FINAL REPORT
SOVEREIGN
U.S. GOVERNMENT
INCOME FUND Funds
John Hancock Funds
DECEMBER 4, 1998
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
Trustees
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
* Members of the Audit Committee
Officers
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Anne C. Hodsdon
President,Chief
Operating Officer and
Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Vice President and Compliance Officer
Custodian
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
60 State Street
Boston, Massachusetts 02109
<PAGE>
<TABLE>
<CAPTION>
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Assets and Liabilities
December 4, 1998 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments at value - Note C:
United States government and agencies securities
(cost - $378,389,161 ) $389,606,430
Joint repurchase agreement (cost -$31,036,000 ) 31,036,000
Corporate savings account 891
-------------------
420,643,321
Receivable for investments sold 1,883,220
Receivable for shares sold 3,320
Interest receivable 4,841,983
Other assets 41,656
-------------------
Total Assets 427,413,500
----------------------------------------------
Liabilities:
Payable for investments purchased 54,388,682
Payable for shares repurchased 3,694
Payable for futures variation margin - Note A 33,548
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 238,315
Accounts payable and accrued expenses 107,397
-------------------
Total Liabilities 54,771,636
----------------------------------------------
Net Assets:
Capital paid-in 400,190,370
Accumulated net realized loss on investments and financial future contracts (38,749,678)
Net unrealized appreciation of investments 11,220,009
Distributions in excess of net investment income (18,837)
===================
Net Assets $372,641,864
==============================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial interest outstanding -
unlimited number of shares authorized with no par value)
Class A - $285,764,515 /28,245,127 $10.12
========================================================================================================================
Class B - $86,877,349 /8,587,007 $10.12
========================================================================================================================
Maximum Offering Price Per Share*
Class A - ( $10.12 x 104.71%) $10.60
========================================================================================================================
* 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
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Operations
Period from June 1, 1998 to December 4, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------
Investment Income:
Interest $ 13,679,554
--------------------------------
Expenses:
Investment management fee - Note B 956,387
Distribution and service fee - Note B
Class A 439,626
Class B 447,353
Transfer agent fee - Note B 461,183
Custodian fee 48,441
Printing 38,239
Financial services fee - Note B 28,547
Registration and filing fees 22,111
Miscellaneous 7,937
Auditing fee 3,500
Trustees' fees 2,416
Legal fees 1,273
--------------------------------
Total Expenses 2,457,013
-------------------------------------------------------------------------------------
Net Investment Income 11,222,541
-------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Future Contracts:
Net realized gain on investments sold 5,794,660
Net realized gain on financial futures contracts 2,118,691
Change in net unrealized appreciation/depreciation
of investments (273,661)
Change in net unrealized appreciation/depreciation
of financial futures contracts (5,250)
--------------------------------
Net Realized and Unrealized Gain on
Investments and Financial Futures Contracts 7,634,440
-------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $ 18,856,981
=====================================================================================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 1, 1998 TO
YEAR ENDED DECEMBER 4, 1998
MAY 31, 1998 (UNAUDITED)
--------------- ----------------------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $24,465,938 $11,222,541
Net realized gain on investments sold and financial futures
contracts 2,936,186 7,913,351
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts 11,373,422 (278,911)
---------- ----------------------------
Net Increase in Net Assets Resulting from Operations 38,775,546 18,856,981
---------- ----------------------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6364 and $0.3047 per share, respectively) (19,290,057) (8,840,295)
Class B - ($0.5689 and $0.2694 per share, respectively) (5,223,588) (2,382,246)
---------- ----------------------------
Total Distributions to Shareholders (24,513,645) (11,222,541)
---------- ----------------------------
From Fund Share Transactions - Net* (45,269,176) (2,923,924)
---------- ----------------------------
Net Assets:
Beginning of period 398,938,623 367,931,348
---------- ----------------------------
End of period (including distributions in excess of net
investment income $196,173 and $18,837, respectively) $367,931,348 $372,641,864
========== ============================
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
* Analysis of Fund Share Transactions:
PERIOD FROM JUNE 1, 1998 TO
YEAR ENDED DECEMBER 4, 1998
MAY 31, 1998 (UNAUDITED)
---------------------------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------------- ------------
Shares sold 1,581,221 $15,573,019 2,195,950 $22,121,024
Shares issued to shareholders in
reinvestment of distributions 1,562,529 15,369,047 715,195 7,110,370
----------- ---------- ------------ ------------
3,143,750 30,942,066 2,911,145 29,231,394
Less shares repurchased (6,008,099) (59,106,595) (3,443,823) (34,687,332)
=========== ========== ============ ============
Net decrease (2,864,349) ($28,164,529) (532,678) ($5,455,938)
=========== ========== ============ ============
CLASS B
Shares sold 1,106,741 $10,958,277 3,051,722 $30,797,080
Shares issued to shareholders in
reinvestment of distributions 285,916 2,811,860 128,161 1,263,084
----------- ---------- ------------ ------------
1,392,657 13,770,137 3,179,883 32,060,164
Less shares repurchased (3,137,772) (30,874,784) (2,923,131) (29,528,150)
=========== ========== ============ ============
Net increase (decrease) (1,745,115) ($17,104,647) 256,752 $2,532,014
=========== ========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the period indicated, investment returns, key ratios
and supplemental data are as follows:
..............................................
PERIOD FROM JUNE 1, 1998
YEAR ENDED OCTOBER 31, PERIOD FROM TO
------------------------------- NOVEMBER 1, 1996 YEAR ENDED DECEMBER 4, 1998
1993 1994 1995 1996 TO MAY 31, 1997(5) MAY 31, 1998 (UNAUDITED)
---- ---- ---- ---- ------------------ ------------ -----------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.29 $10.89 $9.24 $10.01 $9.75 $9.56 $9.92
----- ----- ------ ------ --------- --------- --------------
Net Investment Income 0.68(1) 0.65 0.65 0.64(1) 0.37(1) 0.64(1) 0.30(1)
Net Realized and Unrealized Gain
(Loss) on Investments
and Financial Futures Contracts 0.61 (1.34) 0.77 (0.26) (0.19) 0.36 0.20
----- ----- ------ ------ ---------- --------- --------------
Total from Investment Operations 1.29 (0.69) 1.42 0.38 0.18 1.00 0.50
----- ----- ------ ------ ---------- --------- --------------
Less Distribution:
Dividends from Net Investment Income (0.68) (0.65) (0.65) (0.64) (0.36) (0.64) (0.30)
Distributions form Net Realized Gain
on Investments Sold (0.01) (0.31) - - - - -
Distributions from Capital Paid-In - - - - (0.01) - -
----- ----- ------ ------ ---------- --------- --------------
Total Distributions (0.69) (0.96) (0.65) (0.64) (0.37) (0.64) (0.30)
----- ----- ------ ------ ---------- --------- --------------
Net Asset Value, End of Period $10.89 $9.24 $10.01 $9.75 $9.56 $9.92 $10.12
===== ===== ====== ====== ========== ========= ==============
Total Investment Return at Net Asset
Value (2) 12.89% (6.66%) 15.90% 4.02% 1.92% (3) 10.68% 7.95% (3)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $375,416 $315,372 $370,966 $330,162 $302,589 $285336 $285,765
Ratio of Expenses to Average
Net Assets 1.30% 1.23% 1.17% 1.15% 1.17% (4) 1.14% 1.12% (4)
Ratio of Net Investment Income
to Average Net Assets 6.47% 6.62% 6.76% 6.58% 6.69% (4) 6.48% 6.03% (4)
Portfolio Turnover Rate 273% 127% 94% 143% 88% 148% 138%
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning
of Period $10.28 $10.88 $9.23 $10.00 $9.74 $9.56 $9.92
----- ----- ------ ------ ---------- --------- --------------
Net Investment Income 0.66(1) 0.61 0.60 0.58(1) 0.33(1) 0.57(1) 0.27 (1)
Net Realized and Unrealized Gain
(Loss) on Investments and
Financial Futures Contracts 0.61 (1.34) 0.77 (0.26) (0.18) 0.36 0.20
----- ----- ------ ------ ---------- --------- --------------
Total from Investment Operations 1.27 (0.73) 1.37 0.32 0.15 0.93 0.47
----- ----- ------ ------ ---------- --------- --------------
Less Distribution:
Dividends from Net Investment Income (0.66) (0.61) (0.60) (0.58) (0.32) (0.57) (0.27)
Distributions form Net Realized Gain
on Investments sold (0.01) (0.31) - - - - -
Distributions from Capital Paid-In - - - - (0.01) - -
----- ----- ------ ------ ---------- --------- --------------
----- ----- ------ ------ ---------- --------- --------------
Total Distributions (0.67) (0.92) (0.60) (0.58) (0.33) (0.57) (0.27)
----- ----- ------ ------ ---------- --------- --------------
===== ===== ====== ====== ========== ========= ==============
Net Asset Value, End of Period $10.88 $9.23 $10.00 $9.74 $9.56 $9.92 $10.12
===== ===== ====== ====== ========== ========= ==============
Total Investment Return at Net Asset
Value(2) 12.66% (7.05%) 15.27% 3.33% 1.61%(3) 9.93% 7.26%(3)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $244,133 $196,899 $130,824 $112,228 $96,349 $82,596 $8,587
Ratio of Expenses to Average
Net Assets 1.51% 1.64% 1.72% 1.82% 1.86%(4) 1.83% 1.82%(4)
Ratio of Net Investment Income
to Average Net Assets 6.23% 6.19% 6.24% 5.91% 5.99%(4) 5.79% 5.33%(4)
Portfolio Turnover Rate 273% 127% 94% 143% 88% 148% 138%
(1) Based on the average of shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(3) Not annualized.
(4) Annualized.
(5) Effective May 31, 1997, the fiscal year end changed from October 31 to May 31.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
Schedule of Investments
December 4, 1998 (Unaudited)
- --------------------------------------------------------
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
------------- --------------- ----------------------------
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (32.37%)
United States Treasury,
Bond 10.750% 08-15-05 $ 4,335 $ 5,827,194
Bond 12.000 08-15-13 29,900 45,976,034
Bond 9.250 02-15-16 14,450 20,956,980
Bond 8.125 08-15-19 19,100 25,683,579
Note 8.875 02-15-99 22,000 22,168,520
-------------
120,612,307
-------------
Government - U.S. Agencies (72.18%)
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 10.500 02-01-03 1,841 1,876,655
30 Yr Pass Thru Ctf 9.500 08-01-16 8,573 9,205,677
CMO REMIC 34-C 9.000 11-15-19 1,720 1,731,583
CMO REMIC 1142-H 7.950 12-15-20 5,107 5,154,760
CMO REMIC 1603-K 6.500 10-15-23 5,000 5,056,250
CMO REMIC 1608-L 6.500 09-15-23 5,000 5,157,800
CMO REMIC 1617-PM 6.500 11-15-23 10,000 10,187,500
CMO REMIC 1727-I 6.500 05-15-24 5,000 5,100,000
Deb 8.190 10-06-04 3,500 3,579,310
Deb 6.700 03-03-08 1,000 998,910
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf 9.050 04-10-00 2,000 2,106,880
10 Yr Pass Thru Ctf 8.900 06-12-00 5,000 5,292,200
15 Yr Pass Thru Ctf 9.000 02-01-10 3,984 4,150,517
15 Yr Pass Thru Ctf+ 6.000 03-01-11 to 10-01-13 49,113 49,128,137
15 Yr Pass Thru Ctf 6.500 05-01-13 14,140 14,334,623
CMO REMIC 1994-60-PJ 7.000 04-25-24 6,100 6,305,875
CMO REMIC 1994-75-K 7.000 04-25-24 3,100 3,205,594
CMO REMIC 1996-28-PK 6.500 07-25-25 7,589 7,679,385
CMO REMIC G-8-E 9.000 04-25-21 4,018 4,312,203
CMO REMIC X-225C-TK 6.500 12-25-23 5,032 5,156,190
Medium Term Note 7.230 03-30-06 3,000 3,017,820
Financing Corp.,
Bond 10.350 08-03-18 5,000 7,783,500
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage 7.000# 10-20-22 to 10-20-23 10,427 10,550,704
30 Yr Pass Thru Ctf+ 6.000 10-01-28 18,500 18,326,470
30 Yr Pass Thru Ctf 6.500 02-15-27 to 10-15-28 40,009 40,421,415
30 Yr Pass Thru Ctf 7.500 08-15-23 to 02-15-26 7,860 8,109,628
30 Yr Pass Thru Ctf 8.000 01-15-25 5,370 5,594,510
30 Yr Pass Thru Ctf 9.000 08-15-16 to 12-15-17 5,812 6,241,512
Small Business Administration,
Pass Thru Ctf Ser 97-B 7.100 02-01-17 4,725 5,002,726
Pass Thru Ctf Ser 97-D 7.500 04-01-17 4,676 5,029,650
Pass Thru Ctf Ser 97-E 7.300 05-01-17 2,342 2,503,086
Tennessee Valley Authority,
Note Ser D 8.250 04-15-42 5,305 6,693,053
-------------
268,994,123
-------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES (104.55%)
(Cost $378,389,161) 389,606,430
-------------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
------------- -------------- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (8.33%)
Investment in a joint repurchase agreement
transaction with Lehman Brothers, dated 12-04-98,
due 12-07-98 (secured by U.S. Treasury Notes, 4.750%
thru 7.125%, due 09-30-99 thru 11-15-08) - Note A 4.600 % $ 31,036 $ 31,036,000
-------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account 891
-------------
Current Rate 4.000%
TOTAL SHORT-TERM INVESTMENTS (8.33%) 31,036,891
-------------
TOTAL INVESTMENTS (112.88%) 420,643,321
-------------
OTHER ASSETS AND LIABILITIES, NET (12.88%) (48,001,457)
-------------
TOTAL NET ASSETS (100.00%) $ 372,641,864
=============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENT
# Represents rate in effect on December 4, 1998.
+These securities having an aggregate value of $54,337,630 or 14.58% of the
Fund's 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 $57,645,617 of U.S. Treasury Bond, 8.125% thru 12.00%, due
08-15-13 thru 08-15-19, and U.S. Treasury Note, 8.875%, due 02-15-99 has been
segregated to cover the when issued commitments. The percentage shown for each
investment category is the total value of that category as a percentage of the
net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
(UNAUDITED)
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 consisted
of two series: John Hancock Sovereign U.S. Government Income Fund (the "Fund"),
and John Hancock Strategic Income Fund. The other series of the Trust is
reported in a separate financial statement. The investment objective of the Fund
was to provide as high a level of income as is consistent with long-term total
return by investing in securities issued, guaranteed or otherwise backed by the
United States government, its agencies or instrumentalities. The Trustees
authorized the issuance of multiple classes of shares of the Fund, designated as
Class A and Class B shares. The shares of each class represented an interest in
the same portfolio of investments of the Fund and had equal rights to voting,
redemptions, dividends, and liquidation, except that certain expenses, subject
to the approval of the Trustees, may have been applied differently to each class
of shares in accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class which bore
distribution and service expenses under terms of a distribution plan had
exclusive voting rights to that distribution plan.
On November 11, 1998, the shareholders of the Fund approved a plan of
reorganization between the Fund and the John Hancock Government Income Fund
("Government Income Fund") providing for the transfer of substantially all the
assets and liabilities of the Fund to the Government Income Fund in exchange
solely for the shares of beneficial interest of the Government Income Fund.
After this transaction and as of the close of business on December 4, 1998, the
Fund was terminated. The financial statements herein reflect the position of the
Fund prior to the exchange of net assets and termination of the Fund.
Significant accounting policies of the Fund were as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio were valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
were valued at amortized cost, which approximated market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., participated in a joint repurchase agreement transaction. Aggregate cash
balances were invested in one or more repurchase agreements, whose underlying
securities were obligations of the U.S. government and/or its agencies. The
Fund's custodian bank received delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser was responsible for ensuring
that the agreement was fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions were recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments were determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund qualified as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and was
not be subject to federal income tax on taxable income which was distributed to
shareholders. Therefore, no federal income tax provision was required. For
federal income tax purposes, at December 4, 1998, the Fund had $38,162,046 of
capital loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. These carryforwards will be
transferred to Government Income Fund and if such carryforwards are used, no
capital gains distribution will be made. The carryforwards expire as follows:
May 31, 2002 - $5,692,773, May 31, 2003 - $26,193,155, May 31, 2004 - $3,597,046
and May 31, 2005 - $2,679,072.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
was recorded on the ex-dividend date. Interest income on investment securities
was recorded on the accrual basis.
The Fund recorded all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions were determined
in conformity with income tax regulations, which could have differed from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares were calculated in the same manner, at the same
time and were in the same amount, except for the effect of expenses that could
have been applied differently to each class.
<PAGE>
DISCOUNT ON SECURITIES The Fund accreted discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) were determined at the Fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, if any, were calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporated estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
EXPENSES The majority of the expenses of the Trust were directly identifiable to
an individual fund. Expenses which were not readily identifiable to a specific
fund were allocated in such manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
BANK BORROWINGS The Fund was permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might have required the untimely disposition of securities. These agreements
enabled the Fund to participate with other funds managed by the Adviser in
unsecured lines of credit with banks which permitted borrowings up to $800
million, collectively. Interest was charged to each 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 lines of credit, was allocated among the
participating funds. The Fund had no borrowing activity for the period ended
December 4, 1998.
FINANCIAL FUTURES CONTRACTS The Fund could buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest 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 entered into a financial futures contract, it was required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract was valued at the
official settlement price on the board of trade or U.S. commodities exchange on
which it traded. Subsequent payments, known as "variation margin," to and from
the broker were made on a daily basis as the market price of the financial
futures contract fluctuated. Daily variation margin adjustments, which arose
from this "mark to market," were recorded by the Fund as unrealized gains or
losses.
When the contracts were closed, the Fund recognized a gain or loss.
Risks of entering into futures contracts included the possibility that there was
an illiquid market and/or that a change in the value of the contracts may not
have correlated with changes in the value of the underlying securities. In
addition, the Fund could have prevented from opening or realizing the benefits
of closing out futures positions because of position limits or limits on daily
price fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses could have been affected as a result of futures
contracts.
At December 4, 1998, there were no open positions in financial
futures contracts.
OPTIONS Listed options were valued at the last quoted sales price on the
exchange on which they were primarily traded. Over-the-counter options were
valued at the mean between the last bid and asked prices. Upon the writing of a
call or put option, an amount equal to the premium received by the Fund would
have been included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability would have been
subsequently marked to market to reflect the current market value of the written
option.
The Fund could have used option contracts to manage its exposure to the
stock market. Writing puts and buying calls would have tended to increase the
Fund's exposure to the underlying instrument and buying puts and writing calls
would have tended to decrease the Fund's exposure to the underlying instrument,
or have hedged other Fund investments.
The maximum exposure to loss for any purchased options would have been
limited to the premium initially paid for the option. In all other cases, the
face (or "notional") amount of each contract at value would reflect the maximum
exposure of the Fund in these contracts, but the actual exposure would be
limited to the change in value of the contract over the period the contract
remains open.
<PAGE>
Risks may have also arose if counterparties did not perform under the
contract's terms ("credit risk"), or if the Fund was unable to offset a contract
with a counterparty on a timely basis ("liquidity risk"). Exchange-traded
options had minimal credit risk as the exchanges acted as counterparties to each
transaction, and only present liquidity risk in highly unusual market
conditions. To minimize credit and liquidity risks in over-the-counter option
contracts, the Fund continuously monitored the creditworthiness of all its
counterparties.
At any particular time, except for purchased options, market or
credit risk may have involved 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 December
4, 1998.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the investment management contract, the Fund paid a monthly management fee
to the Adviser for a continuous investment program equivalent, on an annual
basis, to the sum of (a) 0.50% of the first $500,000,000 of the Fund's average
daily net asset value, and (b) 0.45% of the Fund's average daily net asset value
in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned
subsidiary of the Adviser, acted as a distributor for shares of the Fund. For
the period ended December 4, 1998, net sales charges received on sales of Class
A shares of the Fund amounted to $93,152. Of this amount, $11,597 was retained
and used for printing prospectuses, advertising, sales literature, and other
purposes, $15,946 was paid as sales commissions to unrelated broker-dealers and
$65,609 was paid as sales commissions to sales personnel of Signator Investors,
a related broker-dealer. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company (JHMLICo"), is the indirect sole shareholder of Signator
Investors.
Class B shares which were redeemed within six years of purchase were
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.00% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC were paid to JH Funds and were used in whole or in part to defray
its expenses for providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended December 4,
1998 the contingent deferred sales charges received by JH Funds amounted to
$89,972.
In addition, to reimburse JH Funds for the services it provided as
distributors of shares of the Fund, the Fund had adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund made payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may have been service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances
The Fund had a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund paid transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund had an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione were directors and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees was
borne by the Fund. The unaffiliated Trustees could have elected to defer for tax
purposes their receipt of this compensation under the John Hancock Group of
Funds Deferred Compensation Plan. The Fund made investments into other John
Hancock funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation liability
were recorded on the Fund's books as an other asset. The deferred compensation
liability and the related other asset were always equal and were marked to
marketed on a periodic basis to reflect any income earned by the investment as
well as any unrealized gains or losses. At December 4, 1998, the Fund's
investments to cover the deferred compensation liability had unrealized
appreciation of $2,740.
<PAGE>
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of the U.S.
government and its agencies, other than short-term securities, during the period
ended December 4, 1998 aggregated $531,151,335 and $510,544,690, respectively.
The cost of investments owned at December 4, 1998 (excluding corporate
savings account) for federal income tax purposes was $409,427,038. Gross
unrealized appreciation and depreciation of investments aggregated $12,263,708
and $1,048,316, respectively, resulting in net unrealized appreciation of
$11,215,392.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the period ended December 4, 1998, the Fund had reclassified amounts to
reflect a decrease in accumulated net realized loss on investments of $97,455,
an increase in distributions in excess of net investment income of $9,172 and a
decrease in capital paid-in of $88,283. This represented the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of December 4, 1998. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which had no impact on the net asset
value of the Fund, were primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax rules
versus generally accepted accounting principles. The calculation of net
investment income per share in the financial highlights excluded these
adjustments.
