
U.S. Treasuries. They offer solid prospects, especially given low
yields and instability elsewhere. Also, U.S. economic growth
pressures are at a minimum, which means inflation and interest rates
should stay in check. By contrast, we expect European bond prices to
weaken as short-term rates rise there. As for emerging markets, we
expect continued turmoil in Latin America, believing the Southeast
Asian crisis is contagious. So we intend to opportunistically trim
our stake there for the near term. When the crisis passes, however,
we believe there will be significant upside potential in high-quality
Latin American bonds. Given the prospects elsewhere, we're
comfortable keeping a good portion of our assets at home for now.
"...we expect
continued
fallout from
the Southeast
Asian crisis."
- --------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through
the end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
International investing involves special risks such as political and
currency risks and differences in accounting standards and financial
reporting.
1Figures from Lipper Analytical Services, Inc. include reinvested
dividends and do not take into account sales charges. Actual load-
adjusted performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock World Bond Fund.
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
Class A share total return figures include the maximum applicable
sales charge of 4.5%.
Class B share total return figures reflect the maximum contingent
deferred sales charge (maximum 5% and declining to 0% over six
years).
All figures represent past performance and are no guarantee of future
results. Keep in mind, that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares
may be worth more or less than their original cost, depending on when
you sell them. Please read your prospectus for a discussion of the
risks associated with international investing, including currency and
political risks and differences in accounting standards and financial
reporting.
CLASS A
For the period ended September 30, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
-------- ------- ---------
Cumulative Total Returns 0.82% 21.36% 23.49%
Average Annual Total Returns 0.82% 3.95% 3.74%
CLASS B
For the period ended September 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
-------- ------- ---------
Cumulative Total Returns (0.13%) 21.43% 100.47%
Average Annual Total Returns (0.13%) 3.96% 7.20%
YIELDS
As of October 31, 1997
SEC 30-DAY
YIELD
------------
John Hancock World Bond Fund: Class A 5.27%
John Hancock World Bond Fund: Class B 4.81%
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the
John Hancock World Bond Fund would be worth, assuming all
distributions were reinvested for the period indicated. For
comparison, we've shown the same $10,000 investment in the Salomon
Brothers World Government Bond Index -- an unmanaged index that
provides a benchmark bond market performance on a worldwide basis.
Past performance is not indicative of future results.
World Bond Fund
Class A shares
Line chart with the heading World Bond Fund Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines. The first line represents the value
of the Salomon Brothers World Government Bond Index and is equal to
$12,240 as of October 31, 1997. The second line represents the value of
the hypothetical $10,000 investment made in the World Bond Fund on
January 3, 1992, before sales charge, and is equal to $12,817 as of
October 31, 1997. The third line represents the World Bond Fund,after
sales charge, and is equal to $12,240 as of October 31, 1997.
World Bond Fund
Class B shares
Line chart with the heading World Bond Fund Fund: Class B, representing
the growth of a hypothetical $10,000 investment over the life of the
fund. Within the chart are two lines. The first line represents the
value of the Salomon Brothers World Government Bond Index and is equal
to $23,478 as of October 31, 1997. The second line represents the value
of the hypothetical $10,000 investment made in the World Bond Fund on
December 31, 1991, before sales charge, and is equal to $19,989 as of
October 31, 1997.
*No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
John Hancock Funds - World Bond Fund
The Statement of Assets and Liabilities is the Fund's balance sheet
and shows the value of what the Fund owns, is due and owes on October
31, 1997. You'll also find the net asset value and the maximum
offering price per share as of that date.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1997
- ----------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $45,435,414) $46,512,899
Short-term investments (cost - $12,815,947) - Note A 12,815,947
-------------
59,328,846
Cash 928,663
Receivable for investments sold 4,521,248
Receivable for forward foreign currency exchange
contracts - Note A 529,921
Receivable for closed forward foreign currency exchange
contracts - Note A 1,656
Receivable for shares sold 725
Interest receivable 1,028,898
Other assets 9,316
-------------
Total Assets 66,349,273
- ----------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 1,075,889
Payable for bank borrowings - Note A 1,200,000
Dividend Payable 7,440
Payable for shares repurchased 37,332
Payable for securities on loan - Note A 10,817,947
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 56,985
Accounts payable and accrued expenses 112,340
-------------
Total Liabilities 13,307,933
- ----------------------------------------------------------------------------------
Net Assets:
Capital paid-in 53,711,687
Accumulated net realized loss on investments and
foreign currency transactions (1,646,410)
Net unrealized appreciation of investments and
foreign currency transactions 1,610,385
Distributions in excess of net investment income (634,322)
-------------
Net Assets $53,041,340
==================================================================================
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 - $28,959,442/3,206,087 $9.03
==================================================================================
Class B - $24,081,898/2,665,943 $9.03
==================================================================================
Maximum Offering Price Per Share*
Class A - ($9.03 x 104.71%) $9.46
==================================================================================
* 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.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows
net gains (losses) for the period stated.
Statement of Operations
Year ended October 31, 1997
- ----------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (net of foreign withholding taxes of $12,047 and
including income on securities loaned of $9,614) $4,638,629
-----------
Expenses:
Investment management fee - Note B 462,654
Distribution and service fee - Note B
Class A 83,624
Class B 338,125
Transfer agent fee - Note B 169,921
Custodian fee 82,253
Auditing fee 74,000
Registration and filing fees 23,652
Printing 19,176
Financial services fee - Note B 11,364
Trustees' fees 5,677
Miscellaneous 4,227
Interest expense - Note A 204
Legal 88
-----------
Total Expenses 1,274,965
- ----------------------------------------------------------------------------------
Net Investment Income 3,363,664
- ----------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions:
Net realized loss on investments sold (987,650)
Net realized loss on foreign currency transactions (1,203,474)
Change in net unrealized appreciation/depreciation of
investments (208,858)
Change in net unrealized appreciation/depreciation of
foreign currency transactions 707,669
-----------
Net Realized and Unrealized
Loss on Investments and Foreign
Currency Transactions (1,692,313)
- ----------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $1,671,351
==================================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------
1996 1997
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $4,401,299 $3,363,664
Net realized gain (loss) on investments sold
and foreign currency transactions 1,300,834 (2,191,124)
Change in net unrealized appreciation/depreciation of investments
and foreign currency transactions (1,747,787) 498,811
-------------- --------------
Net Increase in Net Assets Resulting from Operations 3,954,346 1,671,351
-------------- --------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5025 and $0.2580 per share, respectively) (1,702,011) (786,477)
Class B - ($0.4418 and $0.2269 per share, respectively) (2,613,385) (838,142)
Distributions in excess of net investment income
Class A - (none and $0.0180 per share, respectively) -- (55,023)
Class B - (none and $0.0159 per share, respectively) -- (58,638)
Distributions from capital paid-in
Class A - ($0.0100 and $0.2580 per share, respectively) (33,881) (786,847)
Class B - ($0.0088 and $0.2270 per share, respectively) (52,022) (838,537)
-------------- --------------
Total Distributions to Shareholders (4,401,299) (3,363,664)
-------------- --------------
From Fund Share Transactions - Net:* (27,053,357) (18,700,439)
-------------- --------------
Net Assets:
Beginning of period 100,934,402 73,434,092
-------------- --------------
End of period (including distributions in excess of
net investment income of $103,541 and $634,322, respectively) $73,434,092 $53,041,340
============== ==============
*Analysis of Fund Share Transactions:
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1996 1997
------------------------------ ---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- --------------
CLASS A
Shares sold 163,813 $1,508,925 1,140,051 $10,428,710
Shares issued to shareholders
in reinvestment of distributions 107,472 990,433 103,224 942,480
---------- ------------- ---------- --------------
271,285 2,499,358 1,243,275 11,371,190
Less shares repurchased (1,101,077) (10,123,045) (1,005,157) (9,195,414)
---------- ------------- ---------- --------------
Net increase (decrease) (829,792) ($7,623,687) 238,118 $2,175,776
========== ============= ========== ==============
CLASS B
Shares sold 237,253 $2,212,528 152,134 $1,401,591
Shares issued to shareholders
in reinvestment of distributions 132,781 1,224,626 83,206 761,099
---------- ------------- ---------- --------------
370,034 3,437,154 235,340 2,162,690
Less shares repurchased (2,474,099) (22,866,824) (2,516,064) (23,038,905)
---------- ------------- ---------- --------------
Net decrease (2,104,065) ($19,429,670) (2,280,724) ($20,876,215)
========== ============= ========== ==============
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the
end of the previous period. The difference reflects earnings less expenses, any investment and foreign
currency gains and losses, distributions paid to shareholders and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund shares sold, reinvested
and repurchased during the last two periods, along with the corresponding dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the periods indicated, investment returns, key
ratios and supplemental data are as follows:
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $9.76 $9.62 $8.85 $9.30 $9.28
-------- -------- -------- -------- --------
Net Investment Income 0.76 0.64(2) 0.57(2) 0.51(2) 0.53(2)
Net Realized and Unrealized Gain
(Loss) on Investments,
Options, Financial Futures Contracts and
Foreign Currency Transactions (0.10) (0.78) 0.48 (0.02) (0.25)
-------- -------- -------- -------- --------
Total from Investment Operations 0.66 (0.14) 1.05 0.49 0.28
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.38) (0.11) (0.59) (0.50) (0.25)
Distributions in Excess of
Net Investment Income (0.04) -- -- -- (0.02)
Distributions from Capital Paid-In (0.38) (0.52) (0.01) (0.01) (0.26)
-------- -------- -------- -------- --------
Total Distributions (0.80) (0.63) (0.60) (0.51) (0.53)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $9.62 $8.85 $9.30 $9.28 $9.03
======== ======== ======== ======== ========
Total Investment Return at
Net Asset Value(1) 7.14% (1.30%) 12.25% 5.48% 3.15%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $12,882 $8,949 $35,334 $27,537 $28,959
Ratio of Expenses to Average Net Assets 1.46% 1.59% 1.48% 1.58% 1.68%(3)
Ratio of Net Investment Income to
Average Net Assets 7.89% 7.00% 6.43% 5.54% 5.84%
Portfolio Turnover Rate 363% 174% 263% 214% 153%
The Financial Highlights summarizes the impact of the following factors on a single share for each period
indicated: net investment income, gains, dividends and total investment return of the Fund. It shows how the
Fund's net asset value for a share has changed since the end of the previous period. Additionally, important
relationships between some items presented in the financial statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $9.74 $9.62 $8.85 $9.30 $9.28
-------- -------- -------- -------- --------
Net Investment Income 0.72 0.59(2) 0.55(2) 0.45(2) 0.47(2)
Net Realized and Unrealized Gain
(Loss) on Investments,
Options, Financial Futures Contracts and
Foreign Currency Transactions (0.09) (0.78) 0.44 (0.02) (0.25)
-------- -------- -------- -------- --------
Total from Investment Operations 0.63 (0.19) 0.99 0.43 0.22
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.33) (0.06) (0.53) (0.44) (0.23)
Distributions in Excess of
Net Investment Income (0.04) -- -- -- (0.01)
Distributions from Capital Paid-In (0.38) (0.52) (0.01) (0.01) (0.23)
-------- -------- -------- -------- --------
Total Distributions (0.75) (0.58) (0.54) (0.45) (0.47)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $9.62 $8.85 $9.30 $9.28 $9.03
======== ======== ======== ======== ========
Total Investment Return at
Net Asset Value(1) 6.77% (1.88%) 11.51% 4.78% 2.43%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $197,166 $114,656 $65,600 $45,897 $24,082
Ratio of Expenses to Average Net Assets 1.91% 2.17% 2.16% 2.25% 2.38%(3)
Ratio of Net Investment Income to
Average Net Assets 7.45% 6.41% 6.03% 4.87% 5.13%
Portfolio Turnover Rate 363% 174% 263% 214% 153%
(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.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
October 31, 1997
- -------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by World Bond Fund on October 31, 1997.
It's divided into two main categories: bonds and short-term investments. The bonds are further broken down by
currency denomination. Short-term investments, which represent the Fund's "cash" position, are listed last.
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ----------- ------------------ ------------
<S> <C> <C> <C>
BONDS
British Pound Sterling (7.81%)
United Kingdom Treasury,
Bond 06-07-02 7.000% 1,700 $2,895,134
Bond 12-07-06 7.500 700 1,248,453
--------------
4,143,587
--------------
U.S. Dollar (79.88%)
Globo Communicacoes e Participacoes
Ltda., (Brazil),
Bond 12-20-06 (R) 10.500 250 225,000
Innova S. de R.L., (Mexico),
Sr Note 04-01-07 12.875 200 203,000
Klabin Fabricadora de Papel e Celulose
S.A., (Brazil),
Gtd Deb 08-12-04 (R) 11.000 500 485,000
Net Sat Services Ltda., (Brazil),
Sr Note 08-05-04 12.750 500 500,000
OPP Petroquimica S.A., (Brazil),
Bond 10-29-04 (R) 11.000 500 482,500
Petroleo Brasileiro S.A., (Brazil),
Unsub Deb 10-17-06 (R) 10.000 500 475,000
Republic of Argentina, (Argentina),
Floating Rate Bond 03-31-05 6.688* 1,920 1,612,800
Republic of South Africa, (South Africa),
Note 06-23-17 8.500 825 800,250
Republic of Venezuela, (Venezuela),
Floating Rate Bond Ser DL 12-18-07 6.750* 3,750 3,243,750
Russian Federation Ministry of Finance, (Russia),
Unsub Deb 11-27-01 (R) 9.250 500 472,500
Unsub Deb 06-26-07 10.000 1,000 960,000
Unsub Deb 06-26-07 (R) 10.000 500 480,000
Sprint Spectrum L.P.,
Sr Note 08-15-06 11.000 500 555,000
Transportacion Maritima Mexicana S.A.
de C.V., (Mexico),
Note 05-15-03 9.250 500 485,000
United Mexican States, (Mexico),
Global Bond 02-06-01 9.750 1,000 1,065,000
Global Bond 05-15-26 11.500 1,000 1,080,000
United States Treasury,
Note 11-30-01 5.875 6,450 6,474,188
Note 02-28-02 6.250 1,600 1,628,496
Note 05-31-02 6.500 8,200 8,434,438
Note 07-31-02 6.000 3,750 3,785,738
Note 10-15-06 6.500 5,520 5,741,683
Note 05-15-07 6.625 3,020 3,179,969
--------------
42,369,312
--------------
TOTAL BONDS
(Cost $45,435,414) (87.68%) 46,512,899
-------- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.77%)
Investment in a joint repurchase agreement
transaction with Aubrey G. Lanston & Co. --
Dated 10-31-97, Due 11-03-97
(Secured by US Treasury Notes, 5.750%
thru 7.125%,
Due 12-31-98 thru 4-30-00) -- Note A 5.680 1,998 1,998,000
--------------
Non-Cash Security Lending Collateral (5.00%)
Tri-Party Collateral which consists of
various U.S. Treasury Bonds and Notes,
5.625% thru 13.675%,
Due 10-15-98 thru 11-15-26** 2,650 2,650,369
--------------
Cash Equivalents (15.40%)
Navigator Securities Lending Prime Portfolio** 8,168 8,167,578
--------------
TOTAL SHORT-TERM INVESTMENTS (24.17%) 12,815,947
-------- --------------
TOTAL INVESTMENTS (111.85%) $59,328,846
======== ==============
NOTES TO SCHEDULE OF INVESTMENTS
* Represents rate in effect on October 31, 1997.
** Represents investment of security lending collateral - Note A.
# Par value of non US$ denominated foreign bonds is expressed in local currency for each country listed.
(R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities
may be resold, normally to qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $2,620,000 or 4.94% of the Fund's net assets as of October 31, 1997.
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.
</TABLE>
<TABLE>
<CAPTION>
Portfolio Concentration (Unaudited)
- -------------------------------------------------------------------------------------
The Fund invests in bonds issued by the U.S. government, its agencies or
instrumentalities, foreign governments and companies. The performance of the Fund is
closely tied to the economic condition within the countries in which it invests. The
concentration of investments by currency denomination for individual securities held
by the Fund is shown in the schedule of investments. In addition, concentration of
investments can be aggregated by various investment categories. The table below shows
the percentages of the Fund's investments at October 31, 1997 assigned to the various
investment categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
- ---------------------- ----------------
<S> <C>
Chemicals 0.91%
Government -- Foreign 26.13
Government -- U.S. 55.13
Media 0.94
Oil & Gas 0.90
Paper & Paper Products 0.91
Telecommunications 1.85
Transportation 0.91
Short-Term Investments 24.17
---------
TOTAL INVESTMENTS 111.85%
==========
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE A -
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom
Investment Trust II) is an open-end management investment company,
registered under the Investment Company Act of 1940. The Trust
consists of six series: John Hancock 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 is 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 bears
distribution and service expenses under terms of a distribution plan
have exclusive voting rights to that distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are
valued on the basis of market quotations, valuations provided by
independent pricing services or at fair value as determined in good
faith in accordance with procedures approved by the Trustees. Short-
term debt investments maturing within 60 days are valued at
amortized cost which approximates market value. All portfolio
transactions initially expressed in terms of foreign currencies have
been translated into U.S. dollars as described in "Foreign Currency
Translation" below. The Fund may invest in indexed securities whose
value is linked either directly or inversely to changes in foreign
currencies, interest rates, commodities, indices or other reference
instruments. Indexed securities may be more volatile than the
reference instrument itself, but any loss is limited to the amount
of the original investment.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by
the Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with
John Hancock Advisers, Inc. (the "Adviser"), a wholly owned
subsidiary of The Berkeley Financial Group, may participate in a
joint repurchase agreement transaction. Aggregate cash balances are
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 receives delivery of the
underlying securities for the joint account on the Fund's behalf.
The Adviser is responsible for ensuring that the agreement is fully
collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of
the date of purchase, sale or maturity. Net realized gains and
losses on sales of investments are determined on the identified cost
basis. Capital gains realized on some foreign securities are subject
to foreign taxes and are accrued, as applicable.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all its taxable
income, including any net realized gain on investments, to its
shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, net currency exchange
gains and losses from sales of foreign debt securities must be
treated as ordinary income even though such items are gains and
losses for accounting purposes. The Fund has $1,621,817 of capital
loss carryforward available, to the extent provided by regulations,
to offset future net realized gains. To the extent such carryforward
is used by the Fund, no capital gains distribution will be made. The
carryforward expires as follows: October 31, 2002 - $938,808 and
October 31, 2005 - $683,009. Expired capital loss carryforwards are
reclassified to capital paid-in, in the year of expiration.
INTEREST AND DISTRIBUTIONS Interest income on investment securities
is recorded on the accrual basis. Foreign income may be subject to
foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net
investment income and realized gains on the ex-dividend date. Such
distributions are determined in conformity with income tax
regulations, which may differ from generally accepted accounting
principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and
will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
DISCOUNT ON SECURITIES The Fund accretes 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) are calculated at the Fund level and
allocated daily to each class of shares based on the relative net
assets of the respective classes. Distribution and service fees, if
any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual fund. Expenses which are not readily
identifiable to a specific fund are allocated in such a manner as
deemed equitable, taking into consideration, among other things, the
nature and type of expense and the relative sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles
incorporates estimates made by management in determining the
reported amounts of assets, liabilities, revenues, and expenses of
the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. These agreements enable the Fund to participate with
other Funds managed by the Adviser in an unsecured line of credit
with banks which permit borrowings up to $600 million, collectively.
Interest is charged to each Fund, based on its borrowings, at a rate
equal to 0.50% over the Fed Funds Rate. In addition, a commitment
fee, at a rate of 0.075% per annum based on the average daily unused
portion of the line of credit, is allocated among the participating
Funds. The maximum loan balance for the Fund during the year for
which loans were outstanding amounted to $1,200,000. At October 31,
1997, the loan outstanding was $1,200,000 with a rate of 6.1875%.
SECURITIES LENDING The Fund may lend its securities to certain
qualified brokers who pay the Fund negotiated lenders fees. These
fees are included in interest income. The loans are collateralized
at all times with cash or securities with a market value at least
equal to the market value of the securities on loan. As with other
extension of credit, the Fund may bear the risk of delay of the
loaned securities in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially.
At October 31, 1997, the Fund loaned securities having a market
value of $10,231,177 collateralized by cash and securities in the
amount of $10,817,947, cash collateral was invested in a short-term
instrument.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 PM,
London time, on the date of any determination of the net asset value
of the Fund. Transactions affecting statement of operations accounts
and net realized gain/(loss) on investments are translated at the
rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from
sales of foreign currency, currency gains or losses realized between
the trade and settlement dates on securities transactions and the
difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains or losses arise from changes in the value of
assets and liabilities other than investments in securities at
fiscal year end, resulting from changes in the exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into
forward foreign currency exchange contracts as a hedge against the
effect of fluctuations in currency exchange rates, and for
speculative purposes, as a substitute for investing in securities
denominated in that currency. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific
currency at a future date at a set price. The aggregate principal
amounts of the contracts are marked-to-market daily at the
applicable foreign currency exchange rates. Any resulting unrealized
gains and losses are included in the determination of the Fund's
daily net assets. The Fund records realized gains and losses at the
time the forward foreign currency contract is closed out or offset
by a matching contract. Risks may arise upon entering these
contracts from potential inability of counterparties to meet the
terms of the contract and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets
and Liabilities. The Fund may also purchase and sell forward
contracts to facilitate the settlement of foreign currency
denominated portfolio transactions, under which it intends to take
delivery of the foreign currency. Such contracts normally involve no
market risk other than that offset by the currency amount of the
underlying transaction.
Open foreign currency forward contracts at October 31, 1997, were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT DATE (DEPRECIATION)
- -------- ------------------- ---------- --------------
SELLS
New Zealand Dollar 3,822,205 NOV 97 $1,132
==============
BUYS
Deutsche Mark 29,200,000 NOV 97 $480,696
Japanese Yen 664,000,000 NOV 97 48,093
--------------
$528,789
==============
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial
futures contracts for speculative purposes and/or to hedge against
the effects of fluctuations in interest rates, currency exchange
rates and other market conditions. Buying futures tends to increase
the Fund's exposure to the underlying instrument. Selling futures
tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. At the time the Fund enters into a
financial futures contract, it will be required to deposit with its
custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the
value of the financial futures contract being traded. Each day, the
futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange on which it trades.
Subsequent payments, known as "variation margin," to and from the
broker are made on a daily basis as the market price of the
financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market," will be recorded by
the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss.
Risks of entering into futures contracts include the possibility
that there may be an illiquid market and/or that a change in the
value of the contracts may not correlate with changes in the value
of the underlying securities. In addition, the Fund could be
prevented from opening or realizing the benefits of closing out
futures positions because of position limits or limits on daily
price fluctuation imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses can be affected as a result of
futures contracts.
At October 31, 1997, there were no open position in financial
futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price
on the exchange on which they are primarily traded. Purchased put or
call over-the-counter options will be valued at the average of the
"bid" prices obtained from two independent brokers. Written put or
call over-the-counter options will be valued at the average of the
"asked" prices obtained from two independent brokers. Upon the
writing of a call or put option, an amount equal to the premium
received by the Fund will be included in the Statement of Assets and
Liabilities as an asset and corresponding liability. The amount of
the liability will be subsequently marked-to-market to reflect the
current market value of the written option.
The Fund may use option contracts to manage its exposure to the
stock market. Writing puts and buying calls will tend to increase
the Fund's exposure to the underlying instrument and buying puts and
writing calls will tend to decrease the Fund's exposure to the
underlying instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be
limited to the premium initially paid for the option. In all other
cases, the face (or "notional") amount of each contract at value
will reflect the maximum exposure of the Fund in these contracts,
but the actual exposure will be limited to the change in value of
the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms, or if the Fund is unable to offset a contract with
a counterparty on a timely basis ("liquidity risk"). Exchange-traded
options have minimal credit risk as the exchanges act as
counterparties to each transaction, and only present liquidity risk
in highly unusual market conditions. To minimize credit and
liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or
credit risk may involve amounts in excess of those reflected in the
Fund's period-end Statement of Assets and Liabilities.
There were no written option transactions for the year ended October
31, 1997.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.75% 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, and Freedom Distributors Corporation ("FDC") acted as
Co-Distributors for shares of the Fund. For the year ended October
31, 1997, net sales charges received with regard to sales of Class A
shares amounted to $8,851. Out of this amount, $810 was retained and
used for printing prospectuses, advertising, sales literature and
other purposes, $5,652 was paid as sales commissions to unrelated
broker-dealers and $2,389 was paid as sales commissions to sales
personnel of John Hancock Distributors, Inc. ("Distributors"),
Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro & Co.
("Sutro"), all of which are broker-dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company ("JHMLICo"), is
the indirect sole shareholder of Distributors and was the indirect
sole shareholder until November 29, 1996 of John Hancock Freedom
Securities Corporation and its subsidiaries which include FDC,
Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will
be subject to a contingent deferred sales charge ("CDSC") at
declining rates beginning at 5.0% of the lesser of the current
market value at the time of redemption or the original purchase cost
of the shares being redeemed. Proceeds from CDSC are paid to JH
Funds and are used in whole or in part to defray its expenses
related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended
October 31, 1997, contingent deferred sales charges paid to JH Funds
amounted to $97,894.
In addition, to reimburse the Co-Distributors for the services they
provide as distributors of shares of the Fund, the Fund has adopted
Distribution Plans with respect to Class A and Class B pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Accordingly,
the Fund will make payments to the Co-Distributors for distribution
and service expenses, at an annual rate not to exceed 0.30% of Class
A average daily net assets and 1.00% of Class B average daily net
assets to reimburse the Co-Distributors for their distribution and
service costs. Up to a maximum of 0.25% of such payments may be
service fees as defined by the amended Rules of Fair Practice of the
National Association of Securities Dealers. Under the amended Rules
of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of The
Berkeley Financial Group. The Fund pays transfer agent fee based on
the number of shareholder accounts and certain out-of-pocket
expenses.
The Fund has an agreement with the Adviser to perform necessary tax
and financial management services for the Fund. The compensation for
the year ended was at an annual rate of less than 0.02% of the
average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon, and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated
Trustees may elect to defer for tax purposes their receipt of this
compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund will make investments into other John
Hancock funds, as applicable, to cover its liability for the
deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other
asset. The deferred compensation liability and the related other
asset are always equal and are marked to market on a periodic basis
to reflect any income earned by the investment as well as any
unrealized gains or losses. At October 31, 1997, the Fund's
investments to cover the deferred compensation liability had
unrealized appreciation of $611.
NOTE C -
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities, other than
obligations of the U.S. government and its agencies and short-term
securities, during the year ended October 31, 1997, aggregated
$50,173,789 and $85,997,493, respectively. Purchases and proceeds
from sales of obligations of the U.S. government its agencies
aggregated $39,715,170 and $26,447,597 respectively, during the year
ended October 31, 1997.
The cost of investments owned at October 31, 1997 (including short-
term investments) for Federal income tax purposes was $58,251,361.
Gross unrealized appreciation and depreciation of investments
aggregated $1,314,881 and $237,396, respectively, resulting in net
unrealized appreciation of $1,077,485.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1997, the Fund has reclassified
amounts to reflect a decrease in accumulated net realized loss on
investments of $2,216,838, an increase in accumulated net investment
loss of $2,156,165 and a decrease in capital paid-in of $60,673.
This represents the amount necessary to report these balances on a
tax basis, excluding certain temporary differences, as of October
31, 1997. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to
certain differences in the computation of distributable income and
capital gains under federal tax rules versus generally accepted
accounting principles. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock World Bond Fund
and the Trustees of John Hancock Investment Trust III
In our opinion, the accompanying statement of assets and
liabilities, including the schedule of investments, and the related
statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of John Hancock World Bond Fund (the "Fund") (a
series of John Hancock Investment Trust III) at October 31, 1997,
and the results of its operations, the changes in its net assets and
the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and the significant estimates made by management,
and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities
owned at October 31, 1997 by correspondence with the custodian and
the application of alternative auditing procedures where investments
purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 15, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is
furnished with respect to the distributions of the Fund for its
fiscal year ended October 31, 1997.
None of the distributions qualify for the dividends received
deduction available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form
1099-DIV in January of 1998. This will reflect the tax character of
all distributions for calendar year 1997.
NOTES
John Hancock Funds - World Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - World Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - World Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
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
1-800-225-5291 1-800-554-6713 (TDD)
Internet: www.jhancock.com/funds
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U.S. Postage
PAID
Randolph, MA
Permit No. 75
This report is for the information of shareholders of the John
Hancock World Bond Fund. 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 with caption
"Printed on Recycled Paper."
0900A 10/97
12/97
<PAGE>
SEMIANNUAL REPORT
World Bond Fund
April 30, 1998
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President and Chief Operating Officer
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to third paragraph.]
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock
market returns averaging 15% or so each year. In the past three
years, the stock market has treated us to a record run, producing
annual returns in excess of 20%.
After such a long and remarkable performance, many began this year
wondering what the market would do for an encore in 1998. The answer
so far has been more of the same. This achievement continues to
bolster many investors' convictions that the market will produce
these results forever, or, in the worst case, that market declines
will always be short-lived. While the economy remains solid and the
environment favorable, history and reason tell us it's a highly
unlikely scenario.
This doesn't mean we know what the market will do next, or that
it's riding for a fall. But after such a run, even in this "new era"
of strong economic growth with low inflation, we believe it would
be wise for investors to set more realistic expectations. As we've
said before, markets do indeed move in two directions, even though
we've seen "up" much more than "down" recently. Over the long term,
the market's historical results have been more in the 10% per year
range, which is still a solid result, considering it has been
produced despite wars, depressions and other social upheavals along
the way.
In addition to adjusting, or at least re-examining expectations,
now could also be a good time to review with your investment
professional how your assets are diversified, perhaps with an
eye toward a more conservative approach. Stocks, especially
with their outsized gains of the last three years, might have grown
to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping
you keep your feet on the ground as you pursue your dreams.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 2 1/2" x 2 3/4" photo at bottom right of page of fund portfolio managers.
Caption reads "Lawrence Daly (r) and Anthony Goodchild (l), Portfolio
Managers".]
BY LAWRENCE J. DALY AND ANTHONY A. GOODCHILD, PORTFOLIO MANAGERS
John Hancock
World Bond Fund
Bond markets make comeback after Asian contagion
For world bond markets, it has been neither the best of times nor the
worst of times. In the United States, bond markets did fairly well as
investors sought liquidity and stability following the Asian financial
crisis. Near-perfect economic conditions kept bond prices stable with
yields on the 10-year Treasury moving from 5.60% in early November to
5.70% in late April. In continental Europe, bonds did better than
expected. Initially interest rates seemed headed up from low levels,
given the fact that many European economies were gaining steam and
converging to launch a single currency. Instead interest rates stayed
surprisingly low throughout the first quarter of 1998, sending
European bond prices sailing. Fueled by a combination of high relative
yields, strong economic growth and low inflation, bonds in the United
Kingdom outperformed those in core Europe. By contrast, Japan's bond
markets suffered from a stagnant economy and low yields.
Emerging-market bonds everywhere tumbled when Southeast Asia's
problems surfaced last October. But markets that made an effort to put
their financial houses in order soon rebounded. Among the biggest
gainers in the new year were bonds in various Latin American
countries, including Brazil and Panama. Still, volatility continued
with a major disruption in February when currencies in Korea,
Indonesia, and Thailand depreciated against the dollar.
"In the United
States, bond
markets did
fairly well... "
Performance review
The J.P. Morgan Global Government Bond Index -- a benchmark for global
bond performance -- returned 1.20% for the six months ended April 30,
1998. In the same period, John Hancock World Bond Fund's Class A and
Class B shares had total returns of 1.28% and 0.93%, respectively, at
net asset value. Keep in mind that your net asset value return will be
different from this performance if you were not invested in the Fund
for the entire period and did not reinvest all distributions. Please
see pages six and seven for longer-term performance information.
[Pie chart at top of left hand column with the heading "Portfolio
Diversification". The chart is divided into 5 sections from top, left to
right: Short-Term Investments & Other 5%; South Korea 1%; Latin America 10%;
United Kingdom 9%; United States 75%. A note below the chart reads "As a
percentage of net assets on April 30, 1998".]
The Fund lagged the average global income fund, which had a total
return of 3.26%, according to Lipper Analytical Services, Inc.1 This
was mainly because we were not invested in continental Europe when
bonds there rallied in the first quarter. In addition, we had a
lower-than-average investment in emerging markets when they rebounded.
These decisions offset several positive moves that benefited the Fund.
To start, the bulk of the Fund's net assets were in U.S. government
bonds, which protected us in the aftermath of the Asian crisis. The
investments we made in the United Kingdom and Latin America served the
Fund well, even if we didn't have enough of them. And avoiding Japan
was the right decision. In terms of currency, the Fund had 86% of its
net assets in U.S. dollar-denominated bonds by the period's end. This
boosted performance, as the dollar appreciated against both the yen
and the mark over the period. In addition, the Fund had a 10% stake in
the British pound, which neither depreciated nor appreciated against
the dollar. Trading other currencies, including the mark and South
African rand, at opportune times also helped.
"In the new
year, we
increased our
investment
in emerging-
market
bonds... "
[Table at bottom of left hand column entitled "Scorecard". The header for
the left column is "Investment" and the header for the right column is
"Recent Performance...and What's Behind the Numbers". The first listing is
U.S. Treasuries followed by an arrow pointing to the left and right with the
phrase "Little change in interest rates". The second listing is Latin
American bonds followed by an up arrow and the phrase "Monetary and fiscal
policy improvements". The third listing is U.K. bonds followed by an up
arrow and the phrase "High (after-inflation) interest rates". A note below
the table reads "See "Schedule of Investments." Investment holdings are
subject to change."]
Bias toward U.S. bonds
Given the volatility in world bond markets last fall, U.S. bonds seemed
like the best place to be. In addition, the lack of growth prospects
outside the United States, and higher interest rates here than in Japan
and Germany made U.S. bonds a good value. Expecting exports to Asia to
slow substantially, investors thought bonds might get an added boost
from the Federal Reserve's lowering interest rates to stimulate the
economy. For all these reasons, we built our stake in U.S. government
bonds to 75% of the Fund's net assets at the end of April, up from 55%
six months earlier. Most of what we owned were U.S. Treasuries with
five- to seven-year maturities. In addition, we had a small investment
in mortgage-backed securities issued by Federal Home Loan Mortgage
Corpora-tion (FHLMC). Like Treasuries, FHLMCs carry the highest credit
quality ratings of AAA. They also have slightly higher yields than
Treasuries.
We kept our 9% stake in U.K. government bonds because yields there
were higher than in the rest of Europe. These bonds remain attractive,
given the possibility that the U.K. might have to slow its economy or
may decide to join the European Economic and Monetary Union. Either
scenario would lower interest rates and push bond prices up. The rest
of Europe didn't seem as attractive, with interest rates at low levels
and poised to rise. By avoiding core Europe, however, we missed the
bond rally there during the first quarter. We're hoping that by
year-end, U.S. bonds will have gained enough ground to compensate us
for missing this short-term opportunity.
Following the crisis in Asian financial and currency markets late last
October, we trimmed our stake in emerging-market bonds to 5% of the
Fund's net assets, down from 24%. We focused on stability and liquidity,
retaining only dollar-denominated government bonds and eliminating
corporate bonds. Among the bond markets we liked were Brazil, Mexico,
and Argentina. In the new year, we increased our investment in
emerging-market bonds to 13% of the Fund's net assets by the end of
April.
[Bar chart at top of left hand column with the heading "Fund Performance".
Under the heading is a note that reads "For the six months ended April 30,
1998". The chart is scaled in increments of 1% with 4% at the top and 0% at
the bottom. The first bar represents the 1.28% total return for the John
Hancock World Bond Fund Class A. The second bar represents the 0.93% total
return for John Hancock World Bond Fund Class B, and the third bar represents
the 3.26% total return for the average global income fund. A note below the
chart reads "Total returns for John Hancock World Bond Fund are at net asset
value with all distributions reinvested. The average global income fund is
tracked by Lipper Analytical Services, Inc. (1). See the following two pages
for historical performance information."]
Caution ahead
We're cautious on world bond markets for several reasons. Our main
concern is Japan and whether or not it can implement real structural
reform that will propel the economy out of recession and aid the rest
of the Pacific Basin. Japan controls about 50% of the world's savings,
so what Japan does will affect financial markets everywhere. In the
United States, we're concerned that the Federal Reserve might decide
to raise interest rates if the economy doesn't slow as expected. This,
in turn, would hurt bond prices. In emerging markets, volatility will
continue as political and fiscal issues buffet the financial markets.
And there's still a lot of uncertainty around how the euro -- Europe's
new single currency -- will play out.
Given these concerns, we plan to maintain a defensive strategy for now
geared toward protecting the Fund from major market explosions. For
the time being, we'll keep the Fund's high stake in U.S. government
bonds, along with smaller stakes in the U.K. and Latin America. We may
add slightly to our investments in mortgage-backed securities and in
emerging markets. In particular, we'll look for buying opportunities
in strong countries where prices have fallen unfairly. Only when
prospects further improve outside the United States will we consider
a substantial shift in assets.
"... we plan
to maintain
a defensive
strategy
for now..."
This commentary reflects the views of the portfolio managers through
the end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
International investing involves special risks such as political,
economic and currency risks and differences in accounting standards
and financial reporting.
1Figures from Lipper Analytical Services, Inc. include reinvested
dividends and do not take into account sales charges. Actual load-
adjusted performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock World Bond Fund.
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
For Class A shares, total return figures include a maximum applicable
sales charge of 4.50%. Class B performance reflects a maximum
contingent deferred sales charge (maximum 5% and declining to 0% over
six years).
All figures represent past performance and are no guarantee of future
results. Keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may
be worth more or less than their original cost, depending on when you
sell them. Please see your prospectus for a discussion of the risks
associated with international investing, including currency and
political risks and differences in accounting standards and financial
reporting.
CLASS A
For the period ended March 31, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
--------- --------- ---------
Cumulative Total Returns 0.93% 22.59% 23.56%
Average Annual Total Returns 0.93% 4.16% 3.45%
CLASS B
For the period ended March 31, 1998
ONE FIVE TEN
YEAR YEARS YEARS
--------- --------- ---------
Cumulative Total Returns (0.05%) 22.58% 77.30%
Average Annual Total Returns (0.05%) 4.16% 5.89%
YIELDS
As of April 30, 1998
SEC 30-DAY
YIELD
----------
John Hancock World Bond Fund: Class A 4.13%
John Hancock World Bond Fund: Class B 3.62%
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock World Bond Fund would be worth, assuming all distributions
were reinvested for the period indicated. For comparison, we've shown
the same $10,000 investment in the Salomon Brothers World Government
Bond Index -- an unmanaged index that provides a benchmark for bond
market performance on a worldwide basis. Past performance is not
indicative of future results.
[Line chart with the heading World Bond Fund Class A, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the
chart are three lines. The first line represents the value of the Salomon
Brothers World Government Bond Index and is equal to $15,488 as of April 30,
1998. The second line represents the value of the hypothetical $10,000
investment made in the World Bond Fund on January 3, 1992, before sales
charge, and is equal to $12,982 as of April 30, 1998. The third line
represents the World Bond Fund, after sales charge, and is equal to $12,398 as
of April 30, 1998. ]
[Line chart with the heading World Bond Fund Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are two lines. The first line represents the value of the
Salomon Brothers World Government Bond Index and is equal to $23,600 as April
30, 1998. The second line represents the value of the hypothetical $10,000
investment made in the World Bond Fund on December 31, 1991, before sales
charge, and is equal to $20,166 as of April 30, 1998. ]
*No contingent deferred sales charge applicable.
Financial Statements
John Hancock Funds - World Bond Fund
The Statement of Assets and Liabilities is the Fund's balance sheet
and shows the value of what the Fund owns, is due and owes on April
30, 1998. You'll also find the net asset value and the maximum
offering price per share as of that date.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
April 30, 1998 (Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $41,154,031) $42,077,830
Options (cost - $50,444) 55,632
Short-term investments (cost - $10,582,880) - Note A 10,582,880
-----------
52,716,342
Cash 199,196
Receivable for investments sold 324,311
Receivable for closed forward foreign currency
exchange contracts - Note A 65,169
Receivable for shares sold 339
Interest receivable 661,627
Other assets 9,316
-----------
Total Assets 53,976,300
- ---------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 496,536
Payable for closed forward foreign currency exchange
contracts - Note A 72,262
Dividend payable 5,374
Payable for shares repurchased 22,239
Payable upon return of securities on loan - Note A 9,476,880
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 53,460
Accounts payable and accrued expenses 58,250
-----------
Total Liabilities 10,185,001
- ---------------------------------------------------------------------------------
Net Assets:
Capital paid-in 45,031,645
Accumulated net realized loss on investments and
foreign currency transactions (1,537,052)
Net unrealized appreciation of investments, options
and foreign currency transactions 931,028
Distributions in excess of net investment income (634,322)
-----------
Net Assets $43,791,299
=================================================================================
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 - $26,934,070 / 3,015,855 $8.93
=================================================================================
Class B - $16,857,229 / 1,887,510 $8.93
=================================================================================
Maximum Offering Price Per Share*
Class A - ($8.93 x 104.71%) $9.35
=================================================================================
* 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.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows net
gains (losses) for the period stated.
Statement of Operations
Six months ended April 30, 1998 (Unaudited)
- ----------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (including income on securities loaned
of $12,568) $1,577,854
----------
Expenses:
Investment management fee - Note B 182,511
Distribution and service fee - Note B
Class A 42,489
Class B 100,781
Transfer agent fee - Note B 70,438
Custodian fee 32,160
Auditing fee 24,894
Registration and filing fees 9,155
Printing 6,842
Financial services fee - Note B 4,300
Miscellaneous 3,085
Trustees' fees 1,610
Legal fees 840
Interest expense - Note A 415
----------
Total Expenses 479,520
- ----------------------------------------------------------------------------------
Net Investment Income 1,098,334
- ----------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Options and Foreign Currency Transactions:
Net realized gain on investments sold 580,136
Net realized loss on foreign currency transactions (470,778)
Change in net unrealized appreciation/depreciation
of investments and options (148,498)
Change in net unrealized appreciation/depreciation
of foreign currency transactions (530,859)
----------
Net Realized and Unrealized
Loss on Investments, Options
and Foreign Currency
Transactions (569,999)
- ----------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $528,335
==================================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1998
OCTOBER 31, 1997 (UNAUDITED)
----------------- ----------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $3,363,664 $1,098,334
Net realized gain (loss) on investments sold and foreign currency transactions (2,191,124) 109,358
Change in net unrealized appreciation/depreciation
of investments and foreign currency transactions 498,811 (679,357)
----------- -----------
Net Increase in Net Assets Resulting from Operations 1,671,351 528,335
----------- -----------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.2580 and $0.2133 per share, respectively) (786,477) (679,492)
Class B - ($0.2269 and $0.1824 per share, respectively) (838,142) (418,842)
Distributions in excess of net investment income
Class A - ($0.0180 and none per share, respectively) (55,023) --
Class B - ($0.0159 and none per share, respectively) (58,638) --
Distributions from capital paid-in
Class A - ($0.2580 and none per share, respectively) (786,847) --
Class B - ($0.2270 and none per share, respectively) (838,537) --
----------- -----------
Total Distributions to Shareholders (3,363,664) (1,098,334)
----------- -----------
From Fund Share Transactions - Net:* (18,700,439) (8,680,042)
----------- -----------
Net Assets:
Beginning of period 73,434,092 53,041,340
----------- -----------
End of period (including distributions in excess
of net investment income of $634,322 and
$634,322, respectively) $53,041,340 $43,791,299
=========== ============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1998
OCTOBER 31, 1997 (UNAUDITED)
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
CLASS A
Shares sold 1,140,051 $10,428,710 301,487 $2,707,075
Shares issued to shareholders in
reinvestment of distributions 103,224 942,480 42,103 376,316
---------- ----------- --------- -----------
1,243,275 11,371,190 343,590 3,083,391
Less shares repurchased (1,005,157) (9,195,414) (533,822) (4,782,715)
---------- ----------- --------- -----------
Net increase (decrease) 238,118 $2,175,776 (190,232) ($1,699,324)
========== =========== ========= ===========
CLASS B
Shares sold 152,134 $1,401,591 21,141 $189,984
Shares issued to shareholders
in reinvestment of distributions 83,206 761,099 21,022 187,906
---------- ----------- --------- -----------
235,340 2,162,690 42,163 377,890
Less shares repurchased (2,516,064) (23,038,905) (820,596) (7,358,608)
---------- ----------- --------- -----------
Net decrease (2,280,724) ($20,876,215) (778,433) ($6,980,718)
========== =========== ========= ===========
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the
previous period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders and any increase or decrease in money shareholders invested in the Fund. The footnote
illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with
the corresponding dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED
-------------------------------------------------------------------- APRIL 30, 1998
1993 1994 1995 1996 1997 (UNAUDITED)
-------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $9.76 $9.62 $8.85 $9.30 $9.28 $9.03
Net Investment Income 0.76 0.64(2) 0.57(2) 0.51(2) 0.53(2) 0.21(2)
Net Realized and Unrealized Gain
(Loss) on Investments,
Options, Financial Futures Contracts and
Foreign Currency Transactions (0.10) (0.78) 0.48 (0.02) (0.25) (0.10)
------- ------ ------- ------- ------- -------
Total from Investment Operations 0.66 (0.14) 1.05 0.49 0.28 0.11
------- ------ ------- ------- ------- -------
Less Distributions:
Distributions from Net Investment Income (0.38) (0.11) (0.59) (0.50) (0.25) (0.21)
Distributions in Excess of
Net Investment Income (0.04) -- -- -- (0.02) --
Distributions from Capital Paid-In (0.38) (0.52) (0.01) (0.01) (0.26) --
------- ------ ------- ------- ------- -------
Total Distributions (0.80) (0.63) (0.60) (0.51) (0.53) (0.21)
------- ------ ------- ------- ------- -------
Net Asset Value, End of Period $9.62 $8.85 $9.30 $9.28 $9.03 $8.93
======= ====== ======= ======= ======= =======
Total Investment Return
at Net Asset Value(1) 7.14% (1.30%) 12.25% 5.48% 3.15% 1.28%(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $12,882 $8,949 $35,334 $27,537 $28,959 $26,934
Ratio of Expenses to
Average Net Assets 1.46% 1.59% 1.48% 1.58% 1.68%(3) 1.68%(3,5)
Ratio of Net Investment Income
to Average Net Assets 7.89% 7.00% 6.43% 5.54% 5.84% 4.80%(5)
Portfolio Turnover Rate 363% 174% 263% 214% 153% 56%
The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net
investment income, gains (losses), distributions and total investment return of the Fund. It shows how the Fund's net asset
value for a share has changed since the end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED
-------------------------------------------------------------------- APRIL 30, 1998
1993 1994 1995 1996 1997 (UNAUDITED)
-------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $9.74 $9.62 $8.85 $9.30 $9.28 $9.03
-------- -------- ------- ------- ------- -------
Net Investment Income 0.72 0.59(2) 0.55(2) 0.45(2) 0.47(2) 0.18(2)
Net Realized and Unrealized Gain
(Loss) on Investments,
Options, Financial Futures Contracts
and Foreign Currency Transactions (0.09) (0.78) 0.44 (0.02) (0.25) (0.10)
-------- -------- ------- ------- ------- -------
Total from Investment Operations 0.63 (0.19) 0.99 0.43 0.22 0.08
-------- -------- ------- ------- ------- -------
Less Distributions:
Distributions from Net Investment Income (0.33) (0.06) (0.53) (0.44) (0.23) (0.18)
Distributions in Excess
of Net Investment Income (0.04) -- -- -- (0.01) --
Distributions from Capital Paid-In (0.38) (0.52) (0.01) (0.01) (0.23) --
-------- -------- ------- ------- ------- -------
Total Distributions (0.75) (0.58) (0.54) (0.45) (0.47) (0.18)
-------- -------- ------- ------- ------- -------
Net Asset Value, End of Period $9.62 $8.85 $9.30 $9.28 $9.03 $8.93
======== ======== ======= ======= ======= =======
Total Investment Return
at Net Asset Value(1) 6.77% (1.88%) 11.51% 4.78% 2.43% 0.93%(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $197,166 $114,656 $65,600 $45,897 $24,082 $16,857
Ratio of Expenses to Average
Net Assets 1.91% 2.17% 2.16% 2.25% 2.38%(3) 2.37%(3,5)
Ratio of Net Investment Income
to Average Net Assets 7.45% 6.41% 6.03% 4.87% 5.13% 4.12%(5)
Portfolio Turnover Rate 363% 174% 263% 214% 153% 56%
(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.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
April 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the World Bond Fund on April 30, 1998. It's divided
into three main categories: bonds, options and short-term investments. The bonds are further broken down by currency
denomination. Short-term investments, which represent the Fund's "cash" position, are listed last.
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S) OMITTED)# VALUE
- -------------------- ---------- ----------------- ----------
<S> <C> <C> <C>
BONDS
British Pound Sterling (9.66%)
NTL, Inc., (United States)
Sr Deb 04-01-08 (R) 9.500% 260 $434,492
United Kingdom Treasury,
Bond 12-07-07 7.250 2,060 3,796,716
-----------
4,231,208
-----------
U.S. Dollar (86.43%)
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 7.000 $2,705 2,760,577
Federative Republic of Brazil, (Brazil),
Variable Rate Bond Ser A 01-01-01 6.875* 525 512,075
Innova S. de R.L., (Mexico),
Sr Note 04-01-07 12.875 200 215,250
Petroleo Brasileiro S.A., (Brazil),
Bond 10-17-06 (R) 10.000 500 525,000
Republic of Argentina, (Argentina),
Floating Rate Bond Ser FRB 03-31-05 6.625* 950 873,525
Republic of Costa Rica, (Costa Rica),
Deb 05-01-03 (R) 8.000 225 227,250
Republic of Korea, (South Korea),
Deb 04-15-03 8.750 300 300,558
Republic of South Africa, (South Africa),
Note 06-23-17 8.500 825 825,000
Republic of Venezuela, (Venezuela),
Floating Rate Bond Ser DL 12-18-07 6.813* 714 640,178
Telefonica de Argentina S.A., (Argentina),
Note 05-07-08 (R) 9.125 300 301,125
United Mexican States, (Mexico),
Global Bond 02-06-01 9.750 1,000 1,057,500
United States Treasury,
Bond 11-15-27 6.125 2,000 2,046,240
Note 11-30-01 5.875 2,250 2,265,120
Note 02-28-02 6.250 1,600 1,631,248
Note 05-31-02 6.500 7,500 7,721,475
Note 10-31-02 5.750 6,000 6,015,000
Note 11-30-02 5.750 1,275 1,278,187
Note 10-15-06 6.500 5,520 5,783,911
Note 05-15-07 6.625 2,220 2,353,888
Note 08-15-07 6.125 500 513,515
-----------
37,846,622
-----------
TOTAL BONDS
(Cost $41,154,031) (96.09%) 42,077,830
-------- -----------
EXPIRATION
CURRENCY DATE/STRIKE
SOLD PRICE
-------- -------------
OPTIONS
Japanese Yen USD 5,765,000 March 99/ 55,632
140-150 -----------
TOTAL OPTIONS
(Premium Paid $50,444) (0.13%) 55,632
-------- -----------
INTEREST PAR VALUE
RATE (000s OMITTED)#
-------- ---------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.52%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion Securities USA, Inc. -
Dated 4-30-98, due 5-01-98 (Secured by
U.S. Treasury Notes, 5.00% thru 9.125%,
due 2-15-99 thru 7-31-00) - Note A 5.500% $1,106 1,106,000
-----------
Non-Cash Security Lending Collateral (4.96%)
Tri-Party Collateral which consists of various
U.S. Treasury Notes, 5.750% thru 6.625%,
due 10-31-02 thru 11-15-27** 2,174 2,173,627
-----------
Cash Equivalents (16.68%)
Navigator Securities Lending Prime Portfolio ** 7,303 7,303,253
-----------
TOTAL SHORT-TERM INVESTMENTS (24.16%) 10,582,880
-------- -----------
TOTAL INVESTMENTS (120.38%) 52,716,342
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (20.38%) (8,925,043)
-------- -----------
TOTAL NET ASSETS (100.00%) $43,791,299
======== ===========
* Represents rate in effect on April 30, 1998.
** Represents investment of security lending collateral - Note A.
# Par value of non-US$ denominated foreign bonds is expressed in local currency for each country listed.
(R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold,
normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to
$1,487,867 or 3.40% of the Fund's net assets as of April 30, 1998.
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.
</TABLE>
<TABLE>
<CAPTION>
Portfolio Concentration (Unaudited)
- ---------------------------------------------------------------------------------------------
The Fund invests in bonds issued by the U.S. government, its agencies or instrumentalities,
foreign governments and companies. The performance of the Fund is closely tied to the
economic conditions 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 April 30, 1998 assigned to the various investment categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
- --------------------- ----------------
<S> <C>
Government - Foreign 18.80%
Government - U.S. 67.61
Government - U.S. Agencies 6.31
Oil & Gas 1.20
Telecommunications 2.17
Options 0.13
Short-Term Investments 24.16
------
TOTAL INVESTMENTS 120.38%
======
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - World Bond Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") (formerly Freedom
Investment Trust II) is an open-end management investment company,
registered under the Investment Company Act of 1940. The Trust
consists of six series: John Hancock 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 is 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 bears distribution and service expenses under terms of a
distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost,
which approximates market value. All portfolio transactions initially
expressed in terms of foreign currencies have been translated into
U.S. dollars as described in "Foreign Currency Translation" below. The
Fund may invest in indexed securities whose value is linked either
directly or inversely to changes in foreign currencies, interest
rates, commodities, indices or other reference instruments. Indexed
securities may be more volatile than the reference instrument itself,
but any loss is limited to the amount of the original investment.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by
the Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of
The Berkeley Financial Group, Inc., may participate in a joint
repurchase agreement transaction. Aggregate cash balances are 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 receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at
all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
Capital gains realized on some foreign securities are subject to
foreign taxes and are accrued, as applicable.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all its taxable
income, including any net realized gain on investments, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, net currency exchange gains and
losses from sales of foreign debt securities must be treated as
ordinary income even though such items are gains and losses for
accounting purposes. The Fund has $1,621,817 of capital loss
carryforward available, to the extent provided by regulations, to
offset future net realized gains. To the extent such carryforward is
used by the Fund, no capital gains distribution will be made. The
carryforward expires as follows: October 31, 2002 - $938,808 and
October 31, 2005 - $683,009. Expired capital loss carryforwards are
reclassified to capital paid-in, in the year of expiration.
INTEREST AND DISTRIBUTIONS Interest income on investment securities is
recorded on the accrual basis. Foreign income may be subject to
foreign withholding taxes, which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid
by the Fund with respect to each class of shares will be calculated in
the same manner, at the same time and will be in the same amount,
except for the effect of expenses that may be applied differently to
each class.
DISCOUNT ON SECURITIES The Fund accretes 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) are 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, are
calculated daily at the class level based on the appropriate net
assets of each class and the specific expense rate(s) applicable to
each class.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual fund. Expenses which are not readily
identifiable to a specific fund are allocated in such a manner as
deemed equitable, taking into consideration, among other things, the
nature and type of expense and the relative sizes of the funds.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues and expenses of the Fund. Actual results
could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. These agreements enable the Fund to participate with other
funds managed by the Adviser in an unsecured line of credit with banks
which permit borrowings up to $800 million, collectively. Interest is
charged to each fund, based on its borrowings, at a rate equal
to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at
rates ranging from 0.070% to 0.075% per annum based on the average
daily unused portion of the line of credit, is allocated among the
participating funds. The maximum loan balance for the Fund during the
year for which loans were outstanding amounted to $1,200,000 with a
rate of 6.1875%. At April 30, 1998, there was no loan outstanding.
SECURITIES LENDING The Fund may lend its securities to certain
qualified brokers who pay the Fund negotiated lenders fees. These fees
are included in interest income. The loans are collateralized at all
times with cash or securities with a market value at least equal to
the market value of the securities on loan. As with other extensions
of credit, the Fund may bear the risk of delay of the loaned
securities in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. At April 30, 1998,
the Fund loaned securities having a market value of $9,289,800
collateralized by cash and securities in the amount of $9,476,880.
Cash collateral was invested in a short-term instrument.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.,
London time, on the date of any determination of the net asset value
of the Fund. Transactions affecting statement of operations accounts
and net realized gain/(loss) on investments are translated at the
rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from
sales of foreign currency, currency gains or losses realized between
the trade and settlement dates on securities transactions and the
difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains or losses arise from changes in the value
of assets and liabilities other than investments in securities at
fiscal year end, resulting from changes in the exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into
forward foreign currency exchange contracts as a hedge against the
effect of fluctuations in currency exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell
a specific currency at a future date at a set price. The aggregate
principal amounts of the contracts are marked to market daily at the
applicable foreign currency exchange rates. Any resulting unrealized
gains and losses are included in the determination of the Fund's daily
net assets. The Fund records realized gains and losses at the time the
forward foreign currency contract is closed out or offset by a
matching contract. Risks may arise upon entering these contracts from
potential inability of counterparties to meet the terms of the
contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets
and Liabilities. The Fund may also purchase and sell forward contracts
to facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intends to take delivery of the foreign
currency. Such contracts normally involve no market risk if they are
offset by the currency amount of the underlying transaction.
At April 30, 1998, there were no open forward foreign currency
exchange contracts.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial
futures contracts for speculative purposes and/or to hedge against the
effects of fluctuations in interest rates, currency exchange rates and
other market conditions. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge
other Fund instruments. At the time the Fund enters into a financial
futures contract, it will be required to deposit with its custodian
a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the
financial futures contract being traded. Each day, the futures
contract is valued at the official settlement price on the board
of trade or U.S. commodities exchange on which it trades. Subsequent
payments, known as "variation margin," to and from the broker are
made on a daily basis as the market price of the financial futures
contract fluctuates. Daily variation margin adjustments, arising
from this "mark to market," will be recorded by the Fund as
unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss.
Risks of entering into futures contracts include the possibility that
there may be an illiquid market and/or that a change in the value of
the contracts may not correlate with changes in the value of the
underlying securities. In addition, the Fund could be prevented from
opening or realizing the benefits of closing out futures positions
because of position limits or limits on daily price fluctuation
imposed by an exchange.
For federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses can be affected as a result of futures
contracts.
At April 30, 1998, there were no open positions in financial futures
contracts.
OPTIONS Listed options will be valued at the last quoted sales price
on the exchange on which they are primarily traded. Purchased put or
call over-the-counter options will be valued at the average of the
"bid" prices obtained from two independent brokers. Written put or
call over-the-counter options will be valued at the average of the
"asked" prices obtained from two independent brokers. Upon the writing
of a call or put option, an amount equal to the premium received by
the Fund will be included in the Statement of Assets and Liabilities
as an asset and corresponding liability. The amount of the liability
will be subsequently marked to market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument, and buying puts and writing
calls will tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the
face (or "notional") amount of each contract at value will reflect the
maximum exposure of the Fund in these contracts, but the actual
exposure will be limited to the change in value of the contract over
the period the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset a
contract with a counterparty on a timely basis ("liquidity risk").
Exchange-traded options have minimal credit risk as the exchanges act
as counterparties to each transaction, and only present liquidity risk
in highly unusual market conditions. To minimize credit and liquidity
risks in over-the-counter option contracts, the Fund will continuously
monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's
period-end Statement of Assets and Liabilities.
There were no written option transactions for the period ended April
30, 1998.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.75% 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 distributors for shares of the Fund. For the
period ended April 30, 1998, net sales charges received with regard to
sales of Class A shares amounted to $270. Out of this amount, $22 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $169 was paid as sales commissions to
unrelated broker-dealers and $79 was paid as sales commissions to
sales personnel of John Hancock Distributors, Inc. ("Distributors"), a
related broker-dealer. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.00% 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 are paid to JH Funds and are
used in whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with
the sale of Class B shares. For the period ended April 30, 1998,
contingent deferred sales charges paid to JH Funds amounted to
$31,670.
In addition, to reimburse the distributors for the services they
provide as distributors of shares of the Fund, the Fund has adopted
Distribution Plans with respect to Class A and Class B pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Accordingly, the
Fund will make payments to the distributors for distribution and
service expenses, at an annual rate not to exceed 0.30% of Class A
average daily net assets and 1.00% of Class B average daily net assets
to reimburse the distributors for their distribution and service
costs. Up to a maximum of 0.25% of such payments may be service fees
as defined by the amended Rules of Fair Practice of the National
Association of Securities Dealers. Under the amended Rules of Fair
Practice, curtailment of a portion of the Fund's 12b-1 payments could
occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of The
Berkeley Financial Group, Inc. The Fund pays transfer agent fees based
on the number of shareholder accounts and certain out-of-pocket
expenses.
The Fund has an agreement with the Adviser to perform necessary tax
and financial management services for the Fund. The compensation for
the period ended was at an annual rate of less than 0.02% of the
average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees
may elect to defer for tax purposes their receipt of this
compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund will make investments into other John
Hancock funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any
income earned by the investment as well as any unrealized gains or
losses. At April 30, 1998, the Fund's investments to cover the
deferred compensation liability had unrealized appreciation of $611.
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 April 30, 1998, aggregated
$14,799,930 and $19,845,394, respectively. Purchases and proceeds from
sales of obligations of the U.S. government and its agencies
aggregated $11,004,297 and $10,839,441 respectively, during the period
ended April 30, 1998.
The cost of investments owned at April 30, 1998 (including short-term
investments) for federal income tax purposes was $51,787,355. Gross
unrealized appreciation and depreciation of investments aggregated
$951,836 and $22,849, respectively, resulting in net unrealized
appreciation of $928,987.
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
1-800-225-5291 1-800-554-6713 (TDD)
Internet: www.jhancock.com/funds
Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
This report is for the information of shareholders of the John Hancock
World Bond Fund. 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 with the caption "Printed on
Recycled Paper."
090SA 4/98
6/98
<PAGE>
JOHN HANCOCK STRATEGIC INCOME FUND
NOTES TO PRO-FORMA COMBINED FINANCIAL STATEMENTS
MAY 31, 1998
Pro-forma information is intended to provide shareholders of the John Hancock
Strategic Income Fund (JHSIF) and John Hancock World Bond Fund (JHWBF) with
information about the impact of the proposed merger by indicating how the merger
might have affected information had the merger been consummated as of May 31,
1997.
The pro-forma combined statements of assets and liabilities and results of
operations as of May 31, 1998, have been prepared to reflect the merger of JHSIF
and JHWBF after giving effect to pro-forma adjustments described in the notes
listed below.
(a) Acquisition by John Hancock Strategic Income Fund of all the assets of
John Hancock World Bond Fund and issuance of John Hancock Strategic Income
Fund Class A and Class B shares in exchange for all of the outstanding
Class A and Class B shares, respectively of John Hancock World Bond Fund.
(b) The investment advisory fee was adjusted to reflect the application of the
fee structure which will be in effect for John Hancock Strategic Income
Fund: 0.60% of the Fund's first $100 million average daily net asset
value; 0.45% of the Fund's next $150 million average daily net asset
value; 0.40% of the Fund's next $250 million average daily net asset
value; 0.35% of the Fund's next $150 million average daily net asset value
and 0.30% of the Fund's average daily net asset value in excess of $650
million.
(c) The 12b-1 fee was adjusted to reflect the application of the fee structure
which will be in effect for John Hancock Strategic Income Fund: 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net
assets.
(d) The transfer agent fee for the Class A and Class B shares is the total of
the respective individual Fund's transfer agent fees. The main criteria in
determining the transfer agent fees for a specific class is the number of
shareholder accounts.
(e) The actual expenses incurred by John Hancock Strategic Income Fund and
John Hancock World Bond Fund for various expenses included on a pro-forma
basis were reduced to reflect the estimated savings arising from the
merger.
<PAGE>
John Hancock Strategic Income Fund
Pro-forma combined statement of assets and liabilities
For the year ended May 31, 1998
<TABLE>
<CAPTION>
John Hancock John Hancock
Strategic World
Income Bond Pro-Forma
Fund Fund Adjustments Combined
------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Assets
Investments at value $ 943,812,821 $ 50,176,435 $ -- $ 993,989,256
Cash -- 875 -- 875
Foreign currency, at value 428 -- -- 428
Receivable for investments sold 6,146,581 -- -- 6,146,581
Receivable for foreign currency exchange contracts
sold 2,276,633 -- -- 2,276,633
Receivable for shares sold 4,363,645 455 -- 4,364,100
Dividends receivable 156,263 -- -- 156,263
Interest receivable 17,307,169 596,718 -- 17,903,887
Receivable for futures variation margin 43,750 -- -- 43,750
Other Assets 35,626 10,055 -- 45,681
------------- ------------ --------------- ---------------
Total assets 974,142,916 50,784,538 -- 1,024,927,454
------------- ------------ --------------- ---------------
Liabilities
Payable for investments purchased 8,927,192 -- -- 8,927,192
Payable for foreign currency exchange contracts
purchased 130,337 150,814 -- 281,151
Payable for shares repurchased 541,309 6,142 -- 547,451
Payable upon return of securities on loan -- 7,984,154 7,984,154
Dividend payable 296,047 5,126 -- 301,173
Payable to John Hancock Advisers, Inc. and affiliates 540,567 26,181 -- 566,748
Accounts payable and accrued expenses 303,549 92,661 -- 396,210
------------- ------------ --------------- ---------------
Total liabilities 10,739,001 8,265,078 -- 19,004,079
------------- ------------ --------------- ---------------
Net assets:
Capital paid-in 937,612,328 43,936,274 -- 981,548,602
Accumulated net realized (loss)
on investments, financial futures contracts
and foreign currency transactions (21,565,217) (1,450,390) -- (23,015,607)
Net unrealized appreciation of investments,
financial futures contracts and foreign
currency transactions 44,001,500 667,898 -- 44,669,398
Undistributed net investment income 3,355,304 (634,322) -- 2,720,982
------------- ------------ --------------- ---------------
Net assets $ 963,403,915 $ 42,519,460 -- $ 1,005,923,375
============= ============ =============== ===============
Net assets:
Strategic Income
Class A $ 489,374,853 $ -- $ 26,327,531(a) $ 515,702,384
Class B 473,428,435 -- 16,191,929(a) 489,620,364
Class C 600,627 -- -- 600,627
World Bond
Class A -- 26,327,531 (26,327,531)(a) --
Class B -- 16,191,929 (16,191,929)(a) --
------------- ------------ --------------- ---------------
$ 963,403,915 $ 42,519,460 $ -- $ 1,005,923,375
============= ============ =============== ===============
Shares outstanding:
Strategic Income
Class A 62,431,106 -- 3,358,689(a) 65,789,795
Class B 60,396,771 -- 2,065,624(a) 62,462,395
Class C 76,624 -- -- 76,624
World Bond
Class A -- 2,959,980 (2,959,980)(a) --
Class B -- 1,820,414 (1,820,414)(a) --
------------- ------------ --------------- ---------------
Net asset value per share:
Strategic Income
Class A $ 7.84 -- -- $ 7.84
Class B $ 7.84 -- -- $ 7.84
Class C $ 7.84 -- -- $ 7.84
World Bond
Class A -- $ 8.89 $ (8.89)(a) --
Class B -- $ 8.89 $ (8.89)(a) --
============= ============ =============== ===============
</TABLE>
<PAGE>
John Hancock Strategic Income Fund
Pro-forma combined statement of operations
For the year ended May 31, 1998
<TABLE>
<CAPTION>
John Hancock John Hancock
Strategic Income World Bond
Fund Fund
Year ended 12 months ended Pro-Forma
May 31, 1998 May 31, 1998 Adjustments Combined
---------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income
Interest $ 71,733,261 $3,561,227 $ -- $ 75,294,488
Dividends(net of withholding tax) 5,159,820 -- -- 5,159,820
------------ ---------- --------- ------------
Total 76,893,081 3,561,227 -- 80,454,308
------------ ---------- --------- ------------
Expenses
Investment management fee 3,388,285 385,661 (230,973)(b) 3,542,973
Distribution and service fee
Class A 1,352,618 84,777 --(c) 1,437,395
Class B 3,944,240 230,034 2,227(c) 4,176,501
Class C 207 -- --(c) 207
Transfer agent fee(d) 1,166,382 141,548 -- 1,307,930
Custodian fee 230,206 67,075 (33,844)(e) 263,437
Registration and filing fees 121,113 19,180 (5,000)(e) 135,293
Financial services fess 150,061 9,140 --(e) 159,201
Auditing Legal fees 51,234 56,660 (47,648)(e) 60,246
Printing 42,554 14,872 (10,000)(e) 47,426
Trustees' fee 50,419 3,917 --(e) 54,336
Miscellaneous 19,143 5,118 (2,118)(e) 22,143
Interest Expense -- 557 --(e) 557
------------ ---------- --------- ------------
Total expenses 10,516,462 1,018,539 (327,356) 11,207,645
------------ ---------- --------- ------------
Net Investment Income 66,376,619 2,542,688 327,356 69,246,663
------------ ---------- --------- ------------
Realized and Unrealized Gain(Loss)
on Investments, Financial
Futures Contracts and Foreign
Currency Transactions:
Net realized gain on investments 9,166,775 1,186,434 -- 10,353,209
Change in net unrealized appreciation
(depreciation) of investments,
Financial Futures Contracts
and Foreign Currency Transactions: 24,710,742 36,207 -- 24,746,949
------------ ---------- --------- ------------
Net Realized and Unrealized
Gain (Loss) on Investments,
Financial Futures Contracts
and Foreign Currency Transactions: 33,877,517 1,222,641 -- 35,100,158
------------ ---------- --------- ------------
Net Increase in Net Assets
Resulting from Operations $100,254,136 $3,765,329 $ 327,356 $104,346,821
============ ========== ========= ============
</TABLE>
<PAGE>
Schedule of Investments
May 31, 1998
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the World Bond fund combined on May 31, 1998.
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BONDS
Advertising (0.42%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 9.375% $4,000 $4,220,000 $4,000 $4,220,000
----------- ------------
Aerospace (0.19%)
Jet Equipment Trust,
Equipment Trust Cert Ser
95B2 08-15-14 (R) 10.910 1,500 1,957,800 1,500 1,957,800
----------- ------------
Banks - Foreign (1.97%)
International Bank for Reconstruction &
Development, Sr Note (South Africa)
07-21-98# 15.000 32,000 6,170,919 32,000 6,170,919
Landeskreditbank Baden - Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) 7.625 11,900 13,620,978 11,900 13,620,978
----------- ------------
19,791,897 19,791,897
----------- ------------
Banks - United States (0.25%)
CSBI Capital Trust I,
Sec Co. Gtd. Bond 06-06-27 (R) 11.750 2,340 2,527,200 2,340 2,527,200
----------- ------------
Beverages (0.20%)
Pepsi-Gemex, S.A. de C.V.,
Sr Note Ser B (Mexico) 03-30-04 (Y) 9.750 2,000 2,060,000 2,000 2,060,000
----------- ------------
Building (0.41%)
Associated Materials, Inc.,
Sr Sub Note 03-01-08 9.250 2,000 2,050,000 2,000 2,050,000
Kevco, Inc.,
Gtd Sr Sub Note 12-01-07 10.375 2,000 2,080,000 2,000 2,080,000
----------- ------------
4,130,000 4,130,000
----------- ------------
Business Services - Misc (0.40%)
Spin Cycle, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.750%, 05-01-01) 05-01-05 , (R) Zero 3,625 2,573,750 3,625 2,573,750
Wesco International, Inc.,
Sr Disc Note, Step Coupon (11.125%,
06-01-03) 06-01-08 (R) 11.125 2,500 1,459,375 2,500 1,459,375
----------- ------------
4,033,125 4,033,125
----------- ------------
Chemicals (0.61%)
AEP Industries Inc.,
Sr Sub Note 11-15-07 9.875 4,000 4,120,000 4,000 4,120,000
PCI Chemcials Canada Inc.,
Sec Note (Canada) 10-15-07 (Y) 9.250 2,000 1,980,000 2,000 1,980,000
----------- ------------
6,100,000 6,100,000
----------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computers (0.94%)
Unisys Corp.,
Sr Note 10-15-04 11.750 8,150 9,413,250 8,150 9,413,250
----------- ------------
Consumer Products Misc. (0.10%)
Diamond Brands Operating Corp.,
Sr Sub Note 04-15-08 (R) 10.125 1,000 1,010,000 1,000 1,010,000
----------- ------------
Containers (0.94%)
Berry Plastics Corp.,
Sr Sub Note 04-15-04 12.250 4,000 4,360,000 4,000 4,360,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental
Interest Cert) 04-01-02 12.250 5,000 5,137,500 5,000 5,137,500
----------- ------------
9,497,500 9,497,500
----------- ------------
Cosmetics & Personal Care (0.31%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) 11.000 3,150 3,087,000 3,150 3,087,000
----------- ------------
Diversified Operations (0.62%)
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y) 11.250 4,000 4,330,000 4,000 4,330,000
Intertek Finance Plc,
Sr Sub Note, Ser B (United Kingdom)
11-01-06 (Y) 10.250 1,850 1,942,500 1,850 1,942,500
----------- ------------
6,272,500 6,272,500
----------- ------------
Electronics (0.80%)
Communications Instruments, Inc.,
Gtd Sr Sub Note Ser B 09-15-04 10.000 2,900 2,972,500 2,900 2,972,500
Viasystems, Inc.,
Sr Sub Note 06-01-07 9.750 2,500 2,531,250 2,500 2,531,250
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) 9.500 3,150 2,551,500 3,150 2,551,500
----------- ------------
8,055,250 8,055,250
----------- ------------
Energy (0.44%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) 9.625 4,300 4,402,125 4,300 4,402,125
----------- ------------
Finance (1.59%)
AEI Holding Co.,
Sr Note 11-15-07 (R) 10.000 4,130 4,150,650 4,130 4,150,650
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) 9.750 3,000 3,000,000 3,000 3,000,000
Maxxam Group Holdings, Inc.,
Sr Sec Note Ser B 08-01-03 12.000 3,000 3,247,500 3,000 3,247,500
Niantic Bay Fuel Trust,
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bond 06-04-03 (R) 8.590 2,300 2,300,000 2,300 2,300,000
William Hill Finance Plc,
Sr Sub Note (United Kingdom)
04-30-08 (R)# 10.625 2,000 3,263,500 2,000 3,263,500
----------- -----------
15,961,650 15,961,650
----------- -----------
Food (0.61%)
Archibald Candy Corp.,
Sr Sec Note 07-01-04 10.250 2,000 2,130,000 2,000 2,130,000
Mastellone Hermanos S.A.,
Sr Bond (Argentina)
04-01-08 (R), (Y) 11.750 3,900 3,958,500 3,900 3,958,500
----------- -----------
6,088,500 6,088,500
----------- -----------
Glass Products (0.27%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico)
05-15-07 (R), (Y) 11.375 2,500 2,675,000 2,500 2,675,000
----------- -----------
Government - Foreign (8.40%)
Argentina, Republic of,
Floating Rate Bond Ser FRB (Argentina)
03-31-05 (Y) 6.625* 950 851,675 950 851,675
Brazil, Federative Republic of,
Variable Rate Bond Ser A (Brazil)
01-01-01 (Y) 6.875* 525 505,906 525 505,906
Costa Rica, Republic of,
Deb 05-01-03 (R), (Y) 8.000 225 226,687 225 226,687
Australia, Commonweath of,
Government Bond (Australia) 08-15-08# 8.750 45,000 35,495,626 45,000 35,495,626
South Africa, Republic of,
Government Bond (South Africa)
06-23-17 (Y) 8.500 7,000 6,746,250 8.500 825 795,094 7,825 7,541,344
Government Bond (South Africa)
10-17-06 (Y) 8.375 2,500 2,575,000 2,500 2,575,000
United Kingdom of Great Britain
Treasury Gilts, Government Bond
(United Kingdom) 07-16-07# 8.500 8,000 15,546,498 8,000 15,546,498
Government Bond (United Kingdom)
06-07-21# 8.000 5,000 10,616,573 5,000 10,616,573
Government Bond (United Kingdom)
11-06-01# 7.000 5,000 8,439,207 7.000 1,000 1,672,688 6,000 10,111,895
United Mexican States,
Global Bond (Mexico) 02-06-01 (Y) 9.750 1,000 1,052,000 1,000 1,052,000
----------- ---------- -----------
79,419,154 5,104,050 84,523,204
----------- ---------- -----------
Government - U.S. (21.59%)
United States Treasury,
Bond 08-15-05 10.750 10,000 12,965,600 10,000 12,965,600
Bond 02-15-16 9.250 11,000 15,058,010 11,000 15,058,010
Bond 08-15-19 8.125 61,500 77,835,630 61,500 77,835,630
Bond 02-15-27 6.625 19,000 20,947,500 19,000 20,947,500
Bond 11-15-27 6.125 10,100 10,552,884 6.125 2,000 2,089,680 12,100 12,642,564
Note 11-15-98 8.875 8,000 8,121,280 8,000 8,121,280
Note 08-15-04 7.250 10,000 10,842,200 10,000 10,842,200
Note 08-31-02 6.250 20,000 20,465,600 20,000 20,465,600
Note 08-15-07 6.125 9,300 9,596,391 6.125 500 515,935 9,800 10,112,326
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Note 05-15-07 6.625 2,220 2,364,988 2,220 2,364,988
Note 05-31-02 6.500 7,500 7,734,375 7,500 7,734,375
Note 10-15-06 6.500 5,520 5,814,989 5,520 5,814,989
Note 02-28-02 6.250 1,600 1,633,504 1,600 1,633,504
Note 11-30-01 5.875 2,250 2,268,630 2,250 2,268,630
Note 04-30-03 5.750 1,050 1,057,213 1,050 1,057,213
Note 10-31-02 5.750 6,000 6,030,000 6,000 6,030,000
Note 11-30-02 5.750 1,275 1,281,171 1,275 1,281,171
----------- ---------- -----------
186,385,095 30,790,485 217,175,580
----------- ---------- -----------
Government - U.S. Agencies (2.50%)
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 7.000 2,651 2,708,952 2,651 2,708,952
REMIC 44-E 11-15-19 9.000 643 665,863 643 665,863
Federal National Mortgage Assn.,
Global Bond (United Kingdom) 06-07-02# 6.875 5,000 8,313,366 5,000 8,313,366
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 7.500 13,050 13,449,940 13,050 13,449,940
----------- ---------- -----------
22,429,169 2,708,952 25,138,121
----------- ---------- -----------
Leisure (5.20%)
Casino America, Inc.,
Sr Sec Note 08-01-03 12.500 5,000 5,625,000 5,000 5,625,000
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 9.625 4,000 4,160,000 4,000 4,160,000
Sr Sub Note Ser D 08-01-08 9.625 1,000 1,030,000 1,000 1,030,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 10.500 4,000 4,400,000 4,000 4,400,000
Grand Casinos, Inc.,
Gtd Sr Note Ser B 10-15-04 9.000 3,000 3,120,000 3,000 3,120,000
Hedstrom Corp.,
Gtd Sr Sub Note 06-01-07 10.000 4,000 4,100,000 4,000 4,100,000
Horseshoe Gaming LLC,
Gtd Sr Sub Note Ser B 06-15-07 9.375 2,500 2,662,500 2,500 2,662,500
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 13.500 5,900 7,522,500 5,900 7,522,500
Production Resource Group LLC,
Sr Sub Note 01-15-08 (R) 11.500 3,000 2,940,000 3,000 2,940,000
Showboat Marina Casino Partnership/Finance
Corp., 1st Mtg Note Ser B 03-15-03 13.500 5,000 5,850,000 5,000 5,850,000
Showboat, Inc.,
Sr Sub Note 08-01-09 13.000 3,000 3,660,000 3,000 3,660,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 2,000 2,060,000 2,000 2,060,000
Waterford Gaming LLC,
Sr Note 11-15-03 12.750 4,729 5,225,545 4,729 5,225,545
----------- ------------
52,355,545 52,355,545
----------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Machinery (1.28%)
Clark Material Handling Co.,
Gtd Sr Note 11-15-06 10.750 2,250 2,407,500 2,250 2,407,500
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 (R) 8.500 5,000 4,925,000 5,000 4,925,000
Elgar Holdings, Inc.,
Sr Note 02-01-08 (R) 9.875 1,500 1,500,000 1,500 1,500,000
Newcor, Inc.,
Sr Sub Note 03-01-08 (R) 9.875 4,000 4,050,000 4,000 4,050,000
----------- ------------
12,882,500 12,882,500
----------- ------------
Manufacturing (1.05%)
Coty, Inc.,
Sr Sub Note 05-01-05 10.250 6,000 6,420,000 6,000 6,420,000
Scovill Fasteners, Inc.,
Sr Note Ser B 11-30-07 11.250 4,000 4,130,000 4,000 4,130,000
----------- ------------
10,550,000 10,550,000
----------- ------------
Media (8.08%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 9.250 3,500 3,596,250 3,500 3,596,250
Australis Media Ltd.,
Gtd Sr Sec Disc Note, Step Coupon
(15.75%, 05-15-00)
(Australia) 05-15-03 , (Y) Zero 164 8,177 164 8,177
Unit (Sr Sub Disc Note & Warrant),
Step Coupon (15.75% 05-15-00)
(Australia) 05-15-03, (Y) Zero 2,000 100,000 2,000 100,000
Capstar Broadcasting Partners, Inc.,
Sr Disc Note, Step Coupon (12.75%,
02-01-02) 02-01-09 Zero 2,750 2,048,750 2,750 2,048,750
CF Cable TV, Inc.
Sr Note (Canada) 02-15-05 (Y) 11.625 2,000 2,257,240 2,000 2,257,240
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07 10.500 3,000 3,345,000 3,000 3,345,000
Sub Deb 01-15-09 12.000 1,059 1,291,736 1,059 1,291,736
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 10.250 2,000 2,190,000 2,000 2,190,000
Comcast Corp.,
Sr Sub Deb 01-15-08 9.500 4,000 4,286,080 4,000 4,286,080
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%,
11-15-00)(United Kingdom) 11-15-07 (Y) Zero 4,000 3,290,000 4,000 3,290,000
CSC Holdings, Inc.,
Sr Sub Deb 02-15-13 9.875 4,000 4,370,000 4,000 4,370,000
Digital Television Services, Inc.
Gtd Sr Sub Note Ser B 08-01-07 12.500 3,000 3,450,000 3,000 3,450,000
Falcon Holding Group L.P./Falcon
Funding Corp., Sr Deb 04-15-10 (R) 8.375 5,000 4,937,500 5,000 4,937,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 12.375 5,000 5,550,000 5,000 5,550,000
Garden State Newspapers, Inc.,
Sr Sub Note Ser B 10-01-09 8.750 3,500 3,552,500 3,500 3,552,500
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 (R) 8.875 2,000 2,000,000 2,000 2,000,000
Intermedia Capital Partners,
Sr Note 08-01-06 11.250 5,048 5,641,140 5,048 5,641,140
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) 10.625 1,250 1,369,713 1,250 1,369,713
Radio One, Inc.,
Sr Sub Note Ser B, Step Coupon
(12.00%, 05-15-00) 05-15-04 7.000 2,000 2,040,000 2,000 2,040,000
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 3,000 3,315,000 3,000 3,315,000
Sr Sec Deb (Canada) 01-15-14# 9.650 2,000 1,585,799 2,000 1,585,799
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) 7.250 2,390 2,736,550 2,390 2,736,550
SFX Entertainment, Inc.,
Sr Sub Note 02-01-08 (R) 9.125 5,000 4,875,000 5,000 4,875,000
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 11.000 2,785 3,056,538 2,785 3,056,538
Sullivan Broadcasting,
Sr Sub Note 12-15-05 10.250 3,000 3,240,000 3,000 3,240,000
Supercanal Holdings S.A. / Supercanal S.A.,
Sr Note (Argentina) 05-15-05 (R), (Y) 11.500 4,000 3,920,000 4,000 3,920,000
TeleWest Communications Plc,
Sr Disc Deb, Step Coupon (11.00%, 10-01-01)
(United Kingdom) 10-01-07 (Y) Zero 4,000 3,210,000 4,000 3,210,000
----------- ------------
81,262,973 81,262,973
----------- ------------
Medical (0.59%)
Everest Healthcare Services Corp.,
Sr Sub Note 05-01-08 (R) 9.750 1,250 1,267,188 1,250 1,267,188
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security 02-01-08 (R) 7.875 2,600 2,596,750 2,600 2,596,750
MEDIQ/PRN Life Support Services, Inc.,
Sr Sub Note 06-01-08 (R) 11.000 2,000 2,040,000 2,000 2,040,000
----------- ------------
5,903,938 5,903,938
----------- ------------
Metal (1.68%)
Centaur Mining & Exploration Ltd.,
Gdt Sr Note (Australia) 12-01-07 (R), (Y) 11.000 2,500 2,606,250 2,500 2,606,250
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 (R), (Y) 8.875 5,100 5,068,125 5,100 5,068,125
GS Technologies Operating Co.,
Sr Note 10-01-05 12.250 4,000 4,570,000 4,000 4,570,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kaiser Aluminum & Chemical Corp.,
Sr Sub Note 02-01-03 12.750 3,388 3,620,925 3,388 3,620,925
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 9.875 1,000 1,025,000 1,000 1,025,000
----------- ------------
16,890,300 16,890,300
----------- ------------
Office (0.15%)
United Stationer Supply,
Sr Sub Note 05-01-05 12.750 1,334 1,520,760 1,334 1,520,760
----------- ------------
Oil & Gas (2.14%)
Canadian Forest Oil Ltd.,
Gtd Sr Sub Note (Canada) 09-15-07 (Y) 8.750 2,900 2,863,750 2,900 2,863,750
Cliffs Drilling Co.,
Gtd Sr Sec Note Ser B 05-15-03 10.250 2,250 2,424,375 2,250 2,424,375
Comp Nav Perez Companc,
Bond (Argentina) 01-30-04 (R), (Y) 9.000 3,000 3,000,000 3,000 3,000,000
Cross Timbers Oil Co.,
Sr Sub Note Ser B 11-01-09 8.750 1,500 1,496,250 1,500 1,496,250
Great Lakes Carbon Corp.,
Sr Sub Note 05-15-08 (R) 10.250 1,800 1,827,000 1,800 1,827,000
Kelly Oil & Gas Partners Ltd.,
Deb 04-01-00 8.500 1,100 1,087,625 1,100 1,087,625
Newpark Resources, Inc.,
Gtd Sr Sub Note 12-15-07 8.625 1,500 1,522,500 1,500 1,522,500
Parker Drilling Corp.,
Gtd Sr Note Ser B 11-15-06 9.750 1,000 1,047,500 1,000 1,047,500
Petroleo Brasileiro S.A.,
Unsub Deb (Brazil) 10-17-06 (R), (Y) 10.000 500 510,000 500 510,000
Petroleos Mexicanos,
Bond (Mexico) 09-15-07 (Y) 8.850 1,000 987,500 1,000 987,500
Universal Compression, Inc.,
Sr Disc Note, Step Coupon (9.875%,
02-15-03) 02-15-08 , (R) Zero 2,650 1,696,000 2,650 1,696,000
Vintage Petroleum, Inc.,
Sr Sub Note 12-15-05 9.000 3,000 3,105,000 3,000 3,105,000
----------- -------- ------------
21,057,500 510,000 21,567,500
----------- -------- ------------
Paper & Paper Products (1.17%)
Copamex Industrias, S.A. de C.V.,
Sr Note Ser B (Mexico) 04-30-04 (Y) 11.375 1,950 2,096,250 1,950 2,096,250
Repap New Brunswick, Inc.,
Sr Note (Canada) 04-15-05 (Y) 10.625 4,000 4,100,000 4,000 4,100,000
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 12.000 5,000 5,537,500 5,000 5,537,500
----------- ------------
11,733,750 11,733,750
----------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pollution Control (0.25%)
American Eco Corp.,
Gtd Sr Note Ser A 05-15-08 (R) 9.625 2,500 2,518,750 2,500 2,518,750
----------- ------------
Printing - Commercial (0.63%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 12.000 3,000 3,187,500 3,000 3,187,500
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 12.750 3,000 3,135,000 3,000 3,135,000
----------- ------------
6,322,500 6,322,500
----------- ------------
Retail (0.34%)
Disco S.A.,
Note (Argentina) 05-15-08 (R), (Y) 9.875 2,000 1,927,500 2,000 1,927,500
United Stationers, Inc.,
Sr Sub Note 04-15-08 (R) 8.375 1,500 1,500,000 1,500 1,500,000
----------- ------------
3,427,500 3,427,500
----------- ------------
Steel (1.57%)
Ameristeel Corp.,
Sr Note 04-15-08 (R) 8.750 4,100 4,120,500 4,100 4,120,500
Bayou Steel Corp.,
1st Mtg Bond 05-15-08 (R) 9.500 3,000 2,981,250 3,000 2,981,250
Haynes International, Inc.,
Sr Note 09-01-04 11.625 2,500 2,825,000 2,500 2,825,000
IVACO Inc.,
Sr Note (Canada) 09-15-05 (Y) 11.500 3,525 3,890,719 3,525 3,890,719
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 11.500 1,875 1,940,625 1,875 1,940,625
----------- ------------
15,758,094 15,758,094
----------- ------------
Telecommunications (18.15%)
Advanced Radio Telecom Corp.,
Unit (Sr Note & Warrants) 02-15-07 14.000 5,000 5,150,000 5,000 5,150,000
Allegiance Telecom, Inc.,
Sr Disc Note, Step Coupon (11.75%,
02-15-03) 02-15-08 (R) Zero 3,500 1,925,000 3,500 1,925,000
American Mobile Satellite Corp./AMSC
Acquisition Co. Inc.,
Unit (Sr Note & Warrant) 04-01-08 (R) 12.250 3,000 2,985,000 3,000 2,985,000
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.40%,
05-15-03) (Canada) 05-15-08# Zero 6,500 2,675,104 6,500 2,675,104
Cellular Communications International, Inc.,
Sr Disc Note, Step Coupon (9.50%,
04-01-03) 04-01-05 , (R) Zero 4,750 3,727,624 4,750 3,727,624
COLT Telecom Group Plc,
Unit (Sr Disc Note & Warrant), Step
Coupon (12.000%, 12-15-01)
(United Kingdom) 12-15-06 (Y) Zero 5,000 3,962,500 5,000 3,962,500
Sr Note (United Kingdom) 11-30-07# 10.125 1,425 2,540,329 1,425 2,540,329
Compagnie De Radiocomunicaciones Moviles S.A.,
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bond (Argentina) 05-08-08 (R), (Y) 9.250 2,500 2,418,750 2,500 2,418,750
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (Y) Zero 5,000 3,875,000 5,000 3,875,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%,
11-01-02) 11-15-07 (R) Zero 5,000 3,387,500 5,000 3,387,500
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants), Step Coupon
(12.625%, 03-01-03) 03-01-08 (R) Zero 5,165 2,737,450 5,165 2,737,450
Dolphin Telecom Plc,
Sr Disc Note, Step Coupon (11.50%, 06-01-03)
(United Kingdom) 06-01-08 (R), (Y) Zero 4,400 2,541,000 4,400 2,541,000
DTI Holdings, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.500%, 03-01-03) 03-01-08 (R) Zero 4,600 2,622,000 4,600 2,622,000
e.spire Communications, Inc.,
Sr Note 07-15-07 13.750 6,000 6,900,000 6,000 6,900,000
Echostar DBS Corp.,
Gtd Sr Sec Note 07-01-02 12.500 5,000 5,612,500 5,000 5,612,500
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) 11.500 1,550 1,643,000 1,550 1,643,000
Facilicom International,
Sr Note 01-15-08 (R) 10.500 4,350 4,328,250 4,350 4,328,250
FLAG Ltd.,
Sr Note (Bermuda) 01-30-08 (R), (Y) 8.250 3,500 3,552,500 3,500 3,552,500
Fonorola, Inc.,
Gtd Sr Sec Note (Canada) 08-15-02 (Y) 12.500 4,000 4,470,000 4,000 4,470,000
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 (R) 9.625 1,500 1,545,000 1,500 1,545,000
Globalstar L.P./Globalstar Capital Corp.,
Sr Note 06-01-05 (R) 11.500 1,900 1,876,250 1,900 1,876,250
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 13.250 5,000 5,750,000 5,000 5,750,000
Hermes Europe Railtel B.V.,
Sr Note (Netherlands) 08-15-07 (Y) 11.500 3,750 4,237,500 3,750 4,237,500
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 (Y) 12.875 3,000 3,157,500 12.875 200 210,500 3,200 3,368,000
Intercel, Inc.,
Unit (Sr Discount Note & Warrant), Step Coupon
(12.00%, 02-01-01) 02-01-06 Zero 4,100 3,239,000 4,100 3,239,000
Intermedia Communications Inc.,
Sr Disc Note, Ser B, Step Coupon
(11.25%, 07-01-02) 07-15-07 Zero 3,000 2,205,000 3,000 2,205,000
Sr Disc Note, Step Coupon (12.50%,
05-15-01) 05-15-06 Zero 3,000 2,452,500 3,000 2,452,500
International Wireless Communications, Inc.,
Sr Sec Disc Note 08-15-01 Zero 3,000 1,200,000 3,000 1,200,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (Y) Zero 6,000 1,620,000 6,000 1,620,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sr Note (United Kingdom) 08-15-06 (Y) 13.500 1,000 660,000 1,000 660,000
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 13.000 4,150 4,461,250 4,150 4,461,250
IXC Communications, Inc.,
Sr Sub Note 04-15-08 (R) 9.000 1,900 1,897,625 1,900 1,897,625
McCaw International Ltd.,
Sr Disc Note, Step Coupon (13.00%,
04-15-02) 04-15-07 Zero 7,000 4,637,500 7,000 4,637,500
McLeodUSA, Inc.,
Sr Note 03-15-08 (R) 8.375 1,350 1,350,000 1,350 1,350,000
Sr Note 07-15-07 9.250 3,000 3,131,250 3,000 3,131,250
MetroNet Communications Corp.,
Sr Discount Note, Step Coupon (10.75%,
11-01-02) (Canada) 11-01-07 (Y) Zero 3,000 2,040,000 3,000 2,040,000
Sr Note (Canada) 08-15-07 (Y) 12.000 2,250 2,587,500 2,250 2,587,500
Microcell Telecommunications Inc.,
Sr Disc Note Ser B, Step Coupon
(11.125%, 10-15-02)
(Canada) 10-15-07# Zero 2,500 1,098,309 2,500 1,098,309
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%,
02-15-99) 08-15-04 Zero 11,000 10,642,500 11,000 10,642,500
NEXTLINK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%,
04-15-03) 04-15-08 (R) Zero 4,000 2,450,000 4,000 2,450,000
Sr Note 10-01-07 9.625 1,500 1,530,000 1,500 1,530,000
NTL, Inc.,
Sr Note 04-01-08 (R) 9.500 1,680 2,741,340 9.500 260 423,936 1,940 3,165,276
Occidente Y Caribe Cellular SA,
Sr Disc Note Ser B , Step Coupon
(14.00%, 03-15-01)
(Colombia) 03-15-04 (Y) Zero 4,000 3,520,000 4,000 3,520,000
Orion Network Systems,
Sr Note 01-15-07 11.250 5,000 5,650,000 5,000 5,650,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 10.875 4,410 5,060,475 4,410 5,060,475
RCN Corp.,
Sr Note 10-15-07 10.000 4,600 4,830,000 4,600 4,830,000
Satelites Mexicanos S.A. de C.V.,
Sr Note (Mexico) 11-01-04 (R), (Y) 10.125 5,000 4,987,500 5,000 4,987,500
Sprint Spectrum L.P.,
Sr Note 08-15-06 11.000 3,750 4,321,875 3,750 4,321,875
Telefonica de Argentina S.A.,
Note (Argentina) 05-07-08 (R), (Y) 9.125 300 291,000 300 291,000
Teleport Communications Group, Inc.,
Sr Disc Note, Step Coupon (11.125%,
07-01-01) 07-01-07 Zero 4,000 3,485,000 4,000 3,485,000
Teletrac, Inc.,
Sr Note Ser B 08-01-07 14.000 2,000 2,000,000 2,000 2,000,000
Teligent, Inc.,
Sr Note 12-01-07 11.500 5,000 5,087,500 5,000 5,087,500
Viatel, Inc.,
Unit (Sr Note & Preferred Stock)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Videotron Holdings Plc,
Sr Disc Note, Step Coupon (11.125%
07-01-99)(United Kingdom) 07-01-04 (Y) Zero 4,000 3,909,120 4,000 3,909,120
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon (14.00%,
10-15-00) 10-15-05 Zero 2,600 2,106,000 2,600 2,106,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 12.500 1,400 1,568,000 1,400 1,568,000
----------- ---------- ------------
181,649,001 925,436 182,574,437
----------- ---------- ------------
Transport (0.63%)
Enterprises Shipholding Corp.,
Sr Note (Greece) 05-01-08 (R), (Y) 8.875 3,400 3,383,000 3,400 3,383,000
Pacific & Atlantic Holding Inc.,
1st Mtg Note (Greece) 05-30-08 (R), (Y) 11.500 3,000 2,977,500 3,000 2,977,500
6,360,500 6,360,500
Utilities (1.47%)
Calpine Corp.,
Sr Note 02-01-04 9.250 2,000 2,055,000 2,000 2,055,000
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 4,000 4,800,400 4,000 4,800,400
Deb Ser B 07-23-06 13.250 4,000 5,152,040 4,000 5,152,040
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R), (Y) 9.625 2,900 2,827,500 2,900 2,827,500
----------- ------------
14,834,940 14,834,940
----------- ------------
TOTAL BONDS
(Cost $857,166,106) (87.94%) 844,544,766 40,038,923 884,583,689
------- ----------- ---------- ------------
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES OR SHARES OR SHARES OR
WARRANTS WARRANTS WARRANTS
--------- --------- ---------
<S> <C> <C> <C> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Advanced Radio Telecom Corp., Warrant** 60,000 780,000 60,000 780,000
Allegiance Telecom, Inc., Warrant** 3,500 - 3,500
American Radio Systems Corp., 11.375%, Ser
B, Preferred Stock 47,376 5,590,368 47,376 5,590,368
American Telecasting, Inc., Warrant** 4,000 400 4,000 400
AVI Holdings, Inc., Warrant (R)** 1,500 9,000 1,500 9,000
California Federal Bank, Ser B, 10.625%,
Preferred Stock 6,667 724,203 6,667 724,203
California Federal Bank, 11.50%, Preferred
Stock 5,000 552,500 5,000 552,500
Capstar Broadcasting Partners, Inc.,
12.00%, Preferred Stock 14,266 1,478,314 14,266 1,478,314
Chancellor Media Corp., 7.00%,
Convertible, Preferred Stock 20,000 2,637,500 20,000 2,637,500
COLT Telecom Plc, Warrant (United Kingdom)
(R)** 5,000 925,000 5,000 925,000
Comunicacion Celular S.A. Warrant
(Colombia) (Y)** 50,000 350,000 50,000 350,000
Core Cap, Inc., Common Stock ** 45,000 900,000 45,000 900,000
Core Cap, Inc. Ser A/I, 10.00%, Preferred Stock 45,000 1,125,000 45,000 1,125,000
Credit Lyonnais Capital S.C.A., American
Depositary Receipt (ADR),
9.50% Ser DTC Preferred Stock (France)
(R), (Y) 100,000 2,525,000 100,000 2,525,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Decorative Home Accents, Inc., Common Stock** 1,000 10 1,000 10
Earthwatch, Inc., 12.00% Ser C Conv
Preferred Stock (R) 200,000 1,400,000 200,000 1,400,000
EchoStar Communications Corp., 12.125%,
Ser B, Preferred Stock 1,061 1,185,668 1,061 1,185,668
Finlay Enterprises Inc., Common Stock** 4,000 102,500 4,000 102,500
Granite Broadcasting Corp., 12.75%,
Preferred Stock 45,263 5,295,720 45,263 5,295,720
Hyperion Telecommunications Inc., 12.875%,
Ser B, Preferred Stock 3,097 3,483,632 3,097 3,483,632
ICF Kaiser International Inc., Warrant** 12,000 3,000 12,000 3,000
ICG Holdings, Inc., 14.00% Preferred Stock 2,297 2,755,998 2,297 2,755,998
Intermedia Communications Inc., 13.50%,
Ser B, Preferred Stock 1,727 2,081,512 1,727 2,081,512
Intermedia Communications, Inc., Common
Stock** 15,000 1,111,875 15,000 1,111,875
International Wireless Inc., Warrant** 3,000 30 3,000 30
Ionica Plc, Warrant (United Kingdom) (R)#** 8,500 552,500 8,500 552,500
IRT Property Co., Real Estate Investment
Trust (REIT) 75,000 853,125 75,000 853,125
Kelley Oil & Gas Corp., $2.625,
Preferred Stock 40,000 1,020,000 40,000 1,020,000
KLM Royal Dutch Air Lines N.V., Common
Stock (Netherlands) 25,000 973,437 25,000 973,437
Lasmo Plc, 10.00%, Ser A, American
Depositary Shares (ADS),
Preferred Stock (United Kingdom) (Y) 50,000 1,331,250 50,000 1,331,250
Loral Space & Communications Ltd., Warrant** 5,000 50,000 5,000 50,000
Maxus Energy Corp., $2.50, Preferred Stock 40,000 1,025,000 40,000 1,025,000
McCaw International Ltd., Warrant** 7,000 26,250 7,000 26,250
MetroNet Communications Corp., Warrant
(Canada) (R)** 2,250 108,000 2,250 108,000
Nextel Communications, Inc., 13.00%, Ser
D, Preferred Stock 2,195 2,458,400 2,195 2,458,400
Nextel Communications, Inc., 11.125%, Ser
E, Preferred Stock (R) 1,716 1,819,433 1,716 1,819,433
Nextel Communications, Inc. (Class A),
Common Stock** 12,394 292,034 12,394 292,034
Nextlink Communications Inc., Warrant (R)** 30,000 - 30,000
Nextlink Communications Inc., 14.00%,
Preferred Stock 100,500 5,979,750 100,500 5,979,750
Northwest Airlines Corp. (Class A), Common
Stock** 150,000 6,759,375 150,000 6,759,375
NTL Inc., 13.00%, Ser B, Preferred Stock 4,406 5,220,519 4,406 5,220,519
PG&E Corp., Common Stock 25,622 807,093 25,622 807,093
Powertel, Inc., Warrant** 2,880 27,360 2,880 27,360
PRIMEDIA Inc., 8.625%, Preferred Stock (R) 25,000 2,475,000 25,000 2,475,000
Qualcomm Financial Trust, 5.75%, Preferred
Stock 60,000 2,910,000 60,000 2,910,000
Quantas Airways Ltd., (ADS), Common Stock
(Australia) (R), (Y) 13,800 213,497 13,800 213,497
RCN Corp., Common Stock** 40,000 860,000 40,000 860,000
Renaissance Cosmetics, Warrant** 4,000 4,000 4,000 4,000
Rite Aid Corp., Common Stock 14,820 530,741 14,820 530,741
Rural Cellular Corp., 11.375%, Preferred
Stock (R) 1,750 1,758,750 1,750 1,758,750
SFX Broadcasting, Inc., 6.50% Ser D Conv
Preferred Stock (R) 25,000 2,093,750 25,000 2,093,750
SFX Broadcasting, Inc., 12.625%, Ser E,
Preferred Stock 9,568 1,129,024 9,568 1,129,024
SFX Entertainment, Inc. (Class A), Common
Stock** 27,467 1,215,415 27,467 1,215,415
Station Casinos, Inc., 7.00% Conv
Preferred Stock 5,000 256,250 5,000 256,250
Teletrac, Inc., Warrant** 2,000 - 2,000
Time Warner, Inc., 10.25%, Ser M,
Preferred Stock 3,576 4,058,760 3,576 4,058,760
TLC Beatrice International Holdings,
(Class A), Common Stock** 20,000 1,040,000 20,000 1,040,000
Valero Energy Corp., Common Stock 46,250 1,508,906 46,250 1,508,906
---------- ----------
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS
(Cost $69,034,676) (8.39%) 84,374,849 84,374,849
------ ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
John Hancock John Hancock World
Strategic Income Fund Bond Fund Combined
========================================================================================
PAR VALUE PAR VALUE PAR VALUE
INTEREST (000's MARKET INTEREST (000's MARKET (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE RATE OMITTED) VALUE OMITTED) VALUE
- ------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXPIRATION EXPIRATION
CURRENCY DATE/STRIKE CURRENCY DATE/STRIKE
CURRENCY PURCHASED SOLD PRICE SOLD PRICE
- ------------------ -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPTIONS
Japanese Yen USD 5,765,000 March 99/140-150 89,358 89,358
TOTAL OPTIONS
(Premium Paid $50,444) (0.01%) 89,358 89,358
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.69%)
Investment in a joint repurchase
agreement transaction with Toronto
Dominion, Dated 5-29-98, due 6-1-98
(secured by U.S. Treasury Notes,
5.125% thru 9.25%, due 8-15-98 thru
11-15-05 and U.S. Treasury Bonds,
6.00% thru 12.00%, due 8-15-13 thru
8-15-27) 5.570 14,893 14,893,000 5.570 2,064 2,064,000 16,957 16,957,000
------------ ----------- --------------
Non-Cash Security Lending
Collateral (0.20%)
Tri-Party Collateral which consists
of various U.S. Treasury Notes,
5.75% thru 6.625%, due 11-30-01
thru 08-15-27 *** 2,032 2,032,111 2,032 2,032,111
Cash Equivalents (0.59%)
Navigator Securities Lending Prime
Portfolio *** 5,952 5,952,043 5,952 5,952,043
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% 206 -- 206
------------ ----------- --------------
TOTAL SHORT-TERM INVESTMENTS (2.48%) 14,893,206 10,048,154 24,941,360
-------- ------------ ----------- --------------
TOTAL INVESTMENTS (98.82%) 943,812,821 50,176,435 993,989,256
-------- ------------ ----------- --------------
OTHER ASSETS AND LIABILITIES, NET (1.18%) 19,591,094 (7,656,975) 11,934,119
-------- ------------ ----------- --------------
TOTAL NET ASSETS (100.00%) $963,403,915 $42,519,460 $1,005,923,375
======== ============ =========== ==============
</TABLE>
<PAGE>
NOTES TO THE SCHEDULE OF INVESTMENTS
* Represents rate in effect on May 31, 1998.
** Non-income producing security.
*** Represents investment of security lending collateral.
# Par value of foreign bonds is expressed in local currency, as shown
parathentically in security description.
(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.
See Note A of the Notes to Financial Statements for valuation policy. Rule
144A securities amounted to $171,365,555 or 17.04% of the fund's net
assets as of May 31, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of foreign issuer, however, security is U. S. dollar
denominated.
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>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Strategic Income Fund (the "Registrant") on Form N-1A
under the Securities Act of 1933 and the Investment company Act of 1940 (File
Nos. 33-5186 and 811-4651), which information is incorporated herein by
reference.
ITEM 16. EXHIBITS:
1. Registrant's Declaration of Trust Filed as Exhibits a through a.5
to Registrant's Registration
Statement on Form N-1A and
incorporated herein by reference
to post-effective amendments nos.
21, 24 and 25 (file nos. 811-4651
and 33-5186 on June 29, 1995;
accession nos.0000950146-95-
000353("PEA 21"), 0001010521-96-
000150("PEA 24") and
0001010521-97-00230("PEA 25")
2 Amended and Restated By-Laws of Filed as Exhibit b to PEA 25 and
Registrant. incorporated herein by reference.
3 Not applicable
4 Form of Agreement and Plan of Filed herewith as Exhibit A to
reorganization between the the Proxy Statement and
Registrant and John Hancock Prospectus included as Part A of
World Bond Fund this Registration Statement.
5 Not applicable
<PAGE>
6 Investment Management Contract Filed as Exhibit d.1 to PEA 21
between the Registrant and John and incorporated herein by
Hancock Advisers, Inc. reference.
7 Distribution Agreement between Filed as Exhibit e to PEA 21 and
the Registrant and John Hancock incorporated herein by reference.
Funds, Inc. (formerly named John
Hancock Broker Distribution
Services, Inc.)
7.1 Form of Soliciting Dealer Filed as Exhibit e.1 to
Agreement between John Hancock Registrant's Registration
Funds, Inc. and Selected Dealers Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no.
22 (file nos. 811-4651 and 33-
5186 on February 9, 1996;
accession no. 000095146-95-
000519 ("PEA 22")
7.2 Form of Financial Institution Filed as Exhibit e.2 to PEA 22
Sales and Service Agreement and incorporated herein by
reference.
7.3 Amendment to Distribution Filed as Exhibit e.3 to PEA 25
Agreement between Registrant an incorporated herein by
and John Hanock Funds, Inc. reference.
8 Not applicable.
9 Master Custodian Agreement Filed as Exhibit g to PEA 21 and
between John Hancock Mutual Funds incorporated herein by reference.
(including Registrant) and
Investors Bank & Trust Company.
10 Class A and Class B Distribution Filed as Exhibit m and m.1 to PEA
Plans between Registrant and John nos. 21 and 25 and incorporated
Hancock Funds, Inc. herein by reference.
11 Class C Distribution Filed as Exhibit m.3 to
Plans between Registrant and John Registrant's Registration
Hancock Funds, Inc. Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no.28
(file nos. 811-4651 and 33-5186
on July 6, 1998; accession no.
0001010521-98-000286.)
12 Opinion as to legality of shares Filed herewith as Exhibit 11
and consent.
13 Form of opinion as to tax matters Filed herewith as Exhibit 12
and consent.
<PAGE>
14 Not applicable
15 Consents of PricewaterhouseCoopers Filed herewith as Exhibit 14
LLP regarding the audited financial
statements of Registrant and John
Hancock Strategic Income Fund.
16 Not applicable
17 Powers of Attorney Filed as addendum to signature
pages of PEA 24 incorporated
herein by reference.
18 Prospectus of John Hancock Filed herewith as Exhibit B
World Bond Fund to Part B of this Registration
dated June 1, 1998 Statement
19 Statement of Additional Filed herewith as Exhibit B
Information of John Hancock to Part B of this Registration
World Bond Fund Statement
dated June 1, 1998
19.1 Statement of Additional Filed herewith as Exhibit A to
Information of John Hancock Part B of this Registration
Strategic Income Fund Statement.
dated October 1, 1998
ITEM 17
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a propectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of 1933,
as amended (the "1933 Act"), the reoffering prospectus will contain the
information called for by the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 13th day of November, 1998.
JOHN HANCOCK STRATEGIC SERIES
By: *
-----------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman
- ----------------------- (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/James B. Little Senior Vice President and Chief November 13, 1998
- ----------------------- Financial Officer (Principal
James B. Little Financial and Accounting Officer)
* Trustee
- -----------------------
Dennis S. Aronowitz
* Trustee
- -----------------------
Richard P. Chapman, Jr.
* Trustee
- -----------------------
William J. Cosgrove
* Trustee
- -----------------------
Douglas M. Costle
* Trustee
- -----------------------
Leland O. Erdahl
* Trustee
- -----------------------
Richard A. Farrell
* Trustee
- -----------------------
Gail D. Fosler
* Trustee
- -----------------------
William F. Glavin
<PAGE>
Signature Title Date
--------- ----- ----
* Trustee
- -----------------------
Anne C. Hodsdon
* Trustee
- -----------------------
Dr. John A. Moore
* Trustee
- -----------------------
Patti McGill Peterson
* Trustee
- -----------------------
John W. Pratt
* Trustee
- -----------------------
Richard S. Scipione
* Trustee
- -----------------------
Edward J. Spellman
*By: /s/Susan S. Newton November 13, 1998
-------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney dated
August 29, 1996
</TABLE>
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
- ----------- -----------
4. Agreement and Plan of Regorganization between the Registrant
and John Hancock World Bond Fund (filed as EXHIBIT A to Part A
of this Registration Statement).
11. Opinion as to legality of shares and consent.
12. Form of opinion as to tax matters and consent.
14. Consent of PricewaterhouseCoopers, LLP regarding the
audited financial statements and highlights of the Registrant
and John Hancock World Bond Fund.
December 14, 1998
John Hancock Strategic Series
on behalf of John Hancock Strategic Income Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under the Securities
Act of 1933, as amended (the "Act"), on Form N-14, with respect to the shares of
beneficial interest of John Hancock Strategic Income Fund (the "Fund"), a series
of John Hancock Strategic Series (the "Trust"), a Massachusetts business trust,
it is the opinion of the undersigned that these shares when issued, will be
legally issued, fully paid and non-assessable.
In connection with this opinion it should be noted that the Trust is an entity
of the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for obligations of the
Trust and indemnifies any shareholder of the Fund, with this indemnification to
be paid solely out of the assets of the Fund. Therefore, the shareholder's risk
is limited to circumstances in which the assets of the Fund are insufficient to
meet the obligations asserted against the Fund's assets.
The undersigned hereby consents to the filing of a copy of this opinion as an
exhibit to the Trust's registration statement on Form N-14 and with the
Securities and Exchange Commission.
Sincerely,
/s/Timothy M. Fagan
Timothy M. Fagan
Attorney and Assistant Secretary
John Hancock Advisers, Inc.
- --------------------------------------------------------------------------------
Washington, DCBoston, MALondon, UK*
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
- --------------------------------------------------------------------------------
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 o fax 617-526-5000
DRAFT
February 19, 1999
Board of Trustees
John Hancock Strategic Series, on behalf of
John Hancock Strategic Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Boards of Trustees:
You have requested our opinion regarding certain federal income tax
consequences described below of the acquisition by John Hancock Strategic Income
Fund ("Acquiring Fund"), a series of John Hancock Strategic Series ("Trust"), of
all of the assets of John Hancock World Bond Fund ("Acquired Fund"), a series of
John Hancock Investment Trust III ("Trust III"), in exchange solely for (i) the
assumption by Acquiring Fund of all of the liabilities of Acquired Fund and (ii)
the issuance of Class A and Class B voting shares of beneficial interest of
Acquiring Fund (the "Acquiring Fund Shares") to Acquired Fund, followed by the
distribution by Acquired Fund, in liquidation of Acquired Fund, of the Acquiring
Fund Shares to the shareholders of Acquired Fund and the termination of Acquired
Fund (the foregoing together constituting the "reorganization" or the
"transaction").
<PAGE>
In rendering this opinion, we have examined and relied upon the facts
stated and representations made in (i) the combined prospectus for Acquiring
Fund and certain other John Hancock mutual funds, dated October 1, 1998, (ii)
the statement of additional information for Acquiring Fund dated October 1,
1998, (iii) the prospectus for Acquired Fund and certain other John Hancock
mutual funds, dated June 1, 1998, (iv) the statement of additional information
for Acquired Fund and another John Hancock mutual fund, dated June 1, 1998, (v)
the Notice of Meeting of Shareholders Scheduled for February 10, 1999 and the
accompanying proxy statement and prospectus relating to the transaction dated
December 17, 1998 (the "Proxy Statement"), (vi) the Agreement and Plan of
Reorganization, made December 9, 1998, between Acquiring Fund and Acquired Fund
(the "Agreement"), (vii) the representation letters on behalf of Acquiring Fund
and Acquired Fund referred to below and (viii) such other documents as we deemed
appropriate.
In our examination of documents, we have assumed the authenticity of
original documents, the accuracy of copies, the genuineness of signatures, and
the legal capacity of signatories. We have assumed that all parties to the
Agreement have acted and will act in accordance with the terms of the Agreement
and all other documents relating to the transaction and that the transaction
will be consummated pursuant to the terms and conditions set forth in the
Agreement without the waiver or modification of any such terms and conditions.
Furthermore, we have assumed that all representations contained in the
Agreement, as well as those representations contained in the representation
letters referred to below are, on the date hereof, true and complete in all
material respects, and that any representation made in any of the documents
referred to herein "to the best of the knowledge and belief" (or similar
qualification) of any person or party is correct without such qualification. We
have not attempted to verify independently such representations, but in the
course of our representation, nothing has come to our attention that would cause
us to question the accuracy thereof.
The conclusions expressed herein represent our judgment regarding the
proper treatment of certain aspects of the transaction affecting Acquiring Fund,
Acquired Fund and the shareholders of Acquired Fund on the basis of our analysis
of the Internal Revenue Code of 1986, as amended (the "Code"), case law,
Treasury regulations and the rulings and other pronouncements of the Internal
Revenue Service (the "Service") which exist at the time this opinion is
rendered. Such authorities are subject to prospective or retroactive change, and
we do not undertake any responsibility to advise you of any such change. Our
opinion represents our best judgment regarding how a court would decide if
presented with the issues addressed herein and is not binding upon the Service
or any court. Moreover, our opinion does not provide any assurance that a
position taken in reliance on such opinion will not be challenged by the Service
and does not constitute any representation or warranty that such position, if so
challenged, will not be rejected by a court.
<PAGE>
This opinion addresses only the specific United States federal income
tax consequences of the transaction set forth below, and does not address any
other federal, state, local, or foreign income, estate, gift, transfer, sales,
or other tax consequences that may result from the transaction or any other
transaction.
FACTS
We understand that the facts relating to the transaction are as
described hereinafter.
Acquiring Fund is a series of Trust, a business trust established under
the laws of The Commonwealth of Massachusetts in 1986. Trust is registered as an
open-end investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"). Acquiring Fund has been operating as an investment company
since the inception of business in 1986. Acquiring Fund is currently the only
series of Trust.
The investment objective of Acquiring Fund is to seek a high level of
current income. Acquiring Fund seeks to achieve this objective by investing
primarily in (1) foreign government and corporate debt securities, (2) United
States ("U.S.") Government securities and (3) lower-rated, high yield, high risk
debt securities (i.e., "junk bonds"). Under normal circumstances, Acquiring
Fund's assets will be invested in each of the foregoing three sectors.
Acquired Fund is a series of Trust III, a business trust established
under the laws of The Commonwealth of Massachusetts in 1986. Trust III is
registered as an open-end investment company under the 1940 Act. Acquired Fund
has been operating as an investment company since the inception of business in
1986. Acquired Fund is one of six series of Trust III. Each series of Trust III
has assets and liabilities that are separate from those of each other series,
and each such series is treated as a separate corporation and regulated
investment company under Section 851(g) of the Code.
The investment objective of Acquired Fund is to achieve a high total
investment return, a combination of current income and capital appreciation, by
investing in a global portfolio of fixed income securities. Under normal
circumstances, Acquired Fund invests in fixed income securities denominated in
at least three currencies, including the U.S. dollar, or multi-currency units.
Under normal circumstances, Acquired Fund invests primarily in fixed income
securities issued or guaranteed by (1) the U.S. Government, its agencies or
instrumentalities; (2) foreign governments or their political subdivisions,
authorities, agencies or instrumentalities; (3) international organizations
backed or jointly owned by more than one national government; or (4) foreign
corporations or financial institutions.
<PAGE>
The steps comprising the reorganization, as set forth in the Agreement,
are as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its assets
(consisting, without limitation, of portfolio securities and instruments,
dividend and interest receivables, cash and other assets). In exchange for the
assets transferred to it, Acquiring Fund will (A) assume all of the liabilities
of Acquired Fund (comprising all of its known and unknown liabilities and
referred to hereinafter as the "Acquired Fund Liabilities") and (B) issue
Acquiring Fund Shares to Acquired Fund that have an aggregate net asset value
equal to the value of the assets transferred to Acquiring Fund by Acquired Fund,
less the Acquired Fund Liabilities assumed by Acquiring Fund.
(ii) Promptly after the transfer of its assets to Acquiring Fund,
Acquired Fund will distribute in liquidation the Acquiring Fund Shares it
receives in the exchange to Acquired Fund shareholders pro rata in exchange for
their surrender of their shares of beneficial interest of Acquired Fund
("Acquired Fund Shares"). In these exchanges, holders of Acquired Fund Shares
designated as Class A ("Class A Acquired Fund Shares") will receive Acquiring
Fund Shares designated as Class A ("Class A Acquiring Fund Shares"), and holders
of Acquired Fund Shares designated as Class B ("Class B Acquired Fund Shares")
will receive Acquiring Fund Shares designated as Class B ("Class B Acquiring
Fund Shares").
(iii) After such exchanges, liquidation and distribution, the existence
of Acquired Fund will be promptly terminated in accordance with Massachusetts
law.
The Agreement and the transactions contemplated thereby were approved
by the Board of Trustees of Trust, on behalf of Acquiring Fund, at a meeting
held on ________________, 1998. Acquiring Fund shareholders are not required and
were not asked to approve the transaction. The Agreement and the transactions
contemplated thereby were approved by the Board of Trustees of Trust III, on
behalf of Acquired Fund, at a meeting held on ______________, 1998, subject to
the approval of Acquired Fund shareholders. Acquired Fund shareholders approved
the transaction at a meeting held on February 10, 1999.
Massachusetts law does not provide dissenters' rights for Acquired Fund
shareholders in the transaction. Additionally, it is the position of the
Division of Investment Management of the Securities and Exchange Commission that
appraisal rights, in contexts such as the reorganization, are inconsistent with
Rule 22c-1 under the 1940 Act and are therefore preempted and invalidated by
such rule. Consequently, Acquired Fund shareholders will not have dissenters' or
appraisal rights in the transaction.
<PAGE>
Our opinions set forth below are subject to the following factual
assumptions being true and correct (including statements relating to future
actions and facts represented to be to the best knowledge of management, whether
or not known). Authorized representatives of Acquiring Fund and Acquired Fund
have represented to us by letters of even date herewith that the following
assumptions are true and correct:
(a) Neither Acquiring Fund nor any person treated as related to
Acquiring Fund under Treasury Regulation Section 1.368-1(e)(3) has any plan or
intention to redeem or otherwise reacquire any of the Acquiring Fund Shares
received by shareholders of Acquired Fund in the transaction except in the
ordinary course of Acquiring Fund's business in connection with its legal
obligation under Section 22(e) of the 1940 Act as a registered open-end
investment company to redeem its own shares (which obligation is not in
connection with, modified in connection with, or in any way related to the
transaction).
(b) After the transaction, Acquiring Fund will continue the historic
business of Acquired Fund and will use all of the assets acquired from Acquired
Fund, which are Acquired Fund's historic business assets, i.e., assets not
acquired as part of or in contemplation of the transaction, in the ordinary
course of a business.
(c) Acquiring Fund has no plan or intention to sell or otherwise
dispose of any assets of Acquired Fund acquired in the transaction, except for
dispositions made in the ordinary course of its business (i.e., dispositions
resulting from investment decisions made after the reorganization on the basis
of investment considerations independent of the reorganization) or to maintain
its qualification as a regulated investment company under Subchapter M of the
Code.
(d) The shareholders of Acquiring Fund and the shareholders of Acquired
Fund will bear their respective expenses, if any, in connection with the
transaction.
(e) Acquiring Fund and Acquired Fund will each bear its own expenses
incurred in connection with the transaction. Any liabilities of Acquired Fund
attributable to such expenses that remain unpaid on the closing date of the
transaction and are assumed by Acquiring Fund in the transaction are
attributable to Acquired Fund's expenses that are solely and directly related to
the transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
<PAGE>
(f) There is no indebtedness between Acquiring Fund and Acquired Fund.
(g) Acquired Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since inception, and qualifies as such for its
taxable year ending on the closing date of the transaction.
(h) Acquiring Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since inception, and qualifies as such as of the
date of the transaction.
(i) Neither Acquiring Fund nor Acquired Fund is under the jurisdiction
of a court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(j) Acquiring Fund does not own and has never owned, directly or
indirectly, any shares of Acquired Fund.
(k) Acquiring Fund will not pay cash in lieu of fractional shares in
connection with the transaction.
(l) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares issued to Acquired Fund in exchange for the assets of
Acquired Fund is approximately equal to the fair market value of the assets of
Acquired Fund received by Acquiring Fund, minus the Acquired Fund Liabilities
assumed by Acquiring Fund. Acquiring Fund will not furnish any consideration in
connection with the acquisition of Acquired Fund's assets other than the
assumption of these Acquired Fund Liabilities and the issuance of these
Acquiring Fund Shares.
(m) Acquired Fund shareholders will not be in control (within the
meaning of Sections 368(a)(2)(H)(i) and 304(c) of the Code, which provide that
control means the ownership of shares possessing at least 50% of the total
combined voting power of all classes of shares that are entitled to vote or at
least 50% of the total value of shares of all classes) of Acquiring Fund after
the transaction.
(n) The principal business purposes of the transaction are to combine
the assets of Acquiring Fund and Acquired Fund in order to capitalize on
economies of scale in expenses, including the costs of accounting, legal,
transfer agency, insurance, custodial, and administrative services, to benefit
from Acquiring Fund's anticipated better performance and better potential for
asset growth and expense reduction, and to increase diversification.
<PAGE>
(o) As of the date of the transaction, the fair market value of the
Class A Acquiring Fund Shares received by each shareholder that holds Class A
Acquired Fund Shares is approximately equal to the fair market value of the
Class A Acquired Fund Shares surrendered by such shareholder, and the fair
market value of the Class B Acquiring Fund Shares received by each shareholder
that holds Class B Acquired Fund Shares is approximately equal to the fair
market value of the Class B Acquired Fund Shares surrendered by such
shareholder. No property other than Acquiring Fund Shares will be distributed to
shareholders of Acquired Fund in exchange for their Acquired Fund Shares, nor
will any such shareholder receive cash or other property as part of the
transaction.
(p) There is no plan or intention on the part of any shareholder of
Acquired Fund that owns beneficially 5% or more of the Acquired Fund Shares and,
to the best knowledge of management of Acquired Fund, there is no plan or
intention on the part of the remaining shareholders of Acquired Fund, in
connection with the transaction, to engage in any transaction with Acquired
Fund, Acquiring Fund, or any person treated as related to Acquired Fund or
Acquiring Fund under the standards made applicable by Treasury Regulation
Section 1.368-1(e)(1)(i) involving the sale, redemption, exchange, transfer,
pledge, or other disposition resulting in a direct or indirect transfer of the
risks of ownership (a "Sale") of any of the Acquired Fund Shares or any of the
Acquiring Fund Shares to be received in the transaction that, considering all
Sales, would reduce the aggregate ownership of the Acquiring Fund Shares by
former Acquired Fund shareholders to a number of shares having a value, as of
the date of the transaction, of less than fifty percent (50%) of the value of
all of the formerly outstanding Acquired Fund Shares as of the same date. All
Sales involving shares of Acquired Fund and Acquiring Fund held by Acquired Fund
shareholders that have occurred or will occur in connection with the transaction
are taken into account for purposes of this representation. No such Sale that is
in connection with the transaction has, to the best knowledge of the management
of Acquired Fund, occurred on or prior to the date of the transaction.
(q) Acquired Fund assets transferred to Acquiring Fund comprise at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets held by
Acquired Fund immediately prior to the transaction. For purposes of this
representation, amounts used by Acquired Fund to pay its outstanding
liabilities, including reorganization expenses, and all redemptions and
distributions (except for redemptions in the ordinary course of business upon
demand of a shareholder that Acquired Fund is required to make as an open-end
investment company pursuant to Section 22(e) of the 1940 Act and regular, normal
dividends, which dividends include any final distribution of previously
undistributed investment company taxable income and net capital gain for
Acquired Fund's final taxable year ending on the date of the transaction) made
by Acquired Fund immediately preceding the transaction are taken into account as
assets of Acquired Fund held immediately prior to the transaction.
<PAGE>
(r) The Acquired Fund Liabilities assumed by Acquiring Fund plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Acquired Fund in the ordinary course of its business or are expenses of the
transaction.
(s) The fair market value of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(t) Acquired Fund does not pay compensation to any
shareholder-employee.
OPINION
On the basis of and subject to the foregoing and in reliance upon the
representations described above, we are of the opinion that:
(a) The acquisition by Acquiring Fund of all of the assets of Acquired
Fund solely in exchange for the issuance of Acquiring Fund Shares to Acquired
Fund and the assumption of all of the Acquired Fund Liabilities by Acquiring
Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired
Fund, of Acquiring Fund Shares to Acquired Fund shareholders in exchange for
their Acquired Fund Shares and the termination of Acquired Fund, will constitute
a "reorganization" within the meaning of Section 368(a)(1)(C) of the Code.
Acquiring Fund and Acquired Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by Acquired Fund upon (i) the
transfer of all of its assets to Acquiring Fund solely in exchange for the
issuance of Acquiring Fund Shares to Acquired Fund and the assumption of all of
the Acquired Fund Liabilities by Acquiring Fund and (ii) the distribution by
Acquired Fund of such Acquiring Fund Shares to the shareholders of Acquired Fund
(Sections 361(a) and 361(c) of the Code).
(c) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund solely in exchange for the issuance of
Acquiring Fund Shares to Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by Acquiring Fund (Section 1032(a) of the Code).
<PAGE>
(d) The basis of the assets of Acquired Fund acquired by Acquiring Fund
will be, in each instance, the same as the basis of those assets in the hands of
Acquired Fund immediately prior to the transfer (Section 362(b) of the Code).
(e) The tax holding period of the assets of Acquired Fund in the hands
of Acquiring Fund will, in each instance, include Acquired Fund's tax holding
period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or loss
upon the exchange of all of their Acquired Fund Shares solely for Acquiring Fund
Shares as part of the transaction (Section 354(a)(1) of the Code).
(g) The basis of the Acquiring Fund Shares received by the Acquired
Fund shareholders in the transaction will be the same as the basis of the
Acquired Fund Shares surrendered in exchange therefor (Section 358(a)(1) of the
Code).
(h) The tax holding period of the Acquiring Fund Shares received by
Acquired Fund shareholders will include, for each shareholder, the tax holding
period for the Acquired Fund Shares surrendered in exchange therefor, provided
that the Acquired Fund Shares were held as capital assets on the date of the
exchange (Section 1223(1) of the Code).
No opinion is expressed or implied regarding the federal income tax
consequences to Acquiring Fund, Acquired Fund or Acquired Fund shareholders of
any conditions existing at the time of, effects resulting from, or other aspects
of the transaction except as expressly set forth above. This opinion may not be
relied upon except with respect to the consequences specifically discussed
herein nor may it be relied upon by persons or entities to whom it is not
addressed, other than with our prior written consent.
Very truly yours,
Hale and Dorr LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this registration statement on Form N-14 (the "Registration
Statement") of John Hancock Strategic Series of our report dated July 9, 1998,
relating to the financial statements and financial highlights appearing in the
May 31, 1998 Annual Report to Shareholders of John Hancock Strategic Income Fund
and our report dated December 15, 1997, relating to the financial statements and
financial highlights appearing in the October 31, 1997 Annual Report to
Shareholders of John Hancock World Bond Fund (collectively, the "Financial
Statements") which appear in Exhibits A and B, respectively, to the Statement of
Additional Information, and which Financial Statements are incorporated by
reference into the Proxy Statement and Prospectus (the "Proxy/Prospectus"),
which constitutes part of this Registration Statement. We further consent to the
reference to us under the heading "Experts" in such Proxy/Prospectus, to the
references to us under the headings "Financial Highlights" in the Prospectuses
of the Funds dated October 1, 1998 for the John Hancock Strategic Income Fund
and June 1, 1998 for the John Hancock World Bond Fund, which are incorporated by
reference into the Proxy/Prospectus and the references to us under the headings
"Independent Auditors" in the Statements of Additional Information of the Funds
dated October 1, 1998 for the John Hancock Strategic Income Fund and June 1,
1998 for the John Hancock World Bond Fund, which are included as Exhibits A and
B, respectively, to the Statement of Additional Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 13, 1998
