As filed with the Securities and Exchange Commission on July 20, 1999.
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 August 20, 1999
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 SHORT-TERM STRATEGIC INCOME FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT STRATEGIC INCOME
FUND; ADDITIONAL INFORMATION ABOUT SHORT-TERM
STRATEGIC 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>
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
August 27, 1999
Dear Fellow Shareholder:
I am writing to ask for your vote on an important matter that will affect your
investment in John Hancock Short-Term Strategic Income Fund.
You may be aware that in addition to your fund, John Hancock Funds offers a
similar multi-sector bond fund called John Hancock Strategic Income Fund.
Strategic Income Fund seeks high current income through flexible investments in
international fixed-income securities, U.S. government issues and high-yielding
corporate bonds.
After careful consideration, your fund's trustees have unanimously agreed that
merging your fund into John Hancock Strategic Income Fund will offer you a
similar investment objective and strategy with lower operating expenses. This
proposed 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
1
<PAGE>
Q: What are the benefits of merging Short-Term Strategic Income Fund into
Strategic Income Fund?
A: Strategic Income Fund is more widely recognized in the mutual fund
marketplace than your fund, which has made it harder for your Fund to raise
assets and reduce expenses. Your trustees firmly believe this merger will allow
you to continue investing for a high level of current income at a lower expense.
Strategic Income Fund's asset base after the merger is projected to be $1,244
million. This is significantly larger than Short-Term Strategic Income Fund's
pre-merger asset base of $61 million and should allow for lower operating
expenses than your fund. Following the merger, annual expense ratios are
projected to be 0.89% for Class A shareholders, down from 1.33%, and 1.59% for
Class B and Class C shareholders, down from 2.03%. Expected lower expenses
should help keep more of your money invested, which often helps bolster an
investment's total return over time.
Q: How does Strategic Income Fund's strategy compare with that of Short-Term
Strategic Income Fund?
A: Both funds seek a high level of current income through investments in foreign
government and corporate debt securities from developed and emerging markets,
U.S. government and agency securities and U.S. corporate debt securities. Unlike
the Short-Term Strategic Income Fund, the Strategic Income Fund has a wider
investment scope which allows the fund to invest in the corporate high-yield
sector and junk bonds rated as low as CC/Ca and their unrated equivalents. These
bonds entail some credit risk, which the Strategic Income Fund minimizes by
applying sound credit research and a relatively conservative investment
approach. This strategy also allows the Strategic Income Fund to seek higher
current income than your fund.
Short-Term Strategic Income Fund maintains an average portfolio quality rating
of A, which is an investment-grade rating, and an average portfolio maturity of
three years or less. While the Strategic Income Fund generally intends to keep
its average credit quality in the investment-grade range, there is no limit on
the fund's average maturity. Over the past three years, the Strategic Income
Fund has maintained an average maturity between 8 to 12 years. While these are
less conservative policies, management believes they offer greater
diversification and therefore can potentially minimize investment risk.
2
<PAGE>
Q: Who manages the Strategic Income Fund?
A: Both funds are managed by the same team of portfolio managers, led by
Frederick L. Cavanaugh, Jr. A senior vice president, Mr. Cavanaugh has more
than 25 years of investment experience and has managed Strategic Income Fund
since its inception on August 18, 1986. His expertise includes the high-yield
bond market and international economies.
Q: How has Strategic Income Fund performed?
A: Although past performance does not necessarily guarantee future results,
Strategic Income Fund has been a steady performer over the years. The fund's
Class A shares have posted average annual total returns of -1.86% over the past
year, 8.89% over the past five years and 7.80% over the past ten years at public
offering price as of May 31, 1999. The fund's Class B shares have posted average
annual total returns of -2.70% over the past year, 8.87% over the past five
years and 7.88% since inception on October 4, 1993. The fund's Class C shares
have posted an average annual total return of 1.09% over the past year and 2.07%
since inception on May 1, 1998.* This performance has earned Strategic Income
Fund a (4-star) rating as of May 31, 1999.** To review Strategic Income Fund in
more detail, please refer to the John Hancock Income Funds prospectus and
Strategic Income Fund's most recent annual report, all of which are 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 October 13, 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 Short-Term Strategic Income Fund shares will
be converted to Strategic Income Fund shares, using the funds' net asset value
share prices, excluding sales charges, as of the close of trading on October 22,
1999. This conversion will not affect the total dollar value of your investment.
3
<PAGE>
Q: Will the merger have tax consequences?
Although taxable dividends and capital gains will be paid prior to the merger,
the merger itself is a non-taxable event and does not need to be reported on
your 1999 tax return.
* Performance figures assume that distributions are reinvested and reflect a
maximum sales charge on Class A shares of 4.5% and the applicable contingent
deferred sales charge (CDSC) on Class B shares and Class C shares. The CDSC on
Class B shares 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.
Class C shares held for less than one year are subject to a 1% CDSC. 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.
**Morningstar proprietary ratings reflect historical risk-adjusted performance
as of 5/31/99. The ratings are subject to change every month. Past performance
is no guarantee of future results. Morningstar ratings are calculated from the
funds' three-, five- and ten-year average annual returns (if applicable) in
excess of 90-day Treasury bill returns with appropriate fee adjustments, and a
risk factor that reflects fund performance below 90-day T-bill returns.
Strategic Income Fund Class B received three and five stars for the three- and
five-year periods, respectively. Strategic Income Fund Class A received three
stars, five stars and two stars for the three-, five- and ten-year periods,
respectively. The top 10% of the funds in an investment class receive five
stars, the next 22.5% receive four stars, the next 35% receive three stars, the
next 22.5% receive two stars and the bottom 10% receive one star. The fund was
rated among 1,536, 1,085 and 369 taxable bond funds for the three-, five- and
ten-year periods, respectively.
4
<PAGE>
JOHN HANCOCK SHORT-TERM STRATEGIC INCOME FUND
(a series of John Hancock Investment Trust III)
101 Huntington Avenue
Boston, MA 02199
NOTICE OF MEETING OF SHAREHOLDERS
SCHEDULED FOR OCTOBER 13, 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 Short-Term Strategic Income Fund:
A shareholder meeting for your fund will be held at 101 Huntington Avenue,
Boston, Massachusetts on Wednesday, October 13, 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 August 11, 1999 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
August 27, 1999
020PX 8/99
5
<PAGE>
PROXY STATEMENT OF
JOHN HANCOCK SHORT-TERM STRATEGIC INCOME FUND
(a series of John Hancock Investment Trust III)
PROSPECTUS FOR
CLASS A, CLASS B AND CLASS C 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 Strategic Income Fund will issue Class C shares to your fund in an
amount equal to the value of your fund's Class C shares. These
shares will be distributed to your fund's Class C 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.
<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 Strategic Income Fund In the same envelope as this proxy
dated April 1, 1999. statement and prospectus.
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 August 27, 1999. It contains
additional information about your fund
and Strategic Income Fund.
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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 August 27, 1999.
2
<PAGE>
TABLE OF CONTENTS
Page
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INTRODUCTION 4
SUMMARY 4
INVESTMENT RISKS 17
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION 19
CAPITALIZATION 26
ADDITIONAL INFORMATION ABOUT
THE FUNDS' BUSINESSES 27
BOARDS' EVALUATION AND RECOMMENDATION 28
VOTING RIGHTS AND REQUIRED VOTE 28
INFORMATION CONCERNING THE MEETING 29
OWNERSHIP OF SHARES OF THE FUNDS 31
EXPERTS 31
AVAILABLE INFORMATION 32
EXHIBITS
A - Agreement and Plan of Reorganization between John Hancock Short-Term
Strategic Income Fund and John Hancock Strategic Income Fund (attached to
this proxy statement).
3
<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, October 13, 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 August 27, 1999.
Who is Eligible to Vote?
Shareholders of record on August 11, 1999 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.
4
<PAGE>
Comparison of Short-Term Strategic Income Fund to Strategic Income Fund
<TABLE>
<CAPTION>
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Short-Term Strategic Strategic Income
Income
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<S> <C> <C>
Business: A diversified series of John A diversified series of John
Hancock Investment Trust III. The Hancock Strategic Series. The
trust is an open-end investment trust is an open-end investment
company organized as a company organized as a
Massachusetts business trust. Massachusetts business trust.
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Net assets as of May $61 million. $1,183 million.
31, 1999:
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Investment adviser John Hancock Advisers, Inc. John Hancock Advisers, Inc.
and portfolio
managers: Fredrick L. Cavanaugh, Jr. Fredrick L. Cavanaugh, Jr.
-Senior vice pres. of adviser -Senior vice pres. of adviser
-Joined team in 1998 -Joined team in 1986
-Joined adviser in 1986 -Joined adviser in 1986
-Began career in 1975 -Began career in 1975
Arthur N. Calavritinos, CFA Arthur N. Calavritinos, CFA
-Vice pres. of adviser -Vice pres. of adviser
-Joined team in 1998 -Joined team in 1995
-Joined adviser in 1988 -Joined adviser in 1988
-Began career in 1986 -Began career in 1986
- -------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
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Short-Term Strategic Strategic Income
Income Fund Fund
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<S> <C> <C>
Investment objective/ The fund seeks a high level of The fund seeks a high level of
primary investments: current income. This objective current income. This objective
cannot be changed without cannot be changed without
shareholder approval. shareholder approval.
The fund invests primarily in: The fund invests primarily in:
o foreign government and o foreign government and
corporate debt securities corporate debt securities
from developed and emerging from developed and emerging
markets; markets;
o U.S. government and agency o U.S. government and agency
securities; securities;
o U.S. corporate debt o U.S. junk bonds.
securities.
Under normal circumstances, the Under normal
fund invests in all three of these circumstances, the fund invests in
sectors, but may invest up to 100% all three of these sectors, but may
of assets in any one sector. invest up to 100% of assets in any
one sector.
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Foreign debt Each fund may invest in foreign debt securities without any percentage
securities: limit.
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Junk bonds: The fund may invest up to 67% of The fund may invest without limit
assets in junk bonds rated as low in junk bonds rated as low as CC/Ca
as B and their unrated and their unrated equivalents
equivalents.
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Average portfolio The fund maintains an average The fund generally intends to keep
quality rating: portfolio quality rating of A, its average credit quality in the
which is an investment-grade investment-grade range.
rating.
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Average portfolio The fund maintains an average There is no limit on the fund's
maturity: portfolio maturity of three years average maturity.
or less.
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Equity securities: The fund typically does not invest The fund may invest up to 10% of
in equity securities. net assets in U.S. or foreign
equity securities.
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</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
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Short-Term Strategic Strategic Income
Income Fund Fund
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<S> <C> <C>
Diversification: The fund became diversified in The fund is diversified and cannot
April, 1999. invest more than 5% of total assets
in securities of a single issuer,
except that the fund may invest
up to 25% of assets in securities
of a single foreign government.
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Pay-in-kind, delayed Each fund may invest in pay-in-kind, delayed and zero coupon debt
and zero coupon debt securities.
securities:
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Illiquid securities: Each fund may invest up to 15% of net assets in illiquid
securities.
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Structured Each fund may invest without limit in structured securities, which
securities: include indexed and/or leveraged mortgage-backed and other debt
securities.
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Mortgage- Each fund may invest without limit in mortgage-backed and
backed and asset-backed securities.
asset-backed
securities:
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Currency Each fund may enter into currency contracts
contracts: for hedging or speculative purposes.
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Financial futures Each fund may invest without limit in financial futures, options on
and related options; futures and options on securities and indices.
options on
securities and
indices:
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When-issued and Both funds may purchase when-issued securities and purchase or
forward commitment sell securities in forward commitment transactions.
transactions:
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Short-term trading: Neither fund is subject to any limitations on short-term
trading.
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Repurchase Both funds may invest without limitation in repurchase agreements.
agreements:
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Securities lending: The fund may lend portfolio The fund may lend portfolio
securities up to 30% of total securities up to 33 1/3% of total
assets. assets.
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</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
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Short-Term Strategic Strategic Income
Income Fund Fund
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<S> <C> <C>
Borrowing and reverse The fund will not borrow money or The fund may borrow money in an
repurchase agreements: enter into reverse repurchase amount that does not exceed 33% of
agreements except from banks its total assets.
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.
The fund will not purchase securities
for investment while borrowings
equaling 5% or more of the Fund's
total assets are outstanding.
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</TABLE>
<TABLE>
<CAPTION>
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CLASSES OF SHARES
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Short-Term Strategic Strategic Income
Income Fund Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A sales charges and Class A shares are offered with front-end Class A shares are offered with
12b-1 fees: sales charges ranging from 2% to 3% of front-end sales charges ranging from
the fund's offering price, depending on 2% to 4.5% of the fund's offering
the amount invested. Class A shares are price, depending on the amount
subject to a 12b-1 distribution fee equal invested. Class A shares are subject
to 0.30% annually of average net assets to a 12b-1 distribution fee equal to
0.30% annually of average net assets.
- ---------------------------------------------------------------------------------------------------------------
The Class A shares of both funds have the following characteristics in common:
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.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
CLASSES OF SHARES
- ---------------------------------------------------------------------------------------------------------------
Short-Term Strategic Strategic Income
Income Fund Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class B sales charges and Class B shares are offered without a Class B shares are offered without a
12b-1 fees: front-end sales charge, but are subject front-end sales charge, but are
to a contingent deferred sales charge subject to a contingent deferred
(CDSC) if sold within four years after sales charge (CDSC) if sold within
purchase. The CDSC ranges from 1.00% to six years after purchase. The CDSC
3.00% depending on how long the shares ranges from 1.00% to 5.00% depending
are held. No CDSC is imposed on shares on how long the shares are held. No
held more than four years. CDSC is imposed on shares held more
than six years.
Class B shares are subject to 12b-1
distribution and service fees equal to Class B shares are subject to 12b-1
1.00% annually of average net assets. distribution and service fees equal
to 1.00% annually of average net
CDSCs are waived for the categories of assets.
investors listed in the funds' prospectus.
CDSCs are waived for the categories
Class B shares automatically convert to of investors listed in the funds'
Class A shares after five years. prospectus.
Class B shares automatically convert
to Class A shares after eight years.
- ---------------------------------------------------------------------------------------------------------------
Class C sales The Class C shares of both funds have the same characteristics and fee
charges and 12b-1 structure.
fees: o Class C shares are offered without a front-end sales charge, but are
subject to a contingent deferred sales charge of 1.00% on shares sold
within one year of purchase.
o Class C shares are subject to 12b-1 distribution and service fees equal
to 1.00% annually of average net assets.
o No automatic conversion to Class A shares, so annual expenses continue
at the Class C level throughout the life of the investment.
- ---------------------------------------------------------------------------------------------------------------
12b-1 fees: o 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.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
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BUYING, SELLING AND EXCHANGING SHARES
- -----------------------------------------------------------------------------------------------
Both Short-Term Strategic Income Fund and Strategic Income Funds
- -----------------------------------------------------------------------------------------------
<S> <C>
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 June 11, 1999, investors will not be
allowed to open new accounts in Short-Term Strategic Income Fund but
can add to existing accounts.
- -----------------------------------------------------------------------------------------------
Minimum initial $1,000 for non-retirement accounts and $250 for retirement accounts
investment: 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.
- -----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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, 1999, 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.
Short-Term Strategic Income Fund
Shareholder transaction expenses Class A Class B Class C
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none none
Maximum sales charge imposed on
reinvested dividends none none none
Maximum deferred sales charge none(1) 3.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B Class C
Management fee 0.65% 0.65% 0.65%
12b-1 fee 0.30% 1.00% 1.00%
Other expenses 0.38% 0.38% 0.38%
---- ---- ----
Total fund operating expenses 1.33% 2.03% 2.03%
Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $431 $709 $1,007 $1,853
Class B shares
Assuming redemption
at end of period $506 $837 $1,093 $1,937
Assuming no redemption $206 $637 $1,093 $1,937
Class C shares
Assuming redemption
at end of period $306 $637 $1,093 $2,358
Assuming no redemption $206 $637 $1,093 $2,358
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
11
<PAGE>
Strategic Income Fund
Shareholder transaction expenses Class A Class B Class C
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none none
Maximum sales charge imposed on
Reinvested dividends none none none
Maximum deferred sale 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) Class A Class B Class C
Management fee 0.38% 0.38% 0.38%
12b-1 fee 0.30% 1.00% 1.00%
Other expenses 0.21% 0.21% 0.21%
---- ---- ----
Total fund operating expenses 0.89% 1.59% 1.59%
Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $537 $721 $921 $1,497
Class B shares
Assuming redemption
at end of period $662 $802 $1,066 $1,702
Assuming no redemption $162 $502 $866 $1,702
Class C Shares
Assuming redemption at
end of period $262 $502 $866 $1,889
Assuming no redemption $162 $502 $866 $1,889
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
12
<PAGE>
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 May 31, 1998. The
expenses shown in the table are based on fees and expenses incurred during the
twelve months ended May 31, 1999, 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.
Strategic Income Fund (PRO FORMA)
(Assuming reorganization with Short-Term Strategic Income Fund)
Shareholder transaction expenses Class A Class B Class C
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none none
Maximum sales charge imposed on
Reinvested dividends none none none
Maximum deferred sale charge none(1) 5.00%(2) 1.00%
Redemption fee (3) none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B Class C
Management fee 0.37% 0.37% 0.37%
12b-1 fee 0.30% 1.00% 1.00%
Other expenses 0.22% 0.22% 0.22%
---- ---- ----
Total fund operating expenses 0.89% 1.59% 1.59%
Pro Forma Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $537 $721 $921 $1,497
Class B shares
Assuming redemption
at end of period $662 $802 $1,066 $1,702
Assuming no redemption $162 $502 $866 $1,702
Class C Shares
Assuming redemption
At end of period $262 $502 $866 $1,889
Assuming no redemption $162 $502 $866 $1,889
13
<PAGE>
(1) Except for investments of $1 million or more.
(2) Class B Strategic Income Fund shares received by Class B Short-Term
Strategic Income Fund shareholders in the reorganization will retain their
lower maximum sales charge and shorter conversion period. Strategic Income
Fund Class B shares purchased after the reorganization will be subject to
Strategic Income Fund's maximum deferred sales change of 5.00% and its
longer conversion period (eight years) and longer contingent deferred
sales charge period (six years).
(3) 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 October 22, 1999, but may occur on any later date before April
30, 2000. 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.
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 Strategic Income Fund will issue to your fund Class C shares in an
amount equal to the aggregate net asset value of your fund's Class C
shares. These shares will immediately be distributed to your fund's
Class C shareholders in proportion to their holdings on the
reorganization date. As a result, Class C shareholders of your fund
will end up as Class C shareholders of Strategic Income Fund.
o After the reorganization is over, your fund will be terminated.
14
<PAGE>
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.
The following diagram shows how the reorganization would be carried out.
[The following information was represented as a flow chart in the
printed materials.]
- ------------------------- ---------------------------
Short-Term Strategic Short-Term Strategic Strategic Income Fund
Income Fund transfers Income Fund receives assets &
assets & liabilities to assets and assumes liabilities of
Strategic Income Fund liabilities Short-Term Strategic
- ------------------------- Income Fund
---------------------------
- ------------- --------------- --------------- ---------------
Class A Class B & C Issues Class Issues Class
shareholders shareholders B & C A Shares
Shares
- ------------- --------------- --------------- ---------------
Your fund receives Strategic Income Fund
Class A, B & C shares and distributes
them to your fund's Class A, B & C shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- -------------------------------------------------------------
Fund Asset Breakpoints Short-Term
Strategic Income
- -------------------------------------------------------------
First $500,000,000 0.65%
- -------------------------------------------------------------
Amount over $500,000,000 0.60%
- -------------------------------------------------------------
15
<PAGE>
- -----------------------------------------------------------
Strategic
Fund Asset Breakpoints Income
- -----------------------------------------------------------
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%
- -----------------------------------------------------------
Strategic Income Fund's management fee rate of 0.38% and its pro forma
management fee rate of 0.37% are substantially lower than your fund's management
fee rate of 0.65%. Strategic Income Fund's other expenses of 0.21% and its pro
forma other expenses of 0.22% are also substantially lower than your fund's
other expenses of 0.38%. Both funds have the same 12b-1 fees for Class A shares
(0.30%) and the same 12b-1 fees for Class B and Class C shares (1.00%) although
your fund's Class B distribution payment last year was 0.96%. Strategic Income
Fund's current annual Class A expense ratio (equal to 0.89% of average net
assets) and its pro forma Class A expense ratio (equal to 0.89% of average net
assets) are substantially lower than your fund's current Class A expense ratio
(equal to 1.33% of average net assets). Strategic Income Fund's current annual
Class B and Class C expense ratio (equal to 1.59% of average net assets) and its
pro forma Class B and Class C expense ratio (equal to 1.59% of average net
assets) are also substantially lower than your fund's current Class B and Class
C expense ratio (equal to 2.03% 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Short-Term Strategic Income Fund Strategic Income Fund
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Risks of debt securities The value of the funds' portfolios will change in response 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 investment The value of below investment grade debt securities, also called junk
grade debt securities bonds, fluctuates more than that of higher rated debt 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 these securities than the market
price and liquidity of higher rated securities because economic
conditions are perceived to have a closer relationship to the ability
of a lower rated issuer to meet its obligations.
-------------------------------------------------------------------------
Your fund may invest up to 67% of Strategic Income Fund may invest
its assets in these securities. without limit in these securities.
To the extent that the fund To the extent that the fund invests
invests in these securities, it in these securities, it is exposed
is exposed to these risks. to these risks.
- -----------------------------------------------------------------------------------------------------
Risks of equity securities The market value of equity securities may move up and down, 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 typically does not Strategic Income Fund may invest up
invest in equity securities. to 10% of its assets in equity
securities. To the extent that the
fund invests in these securities,
it is exposed to these risks.
- -----------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------
Diversification risks Both funds are diversified and are not subject to the risk of
non-diversification.
- -------------------------------------------------------------------------------------------------------------
Foreign Securities The funds' investments in foreign securities are subject to the risks of adverse
and currency risks foreign government actions, political 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.
- -------------------------------------------------------------------------------------------------------------
Risks of restricted and The funds' investments in restricted and illiquid securities may be difficult or
illiquid securities impossible to sell at a desirable time or a fair price. Restricted and illiquid
securities also present a greater risk of inaccurate valuation.
- -------------------------------------------------------------------------------------------------------------
Risks of These instruments are subject to the risk that the issuer will default or
asset-backed and otherwise fail to meet its obligations. In addition, mortgage-backed
mortgage-backed securities are subject to the risk that the life of the security will be
securities 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 derivative Most of these derivative instruments involve leverage, which increases market
instruments, including risks. Leverage magnifies gains and losses on derivatives relative to changes
financial futures, in the value of underlying assets. If a derivative is used for hedging
options on futures, purposes, changes in the value of the derivative may not match those of the
securities and index hedged asset. Over- the- counter derivatives may be illiquid or hard to value
options and structured accurately. In addition, the other party may default on its obligations. If
securities markets for underlying assets do not move in the right direction, a fund's
performance may be worse than if it had not used derivatives.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
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:
o The reorganization is scheduled to occur at 5:00 p.m., Eastern time,
on October 22, 1999, but may occur on any later date before April
30, 2000. 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 Strategic Income Fund will issue to your fund Class C shares in an
amount equal to the aggregate net asset value of your fund's Class C
shares. As part of the liquidation of your fund, these shares will
immediately be distributed to Class C shareholders of record of your
fund in proportion to their holdings on the reorganization date. As
a result, Class C shareholders of your fund will end up as Class C
shareholders of Strategic Income Fund.
o After the reorganization is over, your fund will be terminated.
19
<PAGE>
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. 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.
Second, Strategic Income Fund Class A shares have performed better than Class A
shares of your fund over the past 1, 3 and 5 year periods, and Strategic Income
Fund Class B shares have performed better than Class B shares of your fund over
the past 1, 3 and 5 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 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.
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 larger than your fund, the trustees believe 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 benefit from the reorganization. For example, the
adviser might realize timesavings 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.
20
<PAGE>
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.
Strategic Income Fund's management fee rate of 0.38% and pro forma management
fee rate of 0.37%, are substantially lower than your fund's management fee rate
of 0.65%. Strategic Income Fund's other expenses of 0.21% and its pro forma
other expenses of 0.22%, are also substantially lower than your fund's other
expenses of 0.38%. Both funds have the same 12b-1 fees for Class A shares
(0.30%) and the same 12b-1 fees for Class B and Class C shares (1.00%), although
your fund's Class B distribution payment last year was 0.96%. Strategic Income
Fund's current annual Class A expense ratio and pro forma Class A expense ratio
(both equal to 0.89% of average net assets) are substantially lower than your
fund's current Class A expense ratio (equal to 1.33% of average net assets).
Strategic Income Fund's current annual Class B and Class C expense ratio and pro
forma Class B and Class C expense ratio (both equal to 1.59% of average net
assets) are also substantially lower than your fund's current Class B and Class
C expense ratio (equal to 2.03% of average net assets).
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.
21
<PAGE>
Comparative Performance. The trustees also took into consideration the relative
performance of your fund and Strategic Income Fund.
- --------------------------------------------------------------------------------
Average Annual Total
Return Strategic Income
(without including sales
charges) Class A Class B Class C
- --------------------------------------------------------------------------------
1 year ended 5/31/99 2.77% 2.06% 2.04%
- --------------------------------------------------------------------------------
3 years ended 5/31/99 9.60% 8.84% 2.07%**
- --------------------------------------------------------------------------------
5 years ended 5/31/99 9.91% 9.15%
- --------------------------------------------------------------------------------
10 years ended 5/31/99 8.29% 8.01%*
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Short-Term
Return Strategic Income
(without including sales
charges) Class A Class B Class C
- --------------------------------------------------------------------------------
1 year ended 5/31/99 -0.30% -0.95% 0.99%+++
- --------------------------------------------------------------------------------
3 years ended 5/31/99 4.13% 3.47%
- --------------------------------------------------------------------------------
5 years ended 5/31/99 5.78% 5.08%
- --------------------------------------------------------------------------------
10 years ended 5/31/99 4.95%+ 4.64%++
- --------------------------------------------------------------------------------
*Since Class B shares began operations on October 4, 1993.
**Since Class C shares began operations on May 1, 1998
+Since Class A Shares began operation January 3, 1992.
++Since Class B Shares began operations December 28, 1990.
+++Since Class C Shares began operations on March 1, 1999.
Your fund's Class A, Class B and Class C shares performance has lagged behind
the performance of Strategic Income Fund for all periods shown above.
22
<PAGE>
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%, 1.00% and 1.00% of average daily net assets attributable to Class
A shares, Class B and Class C shares, respectively) will not increase.
The following table shows the actual and pro forma unreimbursed distribution and
shareholder service expenses of Class A, Class B and Class C shares 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>
- -----------------------------------------------------------------------------------------------------------
Unreimbursed
Distribution and Short-Term Strategic Income Strategic Income
Shareholder Service
Expenses --------------------------------------------------------------------------------
Class A Class B Class C Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Actual expenses as of $229,156 $2,755,533 0.00 $2,526,315 $16,319,321 $121,664
May 31, 1999 0.45% 14.64% 0.00% 0.49% 2.95% 1.22%
- -----------------------------------------------------------------------------------------------------------
Pro forma combined $2,755,471 $19,074,854 $121,664
expenses as of 0.49% 3.33% 1.21%
May 31, 1999
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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%, 100%
and 1.00% of average daily net assets attributable to Class A, Class B and Class
C shares, respectively.
John Hancock Funds, Inc. hopes to recover unreimbursed distribution and
shareholder service expenses for Class B and Class C shares over an extended
period of time. However, if Strategic Income Fund's board terminates either
class's 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.
23
<PAGE>
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;
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.
24
<PAGE>
Additional Tax Considerations
As of May 31, 1999, Short-Term Strategic Income Fund had capital loss carryovers
of approximately $28,893,267 which expire as follows: October 31, 2000 -
$16,879,029; October 31, 2001 - $3,127,414; October 31, 2002 - $2,774,082;
October 31, 2003 - $5,103,942; and October 31, 2006 - $1,008,800. 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
Short-Term Strategic Income 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
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).
25
<PAGE>
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 $ 67,000 in total.
CAPITALIZATION
The following table sets forth the capitalization of each fund as of May 31,
1999, 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 1.0481 Class A Strategic Income Fund shares being issued
for each Class A share of your fund, approximately 1.0481 Class B Strategic
Income Fund shares being issued for each Class B share of your fund and
approximately 1.0480 Class C Strategic Income Fund shares being issued for each
Class C 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, 1999 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, 1999
Short-Term
Strategic Strategic
Income Income Pro Forma
Net Assets 61,230,619 $1,182,836,146 $1,244,066,765
Net Asset Value Per Share
Class A 7.82 $7.46 $7.46
Class B 7.82 $7.46 $7.46
Class C 7.82 $7.46 $7.46
Shares Outstanding
Class A 5,816,773 72,523,366 78,619,668
Class B 2,008,232 83,046,054 85,150,864
Class C 7,382 3,007,588 3,015,324
It is impossible to predict how many Class A shares, Class B shares or Class C
26
<PAGE>
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.
- --------------------------------------------------------------------------------
Type of Information Headings in Each Prospectus
- --------------------------------------------------------------------------------
Organization Fund Details: Business Structure
And operation
- --------------------------------------------------------------------------------
Investment objective Goal and Strategy, Main Risks, Fund Details:
and policies Business Structure
- --------------------------------------------------------------------------------
Portfolio Portfolio Management
Management
- --------------------------------------------------------------------------------
Investment adviser Overview: The Management Firm; Fund Details:
and distributor Business Structure
- --------------------------------------------------------------------------------
Expenses Your Expenses
- --------------------------------------------------------------------------------
Custodian and Fund Details: Business Structure
Transfer agent
- --------------------------------------------------------------------------------
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
or sale of shares are Calculated; Transaction Policies; Additional
Investor Services: Systematic Withdrawal Plan
- --------------------------------------------------------------------------------
Dividends, distributions Dividends and Account Policies
And taxes
- --------------------------------------------------------------------------------
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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 is 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 is 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.
- --------------------------------------------------------------------------------
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.
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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 $ 2,000.
Revoking Proxies
A Short-Term Strategic Income 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 August 11, 1999, _______ Class A, Class B and Class C shares of beneficial
interest of your fund were outstanding. Only shareholders of record on August
11, 1999 (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.
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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.
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.
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OWNERSHIP OF SHARES OF THE FUNDS
To the knowledge of the fund, as of August 11, 1999, no person owned of record
or beneficially 5% or more of the outstanding Class A, Class B or Class C shares
of your fund or of the outstanding Class A, Class B, or Class C shares of
Strategic Income Fund.
As of August 11, 1999, the following person owned of record or beneficially 5%
or more of the funds' outstanding shares:
- ----------------------------------------------------------------------
Names and Addresses of Owners of More Short-Term Strategic
Than 5% of Shares Income Fund
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Names and Addresses of Owners of More Strategic Income Fund
Than 5% of Shares
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
As of August 11, 1999, 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
for the period ended May 31, 1999 and Short-Term Strategic Income Fund for the
period ended October 31, 1998 are incorporated by reference into this proxy
statement and prospectus. The financial statements and financial highlights as
of October 31, 1998 for Short-Term Strategic Income Fund and as of May 31, 1999
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.
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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.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 9th day
of June, 1999, 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 Short-Term Strategic Income 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, Class B, and Class C 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, Class B and/or Class
C shares of beneficial interest of the Acquired Fund, as of the close of
business on October 22, 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 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).
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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,
Acquired Fund shareholders who own Class B shares of the Acquired Fund
will receive Class B Acquiring Fund Shares, and Acquired Fund
shareholders who own Class C shares of the Acquired Fund will receive
Class C 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.
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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, Class B and Class C Acquiring Fund
Shares and the net values of the assets and liabilities of the Acquired
Fund attributable to its Class A, Class B and Class C 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, Class B, and Class C Acquiring Fund Shares shall
be computed by the Acquiring 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, Class B, and
Class C 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.
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<PAGE>
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be October 22, 1999 or such other date on or
before April 30, 2000 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 April 30, 2000, 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.
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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, 1998 and the
related statement of operations (copies of which have been furnished to
the Acquiring Fund) and the unaudited statements as of April 30, 1999,
present fairly in all material respects the financial condition of the
Acquired Fund as of October 31, 1998 and April 30, 1999 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;
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<PAGE>
(g) Since April 30, 1999, 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;
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(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 March 1, 1999 (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;
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<PAGE>
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A, Class B, and Class C shares of the
Acquiring Fund, each dated April 1, 1999, 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, 1999 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, 1999 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;
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<PAGE>
(h) Since May 31, 1999, 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;
(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.
39
<PAGE>
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.
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.
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<PAGE>
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
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;
41
<PAGE>
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.
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;
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<PAGE>
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:
(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;
43
<PAGE>
(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.
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.
44
<PAGE>
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.
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.
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<PAGE>
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.
46
<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:/s/ Anne C. Hodsdon
-----------------------------------------
Anne C. Hodsdon
President
JOHN HANCOCK INVESTMENT TRUST III on behalf of
JOHN HANCOCK SHORT-TERM STRATEGIC INCOME FUND
By:/s/ Susan S. Newton
------------------------------------------
Susan S. Newton
Vice President and Secretary
s:\agrcont\agreemnt\reorg\merger\99shortterm.doc
47
<PAGE>
Supplement to the John Hancock Growth Funds Prospectus dated June 1, 1999
Supplement to the John Hancock Income Funds Prospectus dated April 1, 1999
Supplement to the John Hancock Tax-Free Income Funds
Prospectus dated April 1, 1999
Supplement to the John Hancock Growth and Income Funds
Prospectus dated May 1, 1999
Supplement to the John Hancock Money Market Funds
Prospectus dated August 1, 1998
Supplement to the John Hancock International/Global Funds
Prospectus dated March 1, 1999
Supplement to the John Hancock Real Estate Fund
Prospectus dated May 1, 1999
The "CDSC waiver" section has been changed as follows:
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
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
6/11/99
<PAGE>
- --------------------------------------------------------------------------------
JOHN HANCOCK
Income Funds
[LOGO] Prospectus
April 1, 1999
- --------------------------------------------------------------------------------
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 Government Fund
Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
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 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
</TABLE>
<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] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
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 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 guaranteed by the FDIC
or any other government agency. 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
[Clip Art] 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 and
debentures as well as U.S. government and agency 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. There
is no limit on the fund's average maturity.
In managing the fund's portfolio, the managers concentrate 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 sector and industry allocations, the managers try 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 managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look 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 those of its peers. The fund may use certain derivatives (investments
whose value is based on indices, securities or currencies), 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 and other cases, the
fund might not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1988
Joined adviser in 1985
Began career in 1977
Benjamin Matthews
- ---------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1995
Began career in 1970
Anthony A. Goodchild
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1968
PAST PERFORMANCE
[Clip Art] 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 and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The information below was represented by a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
12.13% 6.68% 16.59% 8.19% 11.69% -2.74% 19.46% 4.05% 9.64% 7.50%
Best quarter: Q2 '95, 6.57% Worst quarter: Q1 '94, -2.71%
<PAGE>
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A 2.65% 6.36% 8.66% --
Class B - began 11/23/93 1.75% 6.24% -- 6.46%
Index 8.29% 7.16% 9.19% 6.89%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of U.S.
corporate bonds and Yankee bonds.
4
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk.
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.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly. Because Class C shares have a short history, their expenses are
based on Class B expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on
purchases as a % of purchase price 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
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
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
5
<PAGE>
Government Income Fund
GOAL AND STRATEGY
[Clip Art] 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. There is no limit on the fund's average
maturity.
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 the fund's portfolio, the managers consider 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 U.S.
government bonds, the fund may use them to manage volatility.
The fund may use certain derivatives (investments whose value is based on
indices, securities or currencies), 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 and other cases, the fund
might not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
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
PAST PERFORMANCE
[Clip Art] 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 and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The information below was represented by a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
10.55% 6.98% 15.78% 5.30% 7.65% -5.29% 17.71% 1.29% 8.67% 7.96%
Best quarter: Q3 '91, 6.57% Worst quarter: Q1 '94, -3.52%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class A
Class A - began 9/30/94 3.80% -- -- 7.79%
Class B 2.96% 5.49% 7.40% --
Index 8.49% 6.45% 8.34% 7.69%
Index: Lehman Brothers Government Bond Index, an unmanaged index of U.S.
Treasury and government agency bonds.
6
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk.
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.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 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 0.63% 0.63% 0.63%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.22% 0.22% 0.22%
Total fund operating expenses 1.10% 1.85% 1.85%
Management fee reduction
(at least until 4/1/00) 0.13% 0.13% 0.13%
Annual 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 $772 $1,017 $1,719
Class B - with redemption $675 $869 $1,189 $1,962
- without redemption $175 $569 $ 989 $1,962
Class C - with redemption $275 $569 $ 989 $2,159
- without redemption $175 $569 $ 989 $2,159
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
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
Class C
- ---------------------------------------
Ticker --
CUSIP 41014P797
Newspaper --
SEC number 811-3006
7
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
[Clip Art] 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. There is no
limit on the fund's average maturity.
In managing the fund's portfolio, the managers concentrate 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 managers
use top-down analysis to determine which industries may benefit from current and
future changes in the economy.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves.
The managers also look 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
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund 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 and other cases, the
fund might not achieve its goal.
================================================================================
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 1975
Janet L. Clay, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
PAST PERFORMANCE
[Clip Art] 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 and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The information below was represented by a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -5.05% -6.57% 33.84% 13.33% 21.40% -6.06% 14.53% 15.13% 16.88% -11.88%
Best quarter: Q1 '91, 13.37% Worst quarter: Q3 '98, -18.05%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class A
Class A - began 6/30/93 -15.21% 4.82% -- 5.67%
Class B -15.89% 4.75% 7.53% --
Index 1.87% 8.57% 10.55% 8.90%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yield
bonds.
8
<PAGE>
MAIN RISKS
[Clip Art] The major factors in the fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk.
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 Stock investments may go down in value due to stock market movements or
negative company or industry events.
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
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly. Because Class C shares have a short history, their expenses are
based on Class B expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 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
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
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
9
<PAGE>
Intermediate Government Fund
GOAL AND STRATEGY
[Clip Art] 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.
In managing the fund's portfolio, the managers consider interest rate trends to
determine which types of bonds to emphasize at a given time. The managers
typically favor mortgage-related securities when they anticipate that interest
rates will be relatively stable, and favor U.S. Treasuries at other times. The
managers also invest in non-Treasury securities to enhance the fund's current
yields.
The fund may use certain derivatives (investments 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 and other cases, the fund
might not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
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
PAST PERFORMANCE
[Clip Art] 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 and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The information below was represented by a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
6.56% 3.95% 1.07% 10.27% 3.32% 8.79% 8.58%
Best quarter: Q3 '98, 4.85% Worst quarter: Q1 '96, -1.35%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 12/31/91 5.33% 5.70% 5.57% --
Class B - began 12/31/91 4.77% 5.62% -- 5.32%
Index 1 8.17% 6.12% 6.44% 6.44%
Index 2 9.85% 7.18% 6.76% 6.76%
Index 1: Lipper Intermediate U.S. Government Index, an unmanaged index of
intermediate-term government bonds.
Index 2: Lehman Brothers Government Bond Index, an unmanaged index of U.S.
Treasury and government agency bonds.
10
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is interest rates. When
interest rates rise, bond prices generally fall. Generally, an increase in the
fund's average maturity will make it more sensitive to interest rate risk.
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.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 3.00% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 3.00% 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 0.25% 1.00% 1.00%
Other expenses 0.51% 0.51% 0.51%
Total fund operating expenses 1.16% 1.91% 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
Class C - with redemption $294 $600 $1,032 $2,233
- without redemption $194 $600 $1,032 $2,233
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
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
Class C
- ---------------------------------------
Ticker --
CUSIP 41014P789
Newspaper --
SEC number 811-3006
11
<PAGE>
Strategic Income Fund
GOAL AND STRATEGY
[Clip Art] 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
Although the fund invests in securities rated as low as CC/Ca and their unrated
equivalents, it generally intends to keep its average credit quality in the
investment-grade range. There is no limit on the fund's average maturity.
In managing the portfolio, the managers allocate assets among the three major
sectors based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends.
Within each sector, the managers look for securities that are appropriate for
the overall portfolio in terms of yield, credit quality, structure and industry
distribution. In selecting securities, relative yields and risk/reward ratios
are the primary considerations.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund 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 and other cases, the fund
might not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable dividends.
================================================================================
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior vice president of adviser
Joined team in 1986
Joined adviser in 1986
Began career in 1975
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
PAST PERFORMANCE
[Clip Art] 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 and index figures do not, and would be lower if they
did. All figures assume dividend reinvestment. Past performance does not
indicate future results.
[The information below was represented by a bar graph in the printed materials.]
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -0.41% -9.83% 33.58% 7.68% 13.93% -3.02% 18.73% 11.63% 12.67% 5.41%
Best quarter: Q1 '91, 15.09% Worst quarter: Q3 '90, -6.68%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A 0.61% 7.83% 7.94% --
Class B - began 10/4/93 -0.20% 7.78% -- 8.25%
Index 9.47% 7.30% 9.33% 6.89%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
12
<PAGE>
MAIN RISKS
[Clip Art] 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 generally fall. Generally, an increase in
the fund's average maturity will make it more sensitive to interest rate risk.
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, 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 Stock investments may go down in value due to stock market movements or
negative company or industry events.
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.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly. Because Class C shares have a short history, their expenses are
based on Class B expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 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
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
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
13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, including a Rule 12b-1 plan that
allows it to pay fees for the sale and distribution of its shares. Your
financial representative can help you decide which share class is best for you.
- --------------------------------------------------------------------------------
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
Government) or eight years (all other funds), thus reducing future annual
expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
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.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Sales charges - Intermediate 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
- --------------------------------------------------------------------------------
CDSC on shares
Your investment 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
- --------------------------------------------------------------------------------
CDSC on Intermediate CDSC on all
Years after Government shares other fund shares
purchase 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 6th year none none
- --------------------------------------------------------------------------------
Class C deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1st 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. You must submit additional documentation when
opening a trust, corporate or power of attorney account. For more
information, 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
[Clip Art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable to
"John Hancock Signature "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 slip
mail them to Signature is available, include a note
Services (address below). 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 the
application to your financial amount of your investment to:
representative, or mail it to First Signature Bank & Trust
Signature Services. Account # 900000260
Routing # 211475000
o Obtain your account number by
calling your financial Specify the fund name, your share
representative or Signature class, your account number and
Services. the name(s) in which the account
is registered. Your bank may
o Instruct your bank to wire the charge a fee to wire funds.
amount of your 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
[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 17
<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
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
[Clip Art] 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, call
your financial representative
or 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 sell o To verify that the
any amount (accounts of any telephone redemption
type). privilege is in place on an
account, or to request the
o Requests by phone to sell form to add it to an
up to $100,000 (accounts existing account, call
with telephone redemption Signature Services.
privileges).
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
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
[Clip Art] o Government Income, o Request checkwriting on your
Intermediate Government account application.
and Strategic Income
only. o Verify that the shares to be
sold were purchased more than
o Any account with 10 days earlier or were
checkwriting privileges. 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
- --------------------------------------------------------------------------------
[Clip Art]
Owners of individual, joint, sole o Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general o On the letter, the signatures and
partner 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 with rights o Letter of instruction signed by
of surviorship whose co-tenants are surviving tenant.
deceased.
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, o Call 1-800-225-5291 for
guardians and other sellers or account instructions.
types not listed above.
- ----------------------------------------
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 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
valui ng 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 Signature Services receives your
request in good order.
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 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.
- --------------------------------------------------------------------------------
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 the fund receives payment 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
short-term capital gains are taxable as ordinary income. Dividends from a fund's
long-term capital gains are taxable at a lower rate. Whether gains are
short-term or long-term depends on the fund's holding period. 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 issuers in which the funds invest,
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
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 fiscal year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
Bond 0.50%
Government Income 0.63%
High Yield Bond 0.52%
Intermediate 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.
------------------------------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
Asset
management
------------------------------------
Trustees
Oversee 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
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.29 $15.53 $13.90 $15.40
Net investment income (loss) 1.14 1.12 1.12 1.09
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.62 (1.55) 1.50 (0.50)
Total from investment operations 1.76 (0.43) 2.62 0.59
Less distributions:
Dividends from net investment income (1.14) (1.12) (1.12) (1.09)
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)
Net asset value, end of period $15.53 $13.90 $15.40 $14.90
Total investment return at net asset value(3) (%) 11.80 (2.75) 19.40 4.11
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204 1,416,116
Ratio of expenses to average net assets (%) 1.41 1.26 1.13 1.14
Ratio of net investment income (loss) to average net assets (%) 7.18 7.74 7.58 7.32
Portfolio turnover rate (%) 107 85 103(6) 123
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93(7) 12/94 12/95 12/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.90 $15.52 $13.90 $15.40
Net investment income (loss) 0.11 1.04 1.02 0.98
Net realized and unrealized gain (loss) on investments and
financial futures contracts -- (1.54) 1.50 (0.50)
Total from investment operations 0.11 (0.50) 2.52 0.48
Less distributions:
Dividends from net investment income (0.11) (1.04) (1.02) (0.98)
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)
Net asset value, end of period $15.52 $13.90 $15.40 $14.90
Total investment return at net asset value(3) (%) 0.90(4) (3.13) 18.66 3.38
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112
Ratio of expenses to average net assets (%) 1.63(5) 1.78 1.75 1.84
Ratio of net investment income (loss) to average net assets (%) 0.57(5) 7.30 6.87 6.62
Portfolio turnover rate (%) 107 85 103(6) 123
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/97(1) 5/98 11/98(8)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.90 $14.78 $15.25
Net investment income (loss) 0.44 1.05(2) 0.49(2)
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.12) 0.47 0.09
Total from investment operations 0.32 1.52 0.58
Less distributions:
Dividends from net investment income (0.44) (1.05) (0.49)
Distributions from net realized gain on investments sold
and financial futures contracts -- -- --
Total distributions (0.44) (1.05) (0.49)
Net asset value, end of period $14.78 $15.25 $15.34
Total investment return at net asset value(3) (%) 2.22(4) 10.54 3.87(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,361,924 1,327,728 1,336,017
Ratio of expenses to average net assets (%) 1.11(5) 1.08 1.08(5)
Ratio of net investment income (loss) to average net assets (%) 7.38(5) 6.90 6.35(5)
Portfolio turnover rate (%) 58 198 122
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/97(1) 5/98 11/98(8)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.90 $14.78 $15.25
Net investment income (loss) 0.40 0.95(2) 0.43(2)
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.12) 0.47 0.09
Total from investment operations 0.28 1.42 0.52
Less distributions:
Dividends from net investment income (0.40) (0.95) (0.43)
Distributions from net realized gain on investments sold
and financial futures contracts -- -- --
Total distributions (0.40) (0.95) (0.43)
Net asset value, end of period $14.78 $15.25 $15.34
Total investment return at net asset value(3) (%) 1.93(4) 9.78 3.51(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 132,885 165,983 218,417
Ratio of expenses to average net assets (%) 1.81(5) 1.78 1.78(5)
Ratio of net investment income (loss) to average net assets (%) 6.68(5) 6.18 5.65(5)
Portfolio turnover rate (%) 58 198 122
</TABLE>
- --------------------------------------------------------------------------------
Class C - period ended: 11/98(7,8)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $15.61
Net investment income (loss) 0.14
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.27)
Total from investment operations (0.13)
Less distributions:
Dividends from net investment income (0.14)
Net asset value, end of period $15.34
Total investment return at net asset value(3) (%) (0.85)(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,435
Ratio of expenses to average net assets (%) 1.78(5)
Ratio of net investment income (loss) to average net assets (%) 5.65(5)
Portfolio turnover rate (%) 122
(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. Class C shares began
operations on October 1, 1998.
(8) Unaudited.
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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.85 $8.75 $9.32
Net investment income (loss)(2) 0.06 0.72 0.65(4)
Net realized and unrealized gain (loss) on investments, options
and financial futures contracts (0.10) 0.57 (0.25)
Total from investment operations (0.04) 1.29 0.40
Less distributions:
Dividends from net investment income (0.06) (0.72) (0.65)
Net asset value, end of period $8.75 $9.32 $9.07
Total investment return at net asset value(5) (%) (0.45)(6,7) 15.32(7) 4.49
Total adjusted investment return at net asset value(5) (%) (0.46)(6) 15.28 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 223 470,569 396,323
Ratio of expenses to average net assets(7) (%) 0.12(6) 1.19 1.17
Ratio of net investment income (loss) to average net assets(7) (%) 0.71(6) 7.38 7.10
Portfolio turnover rate (%) 92 102(9) 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
Average monthly shares outstanding during the period (000s omitted) 28,696 N/A N/A
Average daily debt outstanding per share during the period(10) ($) 0.01 N/A N/A
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.83 $10.05 $8.75
Net investment income (loss) 0.70 0.65 0.65
Net realized and unrealized gain (loss) on investments, options
and financial futures contracts 0.24 (1.28) 0.57
Total from investment operations 0.94 (0.63) 1.22
Less distributions:
Dividends from net investment income (0.72) (0.65) (0.65)
Distributions from net realized gain on investments sold -- (0.02) --
Total distributions (0.72) (0.67) (0.65)
Net asset value, end of period $10.05 $8.75 $9.32
Total investment return at net asset value(5) (%) 9.86(7) (6.42)(7) 14.49(7)
Total adjusted investment return at net asset value(5) (%) 9.85 (6.43) 14.47
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 293,413 241,061 226,954
Ratio of expenses to average net assets (%) 2.00(7) 1.93(7) 1.89(7)
Ratio of net investment income (loss) to average net assets (%) 7.06(7) 6.98(7) 7.26(7)
Portfolio turnover rate (%) 138 92 102(9)
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
Average daily debt outstanding during the period (000s omitted)(10) ($) 503 349 N/A
Average monthly shares outstanding during the period (000s omitted) 26,378 28,696 N/A
Average daily debt outstanding per share during the period(10) ($) 0.02 0.01 N/A
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/97(3) 5/98 11/98(11)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.07 $8.93 $9.25
Net investment income (loss)(2) 0.37(4) 0.62(4) 0.29(4)
Net realized and unrealized gain (loss) on investments, options
and financial futures contracts (0.14) 0.32 0.21
Total from investment operations 0.23 0.94 0.50
Less distributions:
Dividends from net investment income (0.37) (0.62) (0.29)
Net asset value, end of period $8.93 $9.25 $9.46
Total investment return at net asset value(5) (%) 2.57(6) 10.82 5.53(6)
Total adjusted investment return at net asset value(5) (%) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 359,758 339,572 349,102
Ratio of expenses to average net assets(7) (%) 1.13(8) 1.10 1.10(8)
Ratio of net investment income (loss) to average net assets(7) (%) 7.06(8) 6.79 6.22(8)
Portfolio turnover rate (%) 129 106 107
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
Average daily debt outstanding during the period (000s omitted)(10) ($) N/A N/A N/A
Average monthly shares outstanding during the period (000s omitted) N/A N/A N/A
Average daily debt outstanding per share during the period(10) ($) N/A N/A N/A
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/96 5/97(3) 5/98 11/98(11)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.32 $9.08 $8.93 $9.25
Net investment income (loss) 0.58(4) 0.33(4) 0.55(4) 0.26(4)
Net realized and unrealized gain (loss) on investments, options
and financial futures contracts (0.24) (0.15) 0.32 0.21
Total from investment operations 0.34 0.18 0.87 0.47
Less distributions:
Dividends from net investment income (0.58) (0.33) (0.55) (0.26)
Distributions from net realized gain on investments sold -- -- -- --
Total distributions (0.58) (0.33) (0.55) (0.26)
Net asset value, end of period $9.08 $8.93 $9.25 $9.46
Total investment return at net asset value(5) (%) 3.84 2.02(6) 10.01 5.15(6)
Total adjusted investment return at net asset value(5) (%) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 178,124 153,390 117,830 148,523
Ratio of expenses to average net assets (%) 1.90 1.86(8) 1.85 1.83(8)
Ratio of net investment income (loss) to average net assets (%) 6.37 6.32(8) 6.05 5.49(8)
Portfolio turnover rate (%) 106 129 106 107
Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- --
Average daily debt outstanding during the period (000s omitted)(10) ($) N/A N/A N/A N/A
Average monthly shares outstanding during the period (000s omitted) N/A N/A N/A N/A
Average daily debt outstanding per share during the period(10) ($) 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.
(11) Unaudited.
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
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.10 $8.23 $7.33 $7.20
Net investment income (loss) 0.33 0.80(4) 0.72 0.76(4)
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12) 0.35
Total from investment operations 0.42 (0.03) 0.60 1.11
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73) (0.76)
Distributions from net realized gain on investments sold -- (0.05) -- --
Total distributions (0.29) (0.87) (0.73) (0.76)
Net asset value, end of period $8.23 $7.33 $7.20 $7.55
Total investment return at net asset value(5) (%) 4.96(6) (0.59) 8.83 16.06
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 52,792
Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16 1.10
Ratio of net investment income (loss) to average net assets (%) 12.89(7) 10.14 10.23 10.31
Portfolio turnover rate (%) 204 153 98 113
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2) 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.43 $8.23 $7.33 $7.20
Net investment income (loss) 0.80 0.74(4) 0.67 0.70(4)
Net realized and unrealized gain (loss) on investments 0.75 (0.83) (0.13) 0.35
Total from investment operations 1.55 (0.09) 0.54 1.05
Less distributions:
Dividends from net investment income (0.75) (0.76) (0.67) (0.70)
Distributions from net realized gain on investments sold -- (0.05) -- --
Total distributions (0.75) (0.81) (0.67) (0.70)
Net asset value, end of period $8.23 $7.33 $7.20 $7.55
Total investment return at net asset value(5) (%) 21.76 (1.33) 7.97 15.24
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586 242,944
Ratio of expenses to average net assets (%) 2.08 1.91 1.89 1.82
Ratio of net investment income (loss) to average net assets (%) 10.07 9.39 9.42 9.49
Portfolio turnover rate (%) 204 153 98 113
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/97(3) 5/98 11/98(8)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.55 $7.87 $8.26
Net investment income (loss) 0.45 0.78(4) 0.39(4)
Net realized and unrealized gain (loss) on investments 0.32 0.51 (1.69)
Total from investment operations 0.77 1.29 (1.30)
Less distributions:
Dividends from net investment income (0.45) (0.78) (0.39)
Distributions from net realized gain on investments sold -- (0.12) --
Total distributions (0.45) (0.90) (0.39)
Net asset value, end of period $7.87 $8.26 $6.57
Total investment return at net asset value(5) (%) 10.54(6) 17.03 (15.85)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 97,925 273,277 267,167
Ratio of expenses to average net assets (%) 1.05(7) 0.97 0.95(7)
Ratio of net investment income (loss) to average net assets (%) 10.19(7) 9.33 10.84(7)
Portfolio turnover rate (%) 78 100 25
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/97(3) 5/98 11/98(8)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.55 $7.87 $8.26
Net investment income (loss) 0.42 0.71(4) 0.36(4)
Net realized and unrealized gain (loss) on investments 0.32 0.51 (1.69)
Total from investment operations 0.74 1.22 (1.33)
Less distributions:
Dividends from net investment income (0.42) (0.71) (0.36)
Distributions from net realized gain on investments sold -- (0.12) --
Total distributions (0.42) (0.83) (0.36)
Net asset value, end of period $7.87 $8.26 $6.57
Total investment return at net asset value(5) (%) 10.06(6) 16.16 (16.19)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 379,024 798,170 767,247
Ratio of expenses to average net assets (%) 1.80(7) 1.72 1.70(7)
Ratio of net investment income (loss) to average net assets (%) 9.45(7) 8.62 10.09(7)
Portfolio turnover rate (%) 78 100 25
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Class C - period ended: 5/98(1) 11/98(8)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.45 $8.26
Net investment income (loss)(4) 0.06 0.36
Net realized and unrealized gain (loss) on investments (0.19) (1.69)
Total from investment operations (0.13) (1.33)
Less distributions:
Dividends from net investment income (0.06) (0.36)
Distributions from net realized gain on investments sold -- --
Total distributions (0.06) (0.36)
Net asset value, end of period $8.26 $6.57
Total investment return at net asset value(5) (%) (1.59)(6) (16.20)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,195 19,022
Ratio of expenses to average net assets (%) 1.72(7) 1.70(7)
Ratio of net investment income (loss) to average net assets (%) 6.70(7) 10.09(7)
Portfolio turnover rate (%) 100 25
</TABLE>
(1) Class A shares began operations on June 30, 1993. Class C shares began
operations on May 1, 1998.
(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) Unaudited.
FUND DETAILS 25
<PAGE>
Intermediate Government Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/94 3/95(1) 3/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.05 $9.89 $9.79
Net investment income (loss) 0.41 0.49 0.62
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.08)
Total from investment operations 0.25 0.38 0.54
Less distributions:
Dividends from net investment income (0.41) (0.48) (0.64)
Distributions from net realized gain on investments sold -- -- --
Total distributions (0.41) (0.48) (0.64)
Net asset value, end of period $9.89 $9.79 $9.69
Total investment return at net asset value(4) (%) 2.51 3.98 5.60
Total adjusted investment return at net asset value(4,5) (%) 2.27 3.43 4.83
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 24,310 12,950 29,024
Ratio of expenses to average net assets (%) 0.75(7) 0.80(7) 0.75(7)
Ratio of adjusted expenses to average net assets(9) (%) 0.99(7) 1.35(7) 1.45(7)
Ratio of net investment income (loss) to average net assets (%) 4.09 4.91 6.49
Ratio of adjusted net investment income (loss) to average assets(9) (%) 3.85 4.36 5.79
Fee reduction per share(3) ($) 0.02 0.05 0.07
Portfolio turnover rate (%) 244 341 423(10)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/94 3/95(1) 3/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.05 $9.89 $9.79
Net investment income (loss) 0.34 0.43 0.57
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.10)
Total from investment operations 0.18 0.32 0.47
Less distributions:
Dividends from net investment income (0.34) (0.42) (0.57)
Distributions from net realized gain on investments sold -- -- --
Total distributions (0.34) (0.42) (0.57)
Net asset value, end of period $9.89 $9.79 $9.69
Total investment return at net asset value(4) (%) 1.85 3.33 4.92
Total adjusted investment return at net asset value(4,5) (%) 1.61 2.78 4.15
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 11,626 9,506 8,532
Ratio of expenses to average net assets (%) 1.40(7) 1.45(7) 1.40(7)
Ratio of adjusted expenses to average net assets(9) (%) 1.64(7) 2.00(7) 2.10(7)
Ratio of net investment income (loss) to average net assets (%) 3.44 4.26 5.80
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 3.20 3.71 5.10
Fee reduction per share(3) ($) 0.02 0.05 0.07
Portfolio turnover rate (%) 244 341 423(10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/97 5/97(2) 5/98 11/98(11)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.69 $9.37 $9.46 $9.72
Net investment income (loss) 0.67 0.11(3) 0.62(3) 0.30(3)
Net realized and unrealized gain (loss) on investments (0.25) 0.09 0.26 0.23
Total from investment operations 0.42 0.20 0.88 0.53
Less distributions:
Dividends from net investment income (0.66) (0.11) (0.62) (0.30)
Distributions from net realized gain on investments sold (0.08) -- -- --
Total distributions (0.74) (0.11) (0.62) (0.30)
Net asset value, end of period $9.37 $9.46 $9.72 $9.95
Total investment return at net asset value(4) (%) 4.56 2.13(6) 9.56 5.51(6)
Total adjusted investment return at net asset value(4,5) (%) 4.19 1.93(6) 9.49 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 22,043 22,755 163,358 171,864
Ratio of expenses to average net assets (%) 0.75 0.75(8) 1.09 1.09(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.12 1.92(8) 1.16 --
Ratio of net investment income (loss) to average net assets (%) 6.99 7.07(8) 6.43 5.99(8)
Ratio of adjusted net investment income (loss) to average assets(9) (%) 6.62 5.90(8) 6.36 --
Fee reduction per share(3) ($) 0.04 0.02 0.01 --
Portfolio turnover rate (%) 427 77 250(10) 126
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/97 5/97(2) 5/98 11/98(11)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.69 $9.37 $9.46 $9.72
Net investment income (loss) 0.60 0.10(3) 0.55(3) 0.26(3)
Net realized and unrealized gain (loss) on investments (0.24) 0.09 0.26 0.23
Total from investment operations 0.36 0.19 0.81 0.49
Less distributions:
Dividends from net investment income (0.60) (0.10) (0.55) (0.26)
Distributions from net realized gain on investments sold (0.08) -- -- --
Total distributions (0.68) (0.10) (0.55) (0.26)
Net asset value, end of period $9.37 $9.46 $9.72 $9.95
Total investment return at net asset value(4) (%) 3.84 2.01(6) 8.74 5.12(6)
Total adjusted investment return at net asset value(4,5) (%) 3.47 1.81(6) 8.67 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 6,779 6,451 19,113 49,494
Ratio of expenses to average net assets (%) 1.43 1.50(8) 1.84 1.84(8)
Ratio of adjusted expenses to average net assets(9) (%) 1.80 2.67(8) 1.91 --
Ratio of net investment income (loss) to average net assets (%) 6.30 6.04(8) 5.66 5.24(8)
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 5.93 4.87(8) 5.59 --
Fee reduction per share(3) ($) 0.04 0.02 0.01 --
Portfolio turnover rate (%) 427 77 250(10) 126
</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.
(11) Unaudited.
26 FUND DETAILS
<PAGE>
Strategic Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/94 5/95 5/96 5/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.55 $7.17 $7.15 $7.27
Net investment income (loss) 0.68 0.64 0.66(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
Total from investment operations 0.35 0.62 0.78 0.91
Less distributions:
Dividends from net investment income (0.58) (0.55) (0.66) (0.64)
Distributions in excess of net investment income (0.05) -- -- --
Distributions from net realized gain on investments sold -- -- -- --
Distributions from capital paid-in (0.10) (0.09) -- --
Total distributions (0.73) (0.64) (0.66) (0.64)
Net asset value, end of period $7.17 $7.15 $7.27 $7.54
Total investment return at net asset value(2) (%) 4.54 9.33 11.37 12.99
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 335,261 327,876 369,127 416,916
Ratio of expenses to average net assets (%) 1.32 1.09 1.03 1.00
Ratio of net investment income (loss) to average net assets (%) 8.71 9.24 9.13 8.61
Portfolio turnover rate (%) 91 55 78 132
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/94(3) 5/95 5/96 5/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.58 $7.17 $7.15 $7.27
Net investment income (loss) 0.40 0.60(1) 0.61(1) 0.59
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12 0.27
Total from investment operations (0.01) 0.58 0.73 0.86
Less distributions:
Dividends from net investment income (0.32) (0.52) (0.61) (0.59)
Distributions in excess of net investment income (0.03) -- -- --
Distributions from net realized gain on investments sold -- -- -- --
Distributions from capital paid-in (0.05) (0.08) -- --
Total distributions (0.40) (0.60) (0.61) (0.59)
Net asset value, end of period $7.17 $7.15 $7.27 $7.54
Total investment return at net asset value(2) (%) (0.22)(4) 8.58 10.61 12.21
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751 328,487
Ratio of expenses to average net assets (%) 1.91(5) 1.76 1.73 1.70
Ratio of net investment income (loss) to average net assets (%) 8.12(5) 8.55 8.42 7.90
Portfolio turnover rate (%) 91 55 78 132
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Class A - period ended: 5/98 11/98(8)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.54 $7.84
Net investment income (loss) 0.64(1) 0.30(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts 0.34 (0.26)
Total from investment operations 0.98 0.04
Less distributions:
Dividends from net investment income (0.64) (0.30)
Distributions in excess of net investment income -- --
Distributions from net realized gain on investments sold (0.04) --
Distributions from capital paid-in -- --
Total distributions (0.68) (0.30)
Net asset value, end of period $7.84 $7.58
Total investment return at net asset value(2) (%) 13.43 0.59(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 489,375 505,719
Ratio of expenses to average net assets (%) 0.92 0.88(5)
Ratio of net investment income (loss) to average net assets (%) 8.20 7.87(5)
Portfolio turnover rate (%) 112 35
<CAPTION>
- --------------------------------------------------------------------------------------------------
Class B - period ended: 5/98 11/98(8)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.54 $7.84
Net investment income (loss) 0.59(1) 0.27(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts 0.34 (0.26)
Total from investment operations 0.93 0.01
Less distributions:
Dividends from net investment income (0.59) (0.27)
Distributions in excess of net investment income -- --
Distributions from net realized gain on investments sold (0.04) --
Distributions from capital paid-in -- --
Total distributions (0.63) (0.27)
Net asset value, end of period $7.84 $7.58
Total investment return at net asset value(2) (%) 12.64 0.24(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 473,428 561,000
Ratio of expenses to average net assets (%) 1.62 1.58(5)
Ratio of net investment income (loss) to average net assets (%) 7.50 7.15(5)
Portfolio turnover rate (%) 112 35
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Class C - period ended: 5/98(6) 11/98(8)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.87 $7.84
Net investment income (loss) 0.05(1) 0.27
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.03)(7) (0.26)
Total from investment operations 0.02 0.01
Less distributions:
Dividends from net investment income (0.05) (0.27)
Net asset value, end of period $7.84 $7.58
Total investment return at net asset value(2) (%) 0.23(4) 0.23(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 601 9,742
Ratio of expenses to average net assets (%) 1.62(5) 1.58(5)
Ratio of net investment income (loss) to average net assets (%) 7.34(5) 6.98(5)
Portfolio turnover rate (%) 112 35
</TABLE>
(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.
(8) Unaudited.
FUND DETAILS 27
<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
JOHN HANCOCK(R) (C) 1999 John Hancock Funds, Inc.
INCPN 4/99
<PAGE>
--------------------------------------------------
The latest report from your Fund's management team
--------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC]
Strategic
Income Fund
MAY 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
------------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
STEPHEN L. BROWN
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE
DOUGLAS M. COSTLE
LELAND O. ERDAHL
RICHARD A. FARRELL
GAIL D. FOSLER
WILLIAM F. GLAVIN
ANNE C. HODSDON
DR. JOHN A. MOORE
PATTI MCGILL PETERSON
JOHN W. PRATT*
RICHARD S. SCIPIONE
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ANNE C. HODSDON
President, Chief Operating Officer
and Chief Investment Officer
OSBERT M. HOOD
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Vice President and Compliance Officer
CUSTODIAN
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
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
------------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
- --------------------------------------------------------------------------------
[A 1"x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
- --------------------------------------------------------------------------------
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
These modifications and replacements are nearly done, and the tests of all our
systems are on schedule for completion by the end of July. The rest of 1999 will
be spent testing with our business partners and continuing to participate in
industry testing. We have also established additional contingency plans beyond
our regular ones to prepare for any challenges that the Year 2000 might present.
In the end, John Hancock will spend approximately $90-$95 million to ensure we
make a successful transition to the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY FREDERICK CAVANAUGH, MANAGEMENT TEAM LEADER, AND
ARTHUR N. CALAVRITINOS, CFA, PORTFOLIO MANAGER
John Hancock
Strategic Income Fund
Bonds struggle as interest rates rise
Shareholders of John Hancock World Bond Fund have approved the merger of their
fund into John Hancock Strategic Income Fund, effective at the close of business
on February 19, 1999.
For bonds, the past year was characterized by a series of dramatic twists and
turns. Beginning late last summer, U.S. Treasury bonds started to catch fire on
evidence that growing global economic turmoil was jeopardizing many foreign
markets and cooling off any inflationary pressures building here at home. From
August through mid-October, the Federal Reserve Board added further fuel to the
Treasury rally with a series of interest-rate cuts aimed at warding off a
possible U.S. recession. Given dire expectations of weak economic growth in
1999, investors flocked to the relative safety of U.S. Treasuries and Western
European government bonds, and shunned almost all other types of bonds. The
riskier segments of the bond market -- including high-yield corporate and
emerging-market bonds in Asia and Latin America -- were among the hardest hit
during this "flight to safety."
In early November, however, Treasuries began to lose some of their luster
when stronger-than-expected economic data dashed hopes that interest rates could
move even lower. In February, Fed Chairman Alan Greenspan jolted the
fixed-income markets again by hinting that the Fed was unlikely to cut interest
rates further. In response, U.S. Treasury securities suffered their
"...the past year was characterized by a series of dramatic twists and turns."
- --------------------------------------------------------------------------------
[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Strategic
Income Fund. Caption below reads "Portfoio management team members (l-r) Lee
Crockett, Roger Hamilton, Fred Cavanaugh and Arthur Calavritinos."]
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
[Table at top left hand column entitled "Top Five Bond Sectors." The first
listing is U.S. Treasury and Government Agencies 29%, the second is Tele-
communications 17%, the third Foreign Governments 15%, the fourth Media 9% and
the fifth Leisure 5%. A note below the table reads "As a percentage of net
assets on May 31, 1999."]
- --------------------------------------------------------------------------------
worst one-month loss in almost 18 years. After GDP rose 4.1% in the first
quarter of 1999, Greenspan delivered an even sterner warning, indicating that
the Fed's next move was more likely to be an interest-rate hike, rather than an
interest-rate cut. Treasuries and other government bonds weakened in response.
As evidence mounted that global economies were calming down, investors began
to move toward investments with higher yields and better return potential,
including high-yield corporate bonds. While higher interest rates weighed
heavily on all bonds, high-yield corporate securities handily outpaced their
Treasury counterparts from November through April.
During that same six-month period, the performance of foreign bonds was
mixed. Emerging-market bonds staged a significant recovery, encouraged by
Brazil's efforts to hold its economy together this spring and improvements in
the economic fortunes of Korea and Singapore. European bonds performed poorly in
the first couple of months of 1999, as interest rates on the continent rose,
although they have rallied more recently in response to interest-rate cuts.
Performance review
For the 12 months ended May 31, 1999, John Hancock Strategic Income Fund's Class
A, Class B and Class C shares had total returns of 2.77%, 2.06% and 2.04%,
respectively, at net asset value. The Fund's returns were better than the
average multi-sector income fund, which returned -0.89% for the same period,
according to Lipper, Inc.1 Keep in mind that your net asset value return will be
different from the Fund's 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.
High-yield helps
Our relatively large weighting in high-yield corporate bonds was the main reason
for the Fund's outperformance relative to its peers. Throughout the past year,
we kept the Fund's stake in high-yield corporate securities between roughly 30%
and 40% of net assets. Our emphasis on strong performers in the
telecommunications sector also was a plus for performance. MetroNet
Communications, a Canadian competitive local exchange network, surged when it
announced its intention to merge with AT&T Canada. Nextel Communications, a
combination cellular/paging/dispatch company, posted strong gains thanks to
continued good subscriber growth and rumors that it was a takeover target. Other
good high-yield performers included Sheffield Steel Corp., which benefited from
the turnaround in steel prices.
"....weighting in high-yield corporate bonds was the main reason for the Fund's
outperformance..."
- --------------------------------------------------------------------------------
[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 Metro
Communications followed by an up arrow with the phrase "Merges with AT&T
Canada." The second listing is Nextel Communications followed by an up arrow
with the phrase "Continued strong subscriber growth." The third listing is
U.S. Treasury Securities follow by a down arrow with the phrase "Worries over
inflation." A note below the table reads "See 'Schedule of Investments.'
Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with the heading "Fund Performance."
Under the heading is a note that reads "For the year ended May 31, 1999." The
chart is scaled in increments of 1% with -1% at the bottom and 3% at the top.
The first bar represents the 2.77% total return for John Hancock Strategic
Income Fund Class A. The second bar represents the 2.06% total return for John
Hancock Strategic Income Fund Class B. The third bar represents the 2.04% total
return for John Hancock Strategic Income Fund Class C. The fourth bar repre-
sents the -0.89% total return for Average multi-sector income fund. A note
below the chart reads "Total returns for John Hancock Strategic Income Fund are
at net asset value with all distrbutions reinvested. The average multi-sector
income fund is tracked by Lipper, Inc. 1 See the following two pages for
historical performance information."]
- --------------------------------------------------------------------------------
Our main disappointment during the period was the performance of U.S.
Treasury securities in 1999. We had built up our Treasury position last fall
when we felt the need to emphasize high-quality bonds in the midst of global
turmoil. That strategy proved beneficial for the Fund's performance. By the end
of last November, however, our view had changed and we began to consider selling
some of our Treasury holdings. A stable or falling interest-rate environment
would have allowed us to sell some of our Treasury positions at attractive
prices and seek better values in the high-yield market. But when interest rates
moved higher and Treasury prices weakened, we postponed our sale of them in
anticipation of more favorable conditions.
Recent changes
Our stake in foreign holdings rose to 26% of net assets by the end of the
period, up from 23% six months earlier. That increase primarily was as a result
of new investments in government debt issued by France and Spain, which we
bought in March after interest rates and bond yields in those countries moved
higher and prices, which move in the opposite direction of yields, were lower.
Generally speaking, however, we avoided government debt of most other Western
European countries because they offered yields significantly below U.S. Treasury
yields. We did, however, maintain our focus on higher-yielding government bonds
from the United Kingdom and Canada. Both performed reasonably well during the
past year in response to falling interest rates in those countries.
Outlook
Over the short-term, the Treasury and high-yield markets could face some
challenges. For the Treasury market, there are still plenty of jitters over
potential inflation and future interest-rate hikes. The high-yield market's
near-term performance may be cramped by a heavy supply of new issues and tepid
demand. But over the long term, we're much more optimistic. Our outlook calls
for slower U.S. economic growth in the second half of 1999, which should keep
inflation in check and drive interest rates lower. What's more, there are still
enough problems remaining in the global economy that could possibly give the Fed
pause before raising rates significantly.
"...still plenty of jitters over potential inflation and future interest-rate
hikes."
- --------------------------------------------------------------------------------
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.
(1) Figures from Lipper, 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
performance includes a contingent deferred sales charge (1% declining to 0%
after one year).
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, 1999
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
Cumulative Total Returns (1.27%) 51.93% 114.72%
Average Annual Total Returns (1.27%) 8.72% 7.94%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended March 31, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (10/4/93)
---- ----- ---------
Cumulative Total Returns (2.15%) 51.97% 53.82%
Average Annual Total Returns (2.15%) 8.73% 8.16%
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
For the period ended March 31, 1999
SINCE
INCEPTION
(5/1/98)
--------
Cumulative Total Return 1.43%
Average Annual Total Return 1.43%(1)
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of May 31, 1999
SEC 30-DAY
YIELD
-----
John Hancock Strategic Income Fund: Class A 6.64%
John Hancock Strategic Income Fund: Class B 6.23%
John Hancock Strategic Income Fund: Class C 6.22%
Note to Performance
(1) Not annualized.
6
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
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, we've shown the same $10,000
investment in the 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. Past performance is not indicative of future
results.
- --------------------------------------------------------------------------------
Line chart with the heading John Hancock Stratgic Income Fund Class A, repre-
senting 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 Lehman
Brothers Government/Corporate Bond Index and is equal to $22,620 as of May 31,
1999. The second line represents the value of the hypothetical $10,000 invest-
ment made in the John Hancock Strategic Income Fund on May 31, 1989, before
sales charge, and is equal to $22,181 as of May 31, 1999. The third line repre-
sents the same hypothetical investment made in the John Hancock Strategic
Income Fund, after sales charge, and is equal to $21,190 as of May 31, 1999.
Line chart with the heading John Hancock Stratgic Income Fund Class B, repre-
senting 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 hypothetical $10,000 investment made in the John Hancock Strategic Income
Fund on October 4, 1993, before sales charge, and is equal to $15,458 as of May
31, 1999. The second line represents the same hypothetical investment made in
the John Hancock Strategic Income Fund, after sales charge, and is equal to
$15,358 as of May 31, 1999. The third line represents the Lehman Brothers
Government/Corporate Bond Index and is equal to $13,905 as of May 31, 1999.
Line chart with the heading John Hancock Stratgic Income Fund Class C, repre-
senting 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 Lehman
Brothers Government/Corporate Bond Index and is equal to $10,518 as of May 31,
1999. The second ine represents value of the hypothetical $10,000 investment
made in the John Hancock Strategic Income Fund on May 1, 1998, before sales
charge, and is equal to $10,224 as of May 31, 1999.
- --------------------------------------------------------------------------------
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Statement of Assets and Liabilities
May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $1,094,407,237) ........................................ $1,063,219,883
Common and preferred stocks and warrants (cost - $62,916,252) ........ 74,831,522
Joint repurchase agreement (cost - $19,205,000) ..................... 19,205,000
Corporate savings account ............................................ 277
---------------
1,157,256,682
Receivable for investments sold ....................................... 41,952
Receivable for foreign currency exchange contracts sold - Note A ...... 2,140,226
Receivable for shares sold ............................................ 2,421,239
Dividends receivable .................................................. 46,825
Interest receivable ................................................... 23,063,311
Other assets .......................................................... 61,759
---------------
Total Assets ........................................ 1,185,031,994
-----------------------------------------------------------------------
Liabilities:
Payable for foreign currency exchange contracts purchased - Note A .... 107,849
Payable for shares repurchased ........................................ 700,517
Dividend payable ...................................................... 421,922
Payable to John Hancock Advisers, Inc. and affiliates - Note B ........ 706,007
Accounts payable and accrued expenses ................................. 259,553
---------------
Total Liabilities ................................... 2,195,848
-----------------------------------------------------------------------
Net Assets:
Capital paid-in ....................................................... 1,209,268,846
Accumulated net realized loss on investments, financial futures
contracts and foreign currency transactions ......................... (18,528,658)
Net unrealized depreciation of investments and foreign currency
transactions ........................................................ (17,413,442)
Undistributed net investment income ................................... 9,509,400
---------------
Net Assets .......................................... $1,182,836,146
=======================================================================
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 - $540,956,470/72,523,366 ..................................... $7.46
=========================================================================================
Class B - $619,445,881/83,046,054 ..................................... $7.46
=========================================================================================
Class C - $22,433,795/3,007,588 ....................................... $7.46
=========================================================================================
Maximum Offering Price Per Share*
Class A - ($7.46 x 104.71%) ........................................... $7.81
=========================================================================================
</TABLE>
* 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.
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 May 31, 1999. You'll 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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest .............................................................. $87,024,342
Dividends (net of foreign withholding taxes of $26,564) ............... 5,604,746
---------------
92,629,088
---------------
Expenses:
Investment management fee - Note B ................................... 4,078,633
Distribution and service fee - Note B
Class A ............................................................ 1,537,522
Class B ............................................................ 5,537,019
Class C ............................................................ 100,017
Transfer agent fee - Note B .......................................... 1,548,551
Custodian fee ........................................................ 285,677
Accounting and legal services fee - Note B ........................... 157,696
Registration and filing fees ......................................... 138,097
Trustees' fees ....................................................... 56,501
Printing ............................................................. 48,373
Auditing fee ......................................................... 43,963
Miscellaneous ........................................................ 32,718
Legal fees ........................................................... 10,890
---------------
Total Expenses ...................................... 13,575,657
-----------------------------------------------------------------------
Net Investment Income ............................... 79,053,431
-----------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions:
Net realized gain on investments sold ................................. 4,499,534
Net realized loss on financial futures contracts ...................... (2,367,753)
Net realized gain on foreign currency transactions .................... 7,056,179
Change in net unrealized appreciation/depreciation
of investments ...................................................... (60,990,202)
Change in net unrealized appreciation/depreciation
of financial futures contracts ...................................... (4,688)
Change in net unrealized appreciation/depreciation
of foreign currency transactions .................................... (156,077)
---------------
Net Realized and Unrealized Loss on
Investments, Financial Futures Contracts
and Foreign Currency Transactions ................... (51,963,007)
-----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........................... $27,090,424
=======================================================================
</TABLE>
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.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................................ $66,376,619 $79,053,431
Net realized gain on investments sold, financial futures contracts
and foreign currency transactions .................................. 9,166,775 9,187,960
Change in net unrealized appreciation/depreciation of investments,
financial futures contracts and foreign currency transactions ...... 24,710,742 (61,150,967)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations ............... 100,254,136 27,090,424
--------------- ---------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6408 and $0.5869 per share, respectively) ............ (36,925,773) (39,586,497)
Class B - ($0.5860 and $0.5336 per share, respectively) ............ (29,451,246) (38,784,062)
Class C - ($0.0477 and $0.5325 per share, respectively) ............ (1,205) (682,872)
Distributions from net realized gain on investments sold
Class A - ($0.0400 and none per share, respectively) ............... (2,270,669) --
Class B - ($0.0400 and none per share, respectively) ............... (2,027,424) --
--------------- ---------------
Total Distributions to Shareholders ................................ (70,676,317) (79,053,431)
--------------- ---------------
From Fund Share Transactions - Net* ..................................... 188,423,596 271,395,238
--------------- ---------------
Net Assets:
Beginning of period .................................................. 745,402,500 963,403,915
--------------- ---------------
End of period (including undistributed net investment income of
$3,355,304 and $9,509,400, respectively) ........................... $963,403,915 $1,182,836,146
=============== ===============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------------------
1998 1999
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ..................................................... 16,444,399 $128,645,376 23,723,150 $180,254,633
Shares issued in reorganization - Note E ........................ -- -- 2,798,003 21,151,500
Shares issued to shareholders in reinvestment of distributions .. 3,159,528 24,637,005 3,266,435 24,761,793
------------- ------------- ------------- -------------
19,603,927 153,282,381 29,787,588 226,167,926
Less shares repurchased ......................................... (12,444,274) (97,186,849) (19,695,328) (149,424,723)
------------- ------------- ------------- -------------
Net increase .................................................... 7,159,653 $56,095,532 10,092,260 $76,743,203
============= ============= ============= =============
CLASS B
Shares sold ..................................................... 24,192,186 $189,153,319 34,911,841 $265,229,237
Shares issued in reorganization - Note E ........................ -- -- 1,568,516 11,857,194
Shares issued to shareholders in reinvestment of distributions .. 1,943,551 15,161,471 2,457,330 18,614,521
------------- ------------- ------------- -------------
26,135,737 204,314,790 38,937,687 295,700,952
Less shares repurchased ......................................... (9,287,224) (72,587,321) (16,288,404) (123,285,702)
------------- ------------- ------------- -------------
Net increase .................................................... 16,848,513 $131,727,469 22,649,283 $172,415,250
============= ============= ============= =============
CLASS C**
Shares sold ..................................................... 76,535 $599,897 3,078,916 $23,354,223
Shares issued to shareholders in reinvestment of distributions .. 89 698 49,364 372,713
------------- ------------- ------------- -------------
76,624 600,595 3,128,280 23,726,936
Less shares repurchased ......................................... -- -- (197,316) (1,490,151)
------------- ------------- ------------- -------------
Net increase .................................................... 76,624 $600,595 2,930,964 $22,236,785
============= ============= ============= =============
</TABLE>
** Class C shares commenced operations on May 1, 1998.
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 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
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................ $7.17 $7.15 $7.27 $7.54 $7.84
-------- -------- -------- -------- --------
Net Investment Income ....................................... 0.64 0.66(1) 0.64(1) 0.64(1) 0.59(1)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency
Transactions (0.02) 0.12 0.27 0.34 (0.38)
-------- -------- -------- -------- --------
Total from Investment Operations .......................... 0.62 0.78 0.91 0.98 0.21
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ...................... (0.55) (0.66) (0.64) (0.64) (0.59)
Distributions from Net Realized Gain on Investments Sold .. -- -- -- (0.04) --
Distributions from Capital Paid-In ........................ (0.09) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ....................................... (0.64) (0.66) (0.64) (0.68) (0.59)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .............................. $7.15 $7.27 $7.54 $7.84 $7.46
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2) ............... 9.33% 11.37% 12.99% 13.43% 2.77%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................... $327,876 $369,127 $416,916 $489,375 $540,956
Ratio of Expenses to Average Net Assets ..................... 1.09% 1.03% 1.00% 0.92% 0.89%
Ratio of Net Investment Income to Average Net Assets ........ 9.24% 9.13% 8.61% 8.20% 7.71%
Portfolio Turnover Rate ..................................... 55% 78% 132% 112% 55%(6)
</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 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.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................... $7.17 $7.15 $7.27 $7.54 $7.84
-------- -------- -------- -------- --------
Net Investment Income ...................................... 0.60(1) 0.61(1) 0.59 0.59(1) 0.53(1)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency
Transactions ........................................... (0.02) 0.12 0.27 0.34 (0.38)
-------- -------- -------- -------- --------
Total from Investment Operations ......................... 0.58 0.73 0.86 0.93 0.15
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ..................... (0.52) (0.61) (0.59) (0.59) (0.53)
Distributions from Net Realized Gain on Investments Sold.. -- -- -- (0.04) --
Distributions from Capital Paid-in ....................... (0.08) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ...................................... (0.60) (0.61) (0.59) (0.63) (0.53)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ............................. $7.15 $7.27 $7.54 $7.84 $7.46
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2) .............. 8.58% 10.61% 12.21% 12.64% 2.06%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $134,527 $206,751 $328,487 $473,428 $619,446
Ratio of Expenses to Average Net Assets .................... 1.76% 1.73% 1.70% 1.62% 1.59%
Ratio of Net Investment Income to Average Net Assets ....... 8.55% 8.42% 7.90% 7.50% 7.01%
Portfolio Turnover Rate .................................... 55% 78% 132% 112% 55%(6)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS) TO YEAR ENDED
MAY 31, 1998 MAY 31, 1999
------------- ------------
<S> <C> <C>
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period .............................. $7.87 $7.84
------------- ------------
Net Investment Income ............................................. 0.05(1) 0.53(1)
Net Realized and Unrealized Loss on Investments,
Financial Futures Contracts and Foreign Currency Transactions ... (0.03)(5) (0.38)
------------- ------------
Total from Investment Operations ................................ 0.02 0.15
------------- ------------
Less Distributions:
Dividends from Net Investment Income ............................ (0.05) (0.53)
------------- ------------
Net Asset Value, End of Period .................................... $7.84 $7.46
============= ============
Total Investment Return at Net Asset Value (2) .................... 0.23%(3) 2.04%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .......................... $601 $22,434
Ratio of Expenses to Average Net Assets ........................... 1.62%(4) 1.59%
Ratio of Net Investment Income to Average Net Assets .............. 7.34%(4) 7.01%
Portfolio Turnover Rate ........................................... 112% 55%(6)
</TABLE>
(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) Not annualized.
(4) Annualized.
(5) 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.
(6) Portfolio turnover rate excludes merger activity.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Schedule of Investments
May 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Strategic Income Fund on May 31, 1999. 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 Fund's
"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 (0.36%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 ................................................... 9.375% B $4,000 $4,280,000
----------
Aerospace (0.15%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) ............................. 10.910 BBB- 1,500 1,813,650
----------
Banks - United States (0.21%)
CSBI Capital Trust I,
Sec Co Gtd Bond Ser A 06-06-27 ......................................... 11.750 B- 2,340 2,503,800
----------
Beverages (0.54%)
Canandaigua Brands, Inc.,
Sr Sub Note 03-01-09 ................................................... 8.500 B+ 2,300 2,288,500
National Wine & Spirits, Inc.,
Sr Note 01-15-09 (R) ................................................... 10.125 B 4,000 4,140,000
----------
6,428,500
----------
Building (0.08%)
Standard Pacific Corp.,
Sr Note 04-01-09 ....................................................... 8.500 BB 1,000 965,000
----------
Business Services - Misc. (0.48%)
United Rentals, Inc.,
Sr Sub Note Ser B 08-15-08 ............................................. 8.800 BB- 3,900 3,812,250
WESCO International, Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%, 06-01-03) 06-01-08 (A) ...... Zero B 2,500 1,800,000
----------
5,612,250
----------
Chemicals (0.23%)
General Chemical Industrial Products, Inc.,
Sr Sub Note 05-01-09 (R) ............................................... 10.625 B+ 1,000 1,010,000
PCI Chemicals Canada, Inc.,
Sec Note (Canada) 10-15-07 (Y) ......................................... 9.250 B+ 2,000 1,680,000
----------
2,690,000
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<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>
Computers (1.68%)
Primark Corp.,
Sr Sub Note 12-15-08 ................................................... 9.250% B+ $5,000 $4,825,000
PSINet, Inc.,
Sr Note 11-01-08 ....................................................... 11.500 B- 4,900 5,145,000
Unisys Corp.,
Sr Note 10-15-04 ....................................................... 11.750 BB- 4,075 4,553,812
Verio, Inc.,
Sr Note 12-01-08 (R) ................................................... 11.250 B- 5,100 5,380,500
----------
19,904,312
----------
Consumer Products Misc. (0.07%)
Diamond Brands Operating Corp.,
Sr Sub Note Ser B 04-15-08 ............................................. 10.125 CCC+ 1,000 780,000
----------
Containers (0.78%)
Berry Plastics Corp.,
Sr Sub Note 04-15-04 ................................................... 12.250 B3 4,000 4,220,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Int Cert) 04-01-02 ..................... 12.250 B- 5,000 5,025,000
----------
9,245,000
----------
Diversified Operations (0.78%)
Diamond Holdings Plc,
Bond (United Kingdom) 02-01-08 # ....................................... 10.000 B- 3,000 5,098,494
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y) .............................. 11.250 B 4,000 4,160,000
----------
9,258,494
----------
Electronics (0.41%)
Communications Instruments, Inc.,
Sr Sub Note Ser B 09-15-04 ............................................. 10.000 B- 2,900 2,668,000
Viasystems, Inc.,
Sr Sub Note 06-01-07 ................................................... 9.750 B- 2,500 2,187,500
----------
4,855,500
----------
Energy (0.84%)
AEI Resources, Inc./AEI Resources Holdings, Inc.,
Gtd Note 12-15-05 (R) .................................................. 10.500 B 5,000 4,950,000
P & L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 ............................................. 9.625 B 5,000 5,000,000
----------
9,950,000
----------
Finance (0.49%)
Ford Motor Credit Co.,
Bond (Deutsche Mark) 06-16-08 # ........................................ 5.250 A 5,000 2,769,181
Maxxam Group Holdings, Inc.,
Sr Sec Note Ser B 08-01-03 ............................................. 12.000 CCC+ 3,000 3,105,000
----------
5,874,181
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<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>
Food (0.21%)
Agrilink Foods, Inc.,
Sr Sub Note 11-01-08 ................................................... 11.875% B $2,400 $2,484,000
------------
Government - Foreign (14.82%)
Argentina, Republic of,
Floating Rate Bond Ser FRB (Argentina) 03-31-05 (Y) .................... 5.9375*** BB 930 776,550
Brazil, Federative Republic of,
Variable Rate Bond Ser A (Brazil) 01-01-01 (Y) ......................... 6.0625*** B+ 369 346,122
Canada, Government of,
Government Bond (Canada) 03-01-01 # .................................... 7.500 AAA 25,000 17,605,682
Government Bond (Canada) 09-01-02 # .................................... 5.500 AAA 15,000 10,224,956
Government Bond (Canada) 12-01-05 # .................................... 8.750 AAA 15,000 12,001,835
Costa Rica, Republic of,
Deb (Costa Rica) 05-01-03 (R) (Y) ...................................... 8.000 BB 225 214,875
France, Republic of,
Deb (France) 04-25-09 (E) .............................................. 4.000 AAA 31,000 31,679,133
Germany, Federal Republic of,
Bond Ser 98 (Germany) 01-04-08 (E) ..................................... 5.250 AAA 3,532 3,995,285
Panama, Republic of,
Note Ser REGS (Panama) 02-13-02 (Y) .................................... 7.875 BB+ 300 288,000
South Africa, Republic of
Note (South Africa) 06-23-17 (Y) ....................................... 8.500 Baa3 7,400 6,438,000
Spain, Kingdom of,
Government Bond (Spain) 01-31-08 (E) ................................... 6.000 AA+ 20,000 23,265,546
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 12-07-00 # ............................ 8.000 AAA 5,500 9,195,567
Government Bond (United Kingdom) 11-06-01 # ............................ 7.000 AAA 6,000 10,025,755
Government Bond (United Kingdom) 06-07-02 # ............................ 7.000 AAA 13,000 21,932,984
Government Bond (United Kingdom) 06-10-03 # ............................ 8.000 AAA 6,000 10,607,753
Government Bond (United Kingdom) 07-16-07 # ............................ 8.500 AAA 8,000 15,673,861
United Mexican States,
Global Bond (Mexico) 02-06-01 (Y) ...................................... 9.750 BB 1,000 1,030,000
------------
175,301,904
------------
Government - U.S. (27.30%)
United States Treasury,
Bond 08-15-05 .......................................................... 6.500 AAA 19,300 20,005,608
Bond 08-15-05 .......................................................... 10.750 AAA 15,000 18,815,550
Bond 02-15-16 .......................................................... 9.250 AAA 20,300 26,884,711
Bond 08-15-19 .......................................................... 8.125 AAA 75,500 92,782,705
Bond 08-15-23 .......................................................... 6.250 AAA 42,215 43,085,473
Bond 02-15-27 .......................................................... 6.625 AAA 32,000 34,430,080
Note 08-31-02 .......................................................... 6.250 AAA 42,800 43,575,536
Note 08-15-04 .......................................................... 7.250 AAA 17,100 18,248,949
Note 08-15-07 .......................................................... 6.125 AAA 24,600 25,092,000
------------
322,920,612
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<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>
Government - U.S. Agencies (1.53%)
Federal Home Loan Mortgage Corp.,
REMIC 44-E 11-15-19 .................................................... 9.000% AAA $331 $338,858
Federal National Mortgage Assn.,
Global Bond (British Pound Sterling) 06-07-02 # ........................ 6.875 AAA 5,000 8,321,913
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 ........................................... 7.500 AAA 9,194 9,401,159
------------
18,061,930
------------
Leisure (5.16%)
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 ............................................. 9.625 B 4,000 4,095,000
Sr Sub Note Ser D 08-01-08 ............................................. 9.625 B 1,000 1,005,000
Coast Hotels and Casinos, Inc.,
Sr Sub Note 04-01-09 (R) ............................................... 9.500 B- 2,400 2,328,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 ................................................... 10.500 B 4,000 4,255,000
Empress Entertainment, Inc.,
Sr Sub Note 07-01-06 ................................................... 8.125 B+ 3,000 3,030,000
Harrah's Operating Co., Inc.,
Sr Sub Note 12-15-05 ................................................... 7.875 BB+ 3,650 3,531,375
Hedstrom Corp.,
Sr Sub Note 06-01-07 ................................................... 10.000 B- 4,000 3,580,000
HMH Properties, Inc.,
Sr Note Ser B 08-01-08 ................................................. 7.875 BB 7,900 7,307,500
Horseshoe Gaming LLC,
Sr Sub Note Ser B 06-15-07 ............................................. 9.375 B+ 2,500 2,543,750
Isle of Capri Casinos, Inc.,
Sr Sub Note 04-15-09 (R) ............................................... 8.750 B 2,200 2,084,500
Jupiters Ltd.,
Sr Note (Australia) 03-01-06 (R) (Y) ................................... 8.500 BB+ 4,000 3,940,000
Production Resource Group LLC,
Sr Sub Note 01-15-08 ................................................... 11.500 B- 3,000 3,000,000
Regal Cinemas, Inc.,
Sr Sub Note 12-15-10 ................................................... 8.875 B 3,900 3,646,500
SFX Entertainment, Inc.,
Sr Sub Note Ser B 02-01-08 ............................................. 9.125 B- 5,000 4,950,000
Sr Sub Note 12-01-08 ................................................... 9.125 B- 2,000 2,000,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) ................................. 8.625 B+ 2,000 1,980,000
Waterford Gaming LLC,
Sr Note 03-15-10 (R) ................................................... 9.500 B+ 4,300 4,364,500
William Hill Finance Plc,
Sr Sub Note (United Kingdom) 04-30-08 # ................................ 10.625 B- 2,000 3,334,864
------------
60,975,989
------------
</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>
Machinery (0.59%)
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 ................................................... 8.500% B $5,000 $4,900,000
Tokheim Corp.,
Sr Sub Note (United States) 08-01-08 (E) (R) ........................... 11.375 B 2,000 2,064,249
------------
6,964,249
------------
Manufacturing (0.20%)
Globe Manufacturing Corp.,
Sr Sub Note 08-01-08 ................................................... 10.000 B2 3,000 2,400,000
------------
Media (8.54%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 ................................................. 9.250 B+ 3,500 3,587,500
American Media Operations, Inc.,
Sr Sub Note 05-01-09 (R) ............................................... 10.250 B- 1,000 1,012,500
Capstar Radio Broadcasting Partners, Inc.,
Sr Sub Note 07-01-07 ................................................... 9.250 B- 4,000 4,135,000
CBS Radio, Inc.,
Sub Deb 01-15-09 ....................................................... 11.375 BB+ 4,738 5,400,864
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) .......................................... 9.750 BB- 3,000 2,385,000
CF Cable TV, Inc.,
Sr Note (Canada) 02-15-05 (Y) .......................................... 11.625 BBB- 2,000 2,176,000
Chancellor Media Corp.,
Sr Sub Note 01-15-07 ................................................... 10.500 Ba3 3,000 3,270,000
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 ................................................... 10.250 B- 2,000 2,180,000
Sr Sub Note 11-15-08 ................................................... 9.250 B- 1,900 2,004,500
Comcast Corp.,
Sr Sub Note 01-15-08 ................................................... 9.500 BB+ 4,000 4,203,560
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(United Kingdom) 11-15-07 (A) (Y) .................................... Zero B- 4,000 3,640,000
CSC Holdings, Inc.,
Sr Sub Deb 02-15-13 .................................................... 9.875 BB- 4,000 4,390,000
Digital Television Services LLC,
Sr Sub Note Ser B 08-01-07 ............................................. 12.500 CCC 3,000 3,330,000
DIVA Systems Corp.,
Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) ...... Zero B- 5,165 1,601,150
EchoStar DBS Corp.,
Sr Note 02-01-09 (R) ................................................... 9.375 B 3,000 3,022,500
Emmis Communications Corp.,
Sr Sub Note 03-15-09 (R) ............................................... 8.125 B- 3,000 2,925,000
Falcon Holdings Group L.P./ Falcon Funding Corp.,
Sr Deb Ser B 04-15-10 .................................................. 8.375 B 5,000 4,875,000
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 ................................................... 12.375 B- 5,000 5,556,250
</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)
Garden State Newspapers, Inc.,
Sr Sub Note Ser B 10-01-09 ......................................... 8.750% B+ $3,500 $3,465,000
Sr Sub Note 07-01-11 (R) ........................................... 8.625 B+ 4,000 3,961,880
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 ............................................... 8.875 B- 2,000 1,977,500
Intermedia Capital Partners,
Sr Note 08-01-06 ................................................... 11.250 B 5,048 5,729,480
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ...................................... 10.625 BBB- 1,250 1,336,862
ONO Finance Plc,
Unit (Note & Equity Value Cert) (United Kingdom) 05-01-09 (E) (R) .. 13.000 CCC+ 2,900 3,038,512
Unit (Note & Equity Value Cert) (United Kingdom) 05-01-09 (R) (Y) .. 13.000 CCC+ 1,450 1,457,250
Radio One, Inc.,
Sr Sub Note Ser B, Step Coupon (12.00%, 05-15-00) 05-15-04 ......... 7.000 B- 2,000 2,080,000
Regional Independent Media Group Plc,
Sr Disc Note, Step Coupon (12.875%, 07-01-03)
(United Kingdom) 07-01-08 # (A) .................................. Zero B- 3,750 3,276,744
Sr Note (United Kingdom) 07-01-08 (Y) .............................. 10.500 B- 1,000 1,012,500
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) ................................ 10.000 BB+ 3,000 3,337,500
Sr Sec Deb (Canada) 01-15-14 # ..................................... 9.650 BB+ 2,000 1,474,786
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) .................................. 7.250 B 2,390 2,760,450
Spectrasite Holdings, Inc.,
Sr Disc Note, Step Coupon (11.25%, 04-15-04) 04-15-09 (A) (R) ...... Zero B- 1,400 798,000
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ............................................... 11.000 B- 2,785 2,931,212
TV Guide, Inc.,
Sr Sub Note 03-01-09 (R) ........................................... 8.125 B+ 2,800 2,716,000
------------
101,048,500
------------
Metal (0.86%)
Centaur Mining & Exploration Ltd.,
Gtd Sr Note (Australia) 12-01-07 (Y) ............................... 11.000 B- 2,500 2,406,250
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 (Y) ................................... 8.875 BB 5,100 4,883,250
Haynes International, Inc.,
Sr Note 09-01-04 ................................................... 11.625 B- 2,000 1,850,000
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 ........................................... 9.875 B- 1,000 1,000,000
------------
10,139,500
------------
Oil & Gas (1.72%)
Cliffs Drilling Co.,
Sr Sec Note Ser B 05-15-03 ......................................... 10.250 BB- 2,250 2,233,125
Comstock Resources, Inc.,
Sr Note 05-01-07 (R) ............................................... 11.250 B 2,200 2,205,500
</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)
Kelley Oil & Gas Partners Ltd.,
Conv Deb 04-01-00 ...................................................... 8.500% CC $1,100 $896,500
Key Energy Services, Inc.,
Unit (Sr Sub Note & Warrant) 01-15-09 (R) .............................. 14.000 B- 5,000 5,112,500
Parker Drilling Co.,
Gtd Sr Note 11-15-06 ................................................... 9.750 B+ 1,000 895,000
Petroleo Brasileiro S.A.,
Bond (Brazil) 10-17-06 (R) (Y) ......................................... 10.000 B1 500 467,500
R&B Falcon Corp.,
Sr Note 12-15-08 (R) ................................................... 9.500 B+ 3,750 3,337,500
RBF Finance Co.,
Gtd Sr Sec Note 03-15-09 (R) ........................................... 11.375 BB- 3,450 3,484,500
Universal Compression, Inc.,
Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) .............. Zero B 2,650 1,696,000
------------
20,328,125
------------
Paper & Paper Products (0.54%)
Packaging Corp. of America,
Sr Sub Note 04-01-09 (R) ............................................... 9.625 B 2,100 2,131,500
Repap New Brunswick, Inc.,
Sr Sec Note (Canada) 06-01-04 (R) (Y) .................................. 11.500 B- 4,150 4,191,500
------------
6,323,000
------------
Printing - Commercial (0.27%)
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 ................................................... 12.750 B- 3,000 3,187,500
------------
Retail (0.36%)
SpinCycle, Inc.,
Sr Disc Note, Step Coupon (12.75%, 05-01-01) 05-01-05 (A) .............. Zero CCC+ 3,625 1,305,000
United Stationers Supply Co.,
Sr Sub Note 05-01-05 ................................................... 12.750 B 1,334 1,470,735
Sr Sub Note 04-15-08 ................................................... 8.375 B 1,500 1,470,000
------------
4,245,735
------------
Steel (0.72%)
AK Steel Corp.,
Sr Note 02-15-09 (R) ................................................... 7.875 BB- 5,000 4,900,000
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 ............................................ 11.500 B- 3,875 3,603,750
------------
8,503,750
------------
Telecommunications (17.07%)
Advanced Radio Telecom Corp.,
Sr Note 02-15-07 ....................................................... 14.000 CCC 2,000 1,530,000
Allegiance Telecom, Inc.,
Sr Disc Note, Ser B, Step Coupon (11.75%, 02-15-03) 02-15-08 (A) ...... Zero B- 3,500 2,100,000
AMSC Acquisition Co., Inc.,
Sr Note Ser B 04-01-08 ................................................. 12.250 B- 3,000 2,160,000
</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 (continued)
Call-Net Enterprises, Inc.,
Sr Note (Canada) 05-15-09 (Y) .......................................... 9.375% BB- $3,800 $3,648,000
CapRock Communications Corp.,
Sr Note 05-01-09 (R) ................................................... 11.500 B 2,700 2,632,500
Centennial Cellular Operating Co.,
Sr Sub Note 12-15-08 (R) ............................................... 10.750 CCC+ 900 936,000
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.40%, 05-15-03)
(Canada) 05-15-08 (A) # .............................................. Zero B3 6,500 2,553,351
Sr Disc Note, Step Coupon (10.125%, 05-01-04)
(Canada) 05-01-09 (A) (Y) ............................................ Zero B3 3,250 1,722,500
COLT Telecom Group Plc (United Kingdom),
Sr Note (Deutsche Mark) 11-30-07 # ..................................... 8.875 B 10,000 5,543,692
Sr Note (Deutsche Mark) 07-31-08 # ..................................... 7.625 B 10,195 5,488,762
Comunicacion Celular S.A.,
Bond, Step Coupon (14.125%, 09-29-00)
(Colombia) 03-01-05 (A) (R) (Y) ...................................... Zero B+ 5,000 3,500,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) ............. Zero B 5,000 3,400,000
Dolphin Telecom Plc,
Sr Disc Note, Step Coupon (11.50%, 06-01-03)
(United Kingdom) 06-01-08 (A) (Y) .................................... Zero B- 6,000 3,090,000
Sr Disc Note, Step Coupon (14.00%, 05-15-04)
(United Kingdom) 05-15-09 (A) (R) (Y) ................................ Zero B- 5,400 2,646,000
DTI Holdings, Inc.,
Sr Disc Note, Step Coupon (12.50%, 03-01-03) 03-01-08 (A) .............. Zero B- 3,600 1,422,000
e.spire Communications, Inc.,
Sr Note 07-15-07 ....................................................... 13.750 B- 2,000 1,760,000
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) .................................. 11.500 B- 1,550 1,666,250
Sr Note (Deutsche Mark) 06-15-08 # ..................................... 11.000 BB- 4,050 2,288,372
FaciliCom International, Inc.,
Sr Note 01-15-08 ....................................................... 10.500 B- 4,350 3,371,250
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 ....................................................... 9.625 B 4,000 4,380,000
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 ................................................... 13.250 B 5,000 5,400,000
Hermes Europe Railtel BV,
Sr Note (Netherlands) 08-15-07 (Y) ..................................... 11.500 B 5,000 5,212,500
Sr Note (Netherlands) 01-15-09 (Y) ..................................... 10.375 B 700 714,000
Intercel, Inc.,
Unit (Sr Disc Note & 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, Step Coupon (12.50%, 05-15-01) 05-15-06 (A) .............. Zero B 6,000 4,920,000
</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)
International Wireless Communications Holdings, Inc.,
Sr Sec Disc Note 08-15-01 .............................................. Zero B- $3,000 $300,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A) (Y) .................................... Zero Ca 6,000 180,000
Level 3 Communications, Inc.,
Sr Note 05-01-08 ....................................................... 9.125% B 7,000 6,825,000
McCaw International Ltd.,
Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) .............. Zero B- 7,000 4,270,000
McLeodUSA, Inc.,
Sr Note 07-15-07 ....................................................... 9.250 B+ 4,250 4,303,125
Sr Note 11-01-08 ....................................................... 9.500 B+ 1,000 1,005,000
Sr Note 02-15-09 (R) ................................................... 8.125 B+ 1,000 940,000
Metrocall, Inc.,
Sr Sub Note 09-15-08 (R) ............................................... 11.000 CCC+ 5,000 4,325,000
Metromedia Fiber Network, Inc.,
Sr Note 11-15-08 (R) ................................................... 10.000 B 900 929,250
MetroNet Communications Corp.,
Sr Disc Note, Step Coupon (10.75%, 11-01-02)
(Canada) 11-01-07 (A) (Y) ............................................ Zero B 4,400 3,476,000
Sr Note (Canada) 08-15-07 (Y) .......................................... 12.000 B 4,000 4,680,000
Microcell Telecommunications, Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%, 10-15-02)
(Canada) 10-15-07 # .................................................. Zero B- 2,500 1,087,400
Nextel Communications, Inc.,
Sr Disc Note 08-15-04 .................................................. 9.750 B- 5,500 5,665,000
Sr Disc Note, Step Coupon (9.95%, 02-15-03) 02-15-08 (A) ............... Zero B- 8,875 5,901,875
Nextel Partners, Inc.,
Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) (R) .......... Zero CCC+ 2,500 1,343,750
NEXTLINK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%, 04-15-03) 04-15-08 ................... Zero B 4,000 2,340,000
Sr Note 10-01-07 ....................................................... 9.625 B 1,500 1,417,500
Sr Note 11-15-08 (R) ................................................... 10.750 B 2,900 2,900,000
NorthEast Optic Network, Inc.,
Sr Note 08-15-08 ....................................................... 12.750 B- 2,250 2,317,500
NTL, Inc.,
Sr Note Ser B 04-01-08 ................................................. 9.500 B- 260 412,689
Sr Note, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) (R) .............. Zero B- 8,500 5,525,000
Sr Note 10-01-08 (R) ................................................... 11.500 B- 6,300 6,835,500
Occidente y Caribe Celular S.A.,
Sr Disc Note Ser B, Step Coupon (14.00%, 03-15-01)
(Colombia) 03-15-04 (A) (Y) .......................................... Zero B 4,000 2,880,000
Orange Plc,
Sr Note (United Kingdom) 08-01-08 (E) .................................. 7.625 BB- 400 442,041
Sr Note (United Kingdom) 08-01-08 (Y) .................................. 8.000 B+ 6,000 6,165,000
</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)
Orion Network Systems,
Sr Note 01-15-07 ....................................................... 11.250% B+ $5,000 $3,950,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 ................................................. 10.875 BB+ 2,867 3,261,528
RCN Corp.,
Sr Disc Note, Step Coupon (11.125%, 10-15-02) 10-15-07 (A) ............. Zero B3 5,000 3,300,000
Sr Note 10-15-07 ....................................................... 10.000 B3 4,900 4,900,000
Sprint Spectrum L.P.,
Sr Note 08-15-06 ....................................................... 11.000 BBB+ 3,750 4,196,438
Telecorp PCS, Inc.,
Sr Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) (R) ......... Zero B3 4,535 2,335,525
Telewest Communications Plc,
Sr Disc Note, Step Coupon (9.25%, 04-15-04)
(United Kingdom) 04-15-09 (R) (Y) .................................... Zero B+ 3,300 3,465,533
Teligent, Inc.,
Sr Note 12-01-07 ....................................................... 11.500 CCC 5,000 4,862,500
Time Warner Telecom LLC,
Sr Note 07-15-08 ....................................................... 9.750 B- 1,250 1,300,000
Tritel PCS, Inc.,
Sr Disc Note, Step Coupon (12.75, 05-15-04) 05-15-09 (A) (R) ........... Zero B3 2,500 1,268,750
VersaTel Telecom International N.V.,
Sr Note (Netherlands) 05-15-08 (Y) ..................................... 13.250 B- 2,400 2,508,000
Viatel, Inc.,
Sr Note 04-15-08 ....................................................... 11.250 Caa1 5,250 5,250,000
Sr Note (United States) 03-15-09 (E) (R) ............................... 11.500 Caa1 2,000 2,105,951
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon (14.00%, 10-15-00) 10-15-05 (A) .............. Zero Caa1 2,600 2,158,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 .................................................. 12.500 CCC+ 1,400 1,407,000
Worldwide Fiber, Inc.,
Sr Note (Canada) 12-15-05 (R) (Y) ...................................... 12.500 B- 3,750 3,862,500
------------
201,922,532
------------
Transportation (0.93%)
Continental Airlines, Inc.,
Note 12-15-05 .......................................................... 8.000 BB- 4,400 4,290,000
Fine Air Services Corp.,
Sr Sub Note 06-01-08 ................................................... 9.875 B 3,900 3,432,000
Pacific & Atlantic Holdings, Inc.,
1st Mtg Note (Greece) 05-30-08 (Y) ..................................... 11.500 CCC+ 3,000 1,185,000
RailWorks Corp.,
Sr Sub Note 04-15-09 (R) ............................................... 11.500 B 2,000 2,030,000
------------
10,937,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<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>
Utilities (1.97%)
Calpine Corp.,
Sr Note 04-01-08 ....................................................... 7.875% BB $2,000 $1,950,000
Sr Note 04-15-09 ....................................................... 7.750 BB 2,300 2,233,300
Midland Funding Corp. II,
Deb Ser A 07-23-05 ..................................................... 11.750 BB 4,000 4,580,000
Deb Ser B 07-23-06 ..................................................... 13.250 BB 4,000 4,813,920
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) (Y) .................................. 9.625 BB 2,900 2,465,000
Niagara Mohawk Power Corp.,
Sec Fac Bond 01-01-18 .................................................. 8.770 BBB- 7,000 7,272,650
-------------
23,314,870
-------------
TOTAL BONDS
(Cost $1,094,407,237) (89.89%) 1,063,219,883
------ -------------
<CAPTION>
NUMBER OF
SHARES
OR WARRANTS
-----------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Advanced Radio Telecom Corp., Warrant ** ............................................. 60,000 660,000
Allegiance Telecom, Inc., Warrant ** ................................................. 3,500 154,000
American Mobile Satellite Corp., Warrant (R) ** ...................................... 3,000 --
American Telecasting, Inc., Warrant ** ............................................... 4,000 40
AVI Holdings, Inc., Warrant (R) ** ................................................... 1,500 15
Capstar Broadcasting Partners, Inc., 12.00%, Preferred Stock ......................... 16,028 1,666,912
Chancellor Media Corp., 7.00%, Conv Preferred Stock .................................. 20,000 2,860,000
COLT Telecom Plc, Warrant (United Kingdom) (R) ** .................................... 5,000 2,375,000
Comunicacion Celular S.A., Warrant (Colombia) ** ..................................... 50,000 250,000
Core Cap, Inc., Common Stock (r) ** .................................................. 45,000 729,000
Core Cap, Inc., Ser A/I, 10.00%, Preferred Stock (r) ................................. 45,000 1,077,300
Credit Lyonnais Capital S.C.A., American Depositary Receipt (ADR),
9.50%, Ser DTC, Preferred Stock (France) (R) ........................................ 100,000 2,587,500
Decorative Home Accents, Inc., Common Stock ** ....................................... 1,000 1
DIVA Systems Corp., Warrant ** ....................................................... 15,495 30,990
DTI Holdings, Inc., Warrant ** ....................................................... 18,000 180
EarthWatch, Inc., 12.00%, Ser C, Conv Preferred Stock (R) ............................ 88,232 948,494
Granite Broadcasting Corp., 12.75%, Preferred Stock .................................. 51,200 5,120,000
Hyperion Telecommunications, Inc., 12.875%, Ser B, Preferred Stock ................... 3,513 3,302,220
ICG Holdings, Inc., 14.00%, Preferred Stock .......................................... 2,730 2,730,000
Intermedia Communications, Inc., 13.50%, Ser B, Preferred Stock ...................... 1,973 2,071,650
Intermedia Communications, Inc., Common Stock ** ..................................... 30,000 759,375
International Wireless, Inc., Warrant ** ............................................. 3,000 30
Ionica Plc, Warrant (United Kingdom) (R) # ** ........................................ 8,500 85
Kelley Oil & Gas Corp., $2.625, Conv Preferred Stock ................................. 40,000 202,500
KLM Royal Dutch Airlines N.V., Common Stock (Netherlands) ............................ 25,893 750,897
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
ISSUER, DESCRIPTION OR WARRANTS VALUE
- ------------------- ----------- -----
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS (continued)
Lasmo Plc, 10.00%, Ser A, ADS, Preferred Stock (United Kingdom) ...................... 50,000 $1,243,750
Loral Space & Communications Ltd., Warrant ** ........................................ 5,000 50,000
McCaw International Ltd., Warrant ** ................................................. 7,000 17,500
MetroNet Communications Corp., Warrant (Canada) (R) ** ............................... 2,250 225,000
Nextel Communications, Inc., 13.00%, Ser D, Preferred Stock .......................... 2,493 2,767,230
Nextel Communications, Inc., 11.125%, Ser E, Preferred Stock ......................... 1,915 1,943,725
Nextel Communications, Inc. (Class A), Common Stock ** ............................... 12,394 457,029
NEXTLINK Communications, Inc., Warrant (R) ** ........................................ 30,000 --
NEXTLINK Communications, Inc., 14.00%, Preferred Stock ............................... 115,323 5,939,135
Northeast Utilities, Common Stock ** ................................................. 75,000 1,321,875
Northwest Airlines Corp., Common Stock ............................................... 150,000 4,987,500
NTL, Inc., 13.00%, Ser B, Preferred Stock ............................................ 5,003 5,503,300
Occidente y Caribe Celular S.A., Warrant (R) ** ...................................... 16,000 272,000
Packaging Corp. of America, 12.375%, Preferred Stock (R) ............................. 11,500 1,201,750
PG&E Corp., Common Stock ............................................................. 25,622 864,743
Powertel, Inc., Warrant ** ........................................................... 2,880 23,040
PRIMEDIA, Inc., 8.625%, Ser H, Preferred Stock ....................................... 25,000 2,362,500
Qantas Airways Ltd. (ADR) (Australia) (R) ............................................ 13,800 406,025
QUALCOMM Financial Trust, 5.75%, Preferred Stock ..................................... 60,000 8,160,000
RCN Corp., Common Stock ** ........................................................... 40,000 1,662,500
Renaissance Cosmetics, Warrant ** .................................................... 4,000 4
Rite Aid Corp., Common Stock ......................................................... 14,820 370,500
Rural Cellular Corp., 11.375%, Ser B, Preferred Stock ................................ 1,957 1,957,000
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock .............................. 5,405 654,005
SFX Entertainment, Inc. (Class A), Common Stock ** ................................... 27,467 1,495,235
SpinCycle, Inc., Warrant (R) * ....................................................... 3,625 36
Station Casinos, Inc., 7.00%, Conv Preferred Stock ................................... 5,000 285,000
Teletrac, Inc., Warrant ** ........................................................... 2,000 --
TLC Beatrice International Holdings (Class A), Common Stock (r) ** ................... 20,000 1,040,000
Valero Energy Corp., Common Stock .................................................... 46,250 927,891
VersaTel Telecom B.V., Warrant (R) ** ................................................ 2,400 144,000
Viatel, Inc., Common Stock ** ........................................................ 6,068 273,060
------------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $62,916,252) (6.33%) 74,831,522
----- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.62%)
Investment in a joint repurchase
agreement transaction with
ABN AMRO Securities, Inc. - Dated 05-28-99,
due 06-01-99 (Secured by U.S. Treasury Bonds,
5.500% thru 12.000%, due 11-15-03 thru
08-15-28 and U.S. Treasury Notes, 7.875% due
11-15-04 and 6.500% due 10-15-06)- Note A ................................ 4.790% $19,205 $19,205,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.00%........................................................ 277
--------------
TOTAL SHORT-TERM INVESTMENTS (1.62%) 19,205,277
-------- --------------
TOTAL INVESTMENTS (97.84%) 1,157,256,682
-------- --------------
OTHER ASSETS AND LIABILITIES, NET (2.16%) 25,579,464
-------- --------------
TOTAL NET ASSETS (100.00%) $1,182,836,146
======== ==============
</TABLE>
* 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, 1999.
# Par value of foreign bonds or warrants is expressed in local currency, as
shown parenthetically in security description.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(E) Parenthetical disclosure of a country in the security description represents
country of issuer; however, security is euro denominated.
(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 $135,258,580 or 11.44% of the Fund's net assets as of
May 31, 1999.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of foreign issue; however, security is U.S. dollar
denominated.
(r) Direct placement securities are restricted as 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, 1999
-------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Core Cap, Inc., Common Stock................................... 10-31-97 $900,000 0.06% $729,000
Core Cap, Inc., Ser A/I, 10.00%, Preferred Stock............... 10-31-97 1,125,000 0.09 1,077,300
TLC Beatrice International Holdings (Class A), Common Stock ... 11-25-87 1,006,000 0.09 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 (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, 1999 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
Argentina .................................................... 0.27%
Australia .................................................... 0.98
Brazil ....................................................... 0.07
Canada ....................................................... 6.36
Colombia ..................................................... 0.56
Costa Rica ................................................... 0.02
France ....................................................... 2.90
Germany ...................................................... 0.34
Greece ....................................................... 0.10
Luxembourg ................................................... 0.23
Mexico ....................................................... 0.30
Netherlands .................................................. 0.78
Panama ....................................................... 0.02
South Africa ................................................. 0.54
Spain ........................................................ 1.97
United Kingdom ............................................... 10.62
United States ................................................ 71.78
-----
TOTAL INVESTMENTS 97.84%
=====
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- -------------------- ----------
AAA ......................................................... 40.91%
AA .......................................................... 1.97
A ........................................................... 0.23
BBB ......................................................... 1.96
BB .......................................................... 9.07
B ........................................................... 33.59
CCC ......................................................... 2.14
CC .......................................................... 0.02
-----
TOTAL BONDS 89.89%
=====
SEE NOTES TO FINANCIAL STATEMENTS.
27
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==========================NOTES TO FINANCIAL 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 one series: John Hancock Strategic Income Fund (the "Fund"). 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 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $15,375,362 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent such carryforwards are used by the
Fund, no capital gains distributions will be made. The carryforwards expire as
follows: May 31, 2003 -- $15,108,354 and May 31, 2004 -- $267,008. Additionally,
net capital losses of $3,759,669 attributable to security transactions incurred
after October 31, 1998 are treated as arising on the first day (June 1, 1999) 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 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
28
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==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
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 issuance 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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing. In
addition, a commitment fee is charged based on the average daily unused portion
of the line of credit and is allocated among the participating funds. The Fund
had no borrowing activity for the year ended May 31, 1999.
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
29
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
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, 1999 were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ----- --------------
BUYS
British Pound Sterling 6,008,750 JUNE 99 ($160,774)
Canadian Dollar 17,204,805 JUNE 99 57,622
Euro Currency 3,995,708 JUNE 99 (4,697)
-----------
($107,849)
===========
SELLS
British Pound Sterling 40,639,375 JUNE 99 $238,189
British Pound Sterling 12,768,014 JULY 99 104,303
British Pound Sterling 9,693,000 AUG 99 142,490
Canadian Dollar 62,609,097 JUNE 99 (1,073,791)
Canadian Dollar 3,876,500 JULY 99 (38,464)
Canadian Dollar 4,143,750 AUG 99 33,933
Canadian Dollar 15,480,000 SEPT 99 (37,447)
Euro Currency 34,085,429 JUNE 99 2,013,998
Euro Currency 31,467,000 JULY 99 720,154
Euro Currency 5,892,250 AUG 99 33,334
Euro Currency 3,982,000 OCT 99 3,527
-----------
$2,140,226
===========
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, 1999, 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. Over-the-counter options are 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 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.
30
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
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.
At May 31, 1999, there were no open written option transactions.
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,
1999, net sales charges received with regard to sales of Class A shares amounted
to $2,771,216. Out of this amount, $222,827 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $1,577,005 was
paid as sales commissions to unrelated broker-dealers and $971,384 was paid as
sales commissions to sales personnel of Signator Investors, Inc. ("Signator
Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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, 1999,
contingent deferred sales charges paid to JH Funds amounted to $976,496.
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,
1999, contingent deferred sales charges paid to JH Funds amounted to $6,904.
In addition, to reimburse the JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan 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 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 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.
31
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. 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,
accounting and legal 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. Stephen L. Brown, Mr. Richard S. Scipione
and Ms. Anne C. Hodsdon are directors 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. The investment had no impact on the operations
of the Fund.
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, 1999, aggregated $620,489,222 and $514,226,811, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $196,219,189 and $52,366,659, respectively, during the year
ended May 31, 1999.
The cost of investments owned at May 31, 1999 (including the joint repurchase
agreement) for federal income tax purposes was $1,170,235,488. Gross unrealized
appreciation and depreciation of investments aggregated $35,135,227 and
$48,114,310, respectively, resulting in net unrealized depreciation of
$12,979,083.
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1999, the Fund has reclassified amounts to reflect
an increase in accumulated net realized loss on investments of $6,151,401, an
increase in undistributed net investment income of $6,154,096 and a decrease in
capital paid-in of $2,695. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of May 31,
1999. 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.
NOTE E -
REORGANIZATION
On February 10, 1999, the shareholders of John Hancock World Bond Fund ("World
Bond Fund") approved a plan of reorganization between World Bond Fund and the
Fund providing for the transfer of substantially all of the assets and
liabilities of the World Bond Fund to the Fund in exchange solely for Class A
and Class B shares of the Fund. The acquisition was accounted for as a tax free
exchange of 2,798,003 Class A shares and 1,568,516 Class B shares of the Fund
for the net assets of World Bond Fund, which amounted to $21,151,500 and
$11,857,194 for Class A and Class B shares, respectively, including $263,975 of
unrealized depreciation, after the close of business on February 19, 1999.
32
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================================================================================
John Hancock Funds - Strategic Income Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
John Hancock Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments (except for Moody's and Standard & Poor's 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") at May 31, 1999, and
the results of its operations for the year then ended, 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 significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at May 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 2, 1999
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 May 31, 1999.
Shareholders will be mailed a 1999 U.S. Treasury Department Form 1099-DIV in
January of 2000. This will reflect the tax character of all distributions for
calendar year 1999.
With respect to the Fund's ordinary taxable income for the fiscal year ended
May 31, 1999, 6.53% of the distributions qualify for the dividends received
deduction available to corporations.
33
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======================================NOTES=====================================
John Hancock Funds - Strategic Income Fund
34
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======================================NOTES=====================================
John Hancock Funds - Strategic Income Fund
35
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================================================================================
----------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
- --------------------------------------------------------------------------------
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 current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 9100A 5/99
7/99
<PAGE>
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK SHORT-TERM STRATEGIC INCOME FUND
SPECIAL MEETING OF SHAREHOLDERS - OCTOBER 13, 1999
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Anne C. Hodsdon, 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 Short-Term Strategic Income Fund ("Short-Term Strategic
Income") which the undersigned is (are) entitled to vote at the Special Meeting
of Shareholders (the "Meeting") of Short-Term Strategic Income Fund to be held
at 101 Huntington Avenue, Boston, Massachusetts, on October 13, 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 August ___, 1999 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 JUDGMENT.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW.
(1) To approve an Agreement and Plan of Reorganization between Short-Term
Strategic Income Fund and John Hancock Strategic Income Fund
("Strategic Income Fund"). Under this Agreement, Short-Term Strategic
Income Fund will 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
Short-Term Strategic Income Fund. Strategic Income Fund will also
assume Short-Term Strategic Income 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)
August 27, 1999
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 August 27, 1999. This Statement of Additional
Information provides additional information about John Hancock Strategic Income
Fund and the Fund that it is acquiring, John Hancock Short-Term Strategic Income
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 4
Underwriters 4
Calculation of Performance Data 4
Financial Statements 4
Additional Information about Short-Term Strategic Income Fund 4
General Information and History 4
Investment Objective and Policies 4
Management of Short-Term Strategic Income Fund 4
Investment Advisory and Other Services 4
Brokerage Allocation 4
Capital Stock and Other Securities 4
Purchase, Redemption and Pricing of Short-Term Strategic Income Fund 4
Tax Status 5
Underwriters 5
Calculation of Performance Data 5
Financial Statements 5
<PAGE>
Exhibits
A - Statement of Additional Information, dated April 1, 1999, of John
Hancock Strategic Income Fund including unaudited financial statements
as of November 30, 1998 and audited financial statements as of May 31,
1998.
B - Statement of Additional Information, dated April 30, 1999, of John
Hancock Short-Term Strategic Income Fund including audited financial
statements as of October 31,1998.
C - Pro forma combined financial statements as of May 31, 1999, assuming
the reorganization of John Hancock Short-Term Strategic Income Fund
into 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 August 27, 1999.
The proxy statement and prospectus has been sent to the shareholders of
Short-Term Strategic Income Fund in connection with the solicitation by the
Trustees of Short-Term Strategic Income Fund of proxies to be voted at the
special meeting of shareholders of Short- Term Strategic Income Fund to be held
on October 13, 1999. This Statement of Additional Information incorporates by
reference the Statement of Additional Information of Strategic Income Fund,
dated April 1, 1999, and the Statement of Additional Information of Short-Term
Strategic Income Fund, dated April 30, 1999. The Strategic Income Fund SAI and
the Short-Term Strategic Income 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 Funds" in the Strategic Income Fund SAI.
Investment Objective and Policies
- ---------------------------------
For additional information about Strategic Income Fund's investment objective,
policies and restrictions, see "Investment Objectives 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.
<PAGE>
Tax Status
- ----------
For additional information about the tax status of Strategic Income Fund, see
"Tax Status" in the Strategic Income Fund SAI.
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 and unaudited financial statements of Strategic Income Fund at May 31,
1998 and November 30, 1998 are attached to the Strategic Income Fund SAI.
Pro forma combined financial statements as of May 31, 1999 are also attached
hereto.
Additional Information About Short-Term Strategic Income Fund
-------------------------------------------------------------
General Information and History
- -------------------------------
For additional information about Short-Term Strategic Income Fund generally and
its history, see "Organization of the Fund" in the Short-Term Strategic Income
Fund SAI.
Investment Objective and Policies
- ---------------------------------
For additional information about Short-Term Strategic Income Fund's investment
objective, policies and restrictions, see "Investment Objective and Policies"
and "Investment Restrictions" in the Short-Term Strategic Income Fund SAI.
Management of Short-Term Strategic Income Fund
- ----------------------------------------------
For additional information about the Short-Term Strategic Income Fund's Board of
Trustees, officers and management personnel, see "Those Responsible for
Management" in the Short-Term Strategic Income Fund SAI.
Investment Advisory and Other Services
- --------------------------------------
For additional information about Short-Term 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 Short-Term
Strategic Income Fund SAI.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about Short-Term Strategic Income Fund's brokerage
allocation practices, see "Brokerage Allocation" in the Short-Term Strategic
Income Fund SAI.
Capital Stock and Other Securities
- ----------------------------------
For additional information about the voting rights and other characteristics of
Short-Term Strategic Income Fund's shares of beneficial interest, see
"Description of the Fund's Shares" in the Short-Term Strategic Income Fund SAI.
Purchase, Redemption and Pricing of about Short-Term Strategic Income Fund
- --------------------------------------------------------------------------
Shares For additional information about the net asset value of Short-Term
Strategic Income Fund, see "Net Asset Value" in the Short-Term Strategic Income
Fund SAI.
<PAGE>
Tax Status
- ----------
For additional information about the tax status of Short-Term Strategic Income
Fund, see "Tax Status" in the Short-Term Strategic Income Fund SAI.
Underwriters
- ------------
For additional information about Short-Term Strategic Income Fund's principal
underwriter and the distribution contract between the principal underwriter and
Short-Term Strategic Income Fund, see "Distribution Contracts" in the Short-Term
Strategic Income Fund SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of Short-Term
Strategic Income Fund, see "Calculation of Performance" in the Short-Term
Strategic Income Fund SAI.
Financial Statements
- --------------------
Audited financial statements of Short-Term Strategic Income Fund at October
31, 1998 are attached to the about Short-Term Strategic Income Fund SAI.
<PAGE>
Supplement to John Hancock Funds
Statement of Additional Information
The following Waiver of Contingent Deferred Sales Charge has been deleted:
* Redemptions where the proceeds are used to purchase a John Hancock Declaration
Variable Annuity.
<PAGE>
JOHN HANCOCK STRATEGIC INCOME FUND
Class A, Class B and Class C Shares
Statement of Additional Information
April 1, 1999
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 April 1, 1999 (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 ................... 37
Special Redemptions ................................................... 40
Additional Services and Programs ...................................... 40
Description of the Fund's Shares ...................................... 42
Tax Status ............................................................ 43
Calculation of Performance ............................................ 48
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 fundamental
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 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.
2
<PAGE>
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 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.
3
<PAGE>
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 that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
4
<PAGE>
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 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.
5
<PAGE>
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.
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.
6
<PAGE>
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 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.
7
<PAGE>
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.
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 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 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 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.
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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.
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.
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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 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.
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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 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.
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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 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.
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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.
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.
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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
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.
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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.
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.
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.
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<PAGE>
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.
(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.
17
<PAGE>
(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 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:
18
<PAGE>
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>
<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, Director and Chief
October 1944 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
and Chief Executive Officer, 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
- ---------------- ---------------- --------------------------
<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 1996); Director, Brookline Bankcorp.
June 1931
Stephen L. Brown* Trustee Chairman and Chief Executive
John Hancock Place Officer, John Hancock Mutual Life
P.O. Box 111 Insurance Company; Director, the
Boston, MA 02117 Adviser, John Hancock Funds,
July 1937 Insurance Agency, John Hancock
Subsidiaries, Inc., The Berkeley
Group, Federal Reserve Bank of
Boston, Signature Services (until
January 1997;) Trustee, John
Hancock Asset Management (until
March 1997).
Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief
160 Washington Street Executive Officer, Brookline
Brookline, MA 02147 Bankcorp. (lending); Director,
February 1935 Lumber 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.;
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
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman and Distinguished
RR2 Box 480 Senior Fellow, Institute for
Woodstock, VT 05091 Sustainable Communities, Montpelier,
July 1939 Vermont (since 1991); Dean, Vermont
Law School (until 1991); Director,
Air and Water Technologies Corp.
(until 1996) (environmental services
and equipment), Niagara Mohawk Power
Co. (electric services); Concept
Five Technologies (until 1997);
Mitretek Systems (governmental
consulting services); Conversion
Technologies, Inc.; Living
Technologies, Inc.
Leland O. Erdahl Trustee Director of Uranium Resources
8046 Mackenzie Court Corporation; Hecla Mining Company,
Las Vegas, NV 89129 Canyon Resources Corporation and
December 1928 Original Sixteen to One Mines, Inc.
(1984-1987 and 1991-1998)
(management consultant); Director,
Freeport-McMoran Copper & Gold, Inc.
(until 1997); Vice President, Chief
Financial Officer and Director of
Amax Gold, Inc. (until 1998).
- -------------------
* 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
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
The Venture Capital Fund of New England (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980,
23rd Floor headed the venture capital group at
Boston, MA 02110 Bank of Boston Corporation.
November 1932
Gail D. Fosler Trustee Senior Vice President and Chief
3054 So. Abingdon Street Economist, The Conference Board
Arlington, VA 22206 (non-profit economic and business
December 1947 research); Director, Unisys Corp.;
and H.B. Fuller Company. Director,
National Bureau of Economic
Research (academic).
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 Chief Investment Officer and
Boston, MA 02199 Director, the Adviser, The Berkeley
April 1953 Group; Executive Vice President and
Director, John Hancock Funds;
Director, 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
- ---------------- ---------------- --------------------------
<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
CIES International Exchange of Scholars
3007 Tilden Street, N.W. (since January 1998), Vice
Washington, D.C. 20008 President, Institute of
May 1943 International Education (since
January 1998); Senior Fellow,
Cornell Institute of Public
Affairs, Cornell University (until
December 1997); President Emerita
of Wells College and St. Lawrence
University; Director, Niagara
Mohawk Power Corporation (electric
utility).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East Emeritus, Harvard University
Cambridge, MA 02138 Graduate School of Business
September 1931 Administration (as of June 1998).
- -------------------
* 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
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Mutual
John Hancock Place Life Insurance Company; Director,
P.O. Box 111 the Adviser, John Hancock Funds,
Boston, MA 02117 Signator Investors, Inc., Insurance
August 1937 Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp., NM
Capital, The Berkeley Group, JH
Networking Insurance Agency, Inc.;
Signature Services (until January
1997).
Osbert M. Hood Senior Vice President and Chief Senior Vice President, Chief
101 Huntington Avenue Financial Officer Financial Officer and Treasurer, the
Boston, MA 02199 Adviser, the Berkeley Group and John
August 1952 Hancock Funds, Inc.; Vice President
and Chief Financial Officer, John
Hancock Mutual Life Insurance
Company Retail Sector (until 1997).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services, John Hancock
July 1950 Funds, NM Capital and SAMCorp.;
Clerk, Insurance Agency, Inc.;
Counsel, John Hancock Mutual Life
Insurance Company (until February
1996).
- -------------------
* 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
- ---------------- ---------------- --------------------------
<S> <C> <C>
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services,
Boston, MA 02199 The Berkeley Group, NM Capital and
March 1950 SAMCo.
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer.
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>
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
Aggregate Compensation Funds in John Hancock Fund
Independent Trustees From the Fund(1) Complex to 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
Outstanding Shares of the
Name and Address of Shareholders Class of 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 of C 5.50%
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 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.
28
<PAGE>
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" 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.
29
<PAGE>
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 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
30
<PAGE>
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.
31
<PAGE>
<TABLE>
<CAPTION>
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
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
32
<PAGE>
<TABLE>
<CAPTION>
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation (1)
Class A investments (% of offering price) (% of offering price) (% of net 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% (2)
Next $1 or more above that -- 0.00% 0.25% 0.25% (2)
Maximum
reallowance First year Maximum
or commission service fee total compensation (1)
Class B investments (% of offering price) (% of net investment) (% of offering price)
--------------------- --------------------- ---------------------
All amounts 3.75% 0.25% 4.00%
Maximum
reallowance First year Maximum
or commission service fee total compensation (1)
Class C investments (% of offering price) (% of net investment) (% of offering price)
--------------------- --------------------- ---------------------
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.
(2) For Group Investment Program sales, the maximum total compensation for
investments of $1 million or more is 1.00% of the offering price (one year CDSC
of 1.00% applies for each sale).
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.
33
<PAGE>
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 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.
34
<PAGE>
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.
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). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
35
<PAGE>
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. A company's (not an individual's)
qualified and non-qualified retirement plan investments can be combined to take
advantage of this privilege.
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), SIMPLE IRA, SIMPLE 401(k),
Money Purchase Pension, Profit Sharing and Section 457 plans. An individual's
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.
36
<PAGE>
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 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 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)
-------
oAmount subject to CDSC $ 280.00
*The appreciation is based on all 100 shares in the lot not just the shares
being redeemed.
37
<PAGE>
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 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.
38
<PAGE>
* 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.
<TABLE>
<CAPTION>
Please see matrix for some examples.
CDSC Waiver Matrix for Class B and Class C
<S> <C> <C> <C> <C> <C>
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-
Distribution (401 (k), Rollover retirement
MPP, PSP)
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Death or Waived Waived Waived Waived Waived
Disability
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions in periodic
or 12% of payments
account value
annually in
periodic
payments.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually
12% of account in periodic
value annually payments
in periodic
payments.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account
(Class B only) annuity annuity annuity annuity value annually
payments (72t) payments (72t) payments (72t) payments (72t) in periodic
or 12% of or 12% of or 12% of or 12% of payments
account value account value account value account value
annually in annually in annually in annually in
periodic periodic periodic periodic
payments. payments. 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
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Qualified Domestic Waived Waived Waived N/A N/A
Relations Orders
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Waived Waived Waived N/A N/A
Employment Before
Normal Retirement Age
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Return of Waived Waived Waived Waived N/A
Excess
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
39
<PAGE>
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.
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 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 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.
40
<PAGE>
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."
41
<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 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).
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.
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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.
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.
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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 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.
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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.
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.
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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 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.
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<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.
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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 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:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
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:
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 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.
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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 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. 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. 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.
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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 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, 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).
A-1
<PAGE>
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 cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
B-1
<PAGE>
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
F-1
<PAGE>
Supplement to the John Hancock International/Global Funds Prospectus
for John Hancock Short-Term Strategic Income Fund
On June 8, 1999, the Trustees of the John Hancock Short-Term Strategic Income
Fund (the "Fund") voted to recommend that the shareholders approve a tax-free
reorganization of the Fund, as described below.
Under the terms of the reorganization, subject to shareholder approval at a
shareholder meeting scheduled to be held on October 13, 1999, the Fund would
transfer all of its assets and liabilities to John Hancock Strategic Income Fund
("Strategic Income Fund") in a tax-free exchange for shares of equal value of
Strategic Income Fund. Further information regarding the proposed reorganization
will be contained in a proxy statement and prospectus which is scheduled to be
mailed to shareholders during the last week of August, 1999.
Effective at the close of business on June 11, 1999, John Hancock Short-Term
Strategic Income Fund will be closed to all new accounts.
June 11, 1999
GLIPS 6/99
<PAGE>
Supplement to the John Hancock Growth Funds Prospectus dated June 1, 1999
Supplement to the John Hancock Income Funds Prospectus dated April 1, 1999
Supplement to the John Hancock Tax-Free Income Funds
Prospectus dated April 1, 1999
Supplement to the John Hancock Growth and Income Funds
Prospectus dated May 1, 1999
Supplement to the John Hancock Money Market Funds
Prospectus dated August 1, 1998
Supplement to the John Hancock International/Global Funds
Prospectus dated March 1, 1999
Supplement to the John Hancock Real Estate Fund
Prospectus dated May 1, 1999
The "CDSC waiver" section has been changed as follows:
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
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
6/11/99
<PAGE>
Supplement to the John Hancock International/Global Funds Prospectus
dated March 1, 1999
for John Hancock Short-Term Strategic Income Fund
John Hancock Short-Term Strategic Income Fund is now classified as a diversified
fund.
April 30, 1999
GLIPS 4/99
<PAGE>
- --------------------------------------------------------------------------------
JOHN HANCOCK
International/
Global Funds
[LOGO] Prospectus
March 1, 1999
- --------------------------------------------------------------------------------
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.
Growth
European Equity Fund
Global Fund
Global Health Sciences Fund
Global Technology Fund
International Fund
Pacific Basin Equities Fund
Income
Short-Term 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 Growth
of goals, strategies, risks,
performance and expenses. European Equity Fund 4
Global Fund 6
Global Health Sciences Fund 8
Global Technology Fund 10
International Fund 12
Pacific Basin Equities Fund 14
Income
Short-Term Strategic Income Fund 16
Policies and instructions Your account
for opening, maintaining
and closing an account Choosing a share class 18
in any international/global How sales charges are calculated 18
fund. Sales charge reductions and waivers 19
Opening an account 20
Buying shares 21
Selling shares 22
Transaction policies 24
Dividends and account policies 24
Additional investor services 25
Further information on the Fund details
international/global funds.
Business structure 26
Financial highlights 27
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
JOHN HANCOCK INTERNATIONAL/GLOBAL FUNDS
These funds invest in foreign and U.S. securities. Most of the funds invest
primarily in stocks and seek long-term growth of capital. One fund invests
primarily in bonds and seeks current income. 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 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
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the FDIC
or any other government agency. 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 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.
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.
3
<PAGE>
European Equity Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital. To pursue this goal, the
fund normally invests at least 80% of assets in stocks of European companies,
most of which have large market capitalizations. These companies derive more
than half of their revenues from European operations, are organized under
European law or are traded principally on European stock exchanges. While the
fund invests most heavily in developed economies, it is permitted to invest in
securities of European emerging market companies.
In managing the portfolio, the managers focus primarily on individual stock
selection rather than country allocation. A team of investment analysts
regularly screens European companies, such as those included in the MSCI Europe
Index, identifying those that appear to have strong leadership and potential for
sustained earnings growth. The analysts track these companies and typically
establish target buy and sell prices for each using a quantitative investment
model. The fund generally invests in companies based on further fundamental
financial analysis and on-site visits. The managers use country and sector
allocation guidelines to reduce concentration risk.
The fund may use derivatives (investments whose value is based on indices,
securities or currencies), especially to manage cash flows and currency
exposure. It may also invest in investment-grade debt securities issued by
European or U.S. companies and governments.
In abnormal market conditions, the fund may temporarily invest more than 20% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PAST PERFORMANCE
[Clipart] This section normally shows how the fund's total return has varied
from year to year, along with a broad based market index for reference. Because
the fund is less than a year old, there is not a full year of performance to
report.
SUBADVISER
Indocam International Investment Services
- --------------------------------------------------------------------------------
Paris-based team responsible for day-to-day investments
Supervised by the adviser
4
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Because the fund concentrates on a
single region of the world, its performance may be more volatile than that of a
fund that invests globally.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's management strategy will influence performance significantly.
European or large-capitalization stocks as a group could fall out of favor with
the market, causing the fund to underperform. Similarly, if the managers' stock
selection strategy doesn't perform as expected, the fund 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 Emerging market securities, derivatives and other higher-risk securities can
be hard to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise.
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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 5.00% 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 0.90% 0.90% 0.90%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 2.11% 2.11% 2.11%
Total fund operating expenses 3.31% 4.01% 4.01%
Expense reimbursement (at least until 3/1/00) 1.41% 1.41% 1.41%
Actual operating expenses 1.90% 2.60% 2.60%
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 $683 $1,343 $2,025 $3,833
Class B - with redemption $763 $1,393 $2,138 $3,978
- without redemption $263 $1,093 $1,938 $3,978
Class C - with redemption $363 $1,093 $1,938 $4,128
- without redemption $263 $1,093 $1,938 $4,128
FUND CODES
Class A
- ---------------------------
Ticker JHEAX
CUSIP 410233886
Newspaper --
SEC number 811-4932
Class B
- ---------------------------
Ticker JHEBX
CUSIP 410233878
Newspaper --
SEC number 811-4932
Class C
- ---------------------------
Ticker --
CUSIP 410233860
Newspaper --
SEC number 811-4932
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
5
<PAGE>
Global Fund
GOAL AND STRATEGY
[Clipart] 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
does not maintain a fixed allocation of assets, either with respect to
securities type or to geography.
In managing the portfolio, the managers concentrate on country allocation and
securities selection. They also seek to diversify the fund across countries and
sectors. The managers base the fund's country allocation on a quantitative model
as well as analysis of political trends and economic factors such as projected
currency exchange rates.
The investment analysis team is organized by sector and regularly screens large,
well-known companies, such as those listed in the MSCI All Country World Free
Index. The team then uses fundamental financial analysis to identify companies
that appear most promising in terms of stable growth, reasonable valuations and
management strength. The team conducts on-site visits and typically establishes
target buy and sell prices based on the team's valuation estimates.
Although the fund invests primarily in common stocks, it may invest in virtually
any type of equity or debt security, foreign or domestic.
The fund may use certain derivatives (investments whose value is based on
indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Miren Etcheverry
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1977
Gerardo J. Espinoza
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1979
John L.F. Wills
- --------------------------------------------------------------------------------
Senior vice president of adviser
Managing director of subadviser
Joined team in 1994
Joined subadviser in 1987
Began career in 1969
SUBADVISER
John Hancock Advisers
International Limited
- --------------------------------------------------------------------------------
London-based affiliate of adviser
Founded in 1986
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 and index 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 1998
33.00% -19.64% 23.14% -0.27% 33.85% -5.44% 9.86% 11.85% 6.58% 20.73%
Best quarter: Q4 '98, 20.73% Worst quarter: Q3 '90, -22.53%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class A
Class A - began 1/3/92 15.41% 7.98% -- 10.14%
Class B 15.73% 8.09% 10.14% --
Index 21.97% 14.78% 12.01% 13.20%
Index: MSCI All Country World Free Index, an unmanaged index of freely traded
stocks of foreign and U.S. companies.
6
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's management strategy will influence performance significantly. If the
fund invests in countries or regions that experience economic downturns,
performance could suffer. Similarly, if certain investments or industries don't
perform as expected, or if the managers' stock selection strategy doesn't
perform as expected, the fund 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 Emerging market securities, derivatives and other higher-risk securities can
be hard 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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 5.00% 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 0.86% 0.86% 0.86%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.66% 0.66% 0.66%
Total fund operating expenses 1.82% 2.52% 2.52%
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 $676 $1,044 $1,436 $2,530
Class B - with redemption $755 $1,085 $1,540 $2,684
- without redemption $255 $ 785 $1,340 $2,684
Class C - with redemption $355 $ 785 $1,340 $2,856
- without redemption $255 $ 785 $1,340 $2,856
FUND CODES
Class A
- ---------------------------
Ticker JHGAX
CUSIP 409906104
Newspaper GlobA
SEC number 811-4630
Class B
- ---------------------------
Ticker FGLOX
CUSIP 409906203
Newspaper GlobB
SEC number 811-4630
Class C
- ---------------------------
Ticker --
CUSIP 409906815
Newspaper --
SEC number 811-4630
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
7
<PAGE>
Global Health Sciences Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital. To pursue this goal, the
fund normally invests at least 65% of assets in U.S. and foreign stocks of
health care companies. These companies derive more than half of their revenues
from health care-related activities or commit more than half of their assets to
these activities. Because the fund is non-diversified, it may invest more than
5% of assets in securities of a single issuer.
In managing the portfolio, the managers study economic trends to allocate assets
among the following major categories:
o pharmaceuticals and biotechnology, including drug delivery systems
o medical devices, including orthopedic, cardiac and ophthalmic devices as well
as analytical equipment
o health-care services, including retail drug stores, nursing homes and HMOs
The managers also use broad economic analysis to identify promising industries
within these categories. Historically, companies that meet these criteria have
generally been U.S.-based companies.
The management team uses fundamental financial analysis to identify individual
companies of any size that appear most attractive in terms of earnings
stability, growth potential and valuation. The team generally assesses the
senior management of companies through interviews and company visits. An
independent advisory board composed of scientific and medical experts provides
advice and consultation on health care developments.
The fund may use certain derivatives (investments whose value is based on
indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other 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 and index 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 1998
18.36% 1.20% 8.85% 39.88% 6.50% 29.73% 19.49%
Best quarter: Q2 '97, 23.14% Worst quarter: Q1 '93, -18.85%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 10/1/91 13.52% 19.02% 20.36% --
Class B - began 3/7/94 13.68% -- -- 18.13%
Index 28.60% 24.05% 20.09% 24.83%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
PORTFOLIO MANAGERS
Linda I. Miller
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1995
Began career in 1980
Robert D. Hallisey, Jr.
- --------------------------------------------------------------------------------
Joined team in 1997
Joined adviser in 1993
Began career in 1993
8
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Another major factor in this fund's
performance is the economic condition of the health care sector. The value of
your investment may fluctuate more widely than it would in a fund that is
diversified across sectors.
The fund's management strategy will influence performance significantly. If the
fund invests in countries or regions that experience economic downturns,
performance could suffer. Similarly, if the managers' asset allocation and stock
selection strategies don't perform as expected, the fund could underperform its
peers or lose money.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If the fund invests heavily in a single issuer, its performance could suffer
significantly from adverse events affecting that issuer.
o Emerging market securities, derivatives and other higher-risk securities can
be hard 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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 5.00% 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 0.80% 0.80% 0.80%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.51% 0.51% 0.51%
Total fund operating expenses 1.61% 2.31% 2.31%
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 $656 $ 983 $1,332 $2,316
Class B - with redemption $734 $1,021 $1,435 $2,471
- without redemption $234 $ 721 $1,235 $2,471
Class C - with redemption $334 $ 721 $1,235 $2,646
- without redemption $234 $ 721 $1,235 $2,646
FUND CODES
Class A
- ---------------------------
Ticker JHGRX
CUSIP 410233308
Newspaper GIHSciA
SEC number 811-4932
Class B
- ---------------------------
Ticker JHRBX
CUSIP 410233704
Newspaper GIHSciB
SEC number 811-4932
Class C
- ---------------------------
Ticker --
CUSIP 410233852
Newspaper --
SEC number 811-4932
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
9
<PAGE>
Global Technology Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital with income as a secondary
objective. To pursue this goal, the fund invests primarily in equity securities
of technology companies. This designation includes U.S. and foreign companies
that rely extensively on technology in their product development or operations.
In managing the portfolio, the managers focus primarily on individual stock
selection rather than country allocation. The managers seek out companies of any
size whose stocks appear to be trading below their true value, as determined by
fundamental financial analysis of their business models and balance sheets as
well as interviews with senior management. The fund particularly favors
companies that are undergoing a business change that appears to signal
accelerated growth or higher earnings. Historically, companies that meet these
criteria have generally been U.S.-based multinational companies.
The fund may invest up to 10% of assets in debt securities of any maturity,
including bonds rated as low as CC/Ca and their unrated equivalents. (Bonds
rated below BBB/Baa are considered junk bonds.) It may also invest in certain
higher-risk securities, including securities that have not been offered to the
public, called restricted securities.
The fund may use certain derivatives (investments whose value is based on
indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
SUBADVISER
American Fund Advisors, Inc.
- --------------------------------------------------------------------------------
Responsible for day-to-day investments
Founded in 1978
Supervised by the adviser
PORTFOLIO MANAGERS
Barry J. Gordon
- --------------------------------------------------------------------------------
President of subadviser
Joined team in 1983
Marc H. Klee, CFA
- --------------------------------------------------------------------------------
Senior vice president of subadviser
Joined team in 1983
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 and index 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
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
16.61% -18.46% 33.05% 5.70% 32.06% 9.62% 46.53% 12.52% 6.68% 49.15%
Best quarter: Q4 '98, 43.01% Worst quarter: Q3 '90, -27.13%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A 41.68% 22.26% 17.08% --
Class B - began 1/3/94 43.16% -- -- 22.78%
Index 28.60% 24.05% 18.95% 24.05%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 U.S. common
stocks.
10
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements. Another major factor in this fund's
performance is the economic condition of the technology sector. The value of
your investment may fluctuate more widely than it would in a fund that is
diversified across sectors.
The fund's management strategy will influence performance significantly. If the
fund invests in countries or regions that experience economic downturns,
performance could suffer. Similarly, if the managers' stock selection strategy
doesn't perform as expected, the fund could underperform its peers or lose
money.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Emerging market securities, derivatives and other higher-risk securities can
be hard to value or to sell at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise. Junk bond
prices can fall on bad news about the economy, an industry or a company.
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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 5.00% 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 0.79% 0.79% 0.79%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.41% 0.41% 0.41%
Total fund operating expenses 1.50% 2.20% 2.20%
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 $645 $950 $1,278 $2,201
Class B - with redemption $723 $988 $1,380 $2,357
- without redemption $223 $688 $1,180 $2,357
Class C - with redemption $323 $688 $1,180 $2,534
- without redemption $223 $688 $1,180 $2,534
FUND CODES
Class A
- ---------------------------
Ticker NTTFX
CUSIP 478032303
Newspaper GITechA
SEC number 811-3392
Class B
- ---------------------------
Ticker FGTBX
CUSIP 478032402
Newspaper GlTechB
SEC number 811-3392
Class C
- ---------------------------
Ticker --
CUSIP 478032600
Newspaper --
SEC number 811-3392
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
11
<PAGE>
International Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital. To pursue this goal, the
fund normally invests at least 65% of assets in common stocks of companies
outside the United States. The fund does not maintain a fixed allocation of
assets, either with respect to securities type or geography.
In managing the portfolio, the managers concentrate on country allocation and
securities selection. They also seek to diversify the fund across countries and
sectors. The managers base the fund's country allocation on a quantitative model
as well as analysis of political trends and economic factors such as projected
currency exchange rates.
The investment analysis team is organized by sector and regularly screens large
companies, such as those listed in the MSCI All Country World-Ex U.S. Free Index
(an unmanaged global index that excludes U.S. companies). The team then uses
fundamental financial analysis to identify companies that appear most promising
in terms of stable growth, reasonable valuations and management strength. The
team conducts on-site visits and typically establishes target buy and sell
prices based on the team's valuation estimates.
Although the fund invests primarily in common stocks, it may invest in virtually
any type of equity or debt security, foreign or domestic. The fund may use
certain derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
Miren Etcheverry
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1977
Gerardo J. Espinoza
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1979
John L.F. Wills
- --------------------------------------------------------------------------------
Senior vice president of adviser
Managing director of subadviser
Joined team in 1994
Joined subadviser in 1987
Began career in 1969
SUBADVISER
John Hancock Advisers
International Limited
- --------------------------------------------------------------------------------
London-based affiliate of adviser
Founded in 1986
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 and index 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
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-6.61% 5.34% 11.36% -7.73% 17.67%
Best quarter: Q4 '98, 22.17% Worst quarter: Q3 '98, -17.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
1 year 5 year
Class A - began 1/3/94 11.84% 2.48%
Class B - began 1/3/94 11.77% 2.43%
Index 21.97% 14.78%
Index: MSCI All Country World-Ex U.S. Free Index, an unmanaged index of freely
traded stocks of foreign companies.
12
<PAGE>
MAIN RISKS
[Clipart] As with most growth funds, the value of your investment will go up and
down in response to stock market movements.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's management strategy will influence performance
significantly. If the fund invests in countries or regions that experience
economic downturns, performance could suffer. Similarly, if certain investments
or industries don't perform as expected, or if the managers' stock selection
strategy doesn't perform as expected, the fund 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 Emerging market securities, derivatives and other higher-risk securities can
be hard 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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 5.00% 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 1.00% 1.00% 1.00%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 2.35% 2.35% 2.35%
Total fund operating expenses 3.65% 4.35% 4.35%
Expense reimbursement (at least until 3/1/00) 1.86% 1.86% 1.86%
Annual operating expenses 1.79% 2.49% 2.49%
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 $673 $1,398 $2,143 $4,096
Class B - with redemption $752 $1,450 $2,259 $4,239
- without redemption $252 $1,150 $2,059 $4,239
Class C - with redemption $352 $1,150 $2,059 $4,385
- without redemption $252 $1,150 $2,059 $4,385
FUND CODES
Class A
- ---------------------------
Ticker FINAX
CUSIP 409906500
Newspaper --
SEC number 811-4630
Class B
- ---------------------------
Ticker FINBX
CUSIP 409906609
Newspaper --
SEC number 811-4630
Class C
- ---------------------------
Ticker --
CUSIP 409906831
Newspaper --
SEC number 811-4630
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
13
<PAGE>
Pacific Basin Equities Fund
GOAL AND STRATEGY
[Clipart] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in a diversified portfolio of equity securities of
companies in the Pacific Basin. The Pacific Basin includes all countries
bordering the Pacific Ocean, but the managers focus on Japan, Hong Kong,
Australia, Singapore, South Korea and Taiwan. The fund may invest in other
Pacific Basin countries, such as Indonesia, Malaysia, New Zealand, the
Philippines, Thailand, China and Vietnam. Some of these are emerging market
countries.
The fund may also invest in stocks of Asian companies outside the Pacific Basin
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.
In managing the portfolio, the managers focus primarily on individual stock
selection rather than country allocation. A team of investment analysts
regularly screens larger and more established companies in these countries which
may be small- or medium-capitalization companies by U.S. standards. The team
identifies those that appear to have capable management and the potential for
strong earnings growth. They track these companies and typically establish
target buy and sell prices for each using a quantitative investment model. The
fund generally invests in 50 to 100 companies based on further fundamental
financial analysis and on-site visits. The managers use country and sector
allocation guidelines to reduce concentration risk.
Although the fund invests primarily in common stocks, it may invest in virtually
any type of equity security, foreign or domestic. The fund may use certain
derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
SUBADVISERS
Indocam Asia Advisers Limited
- --------------------------------------------------------------------------------
Hong Kong-based team responsible for day-to-day investments
Supervised by the adviser
John Hancock Advisers
International Limited
- --------------------------------------------------------------------------------
London-based affiliate of adviser
Founded in 1986
PORTFOLIO MANAGERS
Ayaz Ebrahim
- --------------------------------------------------------------------------------
Director and CIO of Indocam
Joined team in 1997
Began career in 1988
Miren Etcheverry
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team and adviser in 1996
Began career in 1977
Gerardo J. Espinoza
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team and adviser in 1996
Began career in 1979
John L.F. Wills
- --------------------------------------------------------------------------------
Senior vice president of adviser
Managing director of subadviser
Joined team 1988
Joined subadviser in 1987
Began career in 1969
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 and index 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
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
19.04% -23.01% 12.68% 2.02% 70.45% -9.28% 4.95% 3.37% -27.87% -10.72%
Best quarter: Q4 '93, 23.91% Worst quarter: Q4 '97, -25.64%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of
1 year 5 year 10 year Class B
Class A -15.19% -9.65% 0.79% --
Class B - began 3/7/94 -15.83% -- -- -9.01%
Index 2.69% -3.95% -0.71% -6.73%
Index: MSCI Pacific Index, an unmanaged index of stocks of companies in
Australia, Japan and certain other Pacific Rim countries.
14
<PAGE>
MAIN RISKS
[Clipart] As with any growth fund, the value of your investment will go up and
down in response to stock market movements. Because the fund concentrates on a
single region of the world, its performance may be more volatile than that of a
fund that invests globally.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse. In
emerging market economies, including much of the Pacific Basin, these risks are
more significant than in developed economies.
The fund's management strategy will influence performance significantly. Pacific
Basin stocks as a group could fall out of favor with the market, causing the
fund to underperform funds that focus on other types of stocks. Similarly, if
the managers' stock selection strategy doesn't perform as expected, the fund
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 Emerging market securities, derivatives and other higher-risk securities can
be hard to value or sell at a fair price.
o Stocks of small- and medium-capitalization companies tend to be more volatile
than those of larger companies.
o Certain derivatives could produce disproportionate gains or losses.
o Any bonds held by the fund could be downgraded in credit rating or go into
default. Bond prices generally fall when interest rates rise.
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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price .00% 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 0.80% 0.80% 0.80%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 1.36% 1.36% 1.36%
Total fund operating expenses 2.46% 3.16% 3.16%
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 $737 $1,228 $1,745 $3,156
Class B - with redemption $819 $1,274 $1,854 $3,306
- without redemption $319 $ 974 $1,654 $3,306
Class C - with redemption $419 $ 974 $1,654 $3,467
- without redemption $319 $ 974 $1,654 $3,467
FUND CODES
Class A
- ---------------------------
Ticker JHWPX
CUSIP 410233209
Newspaper PacBasA
SEC number 811-4932
Class B
- ---------------------------
Ticker FPBBX
CUSIP 410233506
Newspaper PacBasB
SEC number 811-4932
Class C
- ---------------------------
Ticker --
CUSIP 410233605
Newspaper --
SEC number 811-4932
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
15
<PAGE>
Short-Term Strategic Income Fund
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income. To pursue this goal,
the fund invests primarily in the following types of securities:
o foreign government and corpo-rate debt securities from developed and emerging
markets
o U.S. government and agency securities
o U.S. corporate debt securities
Under normal circumstances, the fund invests assets in all three of these
sectors, but may invest up to 100% of assets in any one sector. The fund
maintains an average portfolio maturity of three years or less.
In managing the portfolio, the managers allocate assets among the three major
sectors based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends.
Within each sector, the managers look for securities that are appropriate for
the overall portfolio in terms of yield, credit quality, structure and industry
distribution. In selecting government securities, relative yields and
risk/reward ratios are the primary considerations. In selecting corporate bonds,
the managers look for market leaders with strong business models and balance
sheets.
The fund maintains an average portfolio quality rating of A, which is an
investment-grade rating. However, 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.)
Because the fund is non-diversified, it may invest more than 5% of assets in
securities of a single issuer.
The fund may use certain derivatives (investments whose value is based on
indices, securities or currencies).
================================================================================
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 and index 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
- --------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998
7.22% 2.57% 5.07% 1.57% 9.25% 8.09% 4.60% 1.19%
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1975
Arthur N. Calavritinos, CFA
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1988
Began career in 1986
Best quarter: Q2 '95, 5.49% Worst quarter: Q3 '98, -4.00%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/98
- --------------------------------------------------------------------------------
Life of Life of
1 year 5 year Class A Class B
Class A - began 1/3/92 -1.32% 4.93% 4.79% --
Class B - began 12/28/90 -1.69% 4.89% -- 4.91%
Index 9.11% 4.82% 4.14% 4.67%
Index: Salomon Brothers World Money Market Index, an unmanaged index of
short-term foreign bonds.
16
<PAGE>
MAIN RISKS
[Clipart] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices typically fall. Any bonds
held by the fund could be downgraded in credit rating or go into default. Junk
bonds can fall on bad news about a country, an industry or a company. Share
price, yield and total return may fluctuate more than with less aggressive bond
funds.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social upheavals
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's management strategy will influence performance significantly. If the
fund invests in countries or regions that experience economic downturns,
performance could suffer. Similarly, if the managers' country or sector
allocations and securities selection strategies don't perform as expected, the
fund could underperform its peers or lose money.
To the extent that the fund invests in securities with additional risks, those
risks could reduce performance:
o If the fund invests heavily in a single issuer, its performance could suffer
significantly from adverse events affecting that issuer.
o Emerging market, securities, derivatives and other higher-risk securities can
be hard 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. Because Class C shares are new, their expenses are based on Class B
expenses.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases
as a % of purchase price 3.00% none none
Maximum deferred sales charge (load)
as a % of purchase or sale price,
whichever is less none(1) 3.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.65% 0.65% 0.65%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.40% 0.40% 0.40%
Total fund operating expenses 1.35% 2.05% 2.05%
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 $433 $715 $1,017 $1,875
Class B - with redemption $508 $842 $1,103 $1,958
- without redemption $208 $643 $1,103 $1,958
Class C - with redemption $308 $643 $1,103 $2,379
- without redemption $208 $643 $1,103 $2,379
FUND CODES
Class A
- ---------------------------
Ticker JHSAX
CUSIP 409906856
Newspaper STStratA
SEC number 811-4630
Class B
- ---------------------------
Ticker FRSWX
CUSIP 409906708
Newspaper STStratB
SEC number 811-4630
Class C
- ---------------------------
Ticker --
CUSIP 409906799
Newspaper --
SEC number 811-4630
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
17
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, including a Rule 12b-1 plan that
allows it to pay fees for the sale and distribution of its shares. Your
financial representative can help you decide which share class is best for you.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o Front-end sales charges, as described at right.
o Distribution and service (12b-1) fees of 0.30%.
- --------------------------------------------------------------------------------
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 (Short-Term
Strategic Income) or eight years (all other funds), thus reducing future
annual expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
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.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
- --------------------------------------------------------------------------------
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 - all other 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
- --------------------------------------------------------------------------------
CDSC on shares
Your investment 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.
18 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
- --------------------------------------------------------------------------------
CDSC on Short-Term CDSC on all
Years after Strategic Income other fund shares
purchase 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 6th year none none
- --------------------------------------------------------------------------------
Class C deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1st 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 19
<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. You must submit additional documentation when
opening trust, corporate or power of attorney accounts. For more information,
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.
20 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 to investment amount payable to
"John Hancock Signature "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 slip
mail them to Signature is available, include a note
Services (address below). 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
[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 the
application to your financial amount of your investment to:
representative, or mail it to First Signature Bank & Trust
Signature Services. Account # 900000260
Routing # 211475000
o Obtain your account number by
calling your financial Specify the fund name, your share
representative or Signature class, your account number and
Services. the name(s) in which the account
is registered. Your bank may
o Instruct your bank to wire the charge a fee to wire funds.
amount of your 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, 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 21
<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, call
your financial representative
or 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 To verify that the
any amount (accounts of any telephone redemption
type). privilege is in place on an
account, or to request the
o Requests by phone to sell form to add it to an
up to $100,000 (accounts existing account, call
with telephone redemption Signature Services.
privileges).
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 Short-Term Strategic o Request checkwriting on your
Income 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.
22 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 o On the letter, the signatures and
partner 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 with rights o Letter of instruction signed by
of surviorship whose co-tenants are surviving tenant.
deceased.
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, o Call 1-800-225-5291 for
guardians and other sellers or account instructions.
types not listed above.
- ----------------------------------------
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 sell shares through a systematic withdrawal plan, see
"Additional investor services."
YOUR ACCOUNT 23
<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. The fund may also value securities at fair value
if the value of these securities has been materially affected by events
occurring after the close of a foreign market.
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 Signature Services receives your
request in good order.
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 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.
- --------------------------------------------------------------------------------
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 Short-Term Strategic Income Fund declares income dividends daily and
pays them monthly. These income dividends begin accruing the day after the fund
receives payment and continue through the day your shares are actually sold. The
other funds pay income dividends, if any, annually. All funds distribute any
capital gains annually. Short-Term Strategic Income Fund's dividends are mostly
from ordinary income and the other funds' dividends are mostly from capital
gains.
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.
24 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 income
and short-term capital gains are taxable as ordinary income. Dividends from a
fund's long-term capital gains are taxable at a lower rate. Whether gains are
short-term or long-term depends on the fund's holding period. Some dividends
paid in January may be taxable as if they had been paid the previous December.
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.
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 issuers in which the funds invest,
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 25
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the John Hancock
international/global 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 European Equity, Global Health Sciences and International
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 international/ global funds last fiscal year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
European Equity 0.00%
Global 0.86%
Global Health Sciences 0.80%
Global Technology 0.79%
International 0.00%
Pacific Basin Equities 0.80%
Short-Term Strategic Income 0.65%
[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
------------------------------------
Subadvisors
John Hancock Advisers
International Limited
32-36 Duke Street
St. James SWIY6DF
London, U.K.
American Fund Advisors, Inc.
1415 Kellum Place
Garden City, NY 11530
Indocam Asia Advisors 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.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
State Street Bank and Trust Company
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
26 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.
European Equity Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Class A - period ended: 10/98(1)
- -------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income loss(2) 0.01
Net realized and unrealized gain (loss) on investments, financial futures
contracts and foreign currency transactions 0.06
Total from investment operations 0.07
Net asset value, end of period $10.07
Total investment return at net asset value(3) (%) 0.70(4)
Total adjusted investment return at net asset value(3,5) (%) (0.24)(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 12,147
Ratio of expenses to average net assets (%) 1.90(6)
Ratio of adjusted expenses to average net assets(7) (%) 3.31(6)
Ratio of net investment income (loss) to average net assets (%) 0.16(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.25)(6)
Portfolio turnover rate (%) 31
Fee reduction per share(2) ($) 0.10
<CAPTION>
- -------------------------------------------------------------------------------------
Class B - period ended: 10/98(1)
- -------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $11.07
Net investment income (loss)(2) (0.04)
Net realized and unrealized gain (loss) on investments, financial futures
contracts and foreign currency transactions (0.99)
Total from investment operations (1.03)
Net asset value, end of period $10.04
Total investment return at net asset value(3) (%) (9.30)(4)
Total adjusted investment return at net asset value(3,5) (%) (9.89)(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 15,847
Ratio of expenses to average net assets (%) 2.60(6)
Ratio of adjusted expenses to average net assets(7) (%) 4.01(6)
Ratio of net investment income (loss) to average net assets (%) (1.12)(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (2.53)(6)
Portfolio turnover rate (%) 31
Fee reduction per share(2) ($) 0.06
</TABLE>
(1) Class A and Class B shares began operations on March 2, 1998 and June 1,
1998, 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) 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.
FUND DETAILS 27
<PAGE>
Global Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94 10/95 10/96 10/97 10/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.30 $14.16 $12.67 $12.97 $12.94
Net investment income (loss)(1) (0.07) (0.03) (0.02) (0.05) (0.05)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 1.24 (0.13) 1.20 1.21 1.53
Total from investment operations 1.17 (0.16) 1.18 1.16 1.48
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions (1.31) (1.33) (0.88) (1.19) (0.96)
Net asset value, end of period $14.16 $12.67 $12.97 $12.94 $13.46
Total investment return at net asset value(2) (%) 8.64 (0.37) 9.87 9.36 11.88
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 100,973 93,597 94,746 92,127 120,775
Ratio of expenses to average net assets (%) 1.98 1.87 1.88 1.81(3) 1.82(3)
Ratio of net investment income (loss) to average net assets (%) (0.54) (0.23) (0.19) (0.36) (0.33)
Portfolio turnover rate (%) 61 60 98 81 160
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95 10/96 10/97 10/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.17 $13.93 $12.36 $12.54 $12.39
Net investment income (loss)(1) (0.15) (0.11) (0.10) (0.14) (0.13)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 1.22 (0.13) 1.16 1.18 1.46
Total from investment operations 1.07 (0.24) 1.06 1.04 1.33
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions (1.31) (1.33) (0.88) (1.19) (0.96)
Net asset value, end of period $13.93 $12.36 $12.54 $12.39 $12.76
Total investment return at net asset value(2) (%) 7.97 (1.01) 9.10 8.67 11.15
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 31,822 24,570 27,599 28,007 55,229
Ratio of expenses to average net assets (%) 2.59 2.57 2.54 2.49(3) 2.46(3)
Ratio of net investment income (loss) to average net assets (%) (1.12) (0.89) (0.83) (1.04) (0.97)
Portfolio turnover rate (%) 61 60 98 81 160
</TABLE>
(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) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
28 FUND DETAILS
<PAGE>
Global Health Sciences Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/94 8/95 8/96 10/96(1) 10/97 10/98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $13.38 $16.51 $21.61 $25.43 $25.11 $30.25
Net investment income (loss) (0.32) (0.36)(2) (0.19)(2) (0.05)(2) (0.19)(2) (0.23)(2)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 3.45 5.46 4.15 (0.27) 6.56 4.38
Total from investment operations 3.13 5.10 3.96 (0.32) 6.37 4.15
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- -- (0.14) -- (1.23) (0.51)
Net asset value, end of period $16.51 $21.61 $25.43 $25.11 $30.25 $33.89
Total investment return at net asset value(3) (%) 23.39 30.89 18.39 (1.26)(4) 26.63 13.91
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,643 24,394 42,405 42,618 53,122 83,928
Ratio of expenses to average net assets (%) 2.55 2.56 1.80 1.92(5) 1.68 1.61
Ratio of net investment income (loss) to average
net assets (%) (2.01) (1.99) (0.75) (1.04)(5) (0.71) (0.71)
Portfolio turnover rate (%) 52 38 68 24 57 39
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/94(6) 8/95 8/96 10/96(1) 10/97 10/98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $29.40
Net investment income (loss)(2) (0.17) (0.55) (0.34) (0.08) (0.37) (0.45)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.66) 5.44 4.07 (0.26) 6.40 4.25
Total from investment operations (0.83) 4.89 3.73 (0.34) 6.03 3.80
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- -- (0.14) -- (1.23) (0.51)
Net asset value, end of period $16.46 $21.35 $24.94 $24.60 $29.40 $32.69
Total investment return at net asset value(3) (%) (4.80)(4) 29.71 17.53 (1.36)(4) 25.76 13.11
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,071 6,333 36,591 37,521 53,436 123,880
Ratio of expenses to average net assets (%) 3.34(5) 3.45 2.42 2.62(5) 2.38 2.31
Ratio of net investment income (loss) to average
net assets (%) (2.65)(5) (2.91) (1.33) (1.74)(5) (1.41) (1.41)
Portfolio turnover rate (%) 52 38 68 24 57 39
</TABLE>
(1) Effective October 31, 1996, the fiscal year end changed from August 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) Annualized.
(6) Class B shares began operations on March 7, 1994.
FUND DETAILS 29
<PAGE>
Global Technology Fund
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95 10/96(1) 10/97 10/98
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $30.05
Net investment income (loss) (0.21) (0.22)(2) (0.22)(2,3) (0.14)(2) (0.27)(2) (0.28)(2)
Net realized and unrealized gain (loss) on
investments and options 4.92 1.87 8.53 1.42 5.76 1.09
Total from investment operations 4.71 1.65 8.31 1.28 5.49 0.81
Less distributions:
Distributions from net realized gain on investments
sold and options (2.20) (1.26) (1.64) -- (1.23) (2.40)
Net asset value, end of period $17.45 $17.84 $24.51 $25.79 $30.05 $28.46
Total investment return at net asset value(4) (%) 32.06 9.62 46.53 5.22(5) 21.90 3.95
Total adjusted investment return at net asset
value(4) (%) -- -- 46.41(6) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 41,749 52,193 155,001 166,010 184,048 186,259
Ratio of expenses to average net assets (%) 2.10 2.16 1.67(3) 1.57(7) 1.51 1.50
Ratio of net investment income (loss) to average
net assets (%) (1.49) (1.25) (0.89)(3) (0.68)(7) (0.95) (0.97)
Portfolio turnover rate (%) 86 67 70 64 104 86
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(8) 12/95 10/96(1) 10/97 10/98
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.24 $17.68 $24.08 $25.20 $29.12
Net investment income (loss)(2) (0.35) (0.39)(3) (0.28) (0.45) (0.45)
Net realized and unrealized gain (loss) on investments and options 2.05 8.43 1.40 5.60 1.02
Total from investment operations 1.70 8.04 1.12 5.15 0.57
Less distributions:
Distributions from net realized gain on investments sold (1.26) (1.64) -- (1.23) (2.40)
Net asset value, end of period $17.68 $24.08 $25.20 $29.12 $27.29
Total investment return at net asset value(4) (%) 10.02(5) 45.42 4.65(5) 21.04 3.20
Total adjusted investment return at net asset value(4) (%) -- 45.30(6) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,324 35,754 50,949 65,851 77,999
Ratio of expenses to average net assets (%) 2.90(7) 2.41(3) 2.27(7) 2.21 2.20
Ratio of net investment income (loss) to average net assets (%) (1.98)(7) (1.62)(3) (1.38)(7) (1.65) (1.67)
Portfolio turnover rate (%) 67 70 64 104 86
</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) Reflects voluntary fee reductions and expense limitations in effect during
the year ended December 31, 1995, which amounted to $0.02 and $0.03 per
share for Class A and Class B shares, respectively. Absent such reductions
the ratio of expenses to average net assets would have been 1.79% and 2.53%
for Class A and Class B shares, respectively, and the ratio of net
investment loss to average net assets would have been (1.01%) and (1.74%)
for Class A and Class B shares, respectively.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation which takes into consideration fees
and expenses waived or borne by the adviser during the periods shown.
(7) Annualized.
(8) Class B shares commenced operations on January 3, 1994.
30 FUND DETAILS
<PAGE>
International Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95 10/96 10/97 10/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $8.65 $8.14 $8.70 $8.41
Net investment income (loss) 0.07(2) 0.04 0.06(2) (0.02)(2) 0.00(2,3)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.08 (0.47) 0.50 (0.26) 0.47
Total from investment operations 0.15 (0.43) 0.56 (0.28) 0.47
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) -- -- (0.07)
Total distributions -- (0.08) -- (0.01) (0.07)
Net asset value, end of period $8.65 $8.14 $8.70 $8.41 $8.81
Total investment return at net asset value(4) (%) 1.77(5) (4.96) 6.88 (3.22) 5.61
Total adjusted investment return at net asset value(4,6) (%) (0.52)(5) (8.12) 5.33 (4.52) 3.75
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,426 4,215 5,098 4,965 6,116
Ratio of expenses to average net assets (%) 1.50(7) 1.64 1.75 1.73(8) 1.79(8)
Ratio of adjusted expenses to average net assets(9) (%) 3.79(7) 4.80 3.30 3.03(8) 3.65(8)
Ratio of net investment income (loss) to average net assets (%) 1.02(7) 0.56 0.68 (0.16) 0.04
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) (1.27)(7) (2.60) (0.87) (1.46) (1.82)
Portfolio turnover rate (%) 50 69 83 169 129
Fee reduction per share(2) ($) 0.16 0.25 0.14 0.12 0.17
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94(1) 10/95 10/96 10/97 10/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $8.61 $8.05 $8.55 $8.22
Net investment income (loss) 0.02(2) (0.03) 0.00(2,3) (0.08)(2) (0.06)(2)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.09 (0.48) 0.50 (0.25) 0.46
Total from investment operations 0.11 (0.51) 0.50 (0.33) 0.40
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- (0.05) -- -- (0.07)
Net asset value, end of period $8.61 $8.05 $8.55 $8.22 $8.55
Total investment return at net asset value(4) (%) 1.29(5) (5.89) 6.21 (3.86) 4.88
Total adjusted investment return at net asset value(4,6) (%) (1.00)(5) (9.05) 4.66 (5.16) 3.02
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,948 3,990 8,175 8,713 9,720
Ratio of expenses to average net assets (%) 2.22(7) 2.52 2.45 2.43(8) 2.49(8)
Ratio of adjusted expenses to average net assets(9) (%) 4.51(7) 5.68 4.00 3.73(8) 4.35(8)
Ratio of net investment income (loss) to average net assets (%) 0.31(7) (0.37) 0.02 (0.88) (0.66)
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) (1.98)(7) (3.53) (1.53) (2.18) (2.52)
Portfolio turnover rate (%) 50 69 83 169 129
Fee reduction per share(2) ($) 0.16 0.25 0.14 0.12 0.17
</TABLE>
FUND DETAILS 31
<PAGE>
International Fund continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Class C - period ended: 10/98(1)
- -------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $9.36
Net investment income (loss)(2) (0.03)
Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.78)
Total from investment operations (0.81)
Net asset value, end of period $8.55
Total investment return at net asset value(4) (%) (8.65)(5)
Total adjusted investment return at net asset value (4,6) (%) (9.43)(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 23
Ratio of expenses to average net assets (%) 2.29(7,8)
Ratio of adjusted expenses to average net assets(9) (%) 4.15(7,8)
Ratio of net investment income (loss) to average net assets (%) (1.27)(7)
Ratio of adjusted net investment income (loss) to average net assets(9) (%) (3.13)(7)
Portfolio turnover rate (%) 129
Fee reduction per share(2) ($) 0.07
</TABLE>
(1) Class A and Class B shares began operations on January 3, 1994. Class C
shares began operations on June 1, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(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) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
(9) Unreimbursed, without fee reduction.
32 FUND DETAILS
<PAGE>
Pacific Basin Equities Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/94 8/95 8/96 10/96(1) 10/97 10/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $11.63
Net investment income (loss)(2) (0.10) 0.02(3) (0.02) (0.02) (0.07) 0.02
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 3.12 (1.24) 0.65 (0.25) (2.66) (2.89)
Total from investment operations 3.02 (1.22) 0.63 (0.27) (2.73) (2.87)
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions (0.41) (0.55) -- -- (0.11) --
Net asset value, end of period $15.88 $14.11 $14.74 $14.47 $11.63 $8.76
Total investment return at net asset value(4) (%) 22.82 (7.65) 4.47 (1.83)(5) (19.03) (24.68)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 50,261 37,417 41,951 38,694 21,109 14,717
Ratio of expenses to average net assets (%) 2.43 2.05 1.97 2.21(6) 2.06 2.46
Ratio of net investment income (loss) to average
net assets (%) (0.66) 0.13(3) (0.15) (0.83)(6) (0.49) 0.22
Portfolio turnover rate (%) 68 48 73 15 118 230
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/94(7) 8/95 8/96 10/96(2) 10/97 10/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $11.32
Net investment income (loss)(2) (0.09) (0.09) (0.13) (0.04) (0.18) (0.04)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.82 (1.24) 0.66 (0.25) (2.59) (2.81)
Total from investment operations 0.73 (1.33) 0.53 (0.29) (2.77) (2.85)
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 $8.47
Total investment return at net asset value(4) (%) 4.83(5) (8.38) 3.80 (2.00)(5) (19.67) (25.18)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,480 14,368 32,342 30,147 17,320 13,166
Ratio of expenses to average net assets (%) 3.00(6) 2.77 2.64 2.90(6) 2.76 3.16
Ratio of net investment income (loss) to average
net assets (%) (1.40)(6) (0.66) (0.86) (1.52)(6) (1.19) (0.48)
Portfolio turnover rate (%) 68 48 73 15 118 230
</TABLE>
(1) Effective October 31, 1996, the fiscal year end changed from August 31 to
October 31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) 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.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) Annualized.
(7) Class B shares began operations on March 7, 1994.
FUND DETAILS 33
<PAGE>
Short-Term Strategic Income Fund
Figures audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94 10/95 10/96 10/97 10/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.12 $8.47 $8.41 $8.46 $8.31
Net investment income (loss) 0.76(1) 0.77(1) 0.65 0.61(1) 0.49(1)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.53) (0.06) 0.05 (0.15) (0.39)
Total from investment operations 0.23 0.71 0.70 0.46 0.10
Less distributions:
Dividends from net investment income (0.62) (0.61) (0.57) (0.52) (0.48)
Distributions in excess of net investment income (0.04) -- -- (0.08) (0.00)(2)
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) (0.01)
Total distributions (0.88) (0.77) (0.65) (0.61) (0.49)
Net asset value, end of period $8.47 $8.41 $8.46 $8.31 $7.92
Total investment return at net asset value(3) (%) 2.64 8.75 8.60 5.55 1.17
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 13,091 16,997 49,338 64,059 50,498
Ratio of expenses to average net assets (%) 1.26 1.33 1.48 1.43 1.35
Ratio of net investment income (loss) to average net assets (%) 8.71 9.13 7.59 7.22 5.97
Portfolio turnover rate (%) 150 147 77 71 74
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95 10/96 10/97 10/98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.11 $8.46 $8.40 $8.45 $8.30
Net investment income (loss) 0.70(1) 0.70(1) 0.59 0.55(1) 0.44(1)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.53) (0.06) 0.05 (0.15) (0.38)
Total from investment operations 0.17 0.64 0.64 0.40 0.06
Less distributions:
Dividends from net investment income (0.56) (0.56) (0.52) (0.47) (0.43)
Distributions in excess of net investment income (0.04) -- -- (0.07) (0.00)(2)
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) (0.01)
Total distributions (0.82) (0.70) (0.59) (0.55) (0.44)
Net asset value, end of period $8.46 $8.40 $8.45 $8.30 $7.92
Total investment return at net asset value(3) (%) 1.93 7.97 7.89 4.83 0.60
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 98,390 84,601 48,137 25,908 19,950
Ratio of expenses to average net assets (%) 1.99 2.07 2.12 2.13 2.02
Ratio of net investment income to average net assets (%) 8.00 8.40 7.07 6.51 5.30
Portfolio turnover rate (%) 150 147 77 71 74
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
34 FUND DETAILS
<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, 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) 1999 John Hancock Funds, Inc.
GLIPN 3/99
John Hancock(R)
<PAGE>
Supplement to John Hancock Funds
Statement of Additional Information
The following Waiver of Contingent Deferred Sales Charge has been deleted:
* Redemptions where the proceeds are used to purchase a John Hancock Declaration
Variable Annuity.
6/11/99
<PAGE>
JOHN HANCOCK SHORT-TERM STRATEGIC INCOME FUND
Class A, Class B and Class C Shares
Statement Of Additional Information
April 30, 1999
This Statement of Additional Information provides information about John Hancock
Short-Term Strategic Income Fund (the "Fund"), in addition to the information
that is contained in the combined International/Global Funds' Prospectus dated
March 1, 1999 (the "Prospectus"). The Fund is a diversified 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 MA 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund........................................... 2
Investment Objective and Policies.................................. 2
Investment Restrictions............................................ 19
Those Responsible for Management................................... 21
Investment Advisory and Other Services............................. 30
Distribution Contracts............................................. 32
Sales Compensation................................................. 34
Net Asset Value.................................................... 35
Initial Sales Charge on Class A Shares............................. 36
Deferred Sales Charge on Class B and Class C Shares................ 39
Special Redemptions................................................ 43
Additional Services and Programs................................... 43
Description of the Fund's Shares................................... 45
Tax Status......................................................... 46
Calculation of Performance......................................... 50
Brokerage Allocation............................................... 52
Transfer Agent Services............................................ 54
Custody of Portfolio............................................... 54
Independent Auditors............................................... 54
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 a 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 commenced operations on July 31, 1990.
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 A contains further
information describing investment risks. The investment objective of the Fund is
fundamental and may only be changed with shareholder approval. There is no
assurance that the Fund will achieve its investment objective.
The Fund's investment objective is a high level of current income. The Fund will
seek to achieve this objective by investing primarily in: (i) foreign government
and corporate debt securities, (ii) U.S. Government securities and (iii)
corporate debt securities of U.S. issuers. There is no fixed allocation among
the types of securities listed.
General. The Fund may invest in all types of debt securities, including debt
obligations issued or guaranteed by United States or foreign governments,
political subdivisions thereof (including states, provinces and municipalities)
or their agencies and instrumentalities ("Governmental entities"), or issued or
guaranteed by international organizations designated or supported by
governmental entities to promote economic reconstruction or development
("supranational entities"), or issued by corporations or financial institutions.
Examples of supranational entities include the International Bank for
Reconstruction and Development (the "World Bank"), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings. Securities issued by supranational entities may be
denominated in U.S. dollars, a foreign currency or a multi-national currency
unit. Securities of corporations and financial institutions in which the Fund
may invest include corporate and commercial obligations, such as medium-term
notes and commercial paper, which may be indexed to foreign currency exchange
rates. 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 such supranational entities which may have been designated by the
SEC. There is no fixed allocation among the foregoing types of securities.
The maximum average dollar weighted maturity of the Fund is three years. This
maturity is calculated by including average maturities, prepayments, refunds,
redemptions, put dates and call dates. 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 or increasing rate note securities.
The Fund may invest in debt obligations denominated in the U.S. dollar or in
non- U.S. currencies issued or guaranteed by foreign corporations, certain
supranational entities (as described above), and foreign governments (including
political subdivisions having taxing authority) or their agencies or
instrumentalities. The Fund may also invest in debt obligations issued by U.S.
corporations denominated in non-U.S. currencies.
2
<PAGE>
Foreign Securities. 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. The Fund may invest in securities of issuers in
industrialized Western European countries (including Scandinavian countries) and
in Canada, Japan, Australia and New Zealand, as well as in emerging markets or
countries with limited or developing capital markets. Investments in securities
of issuers in emerging markets generally involve more risk and may be considered
highly speculative, as described in more detail below.
The value of portfolio securities denominated in foreign currencies may increase
or decrease in response to changes in currency exchange rates. The value of the
Fund's dividends may also be affected. The Fund will incur costs in connection
with converting between currencies. Foreign companies may not be subject to
accounting standards and government supervision comparable to those applicable
to U.S. companies, and there is often less publicly available information about
their operations. Foreign markets generally provide less liquidity than U.S.
markets (and thus potentially greater price volatility), and typically provide
fewer regulatory protections for investors. Foreign securities can also be
affected by political or financial instability abroad. Additional costs could be
incurred in connection with the Fund's international investment activities.
Foreign brokerage commissions are generally higher than in the U.S. Expenses may
also be incurred on currency exchanges when the Fund changes investments from
one country to another. Increased custodian costs as well as administrative
difficulties (such as the need to use foreign custodians) may be associated with
the maintenance of assets in foreign jurisdictions. In addition, there may be
difficulty in enforcing legal rights outside the United States.
The securities markets of many countries have in the past moved relatively
independently of one another, due to differing economic, financial, political
and social factors. When markets in fact move in different directions and offset
each other, there may be a corresponding reduction in risk for the Fund's
portfolio as a whole. This lack of correlation among the movements of the
world's securities markets may also affect unrealized gains the Fund has derived
from movements in any one market.
If securities traded in markets moving in different directions are combined into
a single portfolio, such as that of the Fund, total portfolio volatility may be
reduced. Since the Fund may invest in securities quoted or denominated in
currencies other than U.S. dollars, changes in foreign currency exchange rates
may affect the value of its portfolio securities. Currency exchange rates may
not move in the same direction as the securities markets in a particular
country. As a result, market gains may be offset by unfavorable exchange rate
fluctuations.
Foreign securities markets, while growing in volume, have for the most part
substantially less volume than U.S. securities markets and securities of foreign
companies are generally less liquid and at times their prices may be more
volatile than securities of comparable U. S. companies. Foreign stock exchanges,
brokers and listed companies are generally subject to less government
supervision and regulation than those in the U.S. The customary settlement time
for foreign securities may be longer than the three (3) day customary settlement
time for U.S. securities, or less frequent than in the U.S., which could affect
the liquidity of the Fund's investments. The Adviser will monitor the settlement
time for foreign securities and take undue settlement delays into account in
considering the desirability of allocating investments among specific countries.
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
3
<PAGE>
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
business, restrictions of 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 or currency
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 custodian 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.
Foreign Currency Transactions. 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. The Fund may also
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. The Fund may
also engage in speculative forward currency transactions. Forward currency
transactions are accomplished through contractual agreements to purchase or sell
a specified currency or to deliver a final cash settlement amount based on the
relative performance of two currencies if the contract does not call for the
physical delivery of 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, 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.
4
<PAGE>
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.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly, so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. 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. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the 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.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation, limitations on the removal of funds or
other assets of the 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 terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases, capital gains, and interest payable on certain of
the Fund's foreign portfolio securities, may be subject to foreign withholding
or other foreign taxes, thus reducing the net amount of income or gains
available for distribution to the Fund's shareholders.
Money Market Securities. The Fund's shorter-term investments may be money market
securities. Money market securities include short-term obligations issued or
guaranteed by the U.S. Government or foreign governments or issued by such
governments' respective agencies and instrumentalities, bank money market
instruments including certificates of deposit, banker's acceptances and deposit
notes and certain other short- term obligations such as short-term commercial
paper. With respect to bank money market instruments, the obligations may be
5
<PAGE>
issued by U.S. or foreign depository institutions, foreign branches or
subsidiaries of U.S. depository institutions ("Eurodollar" obligations), U.S.
branches or subsidiaries of foreign depository institutions ("Yankee dollar"
obligations) or foreign branches or subsidiaries of foreign depository
institutions. Eurodollar and Yankee dollar obligations and obligations of
branches or subsidiaries of foreign depository institutions may be general
obligations of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligations or by government regulation.
Foreign subsidiaries of U.S. depository institutions and U.S. and foreign
subsidiaries of foreign depository institutions may be considered investment
companies under the Investment Company Act of 1940 (the "Investment Company
Act").
Mortgage-Backed Securities. The Fund may invest in Government National Mortgage
Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae) and
Federal Home Mortgage Loan Corporation (Freddie Macs) mortgage-backed securities
and other U.S. Government securities, including real estate mortgage investment
companies ("REMICs") and Collateralized Mortgage Obligations ("CMOs")
representing ownership interests in mortgage pools. Certain U.S. Government
securities, including U.S. treasury bills, notes and bonds, and Ginnie Maes, are
supported by the full faith and credit of the United States or by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of Freddie Mac and Fannie Mae. Ginnie Maes, Freddie Macs and Fannie
Maes are mortgage-backed securities which provide monthly payments which are, in
effect, a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans. CMOs in which the Fund may invest are securities issued by a
U.S. Government instrumentality that are collateralized by a portfolio of
mortgages or mortgage-backed securities. Investors may purchase "regular" or
"residual" interests in REMICs, although the Fund does not intend, absent a
change in current tax law, to acquire residual interests in REMICs.
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Fannie Mae, a federally
chartered and privately owned corporation, issues pass-through securities which
are guaranteed as to payment of principal and interest by Fannie Mae. Freddie
Mac, a corporate instrumentality of the Untied States, issues participation
certificates which represent an interest in mortgages from Freddie Mac's
portfolio. Freddie Mac guarantees the timely payment of interest and the
ultimate collection of principal. As is the case with Ginnie Mae Certificates,
the actual maturity of and realized yield on particular Fannie Mae and Freddie
Mac mortgage-based securities will vary based on the prepayment experience of
the underlying pool of mortgages. Generally, the issuers of mortgaged-backed and
receivable-backed bonds, notes or pass-through certificates are special purpose
entities and do not have any significant assets other than the assets securing
such obligations.
Instruments backed by pools of mortgages and receivables may be subject to
unscheduled prepayments of principal prior to maturity. During periods of
declining interest rates, principle and interest on mortgage-backed securities
may be prepaid at faster than expected rates, with the proceeds of these
prepayments being invested in lower-yielding securities. In this situation,
mortgage-backed securities may be less effective at maintaining yields than
traditional debt obligations of similar maturity. Conversely, in a rising
interest rate environment, a declining prepayment rate will extend the average
life of many mortgage-backed securities. Extending the average life of a
mortgage-backed security increases the risk of depreciation due to future
increases in market interest rates. Moreover, prepayments of securities
purchased at a premium could result in a realized loss.
Indexed Obligations. Indexed notes and commercial paper typically provide that
the principal amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect fluctuations in the exchange rate between two currencies
during the period the obligation is outstanding, depending on the terms of the
specific security. In selecting the two currencies, the Adviser will consider
the correlation and relative yields of various currencies. The Fund will
purchase an indexed obligation using the currency in which it is denominated
and, at maturity, will receive interest and principal payments thereon in that
currency. The amount of principal payable by the issuer at maturity, however,
will vary (i.e., increase or decrease) in response
6
<PAGE>
to the change (if any) in the exchange rates between the two specified
currencies during the period from the date the instrument is issued to its
maturity date. The potential for realizing gains as a result of changes in
foreign currency exchange rates may enable the Fund to hedge the currency in
which the obligation is denominated (or to effect cross-hedges against other
currencies) against a decline in the U.S. Dollar value of investments
denominated in foreign currencies while providing an attractive money market
rate of return. However, there can be no assurance that the Fund's hedging
strategies will be effective. The Fund will purchase such indexed obligations to
generate current income or for hedging purposes and will not speculate in such
obligations. As of the date of this Statement of Additional Information, the
Fund has no present intention to invest in these obligations.
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 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. Any governmental guarantees on
portfolio securities do not apply to these securities' market value or current
yield, or to the fund shares.
Obligations of Foreign Governmental Entities. The obligations of foreign
governmental entities have various kinds of government support and include
obligations issued or guaranteed by foreign governmental entities with taxing
power. These obligations may or may not be supported by the full faith and
credit of a foreign government. The Fund will invest in foreign government
securities of issuers considered stable by the Adviser, based on its analysis of
factors such as general political or economic conditions relating to the
government and the likelihood of expropriation, nationalization, freezes or
confiscation of private property. 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 Adviser does not believe that the credit risk inherent in
the obligations of stable foreign governments is significantly greater than that
of U.S. Government securities.
Multi-National Currency Unit Securities. As indicated above, the Fund may invest
in securities denominated in a multi-national currency unit. An illustration of
a multi-national currency unit is the European Currency Unit (the "ECU"), which
is a "basket" consisting of specified amounts of the currencies of the member
states of the European Community, a Western European economic cooperative
organization that includes France, West Germany, The Netherlands and the United
Kingdom. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community to reflect changes in
relative values of the underlying currencies. The Adviser does not believe that
such adjustments will adversely affect holders of ECU- denominated obligations
or the marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The Fund may invest in securities
denominated in the currency of one nation although issued by a governmental
entity, corporation or financial institution of another nation. For example, the
Fund may invest in a British Pound sterling-denominated obligation issued by a
United States corporation. Such investments involve credit risks associated with
the issuer and currency risks associated with the currency in which the
obligation is denominated.
7
<PAGE>
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in the Fund having a
contractual relationship only with the Lender not with the borrower. As a
result, the Fund will assume the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the borrower.
The Fund will acquire Participations only if the Lender interpositioned between
the Fund and the borrower is determined by the Adviser to be creditworthy.
The secondary market for Participations and Assignments is limited to certain
institutional investors, which could adversely affect the value of these
securities and make it more difficult to assign a value to them (see
"Participations" below).
Lower Rated High Yield "High Risk" Debt Obligations. The Fund seeks high current
income and may invest in high yielding, fixed income securities rated Baa, Ba or
B by Moody's or BBB, BB or B by Standard & Poor's, sometimes referred to as junk
bonds. The Fund may also invest in unrated securities which, in the opinion of
the Adviser, offer comparable yields and risks to rated securities. The Fund
will, however, maintain an average portfolio quality rating of A by Standard &
Poor's Ratings Group ("Standard & Poor's") or Moody's Investors Service Inc.
("Moody's") or the unrated equivalent. Ratings are based largely on the
historical financial condition of the issuer. Consequently, the rating assigned
to any particular security is not necessarily a reflection of the issuer's
current financial condition, which may be better or worse than the rating would
indicate.
Debt obligations 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 issuer's ability to make payments of interest
and principal. The high yield fixed income market is relatively new and its
growth occurred during a period of economic expansion. The market has not yet
been fully tested by a recession. The market price and liquidity of lower rated
fixed income securities generally respond more to short-term corporate and
market developments than do those 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.
Reduced volume and liquidity in the high yield high risk bond market, or the
reduced availability of market quotations, will make it more difficult to
dispose of the bonds and to value accurately the Fund's 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.
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, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
8
<PAGE>
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 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 minimum required for
purchase by the Fund. Neither of these events will require the sale of the
securities by the Fund.
Time Deposits. The Fund's 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.
Participation Interests. The Fund may acquire participation interests in senior
floating rate loans that are made primarily to U.S. and foreign companies.
Participation interests, which may take the form of interests in, or assignments
of, the loans, are acquired from banks who have made 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.
Structured Securities. The Fund may invest in structured notes, bonds or
debentures, the value of the principal of and/or interest on which is to be
determined by reference to changes in the value of specific currencies, interest
rates, commodities, indices or other financial indicators (the "Reference") or
the relative change in two or more References. The interest rate or the
principal amount payable upon maturity or redemption may be increased or
decreased depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal is
due at maturity and, therefore, may result in the loss of the Fund's investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, the change in
interest rate or the value of the security at maturity may be a multiple of the
change in the value of the Reference. Consequently, structured securities entail
a greater degree of market risk than other types of debt obligations. Structured
securities may also be more volatile, less liquid and more difficult to
accurately price than less complex fixed income investments.
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 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.
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.
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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.
Swaps, Caps, Floor 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.
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.
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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 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 issued 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 facilitates
the exchange of commercial bank debt for newly issued bonds (known as Brady
Bonds). The World Bank and the 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 the IMF debtor nations are required to implement 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 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.
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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.
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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
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.
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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").
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
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<PAGE>
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
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 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.
Repurchase Agreements. In a repurchase agreement the 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.
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 or be
prevented from liquidating the underlying securities and could experience
losses, including possible decline in the value of 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, as well as the
expense of enforcing its rights.
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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. To minimize various risks associated with
reverse repurchase agreements, the Fund will establish a separate account
consisting of liquid securities, of any type or maturity, in an amount at least
equal to the repurchase prices of these securities (plus accrued interest
thereon) under such agreements. In addition, the Fund will not borrow money or
enter into reverse repurchase agreements except 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 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. The Fund will enter into reverse repurchase
agreements only with federally insured banks which are approved in advance as
being creditworthy by the Trustees. Under procedures established by the
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
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. 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 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 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 the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
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.
17
<PAGE>
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, 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, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
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 30% 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. The Fund may not invest more than 5% of its total assets in
warrants or more than 2% of its total assets in warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. 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.
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 various 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 turnover rate may vary widely
from year to year and may be higher than that of many other mutual funds with
similar investment objectives. The Fund's portfolio rate is set forth in the
"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, the means 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 the meeting
or (2) more than 50% of the Fund's outstanding shares.
18
<PAGE>
The Fund may not:
1. Purchases on Margin and Short Sales. Purchase securities on
margin or sell short, except that the Fund may obtain such
short term credits as are necessary for the clearance of
securities transactions. The deposit or payment by the 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. (See also Restriction 12.)
4. Senior Securities. Issue senior securities except as
appropriate to evidence indebtedness which the Fund is
permitted to incur, provided that (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 the Fund as described in the
Prospectus, including deposits of initial and variation
margin, and (iii) the establishment of separate classes of
shares of the 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 its 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
total assets of the Fund in warrants which are not listed on
those exchanges. Warrants acquired in units or attached to
securities are not included in this restriction.
6. Real Estate. Purchase or sell real estate although the 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 the Fund will not purchase real estate limited
partnership interests.
7. 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 the 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.
8. Making Loans. Make loans, except that the Fund may purchase or
hold debt instruments and may enter into repurchase agreements
(subject to Restriction 11) in accordance with its investment
objectives and policies and make loans of portfolio securities
provided that as a result, no more than 30% of the total
assets of the Fund taken at current value would be so loaned.
19
<PAGE>
9. Industry Concentration. Purchase any securities which would
cause more than 25% of the market value of the 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. This restriction will apply to obligations
of a foreign government unless the SEC 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:
The Fund may not:
(a) Invest more than 15% of its net assets in illiquid securities.
(b) 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.
(c) 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 SEC pursuant to an
exemptive order).
(d) 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 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 value of the Fund's assets will not be
considered a violation of the restriction.
The Fund is also subject to other investment restriction in accordance with
federal and state laws. For example, the Fund may not purchase securities of an
issuer (other than the U.S. Government, its agencies or instrumentalities), to
an extent inconsistent with the Fund's diversified status under the Investment
Company Act of 1940.
20
<PAGE>
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").
<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, Director and Chief
October 1944 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.
21
<PAGE>
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 1996); Director, Brookline Bankcorp.
June 1931
Richard P. Chapman, Jr. Trustee (1) Director, President and Chief
160 Washington Street Executive Officer of Brookline
Brookline, MA 02147 Bankcorp. (lending); Director,
February 1935 Lumber 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.
22
<PAGE>
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 and Distinguished
RR2 Box 480 Senior Fellow, Institute for
Woodstock, VT 05091 Sustainable Communities, Montpelier,
July 1939 Vermont (since 1991); Dean, Vermont
Law School (until 1991); Director,
Air and Water Technologies (until
1996) (environmental services and
equipment), Niagara Mohawk Power
Corp. (electric services); Concept
Five Technologies (until 1997);
Mitretek Systems (governmental
consulting services); Conversion
Technologies, Inc.; Living
Technologies, Inc.
Leland O. Erdahl Trustee Director of Uranium Resources
8046 Mackenzie Court Corporation; Hecla Mining Company,
Las Vegas, NV 89129 Canyon Resources Corporation and
December 1928 Original Sixteen to One Mine, Inc.
(1984-1987 and 1991-1998)
(management consultant); Vice
President, Chief Financial Officer
and Director of Amax Gold, Inc.
(until 1998); Director, Freeport
McMoran Copper & Gold, Inc. (until
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
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
The Venture Capital Fund of New England (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980,
23rd Floor headed the venture capital group at
Boston, MA 02110 Bank of Boston Corporation.
November 1932
Gail D. Fosler Trustee Senior Vice President and Chief
3054 So. Abingdon Street Economist, The Conference Board
Arlington, VA 22206 (non-profit economic and business
December 1947 research); Director, Unisys Corp.;
and H.B. Fuller Company. Director,
National Bureau of Economic
Research (academic).
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, The
Boston, MA 02199 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.
24
<PAGE>
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
CIES International Exchange of Scholars
3007 Tilden Street, N.W. (since January 1998), Vice
Washington, D.C. 20008 President, Institute of
May 1943 International Education (since
January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emerita of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East Emeritus, Harvard University
Cambridge, MA 02138 Graduate School of Business
September 1931 Administration (as of June 1998).
- -------------------
* 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
- ---------------- ---------------- --------------------------
<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, Signator Investors, Inc.,
August 1937 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).
Osbert M. Hood Senior Vice President and Chief Senior Vice President and Chief
101 Huntington Avenue Financial Officer Financial Officer, the Adviser, the
Boston, MA 02199 Berkeley Group and John Hancock
August 1952 Funds, Inc.; Vice President and
Chief Financial Officer, John
Hancock Mutual Life Insurance
Company Retail Sector (until 1997).
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).
- -------------------
* 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>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
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, NM Capital.
March 1950
James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.
101 Huntington Avenue Accounting Officer
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>
27
<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
receive no compensation from the Fund for their services.
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
Dennis S. Aronowitz $ 387 $ 72,000
Richard P. Chapman, Jr.* 401 75,100
William J. Cosgrove * 387 72,000
Douglas M. Costle 402 75,100
Leland O. Erdahl 387 72,000
Richard A. Farrell 402 75,100
Gail D. Fosler 387 72,000
William F. Glavin * 387 72,000
Dr. John A. Moore* 387 72,000
Patti McGill Peterson 397 75,100
John W. Pratt 387 72,000
Edward J. Spellman 402 70,350
------- ---------
Total $4,713 $874,750
1Compensation is for the fiscal year ended October 31, 1998.
2Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1998. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex, with each of these Independent Trustees
serving on thirty-four funds.
*As of December 31, 1998, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $81,203, Mr. Cosgrove was $182,174, Mr. Glavin was $248,920 and for
Dr. Moore was $166,978 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 February 5, 1999, 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% or more of
outstanding shares of the Fund:
28
<PAGE>
Percentage of Total
Outstanding Shares of the
Name and Address of Shareholder Class of Shares Class of the Fund
- ------------------------------- --------------- -----------------
MLPF&S For The Sole Benefit of Its A 11.54%
Customers
Attn: Fund Administration 97C86
4800 Deer Lake Drive East 2nd Fl
Jacksonville FLA 32246-6484
MLPF&S For The Sole Benefit of Its B 12.84%
Customers
Attn: Fund Administration 97C85
4800 Deer Lake Drive East 2nd Fl
Jacksonville FLA 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 more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries a high rating from Standard and 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 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,
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
memberships; insurance premiums; and any extraordinary expenses.
29
<PAGE>
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 of the Fund as follows:
Net Asset Value Annual Rate
--------------- -----------
First $500 million 0.65%
Amounts over $500 million 0.60%
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 its 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.
For the fiscal years ended October 31, 1996, 1997 and 1998, the Fund paid the
Adviser, an investment advisory fee of $640,833, $625,143 and $514,305,
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 or
more other funds or clients 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 the Advisory Agreement, the Adviser is not liable 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 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. 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 any party or by vote of a majority to the outstanding voting
securities of the Fund and will terminate automatically if assigned.
30
<PAGE>
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 October 31, 1996, 1997 and 1998,
the Fund paid the Adviser $6,208, $17,692 and $13,182, respectively, 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 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 that are continually offered at net asset
value next determined, plus an 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 October 31, 1996, 1997 and 1998 were $127,241, $84,777 and
$30,634, respectively. Of such amounts $17,608, $11,040 and $3,492,
respectively, 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 the John Hancock Funds for its distribution
expenses, including but not limited to: (i) initial and ongoing sales
compensation to Selling Brokers and others (including affiliates of the John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the 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 the John Hancock Funds
is 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 and Class C Plans will be
carried forward together with interest on the balance of the unreimbursed
expenses. The Fund does not treat unreimbursed expenses relating to the Class
B/or Class C Plans as a liability of the Fund, because the Trustees may
terminate the Class B Plan at any time. For the fiscal year ended October 31,
1998, an aggregate of $2,674,799 of distribution expenses or 14.48% of the
average net assets of the Class B shares of the Fund was not reimbursed or
recovered by the John Hancock Funds through the receipt of deferred sales
charges or Rule 12b-1 fees in prior periods. Class C shares of the Fund did not
commence operations until March 1, 1999; therefore, there are no unreimbursed
expenses to report.
31
<PAGE>
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including 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 such Plans.
Pursuant to the Plans, at least quarterly, the John Hancock Funds provide 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 as long as their
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 vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class upon 60
day's written notice to the 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 Plan 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 classes 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 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 Fund.
During the fiscal year ended October 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 March 1, 1999; therefore,
there are no expenses to report.
32
<PAGE>
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and Interest,
Mailing of Expenses of Carrying or
Prospectus to Compensation to John Other
New Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A $21,937 $9,550 $96,136 $44,167 $ 0
Class B $10,003 $4,221 $42,710 $17,730 $141,196
</TABLE>
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.
33
<PAGE>
<TABLE>
<CAPTION>
Maximum
Sales charge Reallowance First year Maximum total
Paid by investors Or commission Service fee compensation (1)
Class A investments (% of offering price) (% of offering price) (% of net investment) (% of offering price)
- ------------------- --------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
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%
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% (2)
Next $1 or more above that -- 0.00% 0.25% 0.25% (2)
Maximum
Reallowance First year Maximum
Or commission service fee total compensation
Class B investments (% of offering price) (% of net investment) (% of offering price)
- ------------------- --------------------- --------------------- ----------------------
All amounts 2.25% 0.25% 2.50%
Maximum
Reallowance First year Maximum
Or commission service fee Total compensation
Class C investments (% of offering price) (% of net investment) (% of offering price)
- ------------------- --------------------- --------------------- ----------------------
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.
(2) For Group Investment Program sales, the maximum total compensation for
investments of $1 million or more is 1.00% of the offering price (one year
CDSC of 1.00% applies for each sale).
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.
34
<PAGE>
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 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 the 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 a reduced sales charge
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 Charge. 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:
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, grandparents, grandchildren, mother, father, 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.
35
<PAGE>
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. See your Merrill Lynch financial consultant for
further information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Pension plans transferring assets from a John Hancock variable annuity
contract to the Fund pursuant to an exemptive application approved by
the Securities and 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 le100 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 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). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
36
<PAGE>
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. A company's (not an individual's)
qualified and non-qualified retirement plan investments can be combined to take
advantage of this privilege.
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. Reduced sales charges also are 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 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), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing, and
Section 457 plans. An individual's non-qualified and qualified retirement plan
investments cannot be combined to satisfy LOI of 48 months. Such an investment
(including accumulations and combinations but not including reinvested
dividends) must aggregate $50,000 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 3% 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 such 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 Fund to sell, any additional Class A shares and
may be terminated at any time.
37
<PAGE>
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 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 four years or one year of purchase, respectively, 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 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 purposes of determining this number of
years from the time of any payment for the purchases 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 four-year CDSC redemption period or 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 four-year period for Class B shares. 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 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)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the shares
being redeemed.
38
<PAGE>
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 select
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 and Class C shares and of Class A shares that are subject
to a 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 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 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 your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A or Class C shares by retirement plans that
invest 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 or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
39
<PAGE>
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under sections
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 some examples.
40
<PAGE>
<TABLE>
<CAPTION>
CDSC Waiver Matrix for Class B and Class C
<S> <C> <C> <C> <C> <C>
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), MPP, Rollover
PSP)
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Death or Disability Waived Waived Waived Waived Waived
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions in periodic
or 12% of payments
account value
annually in
periodic
payments.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually
12% of account in periodic
value annually payments
in periodic
payments.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account
(Class B only) annuity annuity annuity annuity value annually
payments (72t) payments (72t) payments (72t) payments (72t) in periodic
or 12% of or 12% of or 12% of or 12% of payments
account value account value account value account value
annually in annually in annually in annually in
periodic periodic periodic periodic
payments. payments. payments. payments.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Hardships Waived Waived Waived N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Qualified Domestic Waived Waived Waived N/A N/A
Relations Orders
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination of Waived Waived Waived N/A N/A
Employment Before
Normal Retirement Age
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
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.
41
<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 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
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 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.
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 such 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 a
Systematic Withdrawal Plan is in effect. The Fund reserves 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.
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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 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 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 of the other John Hancock funds. 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 investment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or 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."
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).
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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 four other
series. The Trustees have also authorized the issuance of three classes of
shares of the Fund, designated as Class A, Class B and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to the classes of the Fund. Holders of
each class of shares have certain exclusive voting rights on matters relating to
their respective 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 of shares 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
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. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock fund. 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.
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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.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
TAX STATUS
The Fund, is treated as a separate entity for accounting and tax purposes, 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, the 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.
The Fund will be subject to a 4% percent 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 long-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 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.
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Foreign exchange gains and losses realized by the 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 the Fund's investment in
stock or securities, possibly 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. 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
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 foreign 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 portions 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 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 taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. If the Fund
cannot or does not make this 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 engages in options, 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. Consequently, subsequent
distributions on those shares from such appreciation 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.
46
<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 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
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 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 shares 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 shares 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 its 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 $28,893,267 of capital loss carryforwards
available to the extent provided by regulations to offset net capital gains. Of
these, $16,879,029 expire October 31, 2000, $3,127,414 expire October 31, 2001,
$2,774,082 expire October 31, 2002, $5,103,942 expire October 31, 2003 and
$1,008,800 expire October 31, 2006.
The dividends and distributions from the Fund are generally not expected to
qualify for the dividends-received deduction for corporations under the Code.
The 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 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
47
<PAGE>
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 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.
Investment in debt obligations that are at risk of or in default presents
special tax issues for the 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 the 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 Fund
may restrict the Fund's ability to enter into options, futures, foreign currency
positions, and foreign currency forward contracts. Certain payments received by
the Fund with respect to loan participations, such as commitment fees or
facility fees, may not be treated as qualifying income under the 90% requirement
referred to above if they are not properly treated as interest under the Code.
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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 capital gains and
losses realized by the Fund. Additionally, the Fund may be required to
recognized 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 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 these 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 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 types 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 Fund
investment 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 October 31, 1998, the annualized yield on Class A
and Class B shares of the Fund was 5.83% and 5.30%, respectively. The average
annual total returns of the Class A shares of the Fund for the one and five year
periods ended October 31, 1998 and since inception on January 3, 1992 were
- -1.90%, 4.68% and 4.63%, respectively. As of October 31, 1998, the average
annual returns for the Fund's Class B shares for the one and five year periods
and since inception on December 28, 1990 were -2.26%, 4.61% and 4.78%,
respectively. Class C shares commenced operations on March 1, 1999; therefore,
there is no yield to report.
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, according to the
following standard formula:
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6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
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).
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.
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:
n ________
T = \ / ERV / P - 1
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-the 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 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 total
return 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 the Russell and Wilshire indices.
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<PAGE>
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
Fund's promotional and sales literature may make reference to the Fund's "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 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
Fund performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and its 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 Adviser, 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 makers 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 these transactions.
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. 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 other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund 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 in 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
51
<PAGE>
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
Adviser's officers will be primarily responsible for the allocation of the
Fund's brokerage business, its 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 October 31, 1998, 1997 and 1996, the negotiated
brokerage commissions paid on portfolio transactions were $1,477, $0 and $0,
respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay 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, 1998, the Fund did not
pay commissions as compensation to any 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 Signator Investors, Inc., a broker-dealer ("Signator" 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 the Affiliated Broker. For the
fiscal years ended October 31, 1998, 1997 and 1996, the Fund did not execute any
portfolio transactions with the Affiliated Broker.
Signator 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
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 brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund or 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 Broker, has, as an
investment adviser to the Fund, the obligation to provide investment management
services, which includes elements of research and related investment skills,
such research and related skills will not be used by the Affiliated Broker as a
basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria.
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.
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 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, plus certain out-of-pocket expenses. 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 State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Under the custodian agreement, State Street Bank
and 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.
53
<PAGE>
APPENDIX A
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 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 Objective 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 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). (e.g., short sales, currency
contracts, financial futures and options; securities and index options).
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., repurchase agreements, securities lending, foreign debt
securities, non-investment-grade debt securities, asset-backed securities,
mortgage-backed securities, participation interests, financial futures and
options; securities and index options, structured securities).
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., currency
trading, foreign debt securities, currency contracts, financial futures and
options; securities and index options).
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,
structured securities).
Information risk The risk that key information about a security or market is
inaccurate or unavailable.(e.g., non-investment-grade debt securities).
A-1
<PAGE>
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.,
foreign debt securities, non-investment-grade debt securities, asset-backed
securities, mortgage-backed securities, participation interests, financial
future and options; securities and index options, structured securities).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.,
when-issued securities and forward commitments, currency contracts, financial
futures and options; securities and index options, structured securities).
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., short sales, non-investment-grade debt securities,
restricted and illiquid securities, mortgage-backed securities, participation
interests, currency contracts, financial futures and options; securities and
index options, structured securities).
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. (e.g., short
sales, short-term trading, when-issued securities and forward commitments,
foreign debt securities, non-investment-grade debt securities, restricted and
illiquid securities, financial futures and options; 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., short sales, when-issued securities and forward commitments,
currency contracts, financial futures and options; securities and index
options).
A-2
<PAGE>
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., 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, structured 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, restricted and illiquid securities, participation interests,
structured securities)
A-3
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS1
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 greater 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.
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)
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.
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
B-1
<PAGE>
"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.
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.
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."
B-2
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 1998 Annual
Report to Shareholder's for the year ended October 31, 1998 (filed
electronically on December 30, 1998 accession number 0001010521-98-000410 and
are included in and incorporated by reference into Part B of the Registration
Statement for John Hancock Short-Term Strategic Income Fund (file no. 811-4630
and 33-4559).
John Hancock Investment Trust III
John Hancock Short-Term Strategic Income Fund
Statement of Assets and Liabilities as of October 31, 1998.
Statement of Operations for the year ended October 31, 1998.
Statement of Changes in Net Asset for the period ended October 31, 1998.
Financial Highlights for the period ended October 31, 1998.
Schedule of Investments as of October 31, 1998.
Notes to Financial Statements.
Report of Independent Auditors.
F-1
<PAGE>
ANNUAL REPORT
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[GRAPHIC OMITTED]
Short-Term
Strategic Income
Fund
OCTOBER 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-----------------------------------------
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
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
PRICEWATERHOUSECOOPERS LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
-----------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term is a
roller coaster. That is because, while long-term history suggests the market's
general direction is up, its swings over the short term can be dramatic and, at
times, violent. This year, the market has given us several stark examples of
this phenomenon. From the new highs set in mid-July, the major indices plunged
by 19% through the end of August. It was the worst such fall since 1990. For the
first time in a number of years, some bonds and bond mutual funds outperformed
stocks and stock mutual funds. Seeking safety in a world of global economic
uncertainties, investors everywhere converged on U.S. Treasury bonds and pushed
their yields to historic lows.
Then in early October, the market staged a remarkable rebound that was
sparked by the Federal Reserve's two cuts in interest rates. The major indices
regained all their previously lost ground and the S&P 500 Stock Index ended
October actually up by 15% year-to-date.
- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
- --------------------------------------------------------------------------------
Investors have been understandably shaken by these dramatic twists and turns,
but we are pleased to report that most individual investors did not panic, and
we hope that means they've taken our words to heart. Over the long term, markets
do not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering the implications of global turmoil and the
potential for slower U.S. economic and corporate earnings growth. While we don't
make a practice of opining on what the market will do next, we continue to
believe it would be wise for investors to set more realistic expectations. 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.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the last six months' divergence in
performance of stocks and high-quality bonds is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY FREDERICK L. CAVANAUGH, JR., ARTHUR N. CALAVRITINOS, CFA, AND
ROGER HAMILTON, PORTFOLIO MANAGERS
John Hancock Short-Term
Strategic Income Fund
Treasuries rally in the face of Latin American, Asian turmoil
Recently, a management team composed of Frederick Cavanaugh, Arthur Calavritinos
and Roger Hamilton assumed leadership of John Hancock Short-Term Strategic
Income Fund. Mr. Cavanaugh, senior vice president, has been in the investment
business since 1973. Messrs. Calavritinos and Hamilton, vice presidents, have
been in the investment business since 1986 and 1980, respectively.
Strong crosscurrents led to widely varying results for the global fixed-income
markets over the past 12 months. Asian bonds continued to falter, plagued by a
worsening economic meltdown in that region and Japan's inability to make
much-needed structural and banking reforms. Like falling dominoes, Latin
American bonds suffered along with their emerging-market Asian counterparts.
Some Latin American markets staged a brief rebound in the spring of 1998, as
proposed economic and fiscal policy changes helped renew investor confidence.
That confidence quickly evaporated in the summer when Brazil, the region's
largest economy and the bellwether for Latin America, suffered bruising losses.
Unable to make the hoped-for policy changes that would help the region stave off
the economic contagion, Brazil suffered from skyrocketing interest rates and
concerns that it would devalue its currency. The sell-off of Brazilian debt was
accompanied by a similar flight from Mexico and Argentina, and the remainder of
Latin America was pulled down along with them. Mexico's currency, for example,
declined at a rate not seen since the 1995 peso crisis.
"The primary beneficiary of this widening global turmoil was the U.S. Treasury
market."
- --------------------------------------------------------------------------------
[A 3" x 2" photo at bottom right side of page of John Hancock Short-Term
Strategic Income Fund. Caption below reads "Fund management team members (l-r):
"Lee Crockett, Roger Hamilton, Fred Cavanaugh, Arthur Calavritinos and Carolee
Bongiovi."]
- --------------------------------------------------------------------------------
Portfolio management team members (l - r): Lee Crockett, Roger Hamilton, Fred
Cavanaugh, Arthur Calavritinos and Carolee Bongiovi
3
<PAGE>
================================================================================
John Hancock Funds - Short-Term Strategic Income Fund
"...we sold some Latin American corporate bonds when brief rallies afforded us
relatively attractive opportunities..."
- --------------------------------------------------------------------------------
[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into five sections (from top to left): Oil & Gas 2%, Foreign
Banks & Finance 4%, Short-Term Investments & Other 7%, Foreign Governments 20%
and U.S. Government & Agencies 67 %. A note below the chart reads "As a
percentage of net assets on October 31, 1998."]
- --------------------------------------------------------------------------------
Compounding the emerging markets' troubles was the near collapse of Russia when
it devalued its currency and defaulted on its debt.
The primary beneficiary of this widening global turmoil was the U.S. Treasury
market. Investors headed for the exits in Asia, Latin America, Eastern Europe
and even the U.S. stock market and increasingly sought out the safe haven of
Treasuries. The renewed interest in these, coupled with two Federal Reserve
Board interest rate cuts intended to stem the world markets' growing liquidity
problems, drove Treasury yields -- which move in the opposite direction of their
prices -- to 30-year lows. Europe surprised many investors by gaining
significant ground during the final months of the period even after its bond
yields had fallen below U.S. bond yields.
Performance review
For the 12-month period ended October 31, 1998, John Hancock Short-Term
Strategic Income Fund's Class A and Class B shares had total returns of 1.17%,
and 0.60%, respectively, at net asset value. The Fund's returns lagged the
average short-term investment-grade bond fund's return of 6.02%, according to
Lipper Analytical Services, Inc.1 Keep in mind that your net asset value return
will be different from the Fund's 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.
The main detractor from the Fund's performance, and the primary reason for
our lag relative to our peers, was our investments in emerging-market debt from
Latin America. Even though our growing stake in Treasuries proved to be a
positive for the Fund, it wasn't enough to totally offset losses we experienced
from our investments in Brazilian, Mexican and Argentinian government and
corporate bonds.
Credit quality upgrade
Growing uncertainty about the fate of emerging markets prompted us to pare back
our holdings in emerging-market regions, first by eliminating our Southeast
Asian holdings in late 1997, then by selling some Latin American investments
this fall. Over the past several months, for example, we sold some Latin
American corporate bonds when brief rallies afforded us relatively attractive
opportunities to do so. Unfortunately, a lack of liquidity meant that we weren't
able to sell as much as we would have liked. By the end of the period, our
emerging-market holdings had declined to 26% of net assets from 44% a year
earlier.
We used the proceeds from our Latin American sales to increase our holdings
in
- --------------------------------------------------------------------------------
[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 up arrow with the phrase "Inflation worries wane and
Fed cuts rates." The second listing is U.K. bonds followed by an up arrow with
the phrase "Interest rates drift lower." The third listing is Latin American
bonds followed by a down arrow with the phrase "Concerns over fiscal, monetary
policies." A note below the table reads "See `Schedule of Investments.'
Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
John Hancock Funds - Short-Term Strategic Income Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended October 31, 1998." The chart is
scaled in increments of 2% with 0% at the bottom and 8% at the top. The first
bar represents the 1.17% Total return for John Hancock Short-Term Strategic
Income Fund Class A. The second bar represents the 0.60% total return for John
Hancock Short-Term Strategic Income Fund Class B and the third bar represents
the 6.02% total return for Average short-term investment-grade bond fund. A note
below the chart reads "Total returns for John Hancock Short-Term Strategic
Income Fund are at net asset value with all distributions reinvested. The
average short-term investment-grade bond fund is tracked by Lipper Analytical
Services, Inc. See the following two pages for historical performance
information."]
- --------------------------------------------------------------------------------
higher-quality bonds. Most notably, we upped our stake in U.S. government and
agency bonds to 67% of net assets at the end of October, from 38% a year ago.
During the last several months, we added Canadian government bonds at attractive
prices after its government temporarily raised rates to support its currency.
Finally, we added a U.K. government bond in anticipation of that country's
interest rates moving lower.
Outlook
We believe that high-quality bonds will be the place to be over the near term.
Although the worst appears to be behind many emerging markets, we feel that
disruptions will continue to occur, although their severity likely will be
diminished. Select emerging markets will eventually offer attractive
opportunities, but we think that possibility is still quite a way off. Our main
concern is Brazil and whether or not it can enact the requisite changes for
pulling itself and the rest of the region away from the brink of much more
severe problems. So we'll look for opportunities to sell emerging-market
holdings during periods of temporary strength, and move more of our holdings
into higher-quality bonds. We'll concentrate on countries where we think
interest rates will come down, including the United Kingdom and the United
States. In the U.S., we expect that the Federal Reserve Board, once worried
about inflation, will continue to be accommodative, turning its sights toward
keeping the economy growing.
"We believe that high-quality bonds will be the place to be over the near term."
- --------------------------------------------------------------------------------
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.
(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 - Short-Term 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 Short-Term 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 3%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 3% and declining to 0% over four 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, before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
-------- --------- -------------
Cumulative Total Returns (5.34%) 24.35% 33.94%
Average Annual Total Returns (5.34%) 4.45% 4.43%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/28/90)
-------- --------- -------------
Cumulative Total Returns (5.76%) 24.05% 41.96%
Average Annual Total Returns (5.76%) 4.41% 4.62%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of October 31, 1998
SEC 30-DAY
YIELD
--------------
John Hancock Short-Term Strategic Income Fund:
Class A 5.83%
John Hancock Short-Term Strategic Income Fund:
Class B 5.30%
6
<PAGE>
================================================================================
John Hancock Funds - Short-Term Strategic Income Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Short-Term Strategic Income 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 Money Market Index-an
unmanaged index that is composed of various non-U.S.-currency-denominated bonds,
usually with an average maturity of three years or less. Past performance is
not indicative of future results.
Line chart with the heading John Hancock Short-Term 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 hypothetical $10,000 investment made in the John Hancock Short-Term
Strategic Income Fund on January 3, 1992, before sales charge, and is equal to
$14,031 as of October 31, 1998. The second line represents the same hypothetical
investment made in the John Hancock Short-Term Strategic Income Fund, after
sales charge, and is equal to $13,617 as of October 31, 1998. The third line
represents the Salomon Brothers World Money Market Index and is equal to $13,193
as of October 31, 1998.
Line chart with the heading John Hancock Short-Term Strategic Income 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 hypothetical $10,000 investment made in the John Hancock Short-Term
Strategic Income Fund on December 28, 1990, before sales charge, and is equal to
$14,424 as of October 31, 1998. The second line represents the Salomon Brothers
World Money Market Index and is equal to $14,417 as of October 31, 1998.
*No contingent deferred sales charge applicable.
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income 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, 1998. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
October 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $69,120,748) ............................... $67,531,507
Common stocks (cost - $583,955) .......................... 549,063
Short-term investments (cost - $4,938,125)
- Note A ................................................. 4,938,125
-------------
73,018,695
Cash ...................................................... 414
Receivable for shares sold ................................ 34,767
Dividends receivable ...................................... 7,245
Interest receivable ....................................... 1,490,498
Other assets .............................................. 5,265
-------------
Total Assets ............................ 74,556,884
-----------------------------------------------------------
Liabilities:
Payable for shares repurchased ............................ 16,768
Payable upon return of securities on loan - Note A ........ 3,914,125
Dividend payable .......................................... 22,780
Payable for futures variation margin - Note A ............. 19,031
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................. 60,905
Accounts payable and accrued expenses ..................... 75,522
-------------
Total Liabilities ....................... 4,109,131
-----------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 100,991,688
Accumulated net realized loss on investments and
foreign currency transactions ............................ (28,786,807)
Net unrealized depreciation of investments, financial
futures contracts and foreign currency transactions ...... (1,730,420)
Distributions in excess of net investment income .......... (26,708)
-------------
Net Assets .............................. $70,447,753
===========================================================
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 - $50,498,114/6,372,297 ........................... $7.92
=============================================================================
Class B - $19,949,639/2,517,428 ........................... $7.92
=============================================================================
Maximum Offering Price Per Share*
Class A - ($7.92 x 103.09%) ............................... $8.16
=============================================================================
* 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.
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, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest
(including income on securities loaned of $74,682) ....... $5,769,735
Dividends ................................................. 21,260
-------------
5,790,995
-------------
Expenses:
Investment management fee - Note B ....................... 514,305
Distribution and service fee - Note B
Class A ................................................ 171,740
Class B ................................................ 215,862
Transfer agent fee - Note B .............................. 143,308
Custodian fee ............................................ 55,736
Auditing fee ............................................. 45,068
Registration and filing fees ............................. 24,422
Financial services fee - Note B .......................... 13,182
Printing ................................................. 12,050
Miscellaneous ............................................ 10,387
Trustees' fees ........................................... 5,096
Legal fees ............................................... 1,305
-------------
Total Expenses .......................... 1,212,461
-----------------------------------------------------------
Net Investment Income ................... 4,578,534
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency Transactions:
Net realized loss on investments sold ..................... (902,555)
Net realized loss on foreign currency transactions ........ (106,958)
Change in net unrealized appreciation/depreciation
of investments ........................................... (2,459,653)
Change in net unrealized appreciation/depreciation
of financial futures contracts ........................... (106,460)
Change in net unrealized appreciation/depreciation
of foreign currency transactions ......................... 19,025
-------------
Net Realized and Unrealized
Loss on Investments, Financial
Futures Contracts and Foreign
Currency Transactions ................... (3,556,601)
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............... $1,021,933
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................................... $6,688,562 $4,578,534
Net realized loss on investments sold and foreign currency
transactions ............................................................................ (217,219) (1,009,513)
Change in net unrealized appreciation/depreciation of
investments, financial futures contracts and foreign
currency transactions ................................................................... (1,367,334) (2,547,088)
------------ ------------
Net Increase in Net Assets Resulting from Operations .................................... 5,104,009 1,021,933
------------ ------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.5176 and $0.4780 per share, respectively) ................................. (3,698,646) (3,322,613)
Class B - ($0.4678 and $0.4230 per share, respectively) ................................. (1,962,894) (1,126,678)
Distributions in excess of net investment income
Class A - ($0.0764 and $0.0015 per share, respectively) ................................. (545,931) (10,603)
Class B - ($0.0691 and $0.0014 per share, respectively) ................................. (289,729) (3,595)
Distributions from capital paid-in
Class A - ($0.0175 and $0.0124 per share, respectively) ................................. (125,016) (85,913)
Class B - ($0.0158 and $0.0109 per share, respectively) ................................. (66,346) (29,132)
------------ ------------
Total Distributions to Shareholders ..................................................... (6,688,562) (4,578,534)
------------ ------------
From Fund Share Transactions - Net:* ......................................................... (5,923,514) (15,963,160)
------------ ------------
Net Assets:
Beginning of period ....................................................................... 97,475,581 89,967,514
------------ ------------
End of period (including distributions in excess of net
investment income of $36,756 and $26,708, respectively) ................................. $89,967,514 $70,447,753
============ ============
</TABLE>
*Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
1997 1998
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 4,479,598 $38,000,567 1,724,135 $14,275,885
Shares issued to shareholders in reinvestment of
distributions .............................................. 283,851 2,403,553 216,155 1,771,929
------------ ------------ ------------ ------------
4,763,449 40,404,120 1,940,290 16,047,814
Less shares repurchased ...................................... (2,890,921) (24,502,562) (3,273,385) (26,994,702)
------------ ------------ ------------ ------------
Net increase (decrease) ...................................... 1,872,528 $15,901,558 (1,333,095) ($10,946,888)
============ ============ ============ ============
CLASS B
Shares sold .................................................. 1,869,770 $15,839,024 937,760 $7,634,236
Shares issued to shareholders in reinvestment of
distributions .............................................. 125,322 1,060,356 66,168 542,160
------------ ------------ ------------ ------------
1,995,092 16,899,380 1,003,928 8,176,396
Less shares repurchased ...................................... (4,572,712) (38,724,452) (1,606,600) (13,192,668)
------------ ------------ ------------ ------------
Net decrease ................................................. (2,577,620) ($21,825,072) (602,672) ($5,016,272)
============ ============ ============ ============
</TABLE>
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 distributions
reflects earnings less expenses, any investment and foreign currency gains and
losses, distributions paid to shareholders, if any, and any increase or decrease
in money shareholders invested in the Fund. The footnote illustrates the number
of Fund shares sold, reinvested and redeemed during the last two periods, along
with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income Fund
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................. $9.12 $8.47 $8.41 $8.46 $8.31
------- ------- ------- ------- -------
Net Investment Income ................................. 0.76(1) 0.77(1) 0.65 0.61(1) 0.49(1)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency
Transactions ........................................ (0.53) (0.06) 0.05 (0.15) (0.39)
------- ------- ------- ------- -------
Total from Investment Operations .................. 0.23 0.71 0.70 0.46 0.10
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .................. (0.62) (0.61) (0.57) (0.52) (0.48)
Distributions in Excess of Net Investment Income ...... (0.04) -- -- (0.08) (0.00)(3)
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) (0.01)
------- ------- ------- ------- -------
Total Distributions ............................... (0.88) (0.77) (0.65) (0.61) (0.49)
------- ------- ------- ------- -------
Net Asset Value, End of Period ........................ $8.47 $8.41 $8.46 $8.31 $7.92
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value(2) ......... 2.64% 8.75% 8.60% 5.55% 1.17%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............. $13,091 $16,997 $49,338 $64,059 $50,498
Ratio of Expenses to Average Net Assets ............... 1.26% 1.33% 1.48% 1.43% 1.35%
Ratio of Net Investment Income to Average Net Assets .. 8.71% 9.13% 7.59% 7.22% 5.97%
Portfolio Turnover Rate ............................... 150% 147% 77% 71% 74%
</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 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.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................. $9.11 $8.46 $8.40 $8.45 $8.30
------- ------- ------- ------- -------
Net Investment Income ................................. 0.70(1) 0.70(1) 0.59 0.55(1) 0.44(1)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency
Transactions ........................................ (0.53) (0.06) 0.05 (0.15) (0.38)
------- ------- ------- ------- -------
Total from Investment Operations .................. 0.17 0.64 0.64 0.40 0.06
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .................. (0.56) (0.56) (0.52) (0.47) (0.43)
Distributions in Excess of Net Investment Income ...... (0.04) -- -- (0.07) (0.00)(3)
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) (0.01)
------- ------- ------- ------- -------
Total Distributions ............................... (0.82) (0.70) (0.59) (0.55) (0.44)
------- ------- ------- ------- -------
Net Asset Value, End of Period ........................ $8.46 $8.40 $8.45 $8.30 $7.92
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value(2) ......... 1.93% 7.97% 7.89% 4.83% 0.60%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............. $98,390 $84,601 $48.137 $25,908 $19,950
Ratio of Expenses to Average Net Assets ............... 1.99% 2.07% 2.12% 2.13% 2.02%
Ratio of Net Investment Income to Average Net Assets .. 8.00% 8.40% 7.07% 6.51% 5.30%
Portfolio Turnover Rate ............................... 150% 147% 77% 71% 74%
</TABLE>
(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) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income Fund
Schedule of Investments
October 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Short-Term Strategic Income Fund on October 31, 1998. It's divided into three
main categories: bonds, common stocks and short-term investments. Bonds and
common stocks are further broken down by currency denomination. Short-term
investments, which represent the Fund's "cash" position, are listed last.
<TABLE>
<CAPTION>
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED)# VALUE
- ------------------- ---- --------------- -----
<S> <C> <C> <C>
BONDS
British Pound Sterling (1.63%)
United Kingdom Treasury,
Bond 12-07-00 .......................... 8.000% 650 $1,145,367
-----------
Canadian Dollar (1.27%)
Government of Canada,
Bond Ser VR22 03-01-01 ................. 7.500 1,300 893,824
-----------
U.S. Dollar (92.96%)
Banco Central de Costa Rica,
(Costa Rica), Floating Rate
Bond Ser A 05-21-05 .................. 6.568* $351 347,219
Banco de Galicia y Buenos
Aires S.A., (Argentina), Floating
Rate Note Ser EMTN 04-15-99 .......... 9.048* 1,500 1,470,000
Companhia Energetica de Minas
Gerais, (Brazil), Deb Ser REGS
11-18-04 ............................. 9.125 250 198,750
Empresas ICA Sociedad S.A
de C.V., (Mexico), Note
05-30-01 (R) ......................... 11.875 1,000 980,000
Espirito Santo Centrais Eletricas
S.A., (Brazil), Sr Note
07-15-07 (R) ......................... 10.000 750 442,500
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 ........... 7.000 1,624 1,658,169
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 10-01-12 ........... 7.500 4,511 4,629,153
Federative Republic of Brazil,
(Brazil),
Global Bond 11-05-01 ................... 8.875 2,000 1,810,000
Variable Rate Bond Ser A
01-01-01 ............................. 6.750* 1,076 947,100
Financiera Energetica Nacional
S.A., (Colombia), Deb Ser
REGS 06-15-06 ........................ 9.375 1,000 710,000
Government of Jamaica, (Jamaica),
Note 06-10-05 (R) ...................... 10.875 1,000 730,000
Petroleo Brasileiro S.A., (Brazil),
Floating Rate Note 09-25-00 ............ 6.821* 2,000 1,690,000
Republic of Argentina, (Argentina),
Floating Rate Bond Ser FRB
03-31-05 ............................. 6.188* 2,820 2,333,550
Floating Rate Note 07-21-03 ............ 10.350* 1,000 820,000
Republic of Colombia, (Colombia),
Note 02-15-03 .......................... 7.250 500 405,000
Republic of Costa Rica, (Costa Rica),
Deb 05-01-03 (R) ....................... 8.000 700 696,500
Republic of Ecuador, (Ecuador),
Bond 04-25-02 (R) ...................... 11.250 750 600,000
Republic of Panama, (Panama),
Floating Rate Note 05-10-02 ............ 6.750* 1,692 1,565,421
Note 02-13-02 .......................... 7.875 375 358,125
Transportacion Maritima
Mexicana S.A., (Mexico),
Note 10-15-00 ........................ 8.500 250 215,000
TV Azteca S.A. de C.V., (Mexico),
Sr Note Ser A 02-15-04 ................. 10.125 500 370,000
United Mexican States, (Mexico),
Global Bond 02-06-01 ................... 9.750 1,500 1,530,000
United States Treasury,
Note 01-31-99 .......................... 5.875 10,300 10,328,943
Note 05-15-99 .......................... 6.375 13,000 13,125,970
Note 11-30-99 .......................... 5.625 500 506,330
Note 11-15-00 .......................... 5.750 4,900 5,035,534
Note 11-30-02 .......................... 5.750 11,425 11,989,052
-----------
65,492,316
-----------
TOTAL BONDS
(Cost $69,120,748) (95.86%) 67,531,507
------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income Fund
<TABLE>
<CAPTION>
NUMBER MARKET
ISSUER, DESCRIPTION OF SHARES VALUE
- ------------------- --------- -----
<S> <C> <C>
COMMON STOCKS
U.S. Dollar (0.78%)
KeySpan Energy Corp. ..................... 8,000 $239,000
Southern Co. ............................. 11,000 310,063
-----------
549,063
-----------
TOTAL COMMON STOCKS
(Cost $583,955) (0.78%) 549,063
------- -----------
<CAPTION>
INTEREST PAR VALUE
RATE (OOOS OMITTED)
---- --------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.45%)
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 10-30-98, due 11-02-98
(Secured by U.S. Treasury Bonds,
6.25% thru 8.125%,
due 11-15-16 thru 11-15-26)
-- Note A ............................ 5.380% $1,024 1,024,000
-----------
Cash Equivalents (5.56%)
Navigator Securities Lending
Prime Portfolio** ................... 3,914 3,914,125
------- -----------
TOTAL SHORT-TERM INVESTMENTS (7.01%) 4,938,125
------- -----------
TOTAL INVESTMENTS (103.65%) 73,018,695
------- -----------
OTHER ASSETS AND LIABILITIES, NET (3.65%) (2,570,942)
------- -----------
TOTAL NETASSETS (100.00%) $70,447,753
======= ===========
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Represents rate in effect on October 31, 1998.
** Represents investment of security lending collateral - Note A.
# Par value of non-US$ 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 $3,449,000 or 4.90% of the Fund's net
assets as of October 31, 1998.
EMTN=Euro Medium Term Note
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.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Short-Term Strategic Income Fund
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by companies and governments of other
countries. The performance of the Fund is closely tied to the economic condition
within the countries in which it invests. The concentration of investments by
currency denomination for individual securities held by the Fund is shown in the
schedule of investments. In addition, concentration of investments can be
aggregated by various investment categories. The table below shows the
percentages of the Fund's investments at October 31, 1998 assigned to the
various investment categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
- --------------------- ---------------
Banks - Foreign....................................... 2.58%
Building.............................................. 1.39
Finance............................................... 1.01
Government - Foreign.................................. 19.64
Government - U.S. .................................... 58.18
Government - U.S. Agencies............................ 8.92
Media................................................. 0.52
Oil & Gas............................................. 2.40
Transport - Ship...................................... 0.31
Utilities - Electric Power............................ 0.72
Utilities - Gas Distribution.......................... 0.34
Utilities - Foreign................................... 0.63
Short-Term Investments................................ 7.01
------
TOTAL INVESTMENTS 103.65%
======
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Short-Term Strategic Income Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company Act of
1940. The Trust consists of six series: John Hancock Short-Term Strategic Income
Fund (the "Fund"), John Hancock Global Fund, John Hancock World Bond Fund, John
Hancock Special Opportunities Fund, John Hancock Growth Fund and John Hancock
International Fund. The other five series of the Trust are 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 and Class B shares. Effective December 8, 1998,
the Board of Trustees have authorized the issuance of Class C shares in 1999.
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. Aggregate cash balances
are invested in one or more repurchase agreements, whose underlying securities
are obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
Capital gains realized on some foreign securities are subject to foreign
taxes and are accrued, as applicable.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, at October 31, 1998, the Fund has $28,893,267 of
capital loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforwards are used by the
Fund, no capital gain distribution will be made. The Fund's carryforwards expire
as follows: October 31, 2000 -- $16,879,029, October 31, 2001 -- $3,127,414,
October 31, 2002 -- $2,774,082, October 31, 2003 -- $5,103,942 and October 31,
2006 -- $1,008,800.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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,
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Short-Term Strategic Income Fund
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 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.
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.
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 lines of credit, is allocated among the participating funds. The
Fund had no borrowing activity for the year ended October 31, 1998.
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 October 31, 1998, the Fund
loaned securities having a market value of $3,832,102 collateralized by cash in
the amount of $3,914,125, which 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
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Short-Term Strategic Income Fund
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 October 31, 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 October 31, 1998, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
DEC 98 21 U.S. TREASURY BONDS LONG $106,460
========
At October 31, 1998, the Fund had deposited in a segregated account, $55,000
par value of U.S. Treasury Note, 6.375%, 05-15-99 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
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.
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Short-Term Strategic Income Fund
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 October 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) 0.65% of the first $500,000,000 of the Fund's
average daily net asset value and (b) 0.60% of the Fund's average daily net
asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, acted as distributors for shares of the Fund. For the year ended
October 31, 1998, net sales charges received with regard to sales of Class A
shares amounted to $30,634. Of this amount, $3,492 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $9,842
was paid as sales commissions to unrelated broker-dealers and $17,300 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 four years of purchase (three years
for purchases prior to January 1, 1994) will be subject to a contingent deferred
sales charge ("CDSC") at declining rates beginning at 3.0% 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 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 October 31, 1998, the contingent deferred sales
charges paid to JH Funds amounted to $76,062.
In addition, to reimburse the distibutors 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 distibutors for their distribution and service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the 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
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 year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are directors and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees 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 makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover
18
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Short-Term Strategic Income Fund
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, 1998, the Fund's investments to cover the deferred compensation
liability had unrealized appreciation of $579.
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, 1998, aggregated $18,273,236 and $33,348,003, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $36,203,746 and $23,085,785, respectively, during the year
ended October 31, 1998.
The cost of investments owned at October 31, 1998 (including short-term
investments) for federal income tax purposes was $74,642,828. Gross unrealized
appreciation and depreciation of investments aggregated $843,413 and $2,467,546,
respectively, resulting in net unrealized depreciation of $1,624,133.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended October 31, 1998, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized loss on investments and foreign
currency transactions of $107,173, an increase in distributions in excess of net
investment income of $104,997 and a decrease in capital paid-in of $2,176. This
represents the amount necessary to report these balances on a tax basis,
excluding certain temporary differences, as of October 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 net realized losses on foreign
currency transactions in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting principles.
The calculation of net investment income per share in the financial highlights
excludes these adjustments.
19
<PAGE>
================================================================================
John Hancock Funds - Short-Term Strategic Income Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Short-Term Strategic Income 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 Short-Term Strategic
Income Fund (the "Fund") (a series of John Hancock Investment Trust III) at
October 31, 1998, 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
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,
1998.
With respect to the distributions paid by the Fund for the fiscal year ended
October 31, 1998, 0.4717% of the distributions qualify for the corporate
dividends received deduction.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January of 1999. This will reflect the total of all distributions that are
taxable for the calendar year 1998.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
20
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Short-Term Strategic Income Fund
21
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Short-Term Strategic Income Fund
22
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Short-Term Strategic Income Fund
23
<PAGE>
================================================================================
----------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
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This report is for the information of shareholders of the John Hancock
Short-Term Strategic Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 3200A 10/98
12/98
[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." A recycled logo in lower left hand corner
with caption "Printed on Recycled Paper."]
<PAGE>
SEMIANNUAL REPORT
The latest report from your
Fund's management team
Short-Term Strategic Income Fund
APRIL 30, 1999
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Stephen L. Brown
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Anne C. Hodsdon
President, Chief Operating Officer,
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Vice President and Compliance Officer
CUSTODIAN
State Street Bank 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
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The Year 2000 is fast approaching and people around the world are getting
ready to celebrate this historic transition to a new millennium. At John
Hancock Funds, we share the excitement, but we aren't popping the
champagne corks just yet. Rather, we are staying on the course that we
set more than two years ago to ensure that the transition to a new
millennium is a smooth one for our shareholders.
As many already know, the Year 2000 has created more than the prospect of
New Year's festivities of epic proportions. It has also presented the
world with a challenge: making sure that older computers, and any
equipment powered by computer chips, can properly read and process the
date "00" as 2000, not 1900. Much has been written about how the world
will weather the change. Some view it as a non-event, while others see the
potential for disruptions. How much disruption, and for how long, depends
on whom you talk to.
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an
important issue to be dealt with and we have made it a top priority. Two
years ago, John Hancock Funds put a full-time team of experts on the case
and established a company-wide program to evaluate all computer
applications and to modify or replace those that needed changing.
These modifications and replacements are nearly done, and the tests of all
our systems are on schedule for completion by the end of July. The rest of
1999 will be spent testing with our business partners and continuing to
participate in industry testing. We have also established additional
contingency plans beyond our regular ones to prepare for any challenges
that the Year 2000 might present. In the end, John Hancock will spend
approximately $90-$95 million to ensure we make a successful transition to
the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is
featuring articles with more detailed information on Y2K matters of
importance to our shareholders. I encourage you to read them, or contact
one of our Customer Service Representatives at 1-800-225-5291 for another
copy. For your own peace of mind, we also recommend that you save your
1999 statements, especially those you receive between October and
December, so that you are able to check them against the first one you
receive in 2000. It's a measure of prudence, not panic. Good record
keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although
we cannot make any ironclad assurances, we are confident that the steps we
have taken will provide shareholders with as smooth a transition as
possible. Once that occurs, we will happily raise our glasses to toast the
New Year, future prosperity and our hopes to serve you well into the
2000's.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
BY FREDERICK L. CAVANAUGH, JR. AND ARTHUR N. CALAVRITINOS, CFA, PORTFOLIO
MANAGERS
John Hancock Short-Term Strategic Income Fund
Investor shift to less defensive bonds
favors emerging markets, hurts Treasuries
[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Short-
Term Strategic Income Fund. Caption below reads "Portfolio management team
members (l-r): "Lee Crockett, Roger Hamilton, Fred Cavanaugh and Arthur
Calavritinos."]
With the exception of emerging-market bonds, most short-term global bonds
struggled during the past six months. U.S. Treasury securities suffered
from a dramatic shift in investor sentiment that started after the Federal
Reserve in November made the final in a series of three interest-rate
cuts. Rather than believing that continued protracted economic weakness
and global market turmoil would dampen inflation, investors became
increasingly concerned that strong U.S. economic growth and stabilized
financial markets would ignite it. Inflation is a bond investor's mortal
enemy because it eats away at their fixed income payments. As a result,
investors sent Treasury bond yields -- which move in the opposite
direction of their prices -- higher by year end.
In early 1999, the pace of U.S. economic growth accelerated and troubled
economies overseas appeared more stable. Against this more upbeat world
economic view, investors no longer demanded the safety and security of
U.S. Treasuries. They began to move instead toward investments with higher
yields and better return potential.
"...most
short-term
global bonds
struggled
during the
past six
months."
In February, Fed Chairman Alan Greenspan jolted the fixed-income markets
by hinting that the Fed was unlikely to continue to cut interest rates. In
response, U.S. Treasury securities suffered their worst one-month losses
in almost 18 years. The sell-off weighed on other bonds, but Treasuries
suffered the worst damage by far. European bonds performed poorly as
interest rates rose in that region early on. These bonds have rallied more
recently in response to interest-rate cuts across the Continent.
[Pie chart at top left hand column with heading "Portfolio Diversification."
The chart is divided into eight sections (from top to left): U.S. Government
& Agencies 40%, REIT 2%, Banking & Finance 6%, Oil & Gas 6%,
Telecommunications 6%, Other 7%, Electric Power Utilities 13% and Foreign
Governments 20%. A note below the chart reads "As a percentage of net
assets on April 30, 1999."]
"...our best
performers
...were our
investments in
emerging-
market debt
from Latin
America."
Meanwhile, the more risky emerging-market bonds staged a recovery.
Encouraged by Brazil's efforts to hold its economy together this spring,
investors increasingly sought bonds issued by that and other Latin
American countries, as well as some emerging-market Southeast Asian bonds.
U.S. corporate bonds also regained some of their footing in response to
investors' rising confidence in the continued strength of corporate
profitability. In addition, investors were attracted by corporate bonds'
attractive yield advantage over Treasuries.
[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
Latin American bonds followed by an up arrow with the phrase "Renewed
optimism prompts rebound." The second listing is PECO Energy Transition
Trust followed by an up arrow with the phrase "Strong demand for high-quality
corporates." The third listing is U.S. Treasuries followed by a down arrow
with the phrase "Rising interest rates send prices down." A note below the
table reads "See 'Schedule of Investments.' Investment holdings are subject
to change."]
Performance and strategy review
For the six-month period ended April 30, 1999, John Hancock Short-Term
Strategic Income Fund's Class A and Class B shares posted total returns of
2.71% and 2.38%, respectively, at net asset value. Those returns were
better than the average short-term investment-grade bond fund's return of
1.76%, according to Lipper, Inc.1 Class C shares, which were launched on
March 1, 1999, returned 1.80% for the first two months of operations. Keep
in mind that your net asset value return will be different from the Fund's
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.
Our small positions in Canadian and United Kingdom government bonds
performed reasonably well during the past six months in response to
falling interest rates in both countries. But our best performers, and the
main reason why the Fund outpaced its peers during the past six months,
were our investments in emerging-market debt from Latin America.
Yield-hungry investors increasingly looked to emerging-market bonds when
they exited the U.S. Treasury market. Although emerging-market bonds
suffered briefly at the beginning of 1999 when Brazil devalued its
currency, they quickly came marching back because of a number of
developments. First came the appointment of a new president of the
Brazilian Central Bank in early February. Later, interest rates were
raised and the country began to seriously address its problems with
foreign bankers and the International Monetary Fund. Those actions helped
boost the government's credibility. In response, many investors became
optimistic that much of the worst of Latin America's problems were behind
it. Because we're not convinced that more negative surprises won't come
out of that region, we used periods of market strength to scale back our
holdings in Latin American bonds.
[Bar chart at top of left hand column with heading "Fund Performance". Under
the heading is a note that reads "For the six months ended April 30, 1999."
The chart is scaled in increments of 1% with 0% at the bottom and 4% at the
top. The first bar represents the 2.71% total return for John Hancock
Short-Term Strategic Income Fund Class A. The second bar represents the
2.38% total return for John Hancock Short-Term Strategic Income Fund Class B.
The third bar represents the 1.80%* total return for John Hancock Short-Term
Strategic Income Fund Class C. The fourth bar represents the 1.76% total
return for Average short-term investment-grade bond fund. A note below the
chart reads "Total returns for John Hancock Short-Term Strategic Income Fund
are at net asset value with all distributions reinvested. The average short-
term investment-grade bond fund is tracked by Lipper, Inc. See the following
two pages for historical performance information. *From inception March 1,
1999 through April 30, 1999."]
Treasuries shrink, high-yield corporates grow
We also cut back our stake in U.S. Treasury securities in order to add
more attractive opportunities elsewhere. By the end of the period,
Treasuries made up about 31% of investments, compared to roughly 58% of
investments six months earlier. We used the proceeds from our sale of
Treasuries to initiate positions in high-quality corporate bonds, which
rose to close to 30% of the Fund's net assets by the end of the period. We
liked high-quality short-term corporate bonds because they offered
attractive yields of about 1.15% more than Treasury securities of
comparable maturity. Given those attractive yields -- and anticipating
that the yield spread, or differential, between corporate and Treasury
issues would narrow -- we added to our holdings in corporate securities.
We were rewarded recently when the yield spread did narrow and corporates
generally outperformed Treasuries. In choosing corporate bonds, we focused
on high-quality names such as PECO Energy Transition Trust. Bonds issued
by this Pennsylvania electric company performed quite well after we
purchased them in mid-March. Other additions included electric provider
Niagara Mohawk Power Corp. and real estate investment trust Mack-Cali
Realty.
"In our view,
corporate
bonds
continue
to be
attractive."
Outlook
In our view, corporate bonds continue to be attractive. Even though they
have gained ground recently, we don't believe high-quality corporate bonds
have yet realized all their potential value. On the other hand,
emerging-market bonds may have over stretched what we believe to be their
fair value. What's more, we are concerned that there could be more
negative developments yet to come in Latin America. So we plan to continue
to pare back our stake in Latin American bonds when the market affords us
attractive opportunities to do so. We'll likely use the proceeds from any
sales toward the purchase of additional corporate bonds. Our outlook calls
for slower U.S. economic growth in the second half of 1999, which should
keep inflation in check and drive interest rates lower.
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, 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 Short-Term 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 3%. Class B performance reflects a maximum contingent
deferred sales charge (maximum 3% and declining to 0% over four years).
Class C performance includes a contingent deferred sales charge (1%
declining to 0% after one year).
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, before you
invest or send money.
CLASS A
For the period ended March 31, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
------- ------- -------
Cumulative Total Returns (2.92%) 28.70% 38.90%
Average Annual Total Returns (2.92%) 5.18% 4.64%
CLASS B
For the period ended March 31, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/28/90)
------- ------- -------
Cumulative Total Returns (3.40%) 28.41% 46.73%
Average Annual Total Returns (3.40%) 5.13% 4.75%
CLASS C
For the period ended March 31, 1999
SINCE
INCEPTION
(3/1/99)
-------
Cumulative Total Return 0.19%
Average Annual Total Return 0.19%(1)
YIELDS
As of April 30, 1999
SEC 30-DAY
YIELD
-------
John Hancock Short-Term
Strategic Income Fund: Class A 4.68%
John Hancock Short-Term
Strategic Income Fund: Class B 4.22%
John Hancock Short-Term
Strategic Income Fund: Class C 4.09%
Notes to Performance
(1) Not annualized.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Short-Term Strategic Income 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
Money Market Index -- an unmanaged index that is composed of various
non-U.S.-currency-denominated bonds, usually with an average maturity of
three years or less. Past performance is not indicative of future results.
Line chart with the heading John Hancock Short-Term 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 hypothetical $10,000 investment made in the John
Hancock Short-Term Strategic Income Fund on January 3, 1992, before sales
charge, and is equal to $14,411. The second line represents the value of the
same hypothetical investment made in the John Hancock Short-Term Strategic
Income Fund, after sales charge, and is equal to $13,986 as of April 30,
1999. The third line represents the Salomon Brothers World Money Market
Index and is equal to $13,922.
Line chart with the heading John Hancock Short-Term Strategic Income 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 hypothetical $10,000 investment made in the John
Hancock Short-Term Strategic Income Fund on December 28, 1990, before sales
charge, and is equal to $14,767. The second line represents the Salomon
Brothers World Money Market Index and is equal to $14,759.
Line chart with the heading John Hancock Short-Term Strategic Income Fund
Class C, 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 hypothetical $10,000 investment made in the John
Hancock Short-Term Strategic Income Fund on March 1, 1999, before sales
charge, and is equal to $10,180 as of April 30, 1999. The second line
represents the Salomon Brothers World Money Market Index and is equal to
$10,114. The third line represents the value of the same hypothetical
investment made in the John Hancock Short-Term Strategic Income Fund, after
sales charge, and is equal to $10,080.
*No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
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, 1999.
You'll also find the net asset value and the maximum offering price per
share as of that date.
Statement of Assets and Liabilities
April 30, 1999 (Unaudited)
- -----------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $59,083,772) $58,897,577
Short-term investments (cost - $16,200,670)
- - Note A 16,200,670
--------------
75,098,247
Receivable for investments sold 5,669,684
Receivable for shares sold 43,968
Interest receivable 980,819
Other assets 5,266
--------------
Total Assets 81,797,984
- -----------------------------------------------------------------------
Liabilities:
Due to custodian 5,668,740
Payable for investments purchased 1,990,060
Payable for forward foreign currency exchange
contracts sold - Note A 73,637
Payable for shares repurchased 320,030
Payable upon return of securities on loan
- - Note A 10,522,670
Dividend payable 8,845
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 45,812
Accounts payable and accrued expenses 44,955
--------------
Total Liabilities 18,674,749
- -----------------------------------------------------------------------
Net Assets:
Capital paid-in 93,776,810
Accumulated net realized loss on investments, financial
futures contracts and foreign currency
transactions (30,367,804)
Net unrealized depreciation of investments and
foreign currency transactions (259,063)
Distributions in excess of net investment
income (26,708)
--------------
Net Assets $63,123,235
=======================================================================
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 - $46,344,967/5,860,749 $7.91
=======================================================================
Class B - $16,726,128/2,115,098 $7.91
=======================================================================
Class C * - $52,140/6,596 $7.91
=======================================================================
Maximum Offering Price Per Share**
Class A - ($7.91 x 103.09%) $8.15
=======================================================================
* Class C shares commenced operations on March 1, 1999.
** 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.
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, 1999 (Unaudited)
- -----------------------------------------------------------------------
Investment Income:
Dividends $7,245
Interest (including income on
securities loaned of $33,895) 2,293,768
--------------
2,301,013
--------------
Expenses:
Investment management fee - Note B 214,928
Distribution and service fee - Note B
Class A 72,191
Class B 84,681
Class C 28
Transfer agent fee - Note B 56,677
Custodian fee 30,063
Auditing fee 20,040
Registration and filing fees 8,508
Printing 6,366
Financial services fee - Note B 4,765
Trustees' fees 1,477
Miscellaneous 79
Legal 50
--------------
Total Expenses 499,853
- -----------------------------------------------------------------------
Net Investment Income 1,801,160
- -----------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency
Transactions:
Net realized loss on investments sold (1,180,036)
Net realized loss on financial futures
contracts (381,723)
Net realized loss on foreign currency
transactions (19,238)
Change in net unrealized appreciation/depreciation
of investments 1,437,938
Change in net unrealized appreciation/depreciation
of financial futures contracts 106,460
Change in net unrealized appreciation/depreciation
of foreign currency transactions (73,041)
--------------
Net Realized and Unrealized
Loss on Investments, Financial
Futures Contracts and Foreign
Currency Transactions (109,640)
- -----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $1,691,520
=======================================================================
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1999
OCTOBER 31, 1998 (UNAUDITED)
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $4,578,534 $1,801,160
Net realized loss on investments sold,
financial futures contracts and foreign
currency transactions (1,009,513) (1,580,997)
Change in net unrealized
appreciation/depreciation of investments
and foreign currency transactions (2,547,088) 1,471,357
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 1,021,933 1,691,520
-------------- --------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.4780 and $0.2213 per share,
respectively) (3,322,613) (1,352,621)
Class B - ($0.4230 and $0.1960 per share,
respectively) (1,126,678) (448,421)
Class C ** - (none and $0.0509 per share,
respectively) -- (118)
Distributions in excess of net investment income
Class A - ($0.0015 and none per share,
respectively) (10,603) --
Class B - ($0.0014 and none per share,
respectively) (3,595) --
Distributions from capital paid-in
Class A - ($0.0124 and none per share,
respectively) (85,913) --
Class B - ($0.0109 and none per share,
respectively) (29,132) --
-------------- --------------
Total Distributions to Shareholders (4,578,534) (1,801,160)
-------------- --------------
From Fund Share Transactions - Net:* (15,963,160) (7,214,878)
-------------- --------------
Net Assets:
Beginning of period 89,967,514 70,447,753
-------------- --------------
End of period (including distributions in
excess of net investment income of $26,708
and $26,708, respectively) $70,447,753 $63,123,235
============== ==============
<CAPTION>
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1999
OCTOBER 31, 1998 (UNAUDITED)
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 1,724,135 $14,275,885 473,226 $3,757,908
Shares issued to shareholders in
reinvestment of distributions 216,155 1,771,929 87,663 695,893
-------------- -------------- -------------- --------------
1,940,290 16,047,814 560,889 4,453,801
Less shares repurchased (3,273,385) (26,994,702) (1,072,437) (8,516,120)
-------------- -------------- -------------- --------------
Net decrease (1,333,095) ($10,946,888) (511,548) ($4,062,319)
============== ============== ============== ==============
CLASS B
Shares sold 937,760 $7,634,236 291,229 $2,303,518
Shares issued to shareholders in
reinvestment of distributions 66,168 542,160 26,619 210,884
-------------- -------------- -------------- --------------
1,003,928 8,176,396 317,848 2,514,402
Less shares repurchased (1,606,600) (13,192,668) (720,178) (5,719,125)
-------------- -------------- -------------- --------------
Net decrease (602,672) ($5,016,272) (402,330) ($3,204,723)
============== ============== ============== ==============
CLASS C **
Shares sold -- -- 6,582 $52,055
Shares issued to shareholders in
reinvestment of distributions -- -- 14 109
-------------- -------------- -------------- --------------
Net increase -- -- 6,596 $52,164
============== ============== ============== ==============
** Class C shares commenced operations on March 1, 1999.
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
distributions reflects earnings less expenses, any investment and foreign
currency gains and losses, distributions paid to shareholders, if any, 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, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of
Period $9.12 $8.47 $8.41 $8.46 $8.31 $7.92
-------- -------- -------- -------- -------- --------
Net Investment Income 0.76(1) 0.77(1) 0.65 0.61(1) 0.49(1) 0.22(1)
Net Realized and Unrealized
Gain (Loss) on Investments,
Financial Futures Contracts
and Foreign Currency
Transactions (0.53) (0.06) 0.05 (0.15) (0.39) (0.01)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.23 0.71 0.70 0.46 0.10 0.21
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment
Income (0.62) (0.61) (0.57) (0.52) (0.48) (0.22)
Distributions in Excess of Net
Investment Income (0.04) -- -- (0.08) (0.00)(3) --
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) (0.01) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.88) (0.77) (0.65) (0.61) (0.49) (0.22)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $8.47 $8.41 $8.46 $8.31 $7.92 $7.91
======== ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value(2) 2.64% 8.75% 8.60% 5.55% 1.17% 2.71%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) $13,091 $16,997 $49,338 $64,059 $50,498 $46,345
Ratio of Expenses to Average
Net Assets 1.26% 1.33% 1.48% 1.43% 1.35% 1.34%(5)
Ratio of Net Investment Income
to Average Net Assets 8.71% 9.13% 7.59% 7.22% 5.97% 5.62%(5)
Portfolio Turnover Rate 150% 147% 77% 71% 74% 71%
<CAPTION>
Financial Highlights (continued)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------------------------------- APRIL 30, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of
Period $9.11 $8.46 $8.40 $8.45 $8.30 $7.92
-------- -------- -------- -------- -------- --------
Net Investment Income 0.70(1) 0.70(1) 0.59 0.55(1) 0.44(1) 0.20(1)
Net Realized and Unrealized
Gain (Loss) on Investments,
Financial Futures Contracts
and Foreign Currency
Transactions (0.53) (0.06) 0.05 (0.15) (0.38) (0.01)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.17 0.64 0.64 0.40 0.06 0.19
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment
Income (0.56) (0.56) (0.52) (0.47) (0.43) (0.20)
Distributions in Excess of Net
Investment Income (0.04) -- -- (0.07) (0.00)(3) --
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) (0.01) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.82) (0.70) (0.59) (0.55) (0.44) (0.20)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $8.46 $8.40 $8.45 $8.30 $7.92 $7.91
======== ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value(2) 1.93% 7.97% 7.89% 4.83% 0.60% 2.38%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) $98,390 $84,601 $48,137 $25,908 $19,950 $16,726
Ratio of Expenses to Average
Net Assets 1.99% 2.07% 2.12% 2.13% 2.02% 1.98(5)
Ratio of Net Investment Income
to Average Net Assets 8.00% 8.40% 7.07% 6.51% 5.30% 4.98(5)
Portfolio Turnover Rate 150% 147% 77% 71% 74% 71%
<CAPTION>
Financial Highlights (continued)
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM MARCH 1, 1999
(COMMENCEMENT OF
OPERATIONS)
TO APRIL 30, 1999
(UNAUDITED)
----------
<S> <C>
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of
Period $7.82
--------
Net Investment Income(1) 0.05
Net Realized and Unrealized
Gain on Investments, Financial
Futures Contracts and Foreign
Currency Transactions 0.09
--------
Total from Investment
Operations 0.14
--------
Less Distributions:
Dividends from Net Investment
Income (0.05)
--------
Net Asset Value, End of Period $7.91
========
Total Investment Return at Net
Asset Value(2) 1.80%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) $52
Ratio of Expenses to Average
Net Assets 2.04%(5)
Ratio of Net Investment Income
to Average Net Assets 4.16%(5)
Portfolio Turnover Rate 71%
(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) Less than $0.01 per share.
(4) Not annualized.
(5) Annualized.
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 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>
Schedule of Investments
April 30, 1999 (Unaudited)
- -----------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Short-Term
Strategic Income Fund on April 30, 1999. It's divided into two main categories: bonds and
short-term investments. 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 (3.48%)
United Kingdom of Great Britain
Treasury,
Bond 12-07-00 8.000% 650 $1,091,873
Bond 06-07-02 7.000 650 1,105,466
--------------
2,197,339
--------------
Canadian Dollar (5.07%)
Government of Canada,
Bond Ser VR22 03-01-01 7.500 3,000 2,153,350
Bond Ser WE00 09-01-02 5.500 1,500 1,045,299
--------------
3,198,649
--------------
U.S. Dollar (84.76%)
AT&T Corp.,
Note 03-15-04 5.625 $2,000 1,990,540
Banco Central de Costa Rica,
(Costa Rica), Floating Rate
Bond Ser A 05-21-05 5.868* 173 164,318
Banco de Galicia y Buenos Aires
S.A. de C.V., (Argentina), Med
Term Note 12-15-00 (R) 10.000 1,500 1,533,750
Calpine Corp.,
Sr Note 02-01-04 9.250 2,000 2,060,000
Cinergy Corp.,
Deb 04-15-04 (R) 6.125 500 499,450
CMS Panhandle Holding Co.,
Sr Note 03-15-04 (R) 6.125 2,000 1,990,000
Connecticut Light & Power Co./
West Mass Electric,
Sec Note 06-05-03 (R) 8.590 2,300 2,350,140
Conoco, Inc.,
Sr Note 04-15-04 5.900 2,000 1,985,600
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 7.000 1,337 1,366,566
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 10-01-12 7.500 3,889 4,013,356
Federative Republic of Brazil,
(Brazil), Variable Rate Bond
Ser A 01-01-01 6.062* 861 817,950
Government of Jamaica, (Jamaica),
Note 06-10-05 (R) 10.875 510 459,000
Mack-Cali Realty, L.P.,
Note 03-15-04 7.000 1,000 997,900
Midland Funding Corp. II,
Deb Ser B 07-23-06 13.250 1,000 1,231,350
Niagara Mohawk Power Corp.,
Sr Note Ser D 10-01-02 7.250 2,000 2,035,080
PECO Energy Transition Trust,
Pass Thru Ctf Ser 1999-A
Class A-2 03-01-02 5.630 1,000 1,000,240
PEMEX Finance Ltd., (Cayman
Islands), Note Ser 1A
11-15-03 (R) 5.720 1,000 988,910
Regency Centers, L.P.,
Gtd Note 04-01-04 7.400 500 493,165
Republic of Argentina, (Argentina),
Floating Rate Bond Ser FRB
03-31-05 5.937* 2,790 2,478,915
Floating Rate Note 07-21-03 8.800* 1,000 947,500
Republic of Costa Rica, (Costa
Rica), Deb 05-01-03 (R) 8.000 700 682,500
Republic of Panama, (Panama),
Floating Rate Note 05-10-02 6.191* 1,481 1,428,989
Note 02-13-02 7.875 375 365,625
Sprint Capital Corp,
Gtd Note 05-01-04 5.875 2,000 1,980,000
United States Treasury,
Note 11-15-00 5.750 10,000 10,098,400
Note 01-31-02 4.500 4,500 4,456,395
Note 11-30-02 5.750 5,000 5,085,950
--------------
53,501,589
--------------
TOTAL BONDS
(Cost $59,083,772) (93.31%) 58,897,577
-------- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (8.99%)
Investment in a joint repurchase
agreement transaction with
SBC Warburg, Inc. - Dated
04-30-99, due 05-03-99
(Secured by U.S. Treasury
Bonds, 6.875% thru 8.125%
due 05-15-21 thru 08-15-25)
- - Note A 4.890% $5,678 $5,678,000
--------------
Cash Equivalents (16.67%)
Navigator Securities Lending
Prime Portfolio** 10,523 10,522,670
-------- --------------
TOTAL SHORT-TERM INVESTMENTS (25.66%) 16,200,670
-------- --------------
TOTAL INVESTMENTS (118.97%) 75,098,247
-------- --------------
OTHER ASSETS AND LIABILITIES, NET (18.97%) (11,975,012)
-------- --------------
TOTAL NET ASSETS (100.00%) $63,123,235
======== ==============
* Represents rate in effect on April 30, 1999.
** Represents investment of security lending collateral - Note A.
# Par value of non-US$ 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 $8,503,750 or 13.47% of the Fund's
net assets as of April 30, 1999.
</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.
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------
The Fund primarily invests in bonds issued by governments and companies of
other countries. 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, 1999 assigned to the various investment
categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
INVESTMENT CATEGORIES NET ASSETS
- -------------------------- -----------
Banks - Foreign 2.69%
Finance 3.52
Government - Foreign 19.92
Government - U.S. 31.12
Government - U.S. Agencies 8.52
Oil & Gas 6.30
REIT 2.36
Telecommunications 6.29
Utilities - Electric Power 12.59
Short-Term Investments 25.66
-----------
TOTAL INVESTMENTS 118.97%
===========
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Investment Trust III (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company Act
of 1940. The Trust consists of five series: John Hancock Short-Term
Strategic Income Fund (the "Fund"), John Hancock Global Fund, John Hancock
Mid Cap Growth Fund, John Hancock Large Cap Growth Fund and John Hancock
International Fund. Prior to June 1, 1999, John Hancock Mid Cap Growth
Fund was known as John Hancock Special Opportunities Fund and John
Hancock Large Cap Growth Fund was known as John Hancock Growth Fund. The
other four series of the Trust are 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 March 1, 1999. 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.
Aggregate cash balances are invested in one or more repurchase agreements,
whose underlying securities are obligations of the U.S. government and/or
its agencies. The Fund's custodian bank receives delivery of the
underlying securities for the joint account on the Fund's behalf. The
Adviser is responsible for ensuring that the agreement is fully
collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date
of purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
Capital gains realized on some foreign securities are subject to foreign
taxes and are accrued, as applicable.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment company"
by complying with the applicable provisions of the Internal Revenue Code
and will not be subject to federal income tax on taxable income which is
distributed to shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, at April 30, 1999, the Fund has
$28,893,267 of capital loss carryforwards available, to the extent
provided by regulations, to offset future net realized capital gains. If
such carryforwards are used by the Fund, no capital gain distribution will
be made. The Fund's carryforwards expire as follows: October 31, 2000 --
$16,879,029, October 31, 2001 --$3,127,414, October 31, 2002 --
$2,774,082, October 31, 2003 -- $5,103,942 and October 31, 2006 --
$1,008,800.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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.
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.
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.
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. Effective
March 12, 1999, the Fund entered into a syndicated line of credit
agreement with various banks, and the agreements previously in effect were
terminated. This agreement enables the Fund to participate with other
funds managed by the Adviser in unsecured lines of credit with banks,
which permit borrowings up to $500 million, collectively. Interest is
charged to each fund, based on its borrowing. In addition, a commitment
fee is charged based on the average daily unused portion of the line of
credit and is allocated among the participating funds. The Fund had no
borrowing activity for the period ended April 30, 1999.
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, 1999, the Fund loaned securities having a market
value of $10,290,763 collateralized by cash in the amount of $10,522,670,
which 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, 1999, open forward foreign currency exchange contracts were
as follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT DATE (DEPRECIATION)
- --------- -------------------- ----------- --------------
SELLS
Canadian Dollar 4,729,725 JUNE 99 ($106,826)
Pound Sterling 714,230 MAY 99 13,914
Pound Sterling 708,500 JUNE 99 19,275
----------
($73,637)
==========
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, 1999, 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. Over-the-counter options are
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 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,
1999.
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) 0.65% of the first
$500,000,000 of the Fund's average daily net asset value and (b) 0.60% of
the Fund's average daily net asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, acted as distributors for shares of the Fund. For the period
ended April 30, 1999, net sales charges received with regard to sales of
Class A shares amounted to $16,948. Of this amount, $2,101 was retained
and used for printing prospectuses, advertising, sales literature and
other purposes, $11,517 was paid as sales commissions to unrelated
broker-dealers and $3,330 was paid as sales commissions to sales personnel
of Signator Investors, Inc. ("Signator Investors"), a related
broker-dealer, formerly known as John Hancock Distributors, Inc. The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company
("JHMLICo"), is the indirect sole shareholder of Signator Investors.
Class B shares which are redeemed within four years of purchase (three
years for purchases prior to January 1, 1994) will be subject to a
contingent deferred sales charge ("CDSC") at declining rates beginning at
3.00% of the lesser of the current market value at the time of redemption
or the original purchase cost of the shares being redeemed. Proceeds from
the CDSC 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, 1999, the contingent deferred sales charges paid to JH Funds
amounted to $20,079.
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 for providing
distribution related services to the Fund in connection with the sale of
Class C shares. For the period ended April 30, 1999, there were no
contingent deferred sales charges paid to JH Funds.
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, Class B and Class C 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 and Class C 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 JHMLICo.
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 was at an annual rate of less than 0.02% of the average net assets
of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Stephen L. Brown, Ms. Anne C. Hodsdon and
Mr. Richard S. Scipione are directors and/or officers of the Adviser
and/or its affiliates, as well as Trustees of the Fund. The compensation
of unaffiliated Trustees 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 makes 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, 1999, the Fund's investments
to cover the deferred compensation liability had unrealized appreciation
of $579.
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, 1999, aggregated $25,096,581 and $12,621,261,
respectively. Purchases and proceeds from sales of obligations of the
U.S. government and its agencies aggregated $20,547,273 and $41,199,188,
respectively, during the period ended April 30, 1999.
The cost of investments owned at April 30, 1999 (including short-term
investments) for federal income tax purposes was $75,284,442. Gross
unrealized appreciation and depreciation of investments aggregated
$271,082 and $457,277, respectively, resulting in net unrealized
depreciation of $186,195.
NOTE D -
SUBSEQUENT EVENT
On June 8, 1999, the Trustees voted to recommend that the shareholders
approve a tax-free reorganization of the Fund. Under the terms of the
reorganization, subject to shareholder approval at a shareholder meeting
scheduled to be held on October 13, 1999, the Fund would transfer all of
its assets and liabilities to John Hancock Strategic Income Fund
("Strategic Income Fund") in a tax-free exchange for shares of equal value
of Strategic Income Fund. Further information regarding the proposed
reorganization will be contained in a proxy statement and prospectus which
is scheduled to be mailed to shareholders during the last week of August,
1999. Effective at the close of business on June 11, 1999, John Hancock
Short-Term Strategic Income Fund was closed to all new accounts.
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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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PAID
Randolph, MA
Permit No. 75
This report is for the information of shareholders of the John Hancock
Short-Term Strategic Income 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
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320SA 4/99
6/99
<PAGE>
Exhibit C
JOHN HANCOCK STRATEGIC INCOME FUND
NOTES TO PRO-FORMA COMBINED FINANCIAL STATEMENTS
MAY 31, 1999
Pro-forma information is intended to provide shareholders of the John Hancock
Strategic Income Fund (JHSIF) and John Hancock Short-Term Strategic Income Fund
(JHSTSIF) 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, 1999. This information is unaudited.
The pro-forma combined statements of assets and liabilities and results of
operations as of May 31, 1999, have been prepared to reflect the merger of JHSIF
and JHSTSIF 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 Short-Term Strategic Income Fund and issuance of John Hancock
Strategic Income Fund Class A, Class B and Class C shares in exchange for
all of the outstanding Class A, Class B and Class C shares, respectively
of John Hancock Short-Term Strategic Income 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
at the maxium rates, which will be in effect for the John Hancock
Strategic Income Fund: 0.30% of Class A average daily net assets, 1.00% of
Class B average daily net assets and 1.00% of Class C average daily. net
assets.
(d) The transfer agent fee for the Class A, Class B and Class C 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 the John Hancock Strategic Income Fund and
John Hancock Short-Term Strategic Income Fund for various expenses
included on a pro-forma basis were reduced to reflect the estimated
savings arising from the merger.
<PAGE>
<TABLE>
<CAPTION>
John Hancock Strategic Income Fund
Pro-forma combined statement of assets and liabilities
For the year ended May 31, 1999
John Hancock
John Hancock Short-Term
Strategic Income Strategic Income Pro-Forma
Fund Fund Adjustments Combined
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Assets
Investments at value $ 1,157,256,682 $ 64,121,434 $ - $ 1,221,378,116
Cash - 330 - 330
Receivable for investments sold 41,952 - - 41,952
Receivable for foreign currency exchange contracts sold 2,140,226 41,705 - 2,181,931
Receivable for shares sold 2,421,239 30,852 - 2,452,091
Dividends receivable 46,825 - - 46,825
Interest receivable 23,063,311 840,621 - 23,903,932
Other Assets 61,759 6,223 - 67,982
------------------ ------------------ ------------------ ------------------
Total Assets 1,185,031,994 65,041,165 - 1,250,073,159
------------------ ------------------ ------------------ ------------------
Liabilities
Payable for foreign currency contracts purchased 107,849 75,222 - 183,071
Payable for shares repurchased 700,517 18,886 - 719,403
Payable upon return of securities on loan - 3,656,140 - 3,656,140
Dividend payable 421,922 8,517 - 430,439
Payable to John Hancock Advisers, Inc, and affiliates 706,007 37,213 - 743,220
Accounts payable and accrued expenses 259,553 14,568 - 274,121
------------------ ------------------ ------------------ ------------------
Total Liabilities 2,195,848 3,810,546 - 6,006,394
------------------ ------------------ ------------------ ------------------
61,230,619
Net Assets:
Capital paid-in 1,209,268,846 92,594,877 - 1,301,863,723
Accumulated net realized loss on investments, financial
futures contracts, and foreign currency transactions (18,528,658) (30,385,428) - (48,914,086)
Net unrealized depreciation of investments,
financial futures contracts and foreign currency
transactions (17,413,442) (952,122) - (18,365,564)
Undistributed net investment income/ distributions
in excess of net investment income 9,509,400 (26,708) - 9,482,692
------------------ ------------------ ------------------ ------------------
Net Assets $ 1,182,836,146 $ 61,230,619 $ - $ 1,244,066,765
================== ================== ================== ==================
Net Assets:
Strategic Income
Class A $ 540,956,470 $ - $ 45,472,923 (a) $ 586,429,393
Class B 619,445,881 - 15,699,989 (a) 635,145,870
Class C 22,433,795 - 57,707 (a) 22,491,502
Short-Term Strategic Income
Class A - 45,472,923 (45,472,923)(a) -
Class B - 15,699,989 (15,699,989)(a) -
Class C - 57,707 (57,707)(a) -
------------------ ------------------
================== ==================
$ 1,182,836,146 $ 61,230,619 $ - $ 1,244,066,765
================== ================== ================== ==================
Shares Outstanding:
Strategic Income
Class A 72,523,366 - 6,096,302 (a) 78,619,668
Class B 83,046,054 - 2,104,810 (a) 85,150,864
Class C 3,007,588 - 7,736.00 (a) 3,015,324
Short-Term Strategic Income
Class A - 5,816,773 (5,816,773)(a) -
Class B - 2,008,232 (2,008,232)(a) -
Class C - 7,382 (7,382)(a) -
------------------ ------------------ ------------------ ------------------
Net Asset Value Per Share:
Strategic Income
Class A $7.46 - - $7.46
Class B $7.46 - - $7.46
Class C $7.46 - - $7.46
Short-Term Strategic Income
Class A - $7.82 ($7.82)(a) -
Class B - $7.82 ($7.82)(a) -
Class C - $7.82 ($7.82)(a) -
================== ================== ================== ==================
</TABLE>
<PAGE>
John Hancock Strategic Income Fund Exhibit C
Pro-forma combined statement of operations
For the year ended May 31, 1999
<TABLE>
<CAPTION>
John Hancock
John Hancock Short-Term
Strategic Income Strategic Income
Fund Fund Pro Forma
May 31, 1999 May 31, 1999 Adjustments Combined
---------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Interest $ 87,024,342 $ 4,907,059 $ -- $ 91,931,401
Dividends 5,604,746 21,670 -- 5,626,416
------------ ----------- ------------ ------------
Total 92,629,088 4,928,729 -- 97,557,817
------------ ----------- ------------ ------------
Expenses:
Investment management fee 4,078,633 449,281 (241,586) (b) 4,286,328
Distribution and service fee
Class A 1,537,522 150,760 -- 1,688,282
Class B 5,537,019 181,190 6,978 (c) 5,725,187
Class C 100,017 70 -- 100,087
Transfer agent fee (d) 1,548,551 105,324 -- 1,653,875
Custodian fee 285,677 54,863 (41,000) (e) 299,540
Financial services fee 157,696 10,181 -- 167,877
Registration and filing fee 138,097 32,527 (8,000) (e) 162,624
Trustees' fee 56,501 3,516 -- 60,017
Printing 48,373 9,836 (5,000) (e) 53,209
Auditing fees 43,963 38,881 (37,844) (e) 45,000
Miscellaneous 32,718 4,553 -- 37,271
Legal fees 10,890 653 -- 11,543
------------ ----------- ------------ ------------
Total Expenses 13,575,657 1,041,635 (326,452.00) 14,290,840
------------ ----------- ------------ ------------
Net Investment Income 79,053,431 3,887,094 326,452.00 83,266,977
------------ ----------- ------------ ------------
Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts,
and Foreign Currency Transactions:
Net realized gain (loss) on investments 9,187,960 (3,122,160) -- 6,065,800
Change in net unrealized appreciation
(depreciation) of investments (61,150,967) (1,237,014) -- (62,387,981)
------------ ----------- ------------ ------------
Net Realized and Unrealized
Gain (Loss) on Investments (51,963,007) (4,359,174) -- (56,322,180)
------------ ----------- ------------ ------------
Net Increase in Net Assets
Resulting from Operation $ 27,090,424 $ (472,080) $ 326,452.00 $ 26,944,796
============ =========== ============ ============
</TABLE>
See Notes to Pro-forma Combined Financial Statements.
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
BONDS
Advertising (0.34%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 9.375% $4,000 $4,280,000
--------------
Aerospace (0.15%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910 1,500 1,813,650
--------------
Banks - Foreign (0.12%)
Banco de Galicia y Buenos Aires S.A. de C.V.,
Med Term Note (Argentina) 12-15-00 (R) (Y) 10.000
Banks - United States (0.20%)
CSBI Capital Trust I,
Sec Co Gtd Bond Ser A, 06-06-27 11.750 2,340 2,503,800
--------------
Beverages (0.52%)
Canandaigua Brands, Inc.,
Sr Sub Note 03-01-09 8.500 2,300 2,288,500
National Wine & Spirits, Inc.,
Sr Note 01-15-09 (R) 10.125 4,000 4,140,000
--------------
6,428,500
--------------
Building (0.08%)
Standard Pacific Corp.,
Sr Note 04-01-09 8.500 1,000 965,000
--------------
Business Services - Misc (0.45%)
United Rentals, Inc.,
Sr Sub Note Ser B 08-15-08 8.800 3,900 3,812,250
WESCO International, Inc.,
Sr Disc Note Ser B, Step Coupon
(11.125%, 06-01-03) 06-01-08 (A) Zero 2,500 1,800,000
--------------
5,612,250
--------------
Chemicals (0.22%)
General Chemical Industrial Products, Inc.,
Sr Sub Note 05-01-09 (R) 10.625 1,000 1,010,000
PCI Chemicals Canada Inc.,
Sec Note (Canada) 10-15-07 (Y) 9.250 2,000 1,680,000
--------------
2,690,000
--------------
Computers (1.60%)
Primark Corp.,
Sr Sub Note 12-15-08 9.250 5,000 4,825,000
PSINet, Inc.,
Sr Note 11-01-08 11.500 4,900 5,145,000
Unisys Corp.,
Sr Note 10-15-04 11.750 4,075 4,553,812
Verio, Inc.,
Sr Note 12-01-08 (R) 11.250 5,100 5,380,500
--------------
19,904,312
--------------
Consumer Products Misc. (0.06%)
Diamond Brands Operating Corp.,
Sr Sub Note Ser B 04-15-08 10.125 1,000 780,000
--------------
Containers (0.74%)
Berry Plastics Corp.,
Sr Sub Note 04-15-04 12.250 4,000 4,220,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Int Cert) 04-01-02 12.250 5,000 5,025,000
--------------
9,245,000
--------------
Diversified Operations (0.74%)
Diamond Holdings Plc,
Bond (United Kingdom) 02-01-08 # 10.000 3,000 5,098,494
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
BONDS
Advertising (0.34%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 $4,000 $4,280,000
--------------
Aerospace (0.15%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) 1,500 1,813,650
--------------
Banks - Foreign (0.12%)
Banco de Galicia y Buenos Aires S.A. de C.V.,
Med Term Note (Argentina) 12-15-00 (R) (Y) 1,500 1,526,250 1,500 1,526,250
----------- --------------
Banks - United States (0.20%)
CSBI Capital Trust I,
Sec Co Gtd Bond Ser A, 06-06-27 2,340 2,503,800
--------------
Beverages (0.52%)
Canandaigua Brands, Inc.,
Sr Sub Note 03-01-09 2,300 2,288,500
National Wine & Spirits, Inc.,
Sr Note 01-15-09 (R) 4,000 4,140,000
--------------
6,428,500
--------------
Building (0.08%)
Standard Pacific Corp.,
Sr Note 04-01-09 1,000 965,000
--------------
Business Services - Misc (0.45%)
United Rentals, Inc.,
Sr Sub Note Ser B 08-15-08 3,900 3,812,250
WESCO International, Inc.,
Sr Disc Note Ser B, Step Coupon
(11.125%, 06-01-03) 06-01-08 (A) 2,500 1,800,000
--------------
5,612,250
--------------
Chemicals (0.22%)
General Chemical Industrial Products, Inc.,
Sr Sub Note 05-01-09 (R) 1,000 1,010,000
PCI Chemicals Canada Inc.,
Sec Note (Canada) 10-15-07 (Y) 2,000 1,680,000
--------------
2,690,000
--------------
Computers (1.60%)
Primark Corp.,
Sr Sub Note 12-15-08 5,000 4,825,000
PSINet, Inc.,
Sr Note 11-01-08 4,900 5,145,000
Unisys Corp.,
Sr Note 10-15-04 4,075 4,553,812
Verio, Inc.,
Sr Note 12-01-08 (R) 5,100 5,380,500
--------------
19,904,312
--------------
Consumer Products Misc. (0.06%)
Diamond Brands Operating Corp.,
Sr Sub Note Ser B 04-15-08 1,000 780,000
--------------
Containers (0.74%)
Berry Plastics Corp.,
Sr Sub Note 04-15-04 4,000 4,220,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Int Cert) 04-01-02 5,000 5,025,000
--------------
9,245,000
--------------
Diversified Operations (0.74%)
Diamond Holdings Plc,
Bond (United Kingdom) 02-01-08 # 3,000 5,098,494
</TABLE>
Page 1
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y) 11.250 4,000 4,160,000
--------------
9,258,494
--------------
Electronics (0.39%)
Communications Instruments, Inc.,
Sr Sub Note Ser B 09-15-04 10.000 2,900 2,668,000
Viasystems, Inc.,
Sr Sub Note 06-01-07 9.750 2,500 2,187,500
--------------
4,855,500
--------------
Energy (0.80%)
AEI Resources, Inc./AEI Resources Holdings, Inc.,
Gtd Note 12-15-05 (R) 10.500 5,000 4,950,000
P & L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 9.625 5,000 5,000,000
--------------
9,950,000
--------------
Finance (0.47%)
Ford Motor Credit Co.,
Bond (Deutsche Mark) 06-16-08 # 5.250 5,000 2,769,181
Maxxam Group Holdings Inc.,
Sr Sec Note Ser B 08-01-03 12.000 3,000 3,105,000
--------------
5,874,181
--------------
Food (0.20%)
Agrilink Foods, Inc.,
Sr Sub Note 11-01-08 11.875 2,400 2,484,000
--------------
Government - Foreign (15.02%)
Argentina, Republic of,
Floating Rate Bond Ser FRB (Argentina) 03-31-05 (Y) 5.9375 930 776,550
Floating Rate Note (Argentina) 07-21-03 (Y) 8.800
Brazil, Federative Republic of,
Variable Rate Bond Ser A (Brazil) 01-01-01 (Y) 6.0625 369 346,122
Canada, Government of
Government Bond (Canada) 03-01-01 # 7.500 25,000 17,605,682
Government Bond (Canada) 09-01-02 # 5.500 15,000 10,224,956
Government Bond (Canada) 12-01-05 # 8.750 15,000 12,001,835
Costa Rica, Republic of
Deb (Costa Rica) 05-01-03 (R) (Y) 8.000 225 214,875
France, Republic of,
Deb (France) 04-25-09 (E) 4.000 31,000 31,679,133
Germany, Federal Republic of,
Bond Ser 98 (Germany) 01-04-08 (E) 5.250 3,532 3,995,285
Panama, Republic of,
Floating Rate Bond (Panama) 05-10-02 (Y) 6.08375
Note Ser REGS (Panama) 02-13-02 (Y) 7.875 300 288,000
South Africa, Republic of
Note (South Africa) 06-23-17 (Y) 8.500 7,400 6,438,000
Spain, Kingdom of,
Government Bond (Spain) 01-31-08 (E) 6.000 20,000 23,265,546
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 12-07-00 # 8.000 5,500 9,195,567
Government Bond (United Kingdom) 11-06-01 # 7.000 6,000 10,025,755
Government Bond (United Kingdom) 06-07-02 # 7.000 13,000 21,932,984
Government Bond (United Kingdom) 06-10-03 # 8.000 6,000 10,607,753
Government Bond (United Kingdom) 07-16-07 # 8.500 8,000 15,673,861
United Mexican States,
Global Bond (Mexico) 02-06-01 (Y) 9.750 1,000 1,030,000
--------------
175,301,904
--------------
Government - U.S. (27.53%)
United States Treasury,
Bond 08-15-05 6.500 19,300 20,005,608
Bond 08-15-05 10.750 15,000 18,815,550
Bond 02-15-16 9.250 20,300 26,884,711
Bond 08-15-19 8.125 75,500 92,782,705
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y) 4,000 4,160,000
--------------
9,258,494
--------------
Electronics (0.39%)
Communications Instruments, Inc.,
Sr Sub Note Ser B 09-15-04 2,900 2,668,000
Viasystems, Inc.,
Sr Sub Note 06-01-07 2,500 2,187,500
--------------
4,855,500
--------------
Energy (0.80%)
AEI Resources, Inc./AEI Resources Holdings, Inc.,
Gtd Note 12-15-05 (R) 5,000 4,950,000
P & L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 5,000 5,000,000
--------------
9,950,000
--------------
Finance (0.47%)
Ford Motor Credit Co.,
Bond (Deutsche Mark) 06-16-08 # 5,000 2,769,181
Maxxam Group Holdings Inc.,
Sr Sec Note Ser B 08-01-03 3,000 3,105,000
--------------
5,874,181
--------------
Food (0.20%)
Agrilink Foods, Inc.,
Sr Sub Note 11-01-08 2,400 2,484,000
--------------
Government - Foreign (15.02%)
Argentina, Republic of,
Floating Rate Bond Ser FRB (Argentina) 03-31-05 (Y) 2,790 2,329,650 3,720 3,106,200
Floating Rate Note (Argentina) 07-21-03 (Y) 1,000 905,000 1,000 905,000
Brazil, Federative Republic of,
Variable Rate Bond Ser A (Brazil) 01-01-01 (Y) 861 807,618 1,230 1,153,740
Canada, Government of
Government Bond (Canada) 03-01-01 # 3,000 2,110,459 28,000 19,716,141
Government Bond (Canada) 09-01-02 # 1,500 1,022,336 16,500 11,247,292
Government Bond (Canada) 12-01-05 # 15,000 12,001,835
Costa Rica, Republic of
Deb (Costa Rica) 05-01-03 (R) (Y) 700 668,500 925 883,375
France, Republic of,
Deb (France) 04-25-09 (E) 31,000 31,679,133
Germany, Federal Republic of,
Bond Ser 98 (Germany) 01-04-08 (E) 3,532 3,995,285
Panama, Republic of,
Floating Rate Bond (Panama) 05-10-02 (Y) 1,269 1,218,516 1,269 1,218,516
Note Ser REGS (Panama) 02-13-02 (Y) 375 360,000 675 648,000
South Africa, Republic of
Note (South Africa) 06-23-17 (Y) 7,400 6,438,000
Spain, Kingdom of,
Government Bond (Spain) 01-31-08 (E) 20,000 23,265,546
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 12-07-00 # 650 1,086,105 6,150 10,281,672
Government Bond (United Kingdom) 11-06-01 # 6,000 10,025,755
Government Bond (United Kingdom) 06-07-02 # 650 1,096,000 13,650 23,028,984
Government Bond (United Kingdom) 06-10-03 # 6,000 10,607,753
Government Bond (United Kingdom) 07-16-07 # 8,000 15,673,861
United Mexican States,
Global Bond (Mexico) 02-06-01 (Y) 1,000 1,030,000
----------- --------------
11,604,184 186,906,088
----------- --------------
Government - U.S. (27.53%)
United States Treasury,
Bond 08-15-05 19,300 20,005,608
Bond 08-15-05 15,000 18,815,550
Bond 02-15-16 20,300 26,884,711
Bond 08-15-19 75,500 92,782,705
</TABLE>
Page 2
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
Bond 08-15-23 6.250 42,215 43,085,473
Bond 02-15-27 6.625 32,000 34,430,080
Note 11-15-00 5.750
Note 01-31-02 4.500
Note 08-31-02 6.250 42,800 43,575,536
Note 11-30-02 5.750
Note 08-15-04 7.250 17,100 18,248,949
Note 08-15-07 6.125 24,600 25,092,000
--------------
322,920,612
--------------
Government - U.S. Agencies (1.88%)
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 7.000
REMIC 44-E 11-15-19 9.000 331 338,858
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 10-01-12 7.500
Global Bond (British Pound Sterling) 06-07-02 # 6.875 5,000 8,321,913
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 7.500 9,194 9,401,159
--------------
18,061,930
--------------
Leisure (4.90%)
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 9.625 4,000 4,095,000
Sr Sub Note Ser D 08-01-08 9.625 1,000 1,005,000
Coast Hotels and Casinos, Inc.,
Sr Sub Note 04-01-09 (R) 9.500 2,400 2,328,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 10.500 4,000 4,255,000
Empress Entertainment, Inc.,
Sr Sub Note 07-01-06 8.125 3,000 3,030,000
Harrah's Operating Co., Inc.,
Sr Sub Note 12-15-05 7.875 3,650 3,531,375
Hedstrom Corp.,
Sr Sub Note 06-01-07 10.000 4,000 3,580,000
HMH Properties, Inc.,
Sr Note Ser B 08-01-08 7.875 7,900 7,307,500
Horseshoe Gaming LLC,
Sr Sub Note Ser B 06-15-07 9.375 2,500 2,543,750
Isle of Capri Casinos, Inc.,
Sr Sub Note 04-15-09 (R) 8.750 2,200 2,084,500
Jupiters Ltd.,
Sr Note (Australia) 03-01-06 (R) (Y) 8.500 4,000 3,940,000
Production Resource Group LLC,
Sr Sub Note 01-15-08 11.500 3,000 3,000,000
Regal Cinemas, Inc.,
Sr Sub Note 12-15-10 8.875 3,900 3,646,500
SFX Entertainment, Inc.,
Sr Sub Note Ser B 02-01-08 9.125 5,000 4,950,000
Sr Sub Note 12-01-08 9.125 2,000 2,000,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 2,000 1,980,000
Waterford Gaming LLC,
Sr Note 03-15-10 (R) 9.500 4,300 4,364,500
William Hill Finance Plc,
Sr Sub Note (United Kingdom) 04-30-08 # 10.625 2,000 3,334,864
--------------
60,975,989
--------------
Machinery (0.56%)
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 8.500 5,000 4,900,000
Tokheim Corp.,
Sr Sub Note (United States) 08-01-08 (E) (R) 11.375 2,000 2,064,249
--------------
6,964,249
--------------
Manufacturing (0.19%)
Globe Manufacturing Corp.,
Sr Sub Note 08-01-08 10.000 3,000 2,400,000
--------------
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Bond 08-15-23 42,215 43,085,473
Bond 02-15-27 32,000 34,430,080
Note 11-15-00 10,000 10,054,700 10,000 10,054,700
Note 01-31-02 4,500 4,438,125 4,500 4,438,125
Note 08-31-02 42,800 43,575,536
Note 11-30-02 5,000 5,015,600 5,000 5,015,600
Note 08-15-04 17,100 18,248,949
Note 08-15-07 24,600 25,092,000
----------- --------------
19,508,425 342,429,037
----------- --------------
Government - U.S. Agencies (1.88%)
Federal Home Loan Mortgage Corp.,
Giant Mtg Part Cert 07-01-12 1,299 1,318,411 1,299 1,318,411
REMIC 44-E 11-15-19 331 338,858
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 10-01-12 3,852 3,957,054 3,852 3,957,054
Global Bond (British Pound Sterling) 06-07-02 # 5,000 8,321,913
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 9,194 9,401,159
----------- --------------
5,275,465 23,337,395
----------- --------------
Leisure (4.90%)
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 4,000 4,095,000
Sr Sub Note Ser D 08-01-08 1,000 1,005,000
Coast Hotels and Casinos, Inc.,
Sr Sub Note 04-01-09 (R) 2,400 2,328,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 4,000 4,255,000
Empress Entertainment, Inc.,
Sr Sub Note 07-01-06 3,000 3,030,000
Harrah's Operating Co., Inc.,
Sr Sub Note 12-15-05 3,650 3,531,375
Hedstrom Corp.,
Sr Sub Note 06-01-07 4,000 3,580,000
HMH Properties, Inc.,
Sr Note Ser B 08-01-08 7,900 7,307,500
Horseshoe Gaming LLC,
Sr Sub Note Ser B 6-15-07 2,500 2,543,750
Isle of Capri Casinos, Inc.,
Sr Sub Note 04-15-09 (R) 2,200 2,084,500
Jupiters Ltd.,
Sr Note (Australia) 03-01-06 (R) (Y) 4,000 3,940,000
Production Resource Group LLC,
Sr Sub Note 01-15-08 3,000 3,000,000
Regal Cinemas, Inc.,
Sr Sub Note 12-15-10 3,900 3,646,500
SFX Entertainment, Inc.,
Sr Sub Note Ser B 02-01-08 5,000 4,950,000
Sr Sub Note 12-01-08 2,000 2,000,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) 2,000 1,980,000
Waterford Gaming LLC,
Sr Note 03-15-10 (R) 4,300 4,364,500
William Hill Finance Plc,
Sr Sub Note (United Kingdom) 04-30-08 # 2,000 3,334,864
--------------
60,975,989
--------------
Machinery (0.56%)
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 5,000 4,900,000
Tokheim Corp.,
Sr Sub Note (United States) 08-01-08 (E) (R) 2,000 2,064,249
--------------
6,964,249
--------------
Manufacturing (0.19%)
Globe Manufacturing Corp.,
Sr Sub Note 08-01-08 3,000 2,400,000
--------------
</TABLE>
Page 3
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
Media (8.12%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 9.250 3,500 3,587,500
American Media Operations, Inc.,
Sr Sub Note 05-01-09 (R) 10.250 1,000 1,012,500
Capstar Radio Broadcasting Partners, Inc.,
Sr Sub Note 07-01-07 9.250 4,000 4,135,000
CBS Radio Inc.,
Sub Deb 01-15-09 11.375 4,738 5,400,864
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) 9.750 3,000 2,385,000
CF Cable TV Inc.,
Sr Note (Canada) 02-15-05 (Y) 11.625 2,000 2,176,000
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07 10.500 3,000 3,270,000
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 10.250 2,000 2,180,000
Sr Sub Note 11-15-08 9.250 1,900 2,004,500
Comcast Corp.,
Sr Sub Note 01-15-08 9.500 4,000 4,203,560
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(United Kingdom) 11-15-07 (A) (Y) Zero 4,000 3,640,000
CSC Holdings Inc.,
Sr Sub Deb 02-15-13 9.875 4,000 4,390,000
Digital Television Services LLC,
Sr Sub Note Ser B 08-01-07 12.500 3,000 3,330,000
DIVA Systems Corp.,
Sr Disc Note Ser B, Step Coupon
(12.625%, 03-01-03) 03-01-08 (A) Zero 5,165 1,601,150
EchoStar DBS Corp.,
Sr Note 02-01-09 (R) 9.375 3,000 3,022,500
Emmis Communications Corp.,
Sr Sub Note 03-15-09 (R) 8.125 3,000 2,925,000
Falcon Holdings Group L.P./ Falcon Funding Corp.,
Sr Deb Ser B 04-15-10 8.375 5,000 4,875,000
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 12.375 5,000 5,556,250
Garden State Newspapers, Inc.,
Sr Sub Note Ser B 10-01-09 8.750 3,500 3,465,000
Sr Sub Note 07-01-11 (R) 8.625 4,000 3,961,880
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 8.875 2,000 1,977,500
Intermedia Capital Partners,
Sr Note 08-01-06 11.250 5,048 5,729,480
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) 10.625 1,250 1,336,862
ONO Finance Plc,
Unit (Note & Equity Value Cert)
(United Kingdom) 05-01-09 (E) (R) 13.000 2,900 3,038,512
Unit (Note & Equity Value Cert)
(United Kingdom) 05-01-09 (R) (Y) 13.000 1,450 1,457,250
Radio One, Inc.,
Sr Sub Note Ser B, Step Coupon
(12.00%, 05-15-00) 05-15-04 7.000 2,000 2,080,000
Regional Independent Media Group Plc,
Sr Disc Note, Step Coupon (12.875%, 07-01-03)
(United Kingdom) 07-01-08 (A) # Zero 3,750 3,276,744
Sr Note (United Kingdom) 07-01-08 (Y) 10.500 1,000 1,012,500
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 3,000 3,337,500
Sr Sec Deb (Canada) 01-15-14 # 9.650 2,000 1,474,786
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) 7.250 2,390 2,760,450
Spectrasite Holdings, Inc.,
Sr Disc Note, Step Coupon
(11.25%, 04-15-04) 04-15-09 (A) (R) Zero 1,400 798,000
<PAGE>
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Media (8.12%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 3,500 3,587,500
American Media Operations, Inc.,
Sr Sub Note 05-01-09 (R) 1,000 1,012,500
Capstar Radio Broadcasting Partners, Inc.,
Sr Sub Note 07-01-07 4,000 4,135,000
CBS Radio Inc.,
Sub Deb 01-15-09 4,738 5,400,864
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) 3,000 2,385,000
CF Cable TV Inc.,
Sr Note (Canada) 02-15-05 (Y) 2,000 2,176,000
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07 3,000 3,270,000
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 2,000 2,180,000
Sr Sub Note 11-15-08 1,900 2,004,500
Comcast Corp.,
Sr Sub Note 01-15-08 4,000 4,203,560
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(United Kingdom) 11-15-07 (A) (Y) 4,000 3,640,000
CSC Holdings Inc.,
Sr Sub Deb 02-15-13 4,000 4,390,000
Digital Television Services LLC,
Sr Sub Note Ser B 08-01-07 3,000 3,330,000
DIVA Systems Corp.,
Sr Disc Note Ser B, Step Coupon
(12.625%, 03-01-03) 03-01-08 (A) 5,165 1,601,150
EchoStar DBS Corp.,
Sr Note 02-01-09 (R) 3,000 3,022,500
Emmis Communications Corp.,
Sr Sub Note 03-15-09 (R) 3,000 2,925,000
Falcon Holdings Group L.P./ Falcon Funding Corp.,
Sr Deb Ser B 04-15-10 5,000 4,875,000
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 5,000 5,556,250
Garden State Newspapers, Inc.,
Sr Sub Note Ser B 10-01-09 3,500 3,465,000
Sr Sub Note 07-01-11 (R) 4,000 3,961,880
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 2,000 1,977,500
Intermedia Capital Partners,
Sr Note 08-01-06 5,048 5,729,480
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) 1,250 1,336,862
ONO Finance Plc,
Unit (Note & Equity Value Cert)
(United Kingdom) 05-01-09 (E) (R) 2,900 3,038,512
Unit (Note & Equity Value Cert)
(United Kingdom) 05-01-09 (R) (Y) 1,450 1,457,250
Radio One, Inc.,
Sr Sub Note Ser B, Step Coupon
(12.00%, 05-15-00) 05-15-04 2,000 2,080,000
Regional Independent Media Group Plc,
Sr Disc Note, Step Coupon (12.875%, 07-01-03)
(United Kingdom) 07-01-08 (A) # 3,750 3,276,744
Sr Note (United Kingdom) 07-01-08 (Y) 1,000 1,012,500
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) 3,000 3,337,500
Sr Sec Deb (Canada) 01-15-14 # 2,000 1,474,786
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) 2,390 2,760,450
Spectrasite Holdings, Inc.,
Sr Disc Note, Step Coupon
(11.25%, 04-15-04) 04-15-09 (A) (R) 1,400 798,000
</TABLE>
Page 4
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 11.000 2,785 2,931,212
TV Guide, Inc.,
Sr Sub Note 03-01-09 (R) 8.125 2,800 2,716,000
--------------
101,048,500
--------------
Metal (0.82%)
Centaur Mining & Exploration Ltd.,
Gtd Sr Note (Australia) 12-01-07 (Y) 11.000 2,500 2,406,250
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 (Y) 8.875 5,100 4,883,250
Haynes International, Inc.,
Sr Note 09-01-04 11.625 2,000 1,850,000
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 9.875 1,000 1,000,000
--------------
10,139,500
--------------
Oil & Gas (2.03%)
CMS Panhandle Holding Co.,
Sr Note 03-15-04 (R) 6.125
Cliffs Drilling Co.,
Sr Sec Note Ser B 05-15-03 10.250 2,250 2,233,125
Comstock Resources, Inc.,
Sr Note 05-01-07 (R) 11.250 2,200 2,205,500
Conoco, Inc.,
Sr Note 04-15-04 5.900
Kelley Oil & Gas Partners Ltd..,
Conv Deb 04-01-00 8.500 1,100 896,500
Key Energy Services, Inc.,
Unit (Sr Sub Note & Warrant) 01-15-09 (R) 14.000 5,000 5,112,500
PEMEX Finance Ltd.,
Note Ser 1 A (Cayman Islands) 11-15-03 (R) (Y) 5.720
Parker Drilling Co.,
Gtd Sr Note 11-15-06 9.750 1,000 895,000
Petroleo Brasileiro S.A.,
Bond (Brazil) 10-17-06 (R) (Y) 10.000 500 467,500
R&B Falcon Corp.,
Sr Note 12-15-08 (R) 9.500 3,750 3,337,500
RBF Finance Co.,
Gtd Sr Sec Note 03-15-09 (R) 11.375 3,450 3,484,500
Universal Compression, Inc.,
Sr Disc Note, Step Coupon
(9.875%, 02-15-03) 02-15-08 (A) Zero 2,650 1,696,000
--------------
20,328,125
--------------
Paper & Paper Products (0.51%)
Packaging Corp. of America,
Sr Sub Note 04-01-09 (R) 9.625 2,100 2,131,500
Repap New Brunswick, Inc.,
Sr Sec Note (Canada) 06-01-04 (R) (Y) 11.500 4,150 4,191,500
--------------
6,323,000
--------------
Printing - Commercial (0.26%)
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 12.750 3,000 3,187,500
--------------
Real Estate Investment Trust (0.12%)
Mack-Cali Realty, L.P.,
Note 03-15-04 7.000
Regency Centers, L.P.,
Gtd Note 04-01-04 7.400
Retail (0.34%)
SpinCycle, Inc.,
Sr Disc Note, Step Coupon
(12.75%, 05-01-01) 05-01-05 (A) Zero 3,625 1,305,000
<PAGE>
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 2,785 2,931,212
TV Guide, Inc.,
Sr Sub Note 03-01-09 (R) 2,800 2,716,000
--------------
101,048,500
--------------
Metal (0.82%)
Centaur Mining & Exploration Ltd.,
Gtd Sr Note (Australia) 12-01-07 (Y) 2,500 2,406,250
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 (Y) 5,100 4,883,250
Haynes International, Inc.,
Sr Note 09-01-04 2,000 1,850,000
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 1,000 1,000,000
--------------
10,139,500
--------------
Oil & Gas (2.03%)
CMS Panhandle Holding Co.,
Sr Note 03-15-04 (R) 2,000 1,960,000 2,000 1,960,000
Cliffs Drilling Co.,
Sr Sec Note Ser B 05-15-03 2,250 2,233,125
Comstock Resources, Inc.,
Sr Note 05-01-07 (R) 2,200 2,205,500
Conoco, Inc.,
Sr Note 04-15-04 2,000 1,955,400 2,000 1,955,400
Kelley Oil & Gas Partners Ltd..,
Conv Deb 04-01-00 1,100 896,500
Key Energy Services, Inc.,
Unit (Sr Sub Note & Warrant) 01-15-09 (R) 5,000 5,112,500
PEMEX Finance Ltd.,
Note Ser 1 A (Cayman Islands) 11-15-03 (R) (Y) 1,000 986,230 1,000 986,230
Parker Drilling Co.,
Gtd Sr Note 11-15-06 1,000 895,000
Petroleo Brasileiro S.A.,
Bond (Brazil) 10-17-06 (R) (Y) 500 467,500
R&B Falcon Corp.,
Sr Note 12-15-08 (R) 3,750 3,337,500
RBF Finance Co.,
Gtd Sr Sec Note 03-15-09 (R) 3,450 3,484,500
Universal Compression, Inc.,
Sr Disc Note, Step Coupon
(9.875%, 02-15-03) 02-15-08 (A) 2,650 1,696,000
----------- --------------
4,901,630 25,229,755
----------- --------------
Paper & Paper Products (0.51%)
Packaging Corp. of America,
Sr Sub Note 04-01-09 (R) 2,100 2,131,500
Repap New Brunswick, Inc.,
Sr Sec Note (Canada) 06-01-04 (R) (Y) 4,150 4,191,500
--------------
6,323,000
--------------
Printing - Commercial (0.26%)
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 3,000 3,187,500
--------------
Real Estate Investment Trust (0.12%)
Mack-Cali Realty, L.P.,
Note 03-15-04 1,000 984,400 1,000 984,400
Regency Centers, L.P.,
Gtd Note 04-01-04 500 487,700 500 487,700
----------- --------------
1,472,100 1,472,100
----------- --------------
Retail (0.34%)
SpinCycle, Inc.,
Sr Disc Note, Step Coupon
(12.75%, 05-01-01) 05-01-05 (A) 3,625 1,305,000
</TABLE>
Page 5
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
United Stationers Supply Co.,
Sr Sub Note 05-01-05 12.750 1,334 1,470,735
Sr Sub Note 04-15-08 8.375 1,500 1,470,000
--------------
4,245,735
--------------
Steel (0.68%)
AK Steel Corp.,
Sr Note 02-15-09 (R) 7.875 5,000 4,900,000
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 11.500 3,875 3,603,750
--------------
8,503,750
--------------
Telecommunications (16.62%)
AMSC Acquisition Co., Inc.,
Sr Note Ser B 04-01-08 12.250 3,000 2,160,000
AT&T Corp.,
Note 03-15-04 5.625
Advanced Radio Telecom Corp.,
Sr Note 02-15-07 14.000 2,000 1,530,000
Allegiance Telecom, Inc.,
Sr Disc Note Ser B, Step Coupon
(11.75%, 02-15-03) 02-15-08 (A) Zero 3,500 2,100,000
Call-Net Enterprises, Inc.,
Sr Note (Canada) 05-15-09 (Y) 9.375 3,800 3,648,000
CapRock Communications Corp.,
Sr Note 05-01-09 (R) 11.500 2,700 2,632,500
Centennial Cellular Operating Co.,
Sr Sub Note 12-15-08 (R) 10.750 900 936,000
Clearnet Communications Inc.,
Sr Disc Note, Step Coupon (10.40%, 05-15-03)
(Canada) 05-15-08 (A) # Zero 6,500 2,553,351
Sr Disc Note, Step Coupon (10.125%, 05-01-04)
(Canada) 05-01-09 (A) (Y) Zero 3,250 1,722,500
COLT Telecom Group Plc, (United Kingdom),
Sr Note (Deutsche Mark) 11-30-07 # 8.875 10,000 5,543,692
Sr Note (Deutsche Mark) 07-31-08 # 7.625 10,195 5,488,762
Comunicacion Celular S.A.,
Bond, Step Coupon (14.125%, 09-29-00)
(Colombia) 11-15-03 (A) (R) (Y) Zero 5,000 3,500,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon
(10.625%, 11-15-02) 11-15-07 (A) Zero 5,000 3,400,000
Dolphin Telecom Plc,
Sr Disc Note, Step Coupon (11.50%, 06-01-03)
(United Kingdom) 06-01-08 (A) (Y) Zero 6,000 3,090,000
Sr Disc Note, Step Coupon (14.00%, 05-15-04)
(United Kingdom) 05-15-09 (A) (R) (Y) Zero 5,400 2,646,000
DTI Holdings Inc.,
Sr Disc Note, Step Coupon
(12.50%, 03-01-03) 03-01-08 (A) Zero 3,600 1,422,000
e.spire Communications, Inc.,
Sr Note 07-15-07 13.750 2,000 1,760,000
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) 11.500 1,550 1,666,250
Sr Note (Deutsche Mark) 06-15-08 # 11.000 4,050 2,288,372
FaciliCom International, Inc.,
Sr Note 01-15-08 10.500 4,350 3,371,250
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 9.625 4,000 4,380,000
GST Equipment Funding Inc.,
Sr Sec Note 05-01-07 13.250 5,000 5,400,000
Hermes Europe Railtel BV,
Sr Note (Netherlands) 08-15-07 (Y) 11.500 5,000 5,212,500
Sr Note (Netherlands) 01-15-09 (Y) 10.375 700 714,000
Intercel, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.00%, 02-01-01) 02-01-06 (A) Zero 4,100 3,239,000
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
United Stationers Supply Co.,
Sr Sub Note 05-01-05 1,334 1,470,735
Sr Sub Note 04-15-08 1,500 1,470,000
--------------
4,245,735
--------------
Steel (0.68%)
AK Steel Corp.,
Sr Note 02-15-09 (R) 5,000 4,900,000
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 3,875 3,603,750
--------------
8,503,750
--------------
Telecommunications (16.62%)
AMSC Acquisition Co., Inc.,
Sr Note Ser B 04-01-08 3,000 2,160,000
AT&T Corp.,
Note 03-15-04 2,000 1,951,640 2,000 1,951,640
Advanced Radio Telecom Corp.,
Sr Note 02-15-07 2,000 1,530,000
Allegiance Telecom, Inc.,
Sr Disc Note Ser B, Step Coupon
(11.75%, 02-15-03) 02-15-08 (A) 3,500 2,100,000
Call-Net Enterprises, Inc.,
Sr Note (Canada) 05-15-09 (Y) 3,800 3,648,000
CapRock Communications Corp.,
Sr Note 05-01-09 (R) 2,700 2,632,500
Centennial Cellular Operating Co.,
Sr Sub Note 12-15-08 (R) 900 936,000
Clearnet Communications Inc.,
Sr Disc Note, Step Coupon (10.40%, 05-15-03)
(Canada) 05-15-08 (A) # 6,500 2,553,351
Sr Disc Note, Step Coupon (10.125%, 05-01-04)
(Canada) 05-01-09 (A) (Y) 3,250 1,722,500
COLT Telecom Group Plc, (United Kingdom),
Sr Note (Deutsche Mark) 11-30-07 # 10,000 5,543,692
Sr Note (Deutsche Mark) 07-31-08 # 10,195 5,488,762
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A) (R) (Y) 5,000 3,500,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon
(10.625%, 11-15-02) 11-15-07 (A) 5,000 3,400,000
Dolphin Telecom Plc,
Sr Disc Note, Step Coupon (11.50%, 06-01-03)
(United Kingdom) 06-01-08 (A) (Y) 6,000 3,090,000
Sr Disc Note, Step Coupon (14.00%, 05-15-04)
(United Kingdom) 05-15-09 (A) (R) (Y) 5,400 2,646,000
DTI Holdings Inc.,
Sr Disc Note, Step Coupon
(12.50%, 03-01-03) 03-01-08 (A) 3,600 1,422,000
e.spire Communications, Inc.,
Sr Note 07-15-07 2,000 1,760,000
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) 1,550 1,666,250
Sr Note (Deutsche Mark) 06-15-08 # 4,050 2,288,372
FaciliCom International, Inc.,
Sr Note 01-15-08 4,350 3,371,250
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 4,000 4,380,000
GST Equipment Funding Inc.,
Sr Sec Note 05-01-07 5,000 5,400,000
Hermes Europe Railtel BV,
Sr Note (Netherlands) 08-15-07 (Y) 5,000 5,212,500
Sr Note (Netherlands) 01-15-09 (Y) 700 714,000
Intercel, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.00%, 02-01-01) 02-01-06 (A) 4,100 3,239,000
</TABLE>
Page 6
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
Intermedia Communications Inc.,
Sr Disc Note, Step Coupon.
(12.50%, 05-15-01) 05-15-06 (A) Zero 6,000 4,920,000
International Wireless Communications Holdings, Inc.,
Sr Sec Disc Note 08-15-01 14.000 3,000 300,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A) (Y) Zero 6,000 180,000
Level 3 Communications, Inc.,
Sr Note 05-01-08 9.125 7,000 6,825,000
McCaw International Ltd.,
Sr Disc Note, Step Coupon
(13.00%, 04-15-02) 04-15-07 (A) Zero 7,000 4,270,000
McLeodUSA, Inc.,
Sr Note 07-15-07 9.250 4,250 4,303,125
Sr Note 11-01-08 9.500 1,000 1,005,000
Sr Note 02-15-09 (R) 8.125 1,000 940,000
Metrocall, Inc.,
Sr Sub Note 09-15-08 (R) 11.000 5,000 4,325,000
Metromedia Fiber Network, Inc.,
Sr Note 11-15-08 (R) 10.000 900 929,250
MetroNet Communications Corp.,
Sr Disc Note, Step Coupon (10.75%, 11-01-02)
(Canada) 11-01-07 (A) (Y) Zero 4,400 3,476,000
Sr Note (Canada) 08-15-07 (Y) 12.000 4,000 4,680,000
Microcell Telecommunications Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%, 10-15-02)
(Canada) 10-15-07 # Zero 2,500 1,087,400
Nextel Communications, Inc.,
Sr Disc Note 08-15-04 9.750 5,500 5,665,000
Sr Disc Note, Step Coupon
(9.95%, 02-15-03) 02-15-08 (A) Zero 8,875 5,901,875
Nextel Partners, Inc.,
Sr Disc Note, Step Coupon
(14.00%, 02-01-04) 02-01-09 (A) (R) Zero 2,500 1,343,750
NEXTLINK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%, 04-15-03) 04-15-08 Zero 4,000 2,340,000
Sr Note 10-01-07 9.625 1,500 1,417,500
Sr Note 11-15-08 (R) 10.750 2,900 2,900,000
NorthEast Optic Network, Inc.,
Sr Note 08-15-08 12.750 2,250 2,317,500
NTL, Inc.,
Sr Note Ser B 04-01-08 9.500 260 412,689
Sr Note, Step Coupon
(12.375%, 10-01-03) 10-01-08 (A) (R) Zero 8,500 5,525,000
Sr Note 10-01-08 (R) 11.500 6,300 6,835,500
Occidente y Caribe Celular SA,
Sr Disc Note Ser B, Step Coupon (14.00%, 03-15-01)
(Colombia) 03-15-04 (A) (Y) Zero 4,000 2,880,000
Orange Plc,
Sr Note (United Kingdom) 08-01-08 (E) 7.625 400 442,041
Sr Note (United Kingdom) 08-01-08 (Y) 8.000 6,000 6,165,000
Orion Network Systems,
Sr Note 01-15-07 11.250 5,000 3,950,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 10.875 2,867 3,261,528
RCN Corp.,
Sr Disc Note, Step Coupon
(11.125%, 10-15-02) 10-15-07 (A) Zero 5,000 3,300,000
Sr Note 10-15-07 10.000 4,900 4,900,000
Sprint Capital Corp.,
Gtd Note 05-01-04 5.875
Sprint Spectrum L.P.,
Sr Note 08-15-06 11.000 3,750 4,196,438
Telecomunicaciones de Puerto Rico,
Sr Note 05-15-02 (R) 6.150
<PAGE>
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Intermedia Communications Inc.,
Sr Disc Note, Step Coupon.
(12.50%, 05-15-01) 05-15-06 (A) 6,000 4,920,000
International Wireless Communications Holdings, Inc.,
Sr Sec Disc Note 08-15-01 3,000 300,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A) (Y) 6,000 180,000
Level 3 Communications, Inc.,
Sr Note 05-01-08 7,000 6,825,000
McCaw International Ltd.,
Sr Disc Note, Step Coupon
(13.00%, 04-15-02) 04-15-07 (A) 7,000 4,270,000
McLeodUSA, Inc.,
Sr Note 07-15-07 4,250 4,303,125
Sr Note 11-01-08 1,000 1,005,000
Sr Note 02-15-09 (R) 1,000 940,000
Metrocall, Inc.,
Sr Sub Note 09-15-08 (R) 5,000 4,325,000
Metromedia Fiber Network, Inc.,
Sr Note 11-15-08 (R) 900 929,250
MetroNet Communications Corp.,
Sr Disc Note, Step Coupon (10.75%, 11-01-02)
(Canada) 11-01-07 (A) (Y) 4,400 3,476,000
Sr Note (Canada) 08-15-07 (Y) 4,000 4,680,000
Microcell Telecommunications Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%, 10-15-02)
(Canada) 10-15-07 # 2,500 1,087,400
Nextel Communications, Inc.,
Sr Disc Note 08-15-04 5,500 5,665,000
Sr Disc Note, Step Coupon
(9.95%, 02-15-03) 02-15-08 (A) 8,875 5,901,875
Nextel Partners, Inc.,
Sr Disc Note, Step Coupon
(14.00%, 02-01-04) 02-01-09 (A) (R) 2,500 1,343,750
NEXTLINK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%, 04-15-03) 04-15-08 4,000 2,340,000
Sr Note 10-01-07 1,500 1,417,500
Sr Note 11-15-08 (R) 2,900 2,900,000
NorthEast Optic Network, Inc.,
Sr Note 08-15-08 2,250 2,317,500
NTL, Inc.,
Sr Note Ser B 04-01-08 260 412,689
Sr Note, Step Coupon
(12.375%, 10-01-03) 10-01-08 (A) (R) 8,500 5,525,000
Sr Note 10-01-08 (R) 6,300 6,835,500
Occidente y Caribe Celular SA,
Sr Disc Note Ser B, Step Coupon (14.00%, 03-15-01)
(Colombia) 03-15-04 (A) (Y) 4,000 2,880,000
Orange Plc,
Sr Note (United Kingdom) 08-01-08 (E) 400 442,041
Sr Note (United Kingdom) 08-01-08 (Y) 6,000 6,165,000
Orion Network Systems,
Sr Note 01-15-07 5,000 3,950,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 2,867 3,261,528
RCN Corp.,
Sr Disc Note, Step Coupon
(11.125%, 10-15-02) 10-15-07 (A) 5,000 3,300,000
Sr Note 10-15-07 4,900 4,900,000
Sprint Capital Corp.,
Gtd Note 05-01-04 2,000 1,948,000 2,000 1,948,000
Sprint Spectrum L.P.,
Sr Note 08-15-06 3,750 4,196,438
Telecomunicaciones de Puerto Rico,
Sr Note 05-15-02 (R) 1,000 990,700 1,000 990,700
</TABLE>
Page 7
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
Telecorp PCS, Inc.,
Sr Disc Note, Step Coupon
(11.625%, 04-15-04) 04-15-09 (A) (R) Zero 4,535 2,335,525
Telewest Communications Plc,
Sr Disc Note, Step Coupon (9.25%, 04-15-04)
(United Kingdom) 04-15-09 (R) (Y) Zero 3,300 3,465,533
Teligent, Inc.,
Sr Note 12-01-07 11.500 5,000 4,862,500
Time Warner Telecom LLC,
Sr Note 07-15-08 9.750 1,250 1,300,000
Tritel PCS, Inc.,
Sr Disc Note, Step Coupon
(12.75, 05-15-04) 05-15-09 (A) (R) Zero 2,500 1,268,750
VersaTel Telecom International N.V.,
Sr Note (Netherlands) 05-15-08 (Y) 13.250 2,400 2,508,000
Viatel, Inc.,
Sr Note 04-15-08 11.250 5,250 5,250,000
Sr Note (United States) 03-15-09 (E) (R) 11.500 2,000 2,105,951
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon
(14.00%, 10-15-00) 10-15-05 (A) Zero 2,600 2,158,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 12.500 1,400 1,407,000
Worldwide Fiber, Inc.,
Sr Note (Canada) 12-15-05 (R) (Y) 12.500 3,750 3,862,500
--------------
201,922,532
--------------
Transportation (0.88%)
Continental Airlines, Inc.,
Note 12-15-05 8.000 4,400 4,290,000
Fine Air Services Corp.,
Sr Sub Note 06-01-08 9.875 3,900 3,432,000
Pacific & Atlantic Holdings, Inc.,
1st Mtg Note (Greece) 05-30-08 (Y) 11.500 3,000 1,185,000
RailWorks Corp.,
Sr Sub Note 04-15-09 (R) 11.500 2,000 2,030,000
--------------
10,937,000
--------------
Utilities (2.60%)
Calpine Corp.,
Sr Note 02-01-04 9.250
Sr Note 04-01-08 7.875 2,000 1,950,000
Sr Note 04-15-09 7.750 2,300 2,233,300
Cinergy Corp.,
Deb 04-15-04 (R) 6.125
Connecticut Light & Power Co./ West Mass Electric,
Sec Note 06-05-03 (R) 8.590
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 4,000 4,580,000
Deb Ser B 07-23-06 13.250 4,000 4,813,920
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 2,900 2,465,000
Niagara Mohawk Power Corp.,
Sec Fac Bond 01-01-18 8.770 7,000 7,272,650
Sr Note Ser D 10-01-02 7.250
PECO Energy Transition Trust,
Pass Thru Ctf Ser 1999-A Class A-2 03-01-02 5.630
--------------
23,314,870
--------------
TOTAL BONDS
(Cost $1,153,554,492) (90.14%) 1,063,219,883
--------------
<PAGE>
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Telecorp PCS, Inc.,
Sr Disc Note, Step Coupon
(11.625%, 04-15-04) 04-15-09 (A) (R) 4,535 2,335,525
Telewest Communications Plc,
Sr Disc Note, Step Coupon (9.25%, 04-15-04)
(United Kingdom) 04-15-09 (R) (Y) 3,300 3,465,533
Teligent, Inc.,
Sr Note 12-01-07 5,000 4,862,500
Time Warner Telecom LLC,
Sr Note 07-15-08 1,250 1,300,000
Tritel PCS, Inc.,
Sr Disc Note, Step Coupon
(12.75, 05-15-04) 05-15-09 (A) (R) 2,500 1,268,750
VersaTel Telecom International N.V.,
Sr Note (Netherlands) 05-15-08 (Y) 2,400 2,508,000
Viatel, Inc.,
Sr Note 04-15-08 5,250 5,250,000
Sr Note (United States) 03-15-09 (E) (R) 2,000 2,105,951
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon
(14.00%, 10-15-00) 10-15-05 (A) 2,600 2,158,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 1,400 1,407,000
Worldwide Fiber, Inc.,
Sr Note (Canada) 12-15-05 (R) (Y) 3,750 3,862,500
----------- --------------
4,890,340 206,812,872
----------- --------------
Transportation (0.88%)
Continental Airlines, Inc.,
Note 12-15-05 4,400 4,290,000
Fine Air Services Corp.,
Sr Sub Note 06-01-08 3,900 3,432,000
Pacific & Atlantic Holdings, Inc.,
1st Mtg Note (Greece) 05-30-08 (Y) 3,000 1,185,000
RailWorks Corp.,
Sr Sub Note 04-15-09 (R) 2,000 2,030,000
--------------
10,937,000
--------------
Utilities (2.60%)
Calpine Corp.,
Sr Note 02-01-04 2,000 2,050,000 2,000 2,050,000
Sr Note 04-01-08 2,000 1,950,000
Sr Note 04-15-09 2,300 2,233,300
Cinergy Corp.,
Deb 04-15-04 (R) 500 485,350 500 485,350
Connecticut Light & Power Co./ West Mass Electric,
Sec Note 06-05-03 (R) 2,300 2,315,410 2,300 2,315,410
Midland Funding Corp. II,
Deb Ser A 07-23-05 4,000 4,580,000
Deb Ser B 07-23-06 1,000 1,203,480 5,000 6,017,400
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 2,900 2,465,000
Niagara Mohawk Power Corp.,
Sec Fac Bond 01-01-18 7,000 7,272,650
Sr Note Ser D 10-01-02 2,000 2,011,660 2,000 2,011,660
PECO Energy Transition Trust,
Pass Thru Ctf Ser 1999-A Class A-2 03-01-02 1,000 985,000 1,000 985,000
----------- --------------
9,050,900 32,365,770
----------- --------------
TOTAL BONDS
(Cost $1,153,554,492) 58,229,294 1,121,449,177
----------- --------------
</TABLE>
Page 8
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Advanced Radio Telecom Corp., Warrant ** 60,000 660,000
Allegiance Telecom Inc., Warrant ** 3,500 154,000
American Mobile Satellite Corp., Warrant (R) ** 3,000 --
American Telecasting, Inc., Warrant ** 4,000 40
AVI Holdings, Inc., Warrant (R) ** 1,500 15
Capstar Broadcasting Partners, Inc., 12.00%, Preferred Stock 16,028 1,666,912
Chancellor Media Corp., 7.00%, Conv Preferred Stock 20,000 2,860,000
COLT Telecom Plc, Warrant (United Kingdom) (R) ** 5,000 2,375,000
Comunicacion Celular S.A., Warrant (Colombia) ** 50,000 250,000
Core Cap, Inc., Common Stock (r) ** 45,000 729,000
Core Cap, Inc., Ser A/I, 10.00%, Preferred Stock (r) 45,000 1,077,300
Credit Lyonnais Capital S.C.A., American Depositary Receipt
(ADR), 9.50%, Ser DTC, Preferred Stock (France) (R) 100,000 2,587,500
Decorative Home Accents, Inc., Common Stock ** 1,000 1
DIVA Systems Corp., Warrant ** 15,495 30,990
DTI Holdings Inc., Warrant ** 18,000 180
EarthWatch, Inc., 12.00%, Ser C, Conv Preferred Stock (R) 88,232 948,494
Granite Broadcasting Corp., 12.75%, Preferred Stock 51,200 5,120,000
Hyperion Telecommunications Inc., 12.875%,
Ser B, Preferred Stock 3,513 3,302,220
ICG Holdings, Inc., 14.00%, Preferred Stock 2,730 2,730,000
Intermedia Communications, Inc., 13.50%,
Ser B, Preferred Stock 1,973 2,071,650
Intermedia Communications, Inc., Common Stock ** 30,000 759,375
International Wireless Inc., Warrant ** 3,000 30
Ionica Plc, Warrant (United Kingdom) (R) # ** 8,500 85
Kelley Oil & Gas Corp., $2.625, Conv Preferred Stock 40,000 202,500
KLM Royal Dutch Airlines N.V.,
Common Stock (Netherlands) 25,893 750,897
Lasmo Plc, 10.00%, Ser A, ADS,
Preferred Stock (United Kingdom) 50,000 1,243,750
Loral Space & Communications Ltd., Warrant ** 5,000 50,000
McCaw International Ltd., Warrant ** 7,000 17,500
MetroNet Communications Corp., Warrant (Canada) (R) ** 2,250 225,000
Nextel Communications, Inc., 13.00%, Ser D, Preferred Stock 2,493 2,767,230
Nextel Communications, Inc., 11.125%, Ser E, Preferred Stock 1,915 1,943,725
Nextel Communications, Inc. (Class A), Common Stock ** 12,394 457,029
NEXTLINK Communications Inc., Warrant (R) ** 30,000 --
NEXTLINK Communications Inc., 14.00%,, Preferred Stock 115,323 5,939,135
Northeast Utilities, Common Stock ** 75,000 1,321,875
Northwest Airlines Corp., Common Stock 150,000 4,987,500
NTL Inc., 13.00%, Ser B, Preferred Stock 5,003 5,503,300
Occidente y Caribe Celular S.A., Warrant (R) ** 16,000 272,000
Packaging Corp. of America, 12.375%, Preferred Stock (R) 11,500 1,201,750
PG&E Corp., Common Stock 25,622 864,743
Powertel, Inc., Warrant ** 2,880 23,040
PRIMEDIA Inc., 8.625%, Ser H, Preferred Stock 25,000 2,362,500
QUALCOMM Financial Trust, 5.75%, Preferred Stock 60,000 8,160,000
Qantas Airways Ltd., ADR (Australia) (R) 13,800 406,025
RCN Corp., Common Stock ** 40,000 1,662,500
Renaissance Cosmetics, Warrant ** 4,000 4
Rite Aid Corp., Common Stock 14,820 370,500
Rural Cellular Corp., 11.375%, Ser B, Preferred Stock 1,957 1,957,000
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock 5,405 654,005
SFX Entertainment, Inc. (Class A), Common Stock ** 27,467 1,495,235
SpinCycle Inc., Warrant (R) * 3,625 36
Station Casinos, Inc., 7.00%, Conv Preferred Stock 5,000 285,000
Teletrac, Inc., Warrant ** 2,000 --
TLC Beatrice International Holdings (Class A),
Common Stock (r) ** 20,000 1,040,000
Valero Energy Corp., Common Stock 46,250 927,891
VersaTel Telecom B.V., Warrant (R) ** 2,400 144,000
Viatel, Inc., Common Stock ** 6,068 273,060
--------------
TOTAL COMMON AND PREFERRED
STOCKS AND WARRANTS
(Cost $62,916,252) (6.02%) 74,831,522
--------------
<PAGE>
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Advanced Radio Telecom Corp., Warrant ** 60,000 660,000
Allegiance Telecom Inc., Warrant ** 3,500 154,000
American Mobile Satellite Corp., Warrant (R) ** 3,000 --
American Telecasting, Inc., Warrant ** 4,000 40
AVI Holdings, Inc., Warrant (R) ** 1,500 15
Capstar Broadcasting Partners, Inc., 12.00%, Preferred Stock 16,028 1,666,912
Chancellor Media Corp., 7.00%, Conv Preferred Stock 20,000 2,860,000
COLT Telecom Plc, Warrant (United Kingdom) (R) ** 5,000 2,375,000
Comunicacion Celular S.A., Warrant (Colombia) ** 50,000 250,000
Core Cap, Inc., Common Stock (r) ** 45,000 729,000
Core Cap, Inc., Ser A/I, 10.00%, Preferred Stock (r) 45,000 1,077,300
Credit Lyonnais Capital S.C.A., American Depositary Receipt
(ADR), 9.50%, Ser DTC, Preferred Stock (France) (R) 100,000 2,587,500
Decorative Home Accents, Inc., Common Stock ** 1,000 1
DIVA Systems Corp., Warrant ** 15,495 30,990
DTI Holdings Inc., Warrant ** 18,000 180
EarthWatch, Inc., 12.00%, Ser C, Conv Preferred Stock (R) 88,232 948,494
Granite Broadcasting Corp., 12.75%, Preferred Stock 51,200 5,120,000
Hyperion Telecommunications Inc., 12.875%,
Ser B, Preferred Stock 3,513 3,302,220
ICG Holdings, Inc., 14.00%, Preferred Stock 2,730 2,730,000
Intermedia Communications, Inc., 13.50%,
Ser B, Preferred Stock 1,973 2,071,650
Intermedia Communications, Inc., Common Stock ** 30,000 759,375
International Wireless Inc., Warrant ** 3,000 30
Ionica Plc, Warrant (United Kingdom) (R) # ** 8,500 85
Kelley Oil & Gas Corp., $2.625, Conv Preferred Stock 40,000 202,500
KLM Royal Dutch Airlines N.V.,
Common Stock (Netherlands) 25,893 750,897
Lasmo Plc, 10.00%, Ser A, ADS,
Preferred Stock (United Kingdom) 50,000 1,243,750
Loral Space & Communications Ltd., Warrant ** 5,000 50,000
McCaw International Ltd., Warrant ** 7,000 17,500
MetroNet Communications Corp., Warrant (Canada) (R) ** 2,250 225,000
Nextel Communications, Inc., 13.00%, Ser D, Preferred Stock 2,493 2,767,230
Nextel Communications, Inc., 11.125%, Ser E, Preferred Stock 1,915 1,943,725
Nextel Communications, Inc. (Class A), Common Stock ** 12,394 457,029
NEXTLINK Communications Inc., Warrant (R) ** 30,000 --
NEXTLINK Communications Inc., 14.00%,, Preferred Stock 115,323 5,939,135
Northeast Utilities, Common Stock ** 75,000 1,321,875
Northwest Airlines Corp., Common Stock 150,000 4,987,500
NTL Inc., 13.00%, Ser B, Preferred Stock 5,003 5,503,300
Occidente y Caribe Celular S.A., Warrant (R) ** 16,000 272,000
Packaging Corp. of America, 12.375%, Preferred Stock (R) 11,500 1,201,750
PG&E Corp., Common Stock 25,622 864,743
Powertel, Inc., Warrant ** 2,880 23,040
PRIMEDIA Inc., 8.625%, Ser H, Preferred Stock 25,000 2,362,500
QUALCOMM Financial Trust, 5.75%, Preferred Stock 60,000 8,160,000
Qantas Airways Ltd., ADR (Australia) (R) 13,800 406,025
RCN Corp., Common Stock ** 40,000 1,662,500
Renaissance Cosmetics, Warrant ** 4,000 4
Rite Aid Corp., Common Stock 14,820 370,500
Rural Cellular Corp., 11.375%, Ser B, Preferred Stock 1,957 1,957,000
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock 5,405 654,005
SFX Entertainment, Inc. (Class A), Common Stock ** 27,467 1,495,235
SpinCycle Inc., Warrant (R) * 3,625 36
Station Casinos, Inc., 7.00%, Conv Preferred Stock 5,000 285,000
Teletrac, Inc., Warrant ** 2,000 --
TLC Beatrice International Holdings (Class A),
Common Stock (r) ** 20,000 1,040,000
Valero Energy Corp., Common Stock 46,250 927,891
VersaTel Telecom B.V., Warrant (R) ** 2,400 144,000
Viatel, Inc., Common Stock ** 6,068 273,060
--------------
TOTAL COMMON AND PREFERRED
STOCKS AND WARRANTS
(Cost $62,916,252) 74,831,522
--------------
</TABLE>
Page 9
<PAGE>
Schedule of Investments
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
<TABLE>
<CAPTION>
------------------------
John Hancock Strategic
Income Fund
------------------------
PAR VALUE
INTEREST (000's MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- --------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.72%)
Investment in a joint repurchase
agreement transaction with
ABN Amro Securities, Inc. - Dated 05-28-99
due 06-01-98 (Secured by U.S. Treasury Bonds,
5.500% thru 12.000% due 11-15-03 thru
08-15-28 and U.S. Treasury Notes, 6.375% thru
7.875% due 08-15-02 thru 10-15-06) - Note A 4.790% $19,205 $19,205,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.00% 277
--------------
Cash Equivalents (0.30%)
Navigator Securities Lending Prime Portfolio
TOTAL SHORT-TERM INVESTMENTS (2.02%) 19,205,277
------- --------------
TOTAL INVESTMENTS (98.18%) 1,157,256,682
------- --------------
OTHER ASSETS AND LIABILITIES, NET (1.82%) 25,579,464
------- --------------
TOTAL NET ASSETS (100.00%) $1,182,836,146
======= ==============
<CAPTION>
------------------------- --------------------
John Hancock Short-Term
Strategic Income Fund Combined Portfolio
------------------------- --------------------
PAR VALUE PAR VALUE
(000's MARKET (000's MARKET
ISSUER, DESCRIPTION OMITTED) VALUE OMITTED) VALUE
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.72%)
Investment in a joint repurchase
agreement transaction with
ABN Amro Securities, Inc. - Dated 05-28-99
due 06-01-99 (Secured by U.S. Treasury Bonds,
5.500% thru 12.000% due 11-15-03 thru
08-15-28 and U.S. Treasury Notes, 6.375% thru
7.875% due 08-15-02 thru 10-15-06) - Note A $2,236 $2,236,000 $21,441 $21,441,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.00% 277
--------------
Cash Equivalents (0.30%)
Navigator Securities Lending Prime Portfolio 3,656 3,656,140 3,656 3,656,140
----------- --------------
TOTAL SHORT-TERM INVESTMENTS 5,892,140 25,097,417
----------- --------------
TOTAL INVESTMENTS 64,121,434 1,221,378,116
----------- --------------
OTHER ASSETS AND LIABILITIES, NET (2,890,815) 22,688,649
----------- --------------
TOTAL NET ASSETS $61,230,619 $1,244,066,765
=========== ==============
</TABLE>
Page 10
<PAGE>
* Represents rate in effect on May 31, 1999.
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
# Par value of foreign bonds is expressed in local currency, as shown
parathentically in security description.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(E) Parenthetical disclosure of a country in the security description
represents country of issuer; however, security is Euro denominated.
(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 $144,191,020 or 11.59% 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, 1999
---- ---- ---------- ------------
<S> <C> <C> <C> <C>
Core Cap, Inc., Common Stock 10-31-97 $900,000 0.06% $729,000
Core Cap, Inc., Ser A/1 10% , Preferred Stock 10-31-97 1,125,000 0.09 1,077,300
TLC Beatrice International Holdings (Class A), Common Stock 11-25-87 1,006,000 0.08 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.
<PAGE>
Portfolio Concentration
May 31, 1999
The Schedule of Investments is a complete list of all the securities owned by
the Strategic Income fund and the Short-Term Strategic Income fund combined on
May 31, 1999.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
Argentina 0.64%
Australia 0.94
Brazil 0.13
Canada 6.30
Cayman Islands 0.08
Colombia 0.53
Costa Rica 0.07
France 2.75
Germany 0.32
Greece 0.10
Luxembourg 0.22
Mexico 0.28
Netherlands 0.74
Panama 0.15
South Africa 0.52
Spain 1.87
United Kingdom 10.27
United States 72.27
--------
TOTAL INVESTMENTS 98.18%
========
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
AAA 41.48%
AA 2.07
A 0.38
BBB 2.38
BB 9.67
B 32.12
CCC 2.03
CC 0.01
--------
TOTAL BONDS 90.14%
========
<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 Amended and Filed herewith as Exhibit 1
Restated Declaration of Trust
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
Short-Term Strategic Income 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 herewith as Exhibit 7.1
Agreement between John Hancock
Funds, Inc. and Selected Dealers
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 and incorporated herein by
and John Hancock Funds, Inc. reference.
8 Not applicable.
9 Amended and Restated Master Filed herewith as Exhibit 9
Custodian Agreement between John
Hancock Mutual Funds (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 herewith as Exhibit 17
18 Prospectus of John Hancock Filed herewith as Exhibit B to
Strategic Income Fund Part B of this Registration
dated April 1, 1999 Statement.
18.1 Prospectus of John Hancock Filed herewith as Exhibit B
Short-Term Strategic Income Fund to Part B of this Registration
dated March 1, 1999 Statement.
19 Statement of Additional Filed herewith as Exhibit B
Information of John Hancock to Part B of this Registration
Short-Term Strategic Income Fund Statement.
dated April 30, 1999
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 April 1, 1999
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 20th day of July, 1999.
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 J. Stokowski Senior Vice President, Treasurer July 20, 1999
- ----------------------- and Chief Accounting Officer)
James J. Stokowski
* Trustee
- -----------------------
Dennis S. Aronowitz
* Trustee
- -----------------------
Stephen L. Brown
* 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
*By: /s/Susan S. Newton July 20, 1999
-------------------
Susan S. Newton
Attorney-in-Fact under
Powers of Attorney
filed herewith
</TABLE>
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Capital Series, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock Investment
Trust II, John Hancock Investment Trust III, John Hancock Investors Trust, John
Hancock Sovereign Bond Fund, John Hancock Special Equities Fund, John Hancock
Strategic Series, John Hancock Tax-Exempt Series Fund, and John Hancock World
Fund, each a Massachusetts business trust, does hereby severally constitute and
appoint Edward J. Boudreau, Jr., Susan S. Newton, and James J. Stokowksi, and
each acting singly, to be my true, sufficient and lawful attorneys, with full
power to each of them, and each acting singly, to sign for me, in my name and in
the capacity indicated below, any Registration Statement on Form N-1A and any
Registration Statement on Form N-14 to be filed by the Trust or the Corporation
under the Investment Company Act of 1940, as amended ( the "1940 Act"), and
under the Securities Act of 1933, as amended (the "1933 Act"), and any and all
amendments to said Registration Statements, with respect to the offering of
shares and any and all other documents and papers relating thereto, and
generally to do all such things in my name and on my behalf in the capacity
indicated to enable the Trust or Corporation to comply with the 1940 Act and the
1933 Act, and all requirements of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
said attorneys or each of them to any such Registration Statements and any and
all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 1st day of January, 1999.
/s/Dennis S. Aronowitz /s/Richard A. Farrell
- ---------------------- ---------------------
Dennis S. Aronowitz, Trustee Richard A. Farrell, Trustee
/s/Richard P. Chapman, Jr. /s/Gail D. Fosler
- -------------------------- -----------------
Richard P. Chapman, Jr., Trustee Gail D. Fosler, Trustee
/s/William J. Cosgrove /s/William F. Glavin
- ---------------------- --------------------
William J. Cosgrove, Trustee William F. Glavin, Truste
/s/Douglas M. Costle /s/John A. Moore
- -------------------- ----------------
Douglas M. Costle, Trustee John A. Moore, Trustee
/s/Leland O. Erdahl /s/Patti McGill Peterson
- ------------------- ------------------------
Leland O. Erdahl, Trustee Patti McGill Peterson, Trustee
/s/John W. Pratt
- ----------------
John W. Pratt, Trustee
s:corpsecty:trustees\pwrattypanel A
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Bank and Thrift Opportunity
Fund, John Hancock Bond Trust, John Hancock California Tax-Free Income Fund,
John Hancock Capital Series, John Hancock Current Interest, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock
Institutional Series Trust, John Hancock Investment Trust, John Hancock
Investment Trust II, John Hancock Investment Trust III, John Hancock Investors
Trust, John Hancock Patriot Global Dividend Fund, John Hancock Patriot Preferred
Dividend Fund, John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Premium Dividend Fund II, John Hancock Patriot Select Dividend Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Strategic Series, John Hancock Tax-Exempt
Series Fund, John Hancock Tax-Free Bond Trust, and John Hancock World Fund,
(each a "Trust"), and Director of John Hancock Cash Reserve, Inc., (a
"Corporation") does hereby severally constitute and appoint Susan S. Newton, and
James J. Stokowski, and each acting singly, to be my true, sufficient and lawful
attorneys, with full power to each of them, and each acting singly, to sign for
me, in my name and in the capacity indicated below, any Registration Statement
on Form N-1A and any Registration Statement on Form N-14 to be filed by the
Trust or the Corporation under the Investment Company Act of 1940, as amended (
the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933
Act"), and any and all amendments to said Registration Statements, with respect
to the offering of shares and any and all other documents and papers relating
thereto, and generally to do all such things in my name and on my behalf in the
capacity indicated to enable the Trust or Corporation to comply with the 1940
Act and the 1933 Act, and all requirements of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by said attorneys or each of them to any such Registration Statements and
any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 1st day of January, 1999.
/s/Edward J. Boudreau, Jr.
- --------------------------
Edward J. Boudreau, Jr., Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Bank and Thrift Opportunity
Fund, John Hancock Bond Trust, John Hancock California Tax-Free Income Fund,
John Hancock Capital Series, John Hancock Current Interest, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock
Institutional Series Trust, John Hancock Investment Trust, John Hancock
Investment Trust II, John Hancock Investment Trust III, John Hancock Investors
Trust, John Hancock Patriot Global Dividend Fund, John Hancock Patriot Preferred
Dividend Fund, John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Premium Dividend Fund II, John Hancock Patriot Select Dividend Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Strategic Series, John Hancock Tax-Exempt
Series Fund, John Hancock Tax-Free Bond Trust, and John Hancock World Fund,
(each a "Trust"), and Director of John Hancock Cash Reserve, Inc., (a
"Corporation") does hereby severally constitute and appoint Edward J. Boudreau,
Jr., Susan S. Newton, and James J. Stokowski, and each acting singly, to be my
true, sufficient and lawful attorneys, with full power to each of them, and each
acting singly, to sign for me, in my name and in the capacity indicated below,
any Registration Statement on Form N-1A and any Registration Statement on Form
N-14 to be filed by the Trust or the Corporation under the Investment Company
Act of 1940, as amended ( the "1940 Act"), and under the Securities Act of 1933,
as amended (the "1933 Act"), and any and all amendments to said Registration
Statements, with respect to the offering of shares and any and all other
documents and papers relating thereto, and generally to do all such things in my
name and on my behalf in the capacity indicated to enable the Trust or
Corporation to comply with the 1940 Act and the 1933 Act, and all requirements
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by said attorneys or each of them to
any such Registration Statements and any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 1st day of January, 1999.
/s/Anne C. Hodsdon
- ------------------
Anne C. Hodsdon, Trustee
/s/Richard S. Scipione
- ----------------------
Richard S. Scipione, Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee of John Hancock Bank and Thrift Opportunity
Fund, John Hancock Bond Trust, John Hancock California Tax-Free Income Fund,
John Hancock Capital Series, John Hancock Current Interest, John Hancock
Declaration Trust, John Hancock Income Securities Trust, John Hancock
Institutional Series Trust, John Hancock Investment Trust, John Hancock
Investment Trust II, John Hancock Investment Trust III, John Hancock Investors
Trust, John Hancock Patriot Global Dividend Fund, John Hancock Patriot Preferred
Dividend Fund, John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Premium Dividend Fund II, John Hancock Patriot Select Dividend Trust,
John Hancock Series Trust, John Hancock Sovereign Bond Fund, John Hancock
Special Equities Fund, John Hancock Strategic Series, John Hancock Tax-Exempt
Series Fund, John Hancock Tax-Free Bond Trust, and John Hancock World Fund,
(each a "Trust"), does hereby severally constitute and appoint Edward J.
Boudreau, Jr., Susan S. Newton, and James J. Stokowski, and each acting singly,
to be my true, sufficient and lawful attorneys, with full power to each of them,
and each acting singly, to sign for me, in my name and in the capacity indicated
below, any Registration Statement on Form N-1A and any Registration Statement on
Form N-14 to be filed by the Trust or the Corporation under the Investment
Company Act of 1940, as amended ( the "1940 Act"), and under the Securities Act
of 1933, as amended (the "1933 Act"), and any and all amendments to said
Registration Statements, with respect to the offering of shares and any and all
other documents and papers relating thereto, and generally to do all such things
in my name and on my behalf in the capacity indicated to enable the Trust or
Corporation to comply with the 1940 Act and the 1933 Act, and all requirements
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by said attorneys or each of them to
any such Registration Statements and any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 17th day of March, 1999.
/s/Stephen L Brown
------------------
Stephen L. Brown, Trustee
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
- ----------- -----------
1. Amended and Restated Declaration of Trust dated June 8, 1999.
4. Agreement and Plan of Regorganization between the Registrant
and John Hancock Short-Term Strategic Income Fund (filed as
EXHIBIT A to Part A of this Registration Statement).
7.1 Form of Soliciting Dealer Agreement between John Hancock Funds
and Selected Dealers.
9. Master Custodian Agreement between John Hancock Mutual Funds
(including Registrant) and Investors Bank and Trust Company.
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 Short-Term Strategic Income Fund.
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
JOHN HANCOCK STRATEGIC SERIES
101 Huntington Avenue
Boston, Massachusetts
02199-7603
Dated June 8, 1999
<PAGE>
Table of Contents
-----------------
Page
----
ARTICLE I - NAME AND DEFINITIONS..............................................1
Section 1.1. Name............................................................1
Section 1.2. Definitions.....................................................1
ARTICLE II - TRUSTEES.........................................................3
Section 2.1. General Powers..................................................3
Section 2.2. Investments.....................................................4
Section 2.3. Legal Title.....................................................6
Section 2.4. Issuance and Repurchase of Shares...............................6
Section 2.5. Delegation; Committees..........................................6
Section 2.6. Collection and Payment..........................................6
Section 2.7. Expenses........................................................6
Section 2.8. Manner of Acting; By-laws.......................................7
Section 2.9. Miscellaneous Powers............................................7
Section 2.10. Principal Transactions..........................................7
Section 2.11. Litigation......................................................8
Section 2.12. Number of Trustees..............................................8
Section 2.13. Election and Term...............................................8
Section 2.14. Resignation and Removal.........................................8
Section 2.15. Vacancies.......................................................9
Section 2.16. Delegation of Power to Other Trustees...........................9
ARTICLE III - CONTRACTS.......................................................9
Section 3.1. Distribution Contract...........................................9
Section 3.2. Advisory or Management Contract.................................10
Section 3.3. Administration Agreement........................................10
Section 3.4. Service Agreement...............................................10
Section 3.5. Transfer Agent..................................................10
Section 3.6. Custodian.......................................................10
Section 3.7. Affiliations of Trustees or Officers, Etc.......................11
Section 3.8. Compliance with 1940 Act........................................11
ARTICLE IV - LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS...........................................................11
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc............11
Section 4.2. Non-Liability of Trustees, Etc..................................12
Section 4.3. Mandatory Indemnification.......................................12
Section 4.4. No Bond Required of Trustees....................................14
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc......14
Section 4.6. Reliance on Experts, Etc........................................14
ARTICLE V - SHARES OF BENEFICIAL INTEREST.....................................15
Section 5.1. Beneficial Interest.............................................15
Section 5.2. Rights of Shareholders..........................................15
Section 5.3. Trust Only......................................................15
Section 5.4. Issuance of Shares..............................................15
Section 5.5. Register of Shares..............................................16
Section 5.6. Transfer of Shares..............................................16
<PAGE>
Section 5.7. Notices.........................................................17
Section 5.8. Treasury Shares.................................................17
Section 5.9. Voting Powers...................................................17
Section 5.10. Meetings of Shareholders........................................17
Section 5.11. Series or Class Designation.....................................18
Section 5.12. Assent to Declaration of Trust..................................20
ARTICLE VI - REDEMPTION AND REPURCHASE OF SHARES..............................21
Section 6.1. Redemption of Shares............................................10
Section 6.2. Price...........................................................21
Section 6.3. Payment.........................................................21
Section 6.4. Effect of Suspension of Determination of Net Asset Value........21
Section 6.5. Repurchase by Agreement.........................................22
Section 6.6. Redemption of Shareholder's Interest............................22
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding................................22
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula......................................................22
Section 6.9. Suspension of Right of Redemption...............................22
ARTICLE VII - DETERMINATION OF NET ASSET VALUE, NET INCOME AND
DISTRIBUTIONS.................................................................23
Section 7.1. Net Asset Value.................................................23
Section 7.2. Distributions to Shareholders...................................24
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares..........................................24
Section 7.4. Power to Modify Foregoing Procedures............................25
ARTICLE VIII - DURATION; TERMINATION OF TRUST OR A SERIES OR CLASS;
AMENDMENT; MERGERS, ETC.......................................................25
Section 8.1. Duration........................................................25
Section 8.2. Termination of the Trust or a Series or a Class.................25
Section 8.3. Amendment Procedure.............................................27
Section 8.4. Merger, Consolidation and Sale of Assets........................27
Section 8.5. Incorporation...................................................28
ARTICLE IX - REPORTS TO SHAREHOLDERS..........................................28
ARTICLE X - MISCELLANEOUS.....................................................29
Section 10.1. Execution and Filing...........................................29
Section 10.2. Governing Law..................................................29
Section 10.3. Counterparts...................................................29
Section 10.4. Reliance by Third Parties......................................29
Section 10.5. Provisions in Conflict with Law or Regulations.................29
<PAGE>
Amended and Restated
Declaration of Trust
of
John Hancock Strategic Series
Dated June 8, 1999
DECLARATION OF TRUST made this 8th day of June, 1999 by the undersigned
(together with all other persons from time to time duly elected, qualified and
serving as Trustees in accordance with the provisions of Article II hereof, the
"Trustees");
WHEREAS, pursuant to an amended and restated declaration of trust
executed and delivered on September 21, 1993 (the "Original Declaration"), the
Trustees established a trust for the investment and reinvestment of funds
contributed thereto;
WHEREAS, the Trustees divided the beneficial interest in the trust
assets into transferable shares of beneficial interest, as provided therein;
WHEREAS, the Trustees declared that all money and property contributed
to the trust established thereunder be held and managed in trust for the benefit
of the holders, from time to time, of the shares of beneficial interest issued
thereunder and subject to the provisions thereof;
WHEREAS, the Trustees desire to amend and restate the Original
Declaration;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, the undersigned, being a majority of the Trustees
of the trust, hereby amend and restate the Original Declaration as follows:
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is "John
Hancock Strategic Series" (the "Trust").
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 3.3 hereof.
1
<PAGE>
(b) "By-laws" means the By-laws referred to in Section 2.8 hereof, as
amended from time to time.
(c) "Class" means any division of shares within a Series in accordance
with the provisions of Article V.
(d) The terms "Commission" and "Interested Person" have the meanings
given them in the 1940 Act. Except as such term may be otherwise defined by the
Trustees in conjunction with the establishment of any Series, the term "vote of
a majority of the Outstanding Shares entitled to vote" shall have the same
meaning as is assigned to the term "vote of a majority of the outstanding voting
securities" in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time
to time. Reference in this Declaration of Trust to "Declaration," "hereof,"
"herein," and "hereunder" shall be deemed to refer to this Declaration rather
than exclusively to the article or section in which such words appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 3.1 hereof.
(h) "Fund" or "Funds" individually or collectively, means the separate
Series of the Trust, together with the assets and liabilities assigned thereto.
(i) "Fundamental Restrictions" means the investment restrictions set
forth in the Prospectus and Statement of Additional Information for any Series
and designated as fundamental restrictions therein with respect to such Series.
(j) "His" shall include the feminine and neuter, as well as the
masculine, genders.
(k) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.
(l) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(m) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
(n) "Prospectus" means the Prospectuses and Statements of Additional
Information included in the Registration Statement of the Trust under the
2
<PAGE>
Securities Act of 1933, as amended, as such Prospectuses and Statements of
Additional Information may be amended or supplemented and filed with the
Commission from time to time.
(o) "Series" individually or collectively means the separately managed
component(s) of the Trust (or, if the Trust shall have only one such component,
then that one) as may be established and designated from time to time by the
Trustees pursuant to Section 5.11 hereof.
(p) "Shareholder" means a record owner of Outstanding Shares.
(q) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust shall be divided from time to time,
including the Shares of any and all Series or of any Class within any Series (as
the context may require) which may be established by the Trustees, and includes
fractions of Shares as well as whole Shares. "Outstanding" Shares means those
Shares shown from time to time on the books of the Trust or its Transfer Agent
as then issued and outstanding, but shall not include Shares which have been
redeemed or repurchased by the Trust and which are at the time held in the
treasury of the Trust.
(r) "Transfer Agent" means any Person other than the Trust who
maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the like.
(s) "Trust" means John Hancock Strategic Series.
(t) "Trustees" means the persons who have signed this Declaration, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who now serve or may from time to time be duly elected,
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in this capacity or their capacities as trustees hereunder.
(u) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including any and all assets of or allocated to any
Series or Class, as the context may require.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without The Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
3
<PAGE>
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To invest in, hold for investment, or reinvest in, cash;
securities, including common, preferred and preference stocks; warrants;
subscription rights; profit-sharing interests or participations and all other
contracts for or evidence of equity interests; bonds, debentures, bills, time
notes and all other evidences of indebtedness; negotiable or non-negotiable
instruments; government securities, including securities of any state,
municipality or other political subdivision thereof, or any governmental or
quasi-governmental agency or instrumentality; and money market instruments
including bank certificates of deposit, finance paper, commercial paper,
bankers' acceptances and all kinds of repurchase agreements, of any corporation,
company, trust, association, firm or other business organization however
established, and of any country, state, municipality or other political
subdivision, or any governmental or quasi-governmental agency or
instrumentality; any other security, instrument or contract the acquisition or
execution of which is not prohibited by any Fundamental Restriction; and the
Trustees shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trust may invest should the Fundamental
Restrictions be amended.
(c) To acquire (by purchase, subscription or otherwise), to hold, to
trade in and deal in, to acquire any rights or options to purchase or sell, to
sell or otherwise dispose of, to lend and to pledge any such securities, to
enter into repurchase agreements, reverse repurchase agreements, firm commitment
agreements, forward foreign currency exchange contracts, interest rate, mortgage
or currency swaps, and interest rate caps, floors and collars, to purchase and
sell options on securities, indices, currency, swaps or other financial assets,
futures contracts and options on futures contracts of all descriptions and to
engage in all types of hedging, risk management or income enhancement
transactions.
(d) To exercise all rights, powers and privileges of ownership or
interest in all securities and repurchase agreements included in the Trust
Property, including the right to vote thereon and otherwise act with respect
thereto and to do all acts for the preservation, protection, improvement and
enhancement in value of all such securities and repurchase agreements.
4
<PAGE>
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real or
personal, including cash or foreign currency, and any interest therein.
(f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; and to endorse, guarantee,
or undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
(h) To enter into a plan of distribution and any related agreements
whereby the Trust may finance directly or indirectly any activity which is
primarily intended to result in the distribution and/or servicing of Shares.
(i) To adopt on behalf of the Trust or any Series thereof an
alternative purchase plan providing for the issuance of multiple Classes of
Shares (as authorized herein at Section 5.11).
(j) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or arising out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
Notwithstanding any other provision herein, the Trustees shall have
full power in their discretion as contemplated in Section 8.5, without any
requirement of approval by Shareholders, to invest part or all of the Trust
Property (or part or all of the assets of any Series), or to dispose of part or
all of the Trust Property (or part or all of the assets of any Series) and
invest the proceeds of such disposition, in securities issued by one or more
other investment companies registered under the 1940 Act. Any such other
investment company may (but need not) be a trust (formed under the laws of any
state) which is classified as a partnership or corporation for federal income
tax purposes.
5
<PAGE>
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any Series of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
deemed appropriately protected. The right, title and interest of the Trustees in
the Trust Property and the Property of each Series of the Trust shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee he
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees shall have
the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in Shares and, subject
to the provisions set forth in Articles VI and VII and Section 5.11 hereof, to
apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the Trust or of the particular
Series with respect to which such Shares are issued, whether capital or surplus
or otherwise, to the full extent now or hereafter permitted by the laws of The
Commonwealth of Massachusetts governing business corporations.
Section 2.5. Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or any
Series of the Trust or the names of the Trustees or otherwise as the Trustees
may deem expedient, to the same extent as such delegation is permitted by the
1940 Act.
Section 2.6. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 2.7. Expenses. The Trustees shall have the power to incur and
pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of this Declaration, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
6
<PAGE>
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided
herein or in the By-laws, any action to be taken by the Trustees may be taken by
a majority of the Trustees present at a meeting of Trustees, including any
meeting held by means of a conference telephone circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, or by written consents of a majority of Trustees
then in office. The Trustees may adopt By-laws not inconsistent with this
Declaration to provide for the conduct of the business of the Trust and may
amend or repeal such By-laws to the extent such power is not reserved to the
Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
Section 2.9. Miscellaneous Powers. The Trustees shall have the power
to: (a) employ or contract with such Persons as the Trustees may deem desirable
for the transaction of the business of the Trust or any Series thereof; (b)
enter into joint ventures, partnerships and any other combinations or
associations; (c) remove Trustees, fill vacancies in, add to or subtract from
their number, elect and remove such officers and appoint and terminate such
agents or employees as they consider appropriate, and appoint from their own
number, and terminate, any one or more committees which may exercise some or all
of the power and authority of the Trustees as the Trustees may determine; (d)
purchase, and pay for out of Trust Property or the property of the appropriate
Series of the Trust, insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, administrators, distributors,
selected dealers or independent contractors of the Trust against all claims
arising by reason of holding any such position or by reason of any action taken
or omitted by any such Person in such capacity, whether or not constituting
negligence, or whether or not the Trust would have the power to indemnify such
Person against such liability; (e) establish pension, profit-sharing, share
purchase, and other retirement, incentive and benefit plans for any Trustees,
officers, employees and agents of the Trust; (f) to the extent permitted by law,
indemnify any person with whom the Trust or any Series thereof has dealings,
including the Investment Adviser, Administrator, Distributor, Transfer Agent and
selected dealers, to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year and taxable year of the Trust or any Series thereof and the method
by which its or their accounts shall be kept; and (i) adopt a seal for the
Trust, but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except for transactions not
permitted by the 1940 Act or rules and regulations adopted, or orders issued, by
the Commission thereunder, the Trustees may, on behalf of the Trust, buy any
securities from or sell any securities to, or lend any assets of the Trust or
any Series thereof to any Trustee or officer of the Trust or any firm of which
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any such Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or Transfer Agent or with any
Interested Person of such Person; and the Trust or a Series thereof may employ
any such Person, or firm or company in which such Person is an Interested
Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing
agent or custodian upon customary terms.
Section 2.11. Litigation. The Trustees shall have the power to engage
in and to prosecute, defend, compromise, abandon, or adjust by arbitration, or
otherwise, any actions, suits, proceedings, disputes, claims, and demands
relating to the Trust, and out of the assets of the Trust or any Series thereof
to pay or to satisfy any debts, claims or expenses incurred in connection
therewith, including those of litigation, and such power shall include without
limitation the power of the Trustees or any appropriate committee thereof, in
the exercise of their or its good faith business judgment, to dismiss any
action, suit, proceeding, dispute, claim, or demand, derivative or otherwise,
brought by any person, including a Shareholder in its own name or the name of
the Trust, whether or not the Trust or any of the Trustees may be named
individually therein or the subject matter arises by reason of business for or
on behalf of the Trust.
Section 2.12. Number of Trustees. The initial Trustees shall be the
persons signing this Declaration. The number of Trustees shall be such number as
shall be fixed from time to time by vote of a majority of the Trustees,
provided, however, that the number of Trustees shall in no event be less than
one (1).
Section 2.13. Election and Term. Except for the Trustees named herein
or appointed to fill vacancies pursuant to Section 2.15 hereof, the Trustees may
succeed themselves and shall be elected by the Shareholders owning of record a
plurality of the Shares voting at a meeting of Shareholders on a date fixed by
the Trustees. Except in the event of resignations or removals pursuant to
Section 2.14 hereof, each Trustee shall hold office until such time as less than
a majority of the Trustees holding office has been elected by Shareholders. In
such event the Trustees then in office shall call a Shareholders' meeting for
the election of Trustees. Except for the foregoing circumstances, the Trustees
shall continue to hold office and may appoint successor Trustees.
Section 2.14. Resignation and Removal. Any Trustee may resign his trust
(without the need for any prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate
number of Trustees after such removal shall not be less than one) with cause, by
the action of two-thirds of the remaining Trustees or by action of two-thirds of
the outstanding Shares of the Trust (for purposes of determining the
circumstances and procedures under which any such removal by the Shareholders
may take place, the provisions of Section 16(c) of the 1940 Act (or any
successor provisions) shall be applicable to the same extent as if the Trust
were subject to the provisions of that Section). Upon the resignation or removal
of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
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the name of the resigning or removed Trustee. Upon the incapacity or death of
any Trustee, his legal representative shall execute and deliver on his behalf
such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.15. Vacancies. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of his death, retirement,
resignation, removal, bankruptcy, adjudicated incompetence or other incapacity
to perform the duties of the office of a Trustee. No such vacancy shall operate
to annul the Declaration or to revoke any existing agency created pursuant to
the terms of the Declaration. In the case of an existing vacancy, including a
vacancy existing by reason of an increase in the number of Trustees, subject to
the provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall
fill such vacancy by the appointment of such other person as they in their
discretion shall see fit, made by vote of a majority of the Trustees then in
office. Any such appointment shall not become effective, however, until the
person named in the vote approving the appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of the
Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the number
of Trustees. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 2.15, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by the Declaration.
The vote by a majority of the Trustees in office, fixing the number of Trustees
shall be conclusive evidence of the existence of such vacancy.
Section 2.16. Delegation of Power to Other Trustees. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees under this Declaration except as herein otherwise expressly
provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
distribution contract or contracts providing for the sale of the Shares to net
the Trust or the applicable Series of the Trust not less than the amount
provided for in Section 7.1 of Article VII hereof, whereby the Trustees may
either agree to sell the Shares to the other party to the contract or appoint
such other party as their sales agent for the Shares, and in either case on such
terms and conditions, if any, as may be prescribed in the By-laws, and such
further terms and conditions as the Trustees may in their discretion determine
not inconsistent with the provisions of this Article III or of the By-laws; and
such contract may also provide for the repurchase of the Shares by such other
party as agent of the Trustees.
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Section 3.2. Advisory or Management Contract. The Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts or, if the Trustees establish multiple Series, separate
investment advisory or management contracts with respect to one or more Series
whereby the other party or parties to any such contracts shall undertake to
furnish the Trust or such Series management, investment advisory,
administration, accounting, legal, statistical and research facilities and
services, promotional or marketing activities, and such other facilities and
services, if any, as the Trustees shall from time to time consider desirable and
all upon such terms and conditions as the Trustees may in their discretion
determine. Notwithstanding any provisions of the Declaration, the Trustees may
authorize the Investment Advisers, or any of them, under any such contracts
(subject to such general or specific instructions as the Trustees may from time
to time adopt) to effect purchases, sales, loans or exchanges of portfolio
securities and other investments of the Trust on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of such Investment Advisers, or
any of them (and all without further action by the Trustees). Any such
purchases, sales, loans and exchanges shall be deemed to have been authorized by
all of the Trustees. The Trustees may, in their sole discretion, call a meeting
of Shareholders in order to submit to a vote of Shareholders at such meeting the
approval or continuance of any such investment advisory or management contract.
If the Shareholders of any one or more of the Series of the Trust should fail to
approve any such investment advisory or management contract, the Investment
Adviser may nonetheless serve as Investment Adviser with respect to any Series
whose Shareholders approve such contract.
Section 3.3. Administration Agreement. The Trustees may in their
discretion from time to time enter into an administration agreement or, if the
Trustees establish multiple Series or Classes, separate administration
agreements with respect to each Series or Class, whereby the other party to such
agreement shall undertake to manage the business affairs of the Trust or of a
Series or Class thereof and furnish the Trust or a Series or a Class thereof
with office facilities, and shall be responsible for the ordinary clerical,
bookkeeping and recordkeeping services at such office facilities, and other
facilities and services, if any, and all upon such terms and conditions as the
Trustees may in their discretion determine.
Section 3.4. Service Agreement. The Trustees may in their discretion
from time to time enter into Service Agreements with respect to one or more
Series or Classes thereof whereby the other parties to such Service Agreements
will provide administration and/or support services pursuant to administration
plans and service plans, and all upon such terms and conditions as the Trustees
in their discretion may determine.
Section 3.5. Transfer Agent. The Trustees may in their discretion from
time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such terms
and conditions as the Trustees may in their discretion determine not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
Section 3.6. Custodian. The Trustees may appoint or otherwise engage
one or more banks or trust companies, each having an aggregate capital, surplus
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and undivided profits (as shown in its last published report) of at least two
million dollars ($2,000,000) to serve as Custodian with authority as its agent,
but subject to such restrictions, limitations and other requirements, if any, as
may be contained in the By-laws of the Trust. The Trustees may also authorize
the Custodian to employ one or more sub-custodians, including such foreign banks
and securities depositories as meet the requirements of applicable provisions of
the 1940 Act, and upon such terms and conditions as may be agreed upon between
the Custodian and such sub-custodian, to hold securities and other assets of the
Trust and to perform the acts and services of the Custodian, subject to
applicable provisions of law and resolutions adopted by the Trustees.
Section 3.7. Affiliations of Trustees or Officers, Etc. The fact that:
(i) any of the Shareholders, Trustees or officers of the
Trust or any Series thereof is a shareholder, director, officer,
partner, trustee, employee, manager, adviser or distributor of or for
any partnership, corporation, trust, association or other organization
or of or for any parent or affiliate of any organization, with which a
contract of the character described in Sections 3.1, 3.2, 3.3 or 3.4
above or for services as Custodian, Transfer Agent or disbursing agent
or for providing accounting, legal and printing services or for related
services may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a Shareholder of
or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in
Sections 3.1, 3.2, 3.3 or 3.4 above or for services as Custodian,
Transfer Agent or disbursing agent or for related services may have
been or may hereafter be made also has any one or more of such
contracts with one or more other partnerships, corporations, trusts,
associations or other organizations, or has other business or
interests, shall not affect the validity of any such contract or
disqualify any Shareholder, Trustee or officer of the Trust from voting
upon or executing the same or create any liability or accountability to
the Trust or its Shareholders.
Section 3.8. Compliance with 1940 Act. Any contract entered into
pursuant to Sections 3.1 or 3.2 shall be consistent with and subject to the
requirements of Section 15 of the 1940 Act (including any amendment thereof or
other applicable Act of Congress hereafter enacted), as modified by any
applicable order or orders of the Commission, with respect to its continuance in
effect, its termination and the method of authorization and approval of such
contract or renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
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in connection with Trust Property or the acts, obligations or affairs of the
Trust or any Series thereof. No Trustee, officer, employee or agent of the Trust
or any Series thereof shall be subject to any personal liability whatsoever to
any Person, other than to the Trust or its Shareholders, in connection with
Trust Property or the affairs of the Trust, except to the extent arising from
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties with respect to such Person; and all such Persons shall look solely to
the Trust Property, or to the Property of one or more specific Series of the
Trust if the claim arises from the conduct of such Trustee, officer, employee or
agent with respect to only such Series, for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust or any Series
thereof, is made a party to any suit or proceeding to enforce any such liability
of the Trust or any Series thereof, he shall not, on account thereof, be held to
any personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general successor) out of
the Trust Property for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made only out of
assets of the one or more Series whose Shares were held by said Shareholder at
the time the act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this
Section 4.1 shall not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust or any Series thereof to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust or any Series thereof shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee, or
agent thereof for any action or failure to act (including without limitation the
failure to compel in any way any former or acting Trustee to redress any breach
of trust) except for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions
and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee, officer,
employee or agent of the Trust (including any individual who serves at
its request as director, officer, partner, trustee or the like of
another organization in which it has any interest as a shareholder,
creditor or otherwise) shall be indemnified by the Trust, or by one or
more Series thereof if the claim arises from his or her conduct with
respect to only such Series, to the fullest extent permitted by law
against all liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
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(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal, or other, including appeals), actual or threatened; and the
words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a Series thereof or
the Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust or a
Series thereof;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(ii)
resulting in a payment by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition;
(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by (x) vote of a
majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Non-interested Trustees then
in office act on the matter) or (y) written opinion of
independent legal counsel; or
(C) by a vote of a majority of the Shares outstanding
and entitled to vote (excluding Shares owned of record or
beneficially by such individual).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust or any Series thereof other
than Trustees and officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 4.3 may be advanced by the Trust or a Series thereof prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
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recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security provided by the recipient, or the Trust or
Series thereof shall be insured against losses arising out of any such
advances; or
(ii) a majority of the Non-interested Trustees acting on the
matter (provided that a majority of the Non-interested Trustees act on
the matter) or an independent legal counsel in a written opinion shall
determine, based upon a review of readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who (i)
is not an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), and (ii) is not involved in the claim, action, suit or
proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments,
Etc. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust or a Series thereof
shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or
be liable for the application of money or property paid, loaned, or delivered to
or on the order of the Trustees or of said officer, employee or agent. Every
obligation, contract, instrument, certificate, Share, other security of the
Trust or a Series thereof or undertaking, and every other act or thing
whatsoever executed in connection with the Trust shall be conclusively presumed
to have been executed or done by the executors thereof only in their capacity as
Trustees under this Declaration or in their capacity as officers, employees or
agents of the Trust or a Series thereof. Every written obligation, contract,
instrument, certificate, Share, other security of the Trust or a Series thereof
or undertaking made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of the Trust or a Series thereof under any
such instrument are not binding upon any of the Trustees or Shareholders
individually, but bind only the Trust Property or the Trust Property of the
applicable Series, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to bind the
Trustees individually. The Trustees shall at all times maintain insurance for
the protection of the Trust Property or the Trust Property of the applicable
Series, its Shareholders, Trustees, officers, employees and agents in such
amount as the Trustees shall deem adequate to cover possible tort liability, and
such other insurance as the Trustees in their sole judgment shall deem
advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or
employee of the Trust or a Series thereof shall, in the performance of his
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duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or a Series thereof, upon an opinion of
counsel, or upon reports made to the Trust or a Series thereof by any of its
officers or employees or by the Investment Adviser, the Administrator, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust, regardless of whether such counsel or expert may also
be a Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest
without par value. The number of such Shares of beneficial interest authorized
hereunder is unlimited. The Trustees shall have the exclusive authority without
the requirement of Shareholder approval to establish and designate one or more
Series of shares and one or more Classes thereof as the Trustees deem necessary
or desirable. Each Share of any Series shall represent an equal proportionate
Share in the assets of that Series with each other Share in that Series. Subject
to the provisions of Section 5.11 hereof, the Trustees may also authorize the
creation of additional Series of Shares (the proceeds of which may be invested
in separate, independently managed portfolios) and additional Classes of Shares
within any Series. All Shares issued hereunder including, without limitation,
Shares issued in connection with a dividend in Shares or a split in Shares,
shall be fully paid and nonassessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to share or assume any losses of the Trust or suffer an assessment of any
kind by virtue of their ownership of Shares. The Shares shall be personal
property giving only the rights specifically set forth in this Declaration. The
Shares shall not entitle the holder to preference, preemptive, appraisal,
conversion or exchange rights, except as the Trustees may determine with respect
to any Series or Class of Shares.
Section 5.3. Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion may,
from time to time without a vote of the Shareholders, issue Shares, in addition
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to the then issued and outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, including
cash or property, at such time or times and on such terms as the Trustees may
deem best, except that only Shares previously contracted to be sold may be
issued during any period when the right of redemption is suspended pursuant to
Section 6.9 hereof, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and Shares held in the treasury. The
Trustees may from time to time divide or combine the Shares of the Trust or, if
the Shares be divided into Series or Classes, of any Series or any Class thereof
of the Trust, into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust or in the Trust Property
allocated or belonging to such Series or Class. Contributions to the Trust or
Series thereof may be accepted for, and Shares shall be redeemed as, whole
Shares and/or 1/1000ths of a Share or integral multiples thereof.
Section 5.5. Register of Shares. A register shall be kept at the
principal office of the Trust or an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him as provided
herein or in the By-laws, until he has given his address to the Transfer Agent
or such other officer or agent of the Trustees as shall keep the said register
for entry thereon. It is not contemplated that certificates will be issued for
the Shares; however, the Trustees, in their discretion, may authorize the
issuance of share certificates and promulgate appropriate rules and regulations
as to their use.
Section 5.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery the transfer shall be recorded on the
register of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
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Section 5.7. Notices. Any and all notices to which any Shareholder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 5.8. Treasury Shares. Shares held in the treasury shall, until
resold pursuant to Section 5.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 2.13; (ii) with
respect to any investment advisory contract entered into pursuant to Section
3.2; (iii) with respect to termination of the Trust or a Series or Class thereof
as provided in Section 8.2; (iv) with respect to any amendment of this
Declaration to the limited extent and as provided in Section 8.3; (v) with
respect to a merger, consolidation or sale of assets as provided in Section 8.4;
(vi) with respect to incorporation of the Trust to the extent and as provided in
Section 8.5; (vii) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust or a Series thereof or the Shareholders of either; (viii)
with respect to any plan adopted pursuant to Rule 12b-1 (or any successor rule)
under the 1940 Act, and related matters; and (ix) with respect to such
additional matters relating to the Trust as may be required by this Declaration,
the By-laws or any registration of the Trust as an investment company under the
1940 Act with the Commission (or any successor agency) or as the Trustees may
consider necessary or desirable. As determined by the Trustees without the vote
or consent of shareholders, on any matter submitted to a vote of Shareholders
either (i) each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote or (ii) each dollar of net asset value (number of
Shares owned times net asset value per share of such Series or Class, as
applicable) shall be entitled to one vote on any matter on which such Shares are
entitled to vote and each fractional dollar amount shall be entitled to a
proportionate fractional vote. The Trustees may, in conjunction with the
establishment of any further Series or any Classes of Shares, establish
conditions under which the several Series or Classes of Shares shall have
separate voting rights or no voting rights. There shall be no cumulative voting
in the election of Trustees. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration or the By-laws to be taken by Shareholders. The By-laws may include
further provisions for Shareholders' votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. No annual or regular meetings
of Shareholders are required. Special meetings of the Shareholders, including
meetings involving only the holders of Shares of one or more but less than all
Series or Classes thereof, may be called at any time by the Chairman of the
Board, President, or any Vice-President of the Trust, and shall be called by the
President or the Secretary at the request, in writing or by resolution, of a
majority of the Trustees, or at the written request of the holder or holders of
ten percent (10%) or more of the total number of Outstanding Shares of the Trust
entitled to vote at such meeting. Meetings of the Shareholders of any Series
shall be called by the President or the Secretary at the written request of the
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holder or holders of ten percent (10%) or more of the total number of
Outstanding Shares of such Series of the Trust entitled to vote at such meeting.
Any such request shall state the purpose of the proposed meeting.
Section 5.11. Series or Class Designation. (a) Without limiting the
authority of the Trustees set forth in Section 5.1 to establish and designate
any further Series or Classes, the Trustees hereby establish the following
Series, each of which consists of Class A Shares, Class B Shares, and Class C
Shares: John Hancock Strategic Income Fund (the "Existing Series").
(b) The Shares of the Existing Series and Class thereof herein
established and designated and any Shares of any further Series and Classes
thereof that may from time to time be established and designated by the Trustees
shall be established and designated, and the variations in the relative rights
and preferences as between the different Series shall be fixed and determined,
by the Trustees (unless the Trustees otherwise determine with respect to further
Series or Classes at the time of establishing and designating the same);
provided, that all Shares shall be identical except that there may be variations
so fixed and determined between different Series or Classes thereof as to
investment objective, policies and restrictions, purchase price, payment
obligations, distribution expenses, right of redemption, special and relative
rights as to dividends and on liquidation, conversion rights, exchange rights,
and conditions under which the several Series or Classes shall have separate
voting rights, all of which are subject to the limitations set forth below. All
references to Shares in this Declaration shall be deemed to be Shares of any or
all Series or Classes as the context may require.
(c) As to any Existing Series and Classes herein established and
designated and any further division of Shares of the Trust into additional
Series or Classes, the following provisions shall be applicable:
(i) The number of authorized Shares and the number of Shares
of each Series or Class thereof that may be issued shall be unlimited. The
Trustees may classify or reclassify any unissued Shares or any Shares previously
issued and reacquired of any Series or Class into one or more Series or one or
more Classes that may be established and designated from time to time. The
Trustees may hold as treasury shares (of the same or some other Series or
Class), reissue for such consideration and on such terms as they may determine,
or cancel any Shares of any Series or Class reacquired by the Trust at their
discretion from time to time.
(ii) All consideration received by the Trust for the issue or
sale of Shares of a particular Series or Class, together with all assets in
which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors of such Series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series, the Trustees shall allocate them among any
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one or more of the Series established and designated from time to time in such
manner and on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all Series for all purposes. No holder of Shares of any
Series shall have any claim on or right to any assets allocated or belonging to
any other Series.
(iii) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that Series or the
appropriate Class or Classes thereof and all expenses, costs, charges and
reserves attributable to that Series or Class or Classes thereof, and any
general liabilities, expenses, costs, charges or reserves of the Trust which are
not readily identifiable as belonging to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the Series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all Series and Classes for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items are capital; and each
such determination and allocation shall be conclusive and binding upon the
Shareholders. The assets of a particular Series of the Trust shall under no
circumstances be charged with liabilities attributable to any other Series or
Class thereof of the Trust. All persons extending credit to, or contracting with
or having any claim against a particular Series or Class of the Trust shall look
only to the assets of that particular Series for payment of such credit,
contract or claim.
(iv) The power of the Trustees to pay dividends and make
distributions shall be governed by Section 7.2 of this Declaration. With respect
to any Series or Class, dividends and distributions on Shares of a particular
Series or Class may be paid with such frequency as the Trustees may determine,
which may be daily or otherwise, pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine, to the holders of Shares of that Series or Class, from such of the
income and capital gains, accrued or realized, from the assets belonging to that
Series, as the Trustees may determine, after providing for actual and accrued
liabilities belonging to that Series or Class. All dividends and distributions
on Shares of a particular Series or Class shall be distributed pro rata to the
Shareholders of that Series or Class in proportion to the number of Shares of
that Series or Class held by such Shareholders at the time of record established
for the payment of such dividends or distribution.
(v) Each Share of a Series of the Trust shall represent a
beneficial interest in the net assets of such Series. Each holder of Shares of a
Series or Class thereof shall be entitled to receive his pro rata share of
distributions of income and capital gains made with respect to such Series or
Class net of expenses. Upon redemption of his Shares or indemnification for
liabilities incurred by reason of his being or having been a Shareholder of a
Series or Class, such Shareholder shall be paid solely out of the funds and
property of such Series of the Trust. Upon liquidation or termination of a
Series or Class thereof of the Trust, Shareholders of such Series or Class
thereof shall be entitled to receive a pro rata share of the net assets of such
Series. A Shareholder of a particular Series of the Trust shall not be entitled
to participate in a derivative or class action on behalf of any other Series or
the Shareholders of any other Series of the Trust.
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(vi) On each matter submitted to a vote of Shareholders, all
Shares of all Series and Classes shall vote as a single class; provided,
however, that (1) as to any matter with respect to which a separate vote of any
Series or Class is required by the 1940 Act or is required by attributes
applicable to any Series or Class or is required by any Rule 12b-1 plan, such
requirements as to a separate vote by that Series or Class shall apply, (2) to
the extent that a matter referred to in clause (1) above, affects more than one
Class or Series and the interests of each such Class or Series in the matter are
identical, then, subject to clause (3) below, the Shares of all such affected
Classes or Series shall vote as a single Class; (3) as to any matter which does
not affect the interests of a particular Series or Class, only the holders of
Shares of the one or more affected Series or Classes shall be entitled to vote;
and (4) the provisions of the following sentence shall apply. On any matter that
pertains to any particular Class of a particular Series or to any Class expenses
with respect to any Series which matter may be submitted to a vote of
Shareholders, only Shares of the affected Class or that Series, as the case may
be, shall be entitled to vote except that: (i) to the extent said matter affects
Shares of another Class or Series, such other Shares shall also be entitled to
vote, and in such cases Shares of the affected Class, as the case may be, of
such Series shall be voted in the aggregate together with such other Shares; and
(ii) to the extent that said matter does not affect Shares of a particular Class
of such Series, said Shares shall not be entitled to vote (except where
otherwise required by law or permitted by the Trustees acting in their sole
discretion) even though the matter is submitted to a vote of the Shareholders of
any other Class or Series.
(vii) Except as otherwise provided in this Article V, the
Trustees shall have the power to determine the designations, preferences,
privileges, payment obligations, limitations and rights, including voting and
dividend rights, of each Class and Series of Shares. Subject to compliance with
the requirements of the 1940 Act, the Trustees shall have the authority to
provide that the holders of Shares of any Series or Class shall have the right
to convert or exchange said Shares into Shares of one or more Series or Classes
of Shares in accordance with such requirements, conditions and procedures as may
be established by the Trustees.
(viii) The establishment and designation of any Series or
Classes of Shares shall be effective upon the execution by a majority of the
then Trustees of an instrument setting forth such establishment and designation
and the relative rights and preferences of such Series or Classes, or as
otherwise provided in such instrument. At any time that there are no Shares
outstanding of any particular Series or Class previously established and
designated, the Trustees may by an instrument executed by a majority of their
number abolish that Series or Class and the establishment and designation
thereof. Each instrument referred to in this section shall have the status of an
amendment to this Declaration.
Section 5.12. Assent to Declaration of Trust. Every Shareholder, by
virtue of having become a Shareholder, shall be held to have expressly assented
and agreed to the terms hereof and to have become a party hereto.
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ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. (a) All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust. The
Trust may require any Shareholder to pay a sales charge to the Trust, the
underwriter, or any other person designated by the Trustees upon redemption or
repurchase of Shares in such amount and upon such conditions as shall be
determined from time to time by the Trustees.
(b) The Trust shall redeem the Shares of the Trust or any Series or
Class thereof at the price determined as hereinafter set forth, upon the
appropriately verified written application of the record holder thereof (or upon
such other form of request as the Trustees may determine) at such office or
agency as may be designated from time to time for that purpose by the Trustees.
The Trustees may from time to time specify additional conditions, not
inconsistent with the 1940 Act, regarding the redemption of Shares in the
Trust's then effective Prospectus.
Section 6.2. Price. Shares shall be redeemed at a price based on their
net asset value determined as set forth in Section 7.1 hereof as of such time as
the Trustees shall have theretofore prescribed by resolution. In the absence of
such resolution, the redemption price of Shares deposited shall be based on the
net asset value of such Shares next determined as set forth in Section 7.1
hereof after receipt of such application. The amount of any contingent deferred
sales charge or redemption fee payable upon redemption of Shares may be deducted
from the proceeds of such redemption.
Section 6.3. Payment. Payment of the redemption price of Shares of the
Trust or any Series or Class thereof shall be made in cash or in property to the
Shareholder at such time and in the manner, not inconsistent with the 1940 Act
or other applicable laws, as may be specified from time to time in the Trust's
then effective Prospectus(es), subject to the provisions of Section 6.4 hereof.
Notwithstanding the foregoing, the Trustees may withhold from such redemption
proceeds any amount arising (i) from a liability of the redeeming Shareholder to
the Trust or (ii) in connection with any Federal or state tax withholding
requirements.
Section 6.4. Effect of Suspension of Determination of Net Asset Value.
If, pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of
the determination of net asset value with respect to Shares of the Trust or of
any Series or Class thereof, the rights of Shareholders (including those who
shall have applied for redemption pursuant to Section 6.1 hereof but who shall
not yet have received payment) to have Shares redeemed and paid for by the Trust
or a Series or Class thereof shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his redemption right so
suspended may, during the period of such suspension, by appropriate written
notice of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any Share certificates
on deposit. The redemption price of Shares for which redemption applications
have not been revoked shall be based on the net asset value of such Shares next
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determined as set forth in Section 7.1 after the termination of such suspension,
and payment shall be made within seven (7) days after the date upon which the
application was made plus the period after such application during which the
determination of net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
Section 6.6. Redemption of Shareholder's Interest. The Trustees, in
their sole discretion, may cause the Trust to redeem all of the Shares of one or
more Series or Class thereof held by any Shareholder if the value of such Shares
held by such Shareholder is less than the minimum amount established from time
to time by the Trustees.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. (a) If the Trustees shall, at any
time and in good faith, be of the opinion that direct or indirect ownership of
Shares or other securities of the Trust has or may become concentrated in any
Person to an extent which would disqualify the Trust or any Series of the Trust
as a regulated investment company under the Internal Revenue Code of 1986, then
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or any Series of the Trust sufficient to
maintain or bring the direct or indirect ownership of Shares or other securities
of the Trust or any Series of the Trust into conformity with the requirements
for such qualification and (ii) to refuse to transfer or issue Shares or other
securities of the Trust or any Series of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust or any Series of the
Trust in question would result in such disqualification. The redemption shall be
effected at the redemption price and in the manner provided in Section 6.1.
(b) The holders of Shares or other securities of the Trust or any
Series of the Trust shall upon demand disclose to the Trustees in writing such
information with respect to direct and indirect ownership of Shares or other
securities of the Trust or any Series of the Trust as the Trustees deem
necessary to comply with the provisions of the Internal Revenue Code of 1986, as
amended, or to comply with the requirements of any other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula. The Trust may also reduce the number of outstanding Shares
of the Trust or of any Series of the Trust pursuant to the provisions of Section
7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (ii)
during which trading on the New York Stock Exchange is restricted, (iii) during
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which an emergency exists as a result of which disposal by the Trust or a Series
thereof of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Trust or a Series thereof fairly to determine the
value of its net assets, or (iv) during any other period when the Commission may
for the protection of Shareholders of the Trust by order permit suspension of
the right of redemption or postponement of the date of payment or redemption;
provided that applicable rules and regulations of the Commission shall govern as
to whether the conditions prescribed in clauses (ii), (iii), or (iv) exist. Such
suspension shall take effect at such time as the Trust shall specify but not
later than the close of business on the business day next following the
declaration of suspension, and thereafter there shall be no right of redemption
or payment on redemption until the Trust shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which said stock exchange shall have reopened or the period specified in (ii) or
(iii) shall have expired (as to which in the absence of an official ruling by
the Commission, the determination of the Trust shall be conclusive). In the case
of a suspension of the right of redemption, a Shareholder may either withdraw
his request for redemption or receive payment based on the net asset value
existing after the termination of the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The net asset value of each outstanding
Share of the Trust or of each Series or Class thereof shall be determined on
such days and at such time or times as the Trustees may determine. The value of
the assets of the Trust or any Series thereof may be determined (i) by a pricing
service which utilizes electronic pricing techniques based on general
institutional trading, (ii) by appraisal of the securities owned by the Trust or
any Series of the Trust, (iii) in certain cases, at amortized cost, or (iv) by
such other method as shall be deemed to reflect the fair value thereof,
determined in good faith by or under the direction of the Trustees. From the
total value of said assets, there shall be deducted all indebtedness, interest,
taxes, payable or accrued, including estimated taxes on unrealized book profits,
expenses and management charges accrued to the appraisal date, net income
determined and declared as a distribution and all other items in the nature of
liabilities which shall be deemed appropriate, as incurred by or allocated to
the Trust or any Series or Class of the Trust. The resulting amount which shall
represent the total net assets of the Trust or Series or Class thereof shall be
divided by the number of Shares of the Trust or Series or Class thereof
outstanding at the time and the quotient so obtained shall be deemed to be the
net asset value of the Shares of the Trust or Series or Class thereof. The net
asset value of the Shares shall be determined at least once on each business
day, as of the close of regular trading on the New York Stock Exchange or as of
such other time or times as the Trustees shall determine. The power and duty to
make the daily calculations may be delegated by the Trustees to the Investment
Adviser, the Administrator, the Custodian, the Transfer Agent or such other
Person as the Trustees by resolution may determine. The Trustees may suspend the
daily determination of net asset value to the extent permitted by the 1940 Act.
It shall not be a violation of any provision of this Declaration if Shares are
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sold, redeemed or repurchased by the Trust at a price other than one based on
net asset value if the net asset value is affected by one or more errors
inadvertently made in the pricing of portfolio securities or in accruing income,
expenses or liabilities.
Section 7.2. Distributions to Shareholders. (a) The Trustees shall from
time to time distribute ratably among the Shareholders of the Trust or of a
Series or Class thereof such proportion of the net profits, surplus (including
paid-in surplus), capital, or assets of the Trust or such Series held by the
Trustees as they may deem proper. Such distributions may be made in cash or
property (including without limitation any type of obligations of the Trust or
Series or Class or any assets thereof), and the Trustees may distribute ratably
among the Shareholders of the Trust or Series or Class thereof additional Shares
of the Trust or Series or Class thereof issuable hereunder in such manner, at
such times, and on such terms as the Trustees may deem proper. Such
distributions may be among the Shareholders of the Trust or Series or Class
thereof at the time of declaring a distribution or among the Shareholders of the
Trust or Series or Class thereof at such other date or time or dates or times as
the Trustees shall determine. The Trustees may in their discretion determine
that, solely for the purposes of such distributions, Outstanding Shares shall
exclude Shares for which orders have been placed subsequent to a specified time
on the date the distribution is declared or on the next preceding day if the
distribution is declared as of a day on which Boston banks are not open for
business, all as described in the then effective Prospectus under the Securities
Act of 1933. The Trustees may always retain from the net profits such amount as
they may deem necessary to pay the debts or expenses of the Trust or a Series or
Class thereof or to meet obligations of the Trust or a Series or Class thereof,
or as they may deem desirable to use in the conduct of its affairs or to retain
for future requirements or extensions of the business. The Trustees may adopt
and offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or related plans as the Trustees shall deem appropriate. The Trustees may
in their discretion determine that an account administration fee or other
similar charge may be deducted directly from the income and other distributions
paid on Shares to a Shareholder's account in each Series or Class.
(b) Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books, the
above provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or a Series or Class thereof to avoid or reduce liability for
taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net income
of the Series and Classes thereof of the Trust shall be determined in such
manner as the Trustees shall provide by resolution. Expenses of the Trust or of
a Series or Class thereof, including the advisory or management fee, shall be
accrued each day. Each Class shall bear only expenses relating to its Shares and
an allocable share of Series expenses in accordance with such policies as may be
established by the Trustees from time to time and as are not inconsistent with
the provisions of this Declaration or of any applicable document filed by the
Trust with the Commission or of the Internal Revenue Code of 1986, as amended.
Such net income may be determined by or under the direction of the Trustees as
of the close of regular trading on the New York Stock Exchange on each day on
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which such market is open or as of such other time or times as the Trustees
shall determine, and, except as provided herein, all the net income of any
Series or Class, as so determined, may be declared as a dividend on the
Outstanding Shares of such Series or Class. If, for any reason, the net income
of any Series or Class determined at any time is a negative amount, or for any
other reason, the Trustees shall have the power with respect to such Series or
Class (i) to offset each Shareholder's pro rata share of such negative amount
from the accrued dividend account of such Shareholder, or (ii) to reduce the
number of Outstanding Shares of such Series or Class by reducing the number of
Shares in the account of such Shareholder by that number of full and fractional
Shares which represents the amount of such excess negative net income, or (iii)
to cause to be recorded on the books of the Trust an asset account in the amount
of such negative net income, which account may be reduced by the amount,
provided that the same shall thereupon become the property of the Trust with
respect to such Series or Class and shall not be paid to any Shareholder, of
dividends declared thereafter upon the Outstanding Shares of such Series or
Class on the day such negative net income is experienced, until such asset
account is reduced to zero. The Trustees shall have full discretion to determine
whether any cash or property received shall be treated as income or as principal
and whether any item of expense shall be charged to the income or the principal
account, and their determination made in good faith shall be conclusive upon the
Shareholders. In the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much if any of the value thereof shall be treated as income, the balance, if
any, to be treated as principal.
Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding any
of the foregoing provisions of this Article VII, but subject to Section 5.11
hereof, the Trustees may prescribe, in their absolute discretion, such other
bases and times for determining the per Share net asset value of the Shares of
the Trust or a Series or Class thereof or net income of the Trust or a Series or
Class thereof, or the declaration and payment of dividends and distributions as
they may deem necessary or desirable. Without limiting the generality of the
foregoing, the Trustees may establish several Series or Classes of Shares in
accordance with Section 5.11, and declare dividends thereon in accordance with
Section 5.11(d)(iv).
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A SERIES OR CLASS;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust shall continue without limitation of
time but subject to the provisions of this Article VIII.
Section 8.2. Termination of the Trust or a Series or a Class. The Trust
or any Series or Class thereof may be terminated by (i) the affirmative vote of
the holders of not less than two-thirds of the Outstanding Shares entitled to
vote and present in person or by proxy at any meeting of Shareholders of the
Trust or the appropriate Series or Class thereof, (ii) by an instrument or
instruments in writing without a meeting, consented to by the holders of
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two-thirds of the Outstanding Shares of the Trust or a Series or Class thereof;
provided, however, that, if such termination as described in clauses (i) and
(ii) is recommended by the Trustees, the vote or written consent of the holders
of a majority of the Outstanding Shares of the Trust or a Series or Class
thereof entitled to vote shall be sufficient authorization, or (iii) notice to
Shareholders by means of an instrument in writing signed by a majority of the
Trustees, stating that a majority of the Trustees has determined that the
continuation of the Trust or a Series or a Class thereof is not in the best
interest of such Series or a Class, the Trust or their respective shareholders
as a result of factors or events adversely affecting the ability of such Series
or a Class or the Trust to conduct its business and operations in an
economically viable manner. Such factors and events may include (but are not
limited to) the inability of a Series or Class or the Trust to maintain its
assets at an appropriate size, changes in laws or regulations governing the
Series or Class or the Trust or affecting assets of the type in which such
Series or Class or the Trust invests or economic developments or trends having a
significant adverse impact on the business or operations of such Series or Class
or the Trust. Upon the termination of the Trust or the Series or Class,
(i) The Trust, Series or Class shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust, Series or Class and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust, Series or
Class shall have been wound up, including the power to fulfill or
discharge the contracts of the Trust, Series or Class, collect its
assets, sell, convey, assign, exchange, transfer or otherwise dispose
of all or any part of the remaining Trust Property or Trust Property
allocated or belonging to such Series or Class to one or more persons
at public or private sale for consideration which may consist in whole
or in part of cash, securities or other property of any kind, discharge
or pay its liabilities, and do all other acts appropriate to liquidate
its business; provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or Trust Property allocated or belonging to such Series or
Class that requires Shareholder approval in accordance with Section 8.4
hereof shall receive the approval so required.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property or the remaining
property of the terminated Series or Class, in cash or in kind or
partly each, among the Shareholders of the Trust or the Series or Class
according to their respective rights.
(b) After termination of the Trust, Series or Class and distribution to
the Shareholders as herein provided, a majority of the Trustees shall execute
and lodge among the records of the Trust and file with the Office of the
Secretary of The Commonwealth of Massachusetts an instrument in writing setting
forth the fact of such termination, and the Trustees shall thereupon be
discharged from all further liabilities and duties with respect to the Trust or
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the terminated Series or Class, and the rights and interests of all Shareholders
of the Trust or the terminated Series or Class shall thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be amended
by a vote of the holders of a majority of the Shares outstanding and entitled to
vote or by any instrument in writing, without a meeting, signed by a majority of
the Trustees and consented to by the holders of a majority of the Shares
outstanding and entitled to vote.
(b) This Declaration may be amended by a vote of a majority of
Trustees, without approval or consent of the Shareholders, except that no
amendment can be made by the Trustees to impair any voting or other rights of
shareholders prescribed by Federal or state law. Without limiting the foregoing,
the Trustees may amend this Declaration without the approval or consent of
Shareholders (i) to change the name of the Trust or any Series, (ii) to add to
their duties or obligations or surrender any rights or powers granted to them
herein; (iii) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein or to make any
other provisions with respect to matters or questions arising under this
Declaration which will not be inconsistent with the provisions of this
Declaration; and (iv) to eliminate or modify any provision of this Declaration
which (a) incorporates, memorializes or sets forth an existing requirement
imposed by or under any Federal or state statute or any rule, regulation or
interpretation thereof or thereunder or (b) any rule, regulation, interpretation
or guideline of any Federal or state agency, now or hereafter in effect,
including without limitation, requirements set forth in the 1940 Act and the
rules and regulations thereunder (and interpretations thereof), to the extent
any change in applicable law liberalizes, eliminates or modifies any such
requirements, but the Trustees shall not be liable for failure to do so.
(c) The Trustees may also amend this Declaration without the approval
or consent of Shareholders if they deem it necessary to conform this Declaration
to the requirements of applicable Federal or state laws or regulations or the
requirements of the regulated investment company provisions of the Internal
Revenue Code of 1986, as amended, or if requested or required to do so by any
Federal agency or by a state Blue Sky commissioner or similar official, but the
Trustees shall not be liable for failing so to do.
(d) Nothing contained in this Declaration shall permit the amendment of
this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(e) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Trustees or by the
Shareholders as aforesaid or a copy of the Declaration, as amended, and executed
by a majority of the Trustees, shall be conclusive evidence of such amendment
when lodged among the records of the Trust.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or any
Series may merge or consolidate into any other corporation, association, trust
or other organization or may sell, lease or exchange all or substantially all of
the Trust Property or Trust Property allocated or belonging to such Series,
27
<PAGE>
including its good will, upon such terms and conditions and for such
consideration when and as authorized at any meeting of Shareholders called for
the purpose by the affirmative vote of the holders of two-thirds of the Shares
of the Trust or such Series outstanding and entitled to vote and present in
person or by proxy at a meeting of Shareholders, or by an instrument or
instruments in writing without a meeting, consented to by the holders of
two-thirds of the Shares of the Trust or such Series; provided, however, that,
if such merger, consolidation, sale, lease or exchange is recommended by the
Trustees, the vote or written consent of the holders of a majority of the
Outstanding Shares of the Trust or such Series entitled to vote shall be
sufficient authorization; and any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to Massachusetts law.
Section 8.5. Incorporation. The Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws of any
jurisdiction or any other trust, partnership, association or other organization
to take over all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series or to carry on any business in which the
Trust shall directly or indirectly have any interest, and to sell, convey and
transfer all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series to any such corporation, trust,
association or organization in exchange for the shares or securities thereof or
otherwise, and to lend money to, subscribe for the shares or securities of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust or such Series holds or is about to acquire
shares or any other interest. The Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring all or a portion of the Trust Property to such organization or
entities.
ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders of
each Series a written financial report of the transactions of the Trust and
Series thereof, including financial statements which shall at least annually be
certified by independent public accountants.
28
<PAGE>
ARTICLE X
MISCELLANEOUS
Section 10.1. Execution and Filing. This Declaration and any amendment
hereto shall be filed in the office of the Secretary of The Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its execution. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and filed with the Secretary of The Commonwealth of
Massachusetts. A restated Declaration shall, upon execution, be conclusive
evidence of all amendments contained therein and may thereafter be referred to
in lieu of the original Declaration and the various amendments thereto.
Section 10.2. Governing Law. This Declaration is executed by the
Trustees and delivered in The Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said Commonwealth.
Section 10.3. Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying (a) the number or identity of Trustees or Shareholders,
(b) the due authorization of the execution of any instrument or writing, (c) the
form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact
that the number of Trustees or Shareholders present at any meeting or executing
any written instrument satisfies the requirements of this Declaration, (e) the
form of any By-laws adopted by or the identity of any officers elected by the
Trustees, or (f) the existence of any fact or facts which in any manner relate
to the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their successors.
Section 10.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986 or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
29
<PAGE>
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the 8th of June, 1999.
/s/ Edward J. Boudreau, Jr.
Edward J. Boudreau, Jr.
as Trustee and not individually,
34 Swan Road
Winchester, Massachusetts 01890
/s/ Dennis S. Aronowitz
Dennis S. Aronowitz
as Trustee and not individually,
1216 Falls Boulevard
Fort Lauderdale, Florida 33327
/s/ Stephen L. Brown
Stephen L. Brown
as Trustee and not individually,
180 Beacon Street, Apt. 14G
Boston, MA 02116
/s/ Richard P. Chapman, Jr.
Richard P. Chapman, Jr.
as Trustee and not individually,
107 Upland Road
Brookline, Massachusetts 02146
/s/ William J. Cosgrove
William J. Cosgrove
as Trustee and not individually,
20 Buttonwood Place
Saddle River, New Jersey 07458
30
<PAGE>
--------------------------------
Douglas M. Costle
as Trustee and not individually,
RR2 Box 480
Woodstock, Vermont 05091
/s/ Leland O. Erdahl
Leland O. Erdahl
as Trustee and not individually,
8046 MacKenzie Court
Las Vegas, Nevada 89129
/s/ Richard A. Farrell
Richard A. Farrell
as Trustee and not individually,
50 Beacon Street
Marblehead, Massachusetts 01945
/s/Gail D. Fosler
Gail D. Fosler
as Trustee and not individually,
3054 So. Abingdon Street
Arlington, VA 22206
--------------------------------
William F. Glavin
as Trustee and not individually,
120 Paget Court
Vero Beach, Florida 32963
/s/ Anne C. Hodsdon
Anne C. Hodsdon
as Trustee and not individually,
135 Woodland Road
Hampton, New Hampshire 03842
31
<PAGE>
/s/ Dr. John A. Moore
Dr. John A. Moore
as Trustee and not individually,
P.O. Box 474
Wicomico, Virginia 22579
/s/ Patti McGill Peterson
Patti McGill Peterson
as Trustee and not individually,
P.O. Box 34
King Ferry, NY 13081
/s/John W. Pratt
John W. Pratt
as Trustee and not individually,
2 Gray Gardens East
Cambridge, Massachusetts 02138
/s/Richard S. Scipione
Richard S. Scipione
as Trustee and not individually,
4 Sentinel Road
Hingham, Massachusetts 02043
THE COMMONWEALTH OF MASSACHUSETTS
SUFFOLK COUNTY, MASSACHUSETTS
June 8, 1999
Then personally appeared the above-named persons, Edward J. Boudreau,
Jr., Dennis S. Aronowitz, Stephen L. Brown, Richard P. Chapman, Jr., William J.
Cosgrove, Leland O. Erdahl, Richard A. Farrell, Gail D. Fosler, Anne C. Hodsdon,
John A. Moore, Patti McGill Peterson, John W. Pratt, and Richard S. Scipione,
who acknowledged the foregoing instrument to be his free act and deed.
Before me,
/s/ Ann Marie White
Notary Public
My commission expires: 10/20/00
Selling Agreement
[JOHN HANCOCK LOGO]
John Hancock Funds, Inc.
Boston Massachusetts 02199-7603
<PAGE>
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Selling Agreement
John Hancock Funds, Inc. ("the Distributor" or "Distributor," "we" or "us")
is the principal distributor of the shares of beneficial interest (the
"securities") of each of the John Hancock Funds, (the "Funds"). Such Funds are
those listed on Schedule A hereto which may be amended or supplemented from time
to time by the Distributor to include additional Funds for which the Distributor
is the principal distributor. You represent that you are a member of the
National Association of Securities Dealers, Inc. (the "NASD"), and, accordingly,
we invite you to become a non-exclusive soliciting dealer to distribute the
securities of the Funds and you agree to solicit orders for the purchase of the
securities on the following terms. Securities are offered pursuant to each
Fund's prospectus and statement of additional information, as such prospectus
and statement of additional information may be amended from time to time. To the
extent that the prospectus or statement of additional information contains
provisions that are inconsistent with the terms of this Agreement, the terms of
the prospectus or statement of additional information shall be controlling.
Offerings
1. You agree to abide by the Conduct Rules of the NASD and to all other rules
and regulations that are now or may become applicable to transactions hereunder,
including state and federal rules plus John Hancock Funds administrative
procedures.
2. As principal distributor of the Funds, we shall have full authority to take
such action as we deem advisable in respect of all matters pertaining to the
distribution. This offer of shares of the Funds to you is made only in such
jurisdictions in which we may lawfully sell such shares of the Funds.
3. You shall not make any representation concerning the Funds or their
securities except those contained in the then-current prospectus or statement of
additional information for each Fund.
4. With the exception of listings of product offerings, you agree not to furnish
or cause to be furnished to any person or display or publish any information or
materials relating to any Fund (including, without limitation, promotional
materials, sales literature, advertisements, press releases, announcements,
posters, signs and other similar materials), except such information and
materials as may be furnished to you by the Distributor or the Fund. All other
materials must receive written approval by the Distributor before distribution
or display to the public. Use of all approved advertising and sales literature
materials is restricted to appropriate distribution channels.
5. You are not authorized to act as our agent. Nothing shall constitute you as a
syndicate, association, joint venture, partnership, unincorporated business or
other separate entity or otherwise partners with us, but you shall be liable for
your proportionate share of any tax, liability or expense based on any claim
arising from the sale of shares of the Funds under this Agreement. We shall not
be under any liability to you, except for obligations expressly assumed by us in
this Agreement and liabilities under Section 11(f) of the Securities Act of
1933, and no obligations on our part shall be implied or inferred.
6. Dealer Compliance/Suitability Standards - Certain mutual funds distributed by
the Distributor are being offered with two or more classes of shares of the same
investment portfolio ("Fund") - refer to each Fund prospectus for availability
and details. It is essential that the following minimum compliance/suitability
standards be adhered to in offering and selling shares of these Funds to
investors. All dealers offering shares of the Funds and their associated persons
agree to comply with these general suitability and compliance standards.
<PAGE>
Suitability
With two classes of shares of certain funds available to individual
investors, it is important that each investor purchases not only the fund that
best suits his or her investment objective but also the class of shares that
offers the most beneficial distribution financing method for the investor based
upon his or her particular situation and preferences. Fund share recommendations
and orders must be carefully reviewed by you and your registered representatives
in light of all the facts and circumstances, to ascertain that the class of
shares to be purchased by each investor is appropriate and suitable. These
recommendations should be based on several factors, including but not limited
to:
(a) the amount of money to be invested initially and over a period of time;
(b) the current level of sales loads imposed by the Fund;
(c) the period of time over which the client expects to retain the investment;
(d) the anticipated level of yield from fixed income funds;
(e) any other relevant circumstances such as the availability of reduced sales
charges under letters of intent and/or rights of accumulation.
There are instances when one distribution financing method may be more
appropriate than another. For example, shares subject to a front-end sales
charge may be more appropriate than shares subject to a contingent deferred
sales charge for large investors who qualify for a significant quantity discount
on the front-end sales charge. In addition, shares subject to a contingent
deferred sales charge may be more appropriate for investors whose orders would
not qualify for quantity discounts and who, therefore, may prefer to defer sales
charges, and also for investors who determine it to be advantageous to have all
of their funds invested without deduction of a front-end sales commission.
However, if it is anticipated that an investor may redeem his or her shares
within a short period of time, the investor may, depending on the amount of his
or her purchase, bear higher distribution expenses by purchasing shares subject
to a CDSC than if he or she had purchased shares subject to a front-end sales
charge.
Compliance
Your supervisory procedures should be adequate to assure that an
appropriate person reviews and approves transactions entered into pursuant to
this Selling Agreement for compliance with the foregoing standards. In certain
instances, it may be appropriate to discuss the purchase with the registered
representatives involved or to review the advantages and disadvantages of
selecting one class of shares over another with the client. The Distributor will
not accept orders for Class B shares in any Fund from you for accounts
maintained in street name. Trades for Class B shares will only be accepted in
the name of the shareholder.
7. Other Class Shares - Certain mutual funds distributed by the Distributor may
be offered with Class shares other than A, B and C. Refer to each Fund
prospectus for availability and details. Some Class shares are designed for
institutional investors and qualified benefit plans, including pension funds,
and are sold without a sales charge or 12b-1 fee. If a commission is paid to you
for transactions in Class shares other than A, B and C it will be paid by the
Distributor out of its own resources.
Sales
8. Orders for securities received by you from investors will be for the sale of
the securities at the public offering price, which will be the net asset value
per share as determined in the manner provided in the relevant Fund's
prospectus, as now in effect or as amended from time to time, after receipt by
us (or the relevant Fund's transfer agent) of the purchase application and
payment for the securities, plus the relevant sales charges set forth in the
relevant Fund's then- current prospectus (the "Public Offering Price"). The
procedures relating to the handling of orders shall be subject to our
instructions which we will forward from time to time to you. All orders are
subject to acceptance by us, and we reserve the right in our sole discretion to
reject any order.
In addition to the foregoing, you acknowledge and agree to the initial and
subsequent investment minimums, which may vary from year to year, as described
in the then-current prospectus for each Fund.
9. You agree to sell the securities only (a) to your customers at the public
offering price then in effect, or (b) back to the Funds at the currently quoted
net asset value. No sales may be made to other broker-dealers.
<PAGE>
10. The amount of sales charge to be reallowed to you (the "Reallowance") as a
percentage of the offering price is set forth in the then-current prospectus of
each Fund.
If a sales charge on the purchase is reduced in accordance with the
provisions of the relevant Fund's then-current prospectus pertaining to "Methods
of Obtaining Reduced Sales Charges," the Reallowance shall be reduced pro rata.
11. We shall pay a Reallowance subject to the provisions of this agreement as
set forth in Schedule B hereto on all purchases made by your customers pursuant
to orders accepted by us (a) where an order for the purchase of securities is
obtained by a registered representative in your employ and remitted to us
promptly by you, (b) where a subsequent investment is made to an account
established by a registered representative in your employ or (c) where a
subsequent investment is made to an account established by a broker/dealer other
than you and is accompanied by a signed request from the account shareholder
that your registered representative receive the Reallowance for that investment
and/or for subsequent investments made in such account. If for any reason, a
purchase transaction is reversed, you shall not be entitled to receive or retain
any part of the Reallowance on such purchase and shall pay to us on demand in
full the amount of the Reallowance received by you in connection with any such
purchase. We may withhold and retain from the amount of the Reallowance due you
a sum sufficient to discharge any amount due and payable by you to us.
12. Certain of the Funds have adopted a plan under Investment Company Act Rule
12b-1 ("Distribution Plan" as described in the prospectus). To the extent you
provide distribution and marketing services in the promotion of the sale of
shares of these Funds, including furnishing services and assistance to your
customers who invest in and own shares of such Funds and including, but not
limited to, answering routine inquiries regarding such Funds and assisting in
changing distribution options, account designations and addresses, you may be
entitled to receive compensation from us as set forth in Schedule C hereto. All
compensation, including 12b-1 fees, shall be payable to you only to the extent
that funds are received and in the possession of the Distributor.
13. We will advise you as to the jurisdictions in which we believe the shares
have been qualified for sale under the respective securities laws of such
jurisdictions, but we assume no responsibility or obligations as to your right
to sell the shares of the Funds in any state or jurisdiction.
14. Orders may be placed through:
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
1-800-338-4265
Settlement
15. Settlements for wire orders shall be made within three business days after
our acceptance of your order to purchase shares of the Funds. Certificates, when
requested, will be delivered to you upon payment in full of the sum due for the
sale of the shares of the Funds. If payment is not so received or made, we
reserve the right forthwith to cancel the sale, or, at our option, to liquidate
the shares of the Fund subject to such sale at the then prevailing net asset
value, in which latter case you will agree to be responsible for any loss
resulting to the Funds or to us from your failure to make payments as aforesaid.
Indemnification
16. The parties to this agreement hereby agree to indemnify and hold harmless
each other, their officers and directors, and any person who is or may be deemed
to be a controlling person of each other, from and against any losses, claims,
damages, liabilities or expenses (including reasonable fees of counsel), whether
joint or several, to which any such person or entity may become subject insofar
as such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) arise out of or are based upon (a) any untrue statement or alleged
untrue statement of material fact, or any omission or alleged omission to state
a material fact made or omitted by it herein, or (b) any willful misfeasance or
gross misconduct by it in the performance of its duties and obligations
hereunder.
<PAGE>
17. National Securities Clearing Corporation (NSCC) Indemnity - Shareholder and
House Accounts - In consideration of the Distributor and John Hancock Signature
Services ("JHSS") liquidating, exchanging and/or transferring unissued shares of
the Funds for your customers without the use of original or underlying
documentation supporting such instructions (e.g., a signed stock power or
signature guarantee), you hereby agree to indemnify the Distributor, Investor
Services and each respective Fund against any losses, including reasonable
attorney's fees, that may arise from such liquidation exchange and/or transfer
of unissued shares upon your direction. This indemnification shall apply only to
the liquidation, exchange and/or transfer of unissued shares in shareholder and
house accounts executed as wire orders transmitted via the NSCC's Fund/SERV
system. You represent and warrant to the Funds, the Distributor and Investor
Services that all such transactions shall be properly authorized by your
customers.
The indemnification in this Section 16 shall not apply to any losses
(including attorney's fees) caused by a failure of the Distributor, Investor
Services or a Fund to comply with any of your instructions governing any of the
above transactions, or any negligent act or omission of the Distributor,
Investor Services or a Fund, or any of their directors, officers, employees or
agents. All transactions shall be settled upon your confirmation through NSCC
transmission to Investor Services.
Miscellaneous
18. We will supply to you at our expense additional copies of the prospectus and
statement of additional information for each of the Funds and any printed
information supplemental to such material in reasonable quantities upon request.
19. Any notice to you shall be duly given if mailed to you at your address as
registered from time to time with the NASD.
20. Miscellaneous provisions, if any, are attached hereto and incorporated
herein by reference.
21. In the event your firm is appointed or selected by us to sell
insurance-related securities products, this agreement will be supplemented by
Schedule D, which will include the terms, including additional terms, and
conditions of the distribution by you of such products, and such Schedule is
hereby incorporated herein by reference and made a part of this Selling
Agreement.
In the case of any conflict between this Selling Agreement and Schedule D
with respect to insurance-related securities products, Schedule D shall
control.
22. We reserve the right to reject any order received by us from a broker-dealer
that does not have an existing selling agreement with us. It is your
responsibility to inform us of all clearing arrangements with broker-dealers
ordering our funds and to assist us in securing a selling agreement from them or
indemnify us for any errors or omissions in the solicitation or ordering of our
funds.
Termination
23. This agreement, which shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, may be terminated by any party hereto upon a
thirty (30) day written notice. This agreement may not be assigned except by
written consent of all the parties. Automatic termination of this agreement
occurs if the dealer: 1.) Files a bankruptcy petition; 2.) Is terminated as an
NASD member; 3.) Uses unapproved sales literature; 4.) Is subject to
deregistration by state.
Discretionary termination: Hancock reserves the right to terminate this
agreement at any time at its sole discretion upon thirty (30) days' notice.
Hancock may also suspend payment of commissions for reasonable cause with or
without notice.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
DATE: ______________________
SOLICITING DEALER PROFILE Firm CRD Number: ______________________
--------------------------------------------------
Name of Organization
By:__________________________________________________
Authorized Signature of Soliciting Dealer
---------------------------------------------------
Please Print or Type Name
---------------------------------------------------
Title
---------------------------------------------------
Print or Type Address
---------------------------------------------------
Telephone Number
Mutual Fund Coordinator:_____________________________________
In order to service you efficiently, please provide
the following information on your Mutual Funds
Operations Department:
Operations Manager:_______________________________________________
Order Room Manager:_______________________________________________
Operations Address:_______________________________________________
-----------------------------------------------
Telephone:______________________________ Fax:_______________________________
- --------------------------------------------------------------------------------
TO BE COMPLETED BY: TO BE COMPLETED BY:
JOHN HANCOCK FUNDS, INC. JOHN HANCOCK SIGNATURE
SERVICES, INC.
By:_____________________________________ By:_______________________________
________________________________________ _________________________________
Title Title
- --------------------------------------------------------------------------------
Pay Office Branch Number:____________________________________________
(If no pay office branch number is indicated, we will assume #001.)
DEALER NUMBER:___________________________________________________
(to be assigned by John Hancock Signature Services Corporation)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
John Hancock Funds, Inc.
[ ] SCHEDULE A [ ]
Dated January 1, 1998 to the
Selling Agreement Relating to Shares of
John Hancock Funds
<S> <C>
Growth Funds Tax-Free Income Funds
John Hancock Emerging Growth Fund John Hancock California Tax-Free Income Fund
John Hancock Financial Industries Fund John Hancock High Yield Tax-Free Fund
John Hancock Growth Fund John Hancock Massachusetts Tax-Free Income Fund
John Hancock Regional Bank Fund John Hancock New York Tax-Free Income Fund
John Hancock Special Equities Fund John Hancock Tax-Free Bond Fund
John Hancock Special Opportunities Fund
John Hancock Special Value Fund International/Global Funds
John Hancock European Equity Fund
Growth and Income Funds John Hancock Global Fund
John Hancock Growth and Income Fund John Hancock Global Health Sciences Fund
John Hancock Independence Equity Fund John Hancock Global Technology Fund
John Hancock Sovereign Balanced Fund John Hancock International Fund
John Hancock Sovereign Investors Fund John Hancock Pacific Basin Equities Fund
John Hancock Short-Term Strategic Income Fund
Income Funds John Hancock World Bond Fund
John Hancock Bond Fund
John Hancock Government Income Fund Money Market
John Hancock High Yield Bond Fund John Hancock Money Market Fund
John Hancock Intermediate Maturity Government Fund John Hancock U.S. Government Cash Reserve
John Hancock Sovereign U.S. Government Income Fund
John Hancock Strategic Income Fund
</TABLE>
From time to time John Hancock Funds, Inc., as principal distributor of the John
Hancock funds, will offer additional funds for sale. These funds will
automatically become part of this Agreement and will be subject to all its
provisions unless otherwise directed by John Hancock Funds, Inc.
<PAGE>
John Hancock Funds, Inc.
[ ] Schedule B [ ]
Dated May 1, 1998 to the
Selling Agreement Relating to Shares of
John Hancock Funds
Reallowance
I. The Reallowance paid to the selling Brokers for sales of John Hancock Funds
is set forth in each Fund's then-current prospectus. No commission will be paid
on sales of any John Hancock Fund that is without a sales charge. Purchases of
Class A shares of $1 million or more, or purchases into an account or accounts
whose aggregate value of fund shares is $1 million or more, will be made at net
asset value with no initial sales charge. On purchases of this type, John
Hancock Funds, Inc. may pay a commission as set forth in each Fund's
then-current prospectus. John Hancock Funds, Inc. will pay Brokers for sales of
Class B shares of the Funds a marketing fee as set forth in each Fund's
then-current prospectus.
II. If, at any time, the sales charges on any class of shares offered herein
exceed the maximum sales charges permitted by the NASD Conduct Rules, John
Hancock Funds reserves the right to amend, modify or curtail payment of any or
all compensation due on such shares immediately and without notice.
<PAGE>
John Hancock Funds, Inc.
[ ] Schedule C [ ]
Dated September 1, 1998 to the
Selling Agreement Relating to Shares of
John Hancock Funds
First Year Service Fees
Pursuant to the Distribution Plan applicable to each of the Funds listed in
Schedule A, John Hancock Funds, Inc. will advance to you a First Year Service
Fee related to the purchase of Class A shares (only if subject to sales charge)
or Class B shares of any of the Funds, as the case may be, sold by your firm.
This Service Fee will be compensation for your personal service and/or the
maintenance of shareholder accounts ("Customer Servicing") during the
twelve-month period immediately following the purchase of such shares, in the
amount not to exceed .25 of 1% of net assets invested in Class A shares or Class
B shares of the Fund, as the case may be, purchased by your customers.
Service Fee Subsequent to the First Year
Pursuant to the Distribution Plan applicable to each of the Funds listed in
Schedule A, the Distributor will pay you quarterly, in arrears, a Service Fee
commencing at the end of the twelve-month period immediately following the
purchase of Class A shares (only if subject to sales charge) or Class B shares,
as the case may be, sold by your firm, for Customer Servicing, in an amount not
to exceed .25 of 1% of the average daily net assets attributable to the Class A
shares or Class B shares of the Fund, as the case may be, purchased by your
customers, provided your firm has under management with the Funds combined
average daily net assets for the preceding quarter of no less than $1 million,
or an individual representative of your firm has under management with the Funds
combined average daily net assets for the preceding quarter of no less than
$250,000 (an "Eligible Firm").
Effective October 1, 1995 for Dealers that have entered into a Wrap Fee
Agreement with the Distributor, the following provisions shall apply with
respect to the payment of service fees:
Pursuant to the Distribution Plan applicable to each of the Funds listed in
Schedule A, the Distributor will pay you quarterly, in arrears, a Service Fee
commencing immediately following the purchase of Class A shares at net asset
value sold by your firm, for Customer Servicing, in an amount not to exceed .25
of 1% of the average daily net assets attributable to the Class A shares of the
Fund purchased by your customers, provided your firm has under management with
John Hancock Funds combined average daily net assets (in any class of shares of
funds listed on Schedule A plus assets in wrap (fee-based) accounts) for the
preceding quarter of no less than $1 million, or an individual representative of
your firm has under management with the Funds combined average daily net assets
for the preceding quarter of no less than $250,000 (an "Eligible Firm"). This
section is only applicable to firms which have executed the SUPPLEMENT TO THE
SELLING DEALER AGREEMENT specifically applicable to fee-based arrangements.
Retirement Multi-Fund Family Program
An initial and subsequent service fee will be paid to broker/dealers selling
outside funds in the John Hancock Funds, Inc. Retirement Multi-Fund Family
Program, according to the schedule outlined below.
Funds offered in the program and the service fees payable are subject to change
at the discretion of John Hancock Funds, Inc.
Initial Fee Payable Immediately*
o State Street Global Advisors
S&P 500 Index Fund (SSGA) .00%
o All Other Funds .50%
Subsequent Fee Payable After One Year
o State Street Global Advisors
S&P 500 Index Fund (SSGA) .00%
o All Other Funds .15%
* No initial fee is paid upon an exchange between any outside funds and the
Distributor.
MASTER CUSTODIAN AGREEMENT
between
JOHN HANCOCK MUTUAL FUNDS
and
INVESTORS BANK & TRUST COMPANY
Amended and Restated
March 9, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
1. Definitions.............................................................1-3
2. Employment of Custodian and Property to be held by it.....................3
3. The Custodian as a Foreign Custody Manager................................3
A. Definitions......................................................3-4
B. Delegation to the Custodian as Foreign Custody Manager.............4
C. Countries Covered..................................................4
D. Scope of Delegated Responsibilities..............................5-7
E. Standard of Care as Foreign Custody Manager of the Fund............7
F. Reporting Requirements.............................................7
G. Representations with respect to Rule 17f-5.........................7
H. Effective Date and Termination of the Custodian as Foreign.......7-8
Custody Manager
I. Withdrawal of Custodian as Foreign Custody Manager with............8
Respect to Designated Countries and with Respect to
Eligible Foreign Custodians
J. Guidelines for the Exercise of Delegated Authority and ..........8-9
Provision of Information Regarding Country Risk
K. Most Favored Client.............................................9-10
L. Direction as to Eligible Foreign Custodians.......................10
4. Duties of the Custodian with Respect toProperty of the Fund..............10
A. Safekeeping and Holding of Property...............................10
B. Delivery of Securities.........................................10-13
C. Registration of Securities........................................13
D. Bank Accounts..................................................13-14
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E. Payments for Shares of the Fund...................................14
F. Investment and Availability of Federal Funds......................14
G. Collections....................................................14-15
H. Payment of Fund Moneys.........................................15-16
I. Liability for Payment in Advance of Receipt of.................16-17
Securities Purchased
J. Payments for Repurchases of Redemptions of Shares of the Fund.....17
K. Appointment of Agents by the Custodian.........................17-18
L. Deposit of Fund Portfolio Securities in Securities Systems.....18-19
M. Deposit of Fund Commercial Paper in an Approved................19-22
Book-Entry System for Commercial Paper
N. Segregated Account................................................22
O. Ownership Certificates for Tax Purposes...........................22
P. Proxies...........................................................22
Q. Communications Relating to Fund Portfolio Securities...........22-23
R. Exercise of Rights; Tender Offers................................23
S. Depository Receipts............................................23-24
T. Interest Bearing Call or Time Deposits............................24
U. Options, Futures Contracts and Foreign Currency Transactions...24-25
V. Actions Permitted Without Express Authority.......................25
5. Duties of Bank with Respect to Books of Account and......................26
Calculations of Net Asset Value
6. Records and Miscellaneous Duties......................................26-27
7. Opinion of Fund`s Independent Public Accountants.........................27
ii
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8. Compensation and Expenses of Bank........................................27
9. Responsibility of Bank................................................27-28
10. Persons Having Access to Assets of the Fund...........................28-29
11. Effective Period, Termination and Amendment;..........................29-30
Successor Custodian
12. Interpretive and Additional Provisions...................................30
13. Certification as to Authorized Officers..................................30
14. Notices..................................................................30
15. Massachusetts Law to Apply; Limitations on Liability..................30-31
16. Adoption of the Agreement by the Fund....................................31
iii
<PAGE>
MASTER CUSTODIAN AGREEMENT
This Agreement is made as of December 15, 1992 as amended and restated
March 9, 1999 between each investment company advised by John Hancock Advisers,
Inc. which has adopted this Agreement in the manner provided herein and
Investors Bank & Trust Company (hereinafter called "Bank", "Custodian" and
"Agent"), a trust company established under the laws of Massachusetts with a
principal place of business in Boston, Massachusetts.
Whereas, each such investment company is registered under the Investment
Company Act of 1940 and has appointed the Bank to act as Custodian of its
property and to perform certain duties as its Agent, as more fully hereinafter
set forth; and
Whereas, the Bank is willing and able to act as each such investment
company's Custodian and Agent, subject to and in accordance with the provisions
hereof;
Now, therefore, in consideration of the premises and of the mutual
covenants and agreements herein contained, each such investment company and the
Bank agree as follows:
1. Definitions
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
(a) "Fund" shall mean the investment company which has adopted this
Agreement and is listed on Appendix A hereto. If the Fund is a Massachusetts
business trust or Maryland corporation, it may in the future establish and
designate other separate and distinct series of shares, each of which may be
called a "portfolio"; in such case, the term "Fund" shall also refer to each
such separate series or portfolio.
(b) "Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
(c) "The Depository Trust Company", a clearing agency registered with
the Securities and Exchange Commission under Section 17A of the Securities
Exchange Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
(d) "Authorized Officer", shall mean any of the following officers of
the Fund: The Chairman of the Board of Trustees, the President, a Vice
President, the Secretary, the Treasurer or Assistant Secretary or Assistant
Treasurer, or any other officer of the Fund duly authorized to sign by
appropriate resolution of the Board of Trustees of the Trust.
(e) "Participants Trust Company", a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities Exchange
Act of 1934 which acts as a securities depository and which has been
specifically approved as a securities depository for the Fund by the Board.
1
<PAGE>
(f) "Approved Clearing Agency" shall mean any other domestic clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934 which acts as a securities depository but
only if the Custodian has received a certified copy of a vote of the Board
approving such clearing agency as a securities depository for the Fund.
(g) "Federal Book-Entry System" shall mean the book-entry system
referred to in Rule 17f-4(b) under the Investment Company Act of 1940 for United
States and federal agency securities (i.e., as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry
regulations of federal agencies substantially in the form of Subpart O).
(h) "Approved Book-Entry System for Commercial Paper" shall mean a
system maintained by the Custodian or by a subcustodian employed pursuant to
Section 2 hereof for the holding of commercial paper in book-entry form but only
if the Custodian has received a certified copy of a vote of the Board approving
the participation by the Fund in such system.
(i) The Custodian shall be deemed to have received "proper instructions"
in respect of any of the matters referred to in this Agreement upon receipt of
written or facsimile instructions signed by such one or more person or persons
as the Board shall have from time to time authorized to give the particular
class of instructions in question. Electronic instructions for the purchase and
sale of securities which are transmitted by John Hancock Advisers, Inc. (the
"Adviser") to the Custodian shall be deemed to be proper instructions; the Fund
shall cause all such instructions to be confirmed in writing. Different persons
may be authorized to give instructions for different purposes. A certified copy
of a vote of the Board may be received and accepted by the Custodian as
conclusive evidence of the authority of any such person to act and may be
considered as in full force and effect until receipt of written notice to the
contrary. Such instructions may be general or specific in terms and, where
appropriate, may be standing instructions. Unless the vote delegating authority
to any person or persons to give a particular class of instructions specifically
requires that the approval of any person, persons or committee shall first have
been obtained before the Custodian may act on instructions of that class, the
Custodian shall be under no obligation to question the right of the person or
persons giving such instructions in so doing. Oral instructions will be
considered proper instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. The Fund authorizes
2
<PAGE>
the Custodian to tape record any and all telephonic or other oral instructions
given to the Custodian. "Proper instructions" may also include communications
effected directly between electromechanical or electronic devices provided that
the President and Treasurer of the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. In performing
its duties generally, and more particularly in connection with the purchase,
sale and exchange of securities made by or for the Fund, the Custodian may take
cognizance of the provisions of the governing documents and registration
statement of the Fund as the same may from time to time be in effect (and votes,
resolutions or proceedings of the shareholders or the Board), but, nevertheless,
except as otherwise expressly provided herein, the Custodian may assume unless
and until notified in writing to the contrary that so-called proper instructions
received by it are not in conflict with or in any way contrary to any provisions
of such governing documents and registration statement, or votes, resolutions or
proceedings of the shareholders or the Board.
2. Employment of Custodian and Property to be Held by It
The Fund hereby appoints and employs the Bank as its Custodian and Agent
in accordance with and subject to the provisions hereof, and the Bank hereby
accepts such appointment and employment. The Fund agrees to deliver to the
Custodian all securities, participation interests, cash and other assets owned
by it, and all payments of income, payments of principal and capital
distributions and adjustments received by it with respect to all securities and
participation interests owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares ("Shares") of the
Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held by the Fund and not delivered by
the Fund to the Custodian. The Fund will also deliver to the Bank from time to
time copies of its currently effective charter (or declaration of trust or
partnership agreement, as the case may be), by-laws, prospectus, statement of
additional information and distribution agreement with its principal
underwriter, together with such resolutions, votes and other proceedings of the
Fund as may be necessary for or convenient to the Bank in the performance of its
duties hereunder.
The Custodian may from time to time employ one or more subcustodians to
perform such acts and services upon such terms and conditions as shall be
approved from time to time by the Board. Any such subcustodian so employed by
the Custodian shall be deemed to be the agent of the Custodian, and the
Custodian shall remain primarily responsible for the securities, participation
interests, moneys and other property of the Fund held by such subcustodian. For
the purposes of this Agreement, any property of the Fund held by any such
subcustodian (domestic or foreign) shall be deemed to be held by the Custodian
under the terms of this Agreement.
3. The Custodian as a Foreign Custody Manager
A. Definitions Capitalized terms in this Article 3 shall have the
following meanings:
(a) "Country risk" means all factors reasonably related to
the systemic risk of holding Foreign Assets in a
particular country including, but not limited to, a
country's political environment; economic and financial
infrastructure (including financial institutions such as
any Mandatory Securities Depositories operating in the
country); prevailing custody and settlement practices; and
laws and regulations applicable to the safekeeping and
recovery of Foreign Assets held in custody in that
country.
3
<PAGE>
(b) "Eligible Foreign Custodian" has the meaning set forth in section
(a)(1) of Rule 17f-5 and also includes a U.S. Bank.
(c) "Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in these investments.
(d) "Foreign Custody Manager" has the meaning set forth in section (a)(2)
of Rule 17f-5; it is a Fund's Board of Directors or any person serving as
the Board's delegate under sections (b) or (d) of Rule 17f-5.
(e) "Mandatory Securities Depository" means a Securities Depository the use
of which is mandatory (i) by law or regulation; (ii) because securities
cannot be withdrawn from the depository; (iii) because maintaining
securities outside the Securities Depository would impair the liquidity of
the securities because settlement within the depository is mandatory and
the period of time required to deposit securities is longer than the
settlement period or where particular classes of transactions, such as
large trades or turn-around trades, are not available if the securities are
held in physical form; or (iv) because maintaining securities outside of
the Securities Depository is not consistent with prevailing custodial or
market practices generally accepted by institutional investors.
(f) "Securities Depository" has the same meaning set forth in section
(a)(6) of Rule 17f-5: it is a system for the central handling of securities
where all securities are of a particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred
or pledged by bookkeeping entry without physical delivery of the
securities.
(g) "U.S. Bank" means a bank which qualifies to serve as a custodian of
assets of investment companies under ss.17(f) of the Investment Company Act
of 1940, as amended.
B. Delegation to the Custodian as Foreign Custody Manager Each Fund,
by resolution adopted by its Board, hereby appoints the Custodian
as the Foreign Custody Manager of the Fund and delegates to the
Custodian, the responsibilities set forth in this Article 3 with
respect to Foreign Assets held outside the United States, and the
Custodian hereby accepts this delegation.
C. Countries Covered The Foreign Custody Manager shall be responsible
for performing the delegated responsibilities defined below only
with respect to the countries listed on Schedule A, which may be
amended from time to time by the Foreign Custody Manager.
Mandatory Securities Depositories are listed on Schedule B, which
may be amended from time to time by the Foreign Custody Manager.
Schedules A and B may also be amended in accordance with
subsection F of Article 3.
4
<PAGE>
D. Scope of Delegated Responsibilities
1) Selection of Eligible Foreign Custodians Subject to the
provisions of this Article 3 and Rule 17f-5 (and any other
applicable law), the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of an Eligible
Foreign Custodian selected by the Foreign Custody Manager in
each country listed on Schedule A, as amended from time to
time. In addition, the Foreign Custody Manager shall provide
the Fund with all requisite forms and documentation to open
an account in any country listed on Schedule A as requested
by any Authorized Officer and shall assist the Fund with the
filing and processing of these forms and documents.
Execution of this amended and restated Agreement by the Fund
shall be deemed to be a Proper Instruction to open an
account, or to place or maintain Foreign Assets in each
country listed on Schedule A.
In performing its delegated responsibilities as Foreign
Custody Manager to place or maintain Foreign Assets with an
Eligible Foreign Custodian, the Foreign Custody Manager
shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will
be held by that Eligible Foreign Custodian, after
considering all factors relevant to the safekeeping of those
assets. These factors include, without limitation:
(i) the Eligible Foreign Custodian's practices, procedures
and internal controls, including but not limited to, the
physical protections available for certificated securities
(if applicable), its methods of keeping custodial records
and its security and data protection practices;
(ii) whether the Eligible Foreign Custodian has the
requisite financial strength to provide reasonable care for
Foreign Assets;
(iii) the Eligible Foreign Custodian's general reputation
and standing and, in the case of any Securities Depository,
the Securities Depository's operating history and the number
of participants; and
(iv) whether the Fund will have jurisdiction over and be
able to enforce judgments against the Eligible Foreign
Custodian, such as by virtue of the existence of any offices
of the Eligible Foreign Custodian in the United States or
the Eligible Foreign Custodian's consent to service of
process in the United States.
2) Contracts With Eligible Foreign Custodians For each Eligible
Foreign Custodian selected by the Foreign Custody Manager,
the Foreign Custody Manager shall (or, in the case of a
Securities Depository which is not a Mandatory Securities
Depository, may under the rules or established practices or
procedures of the Securities Depository) enter into a
written
5
<PAGE>
contract governing the Fund's foreign custody
arrangements with the Eligible Foreign Custodian. The
Foreign Custody Manager shall determine that each contract
will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards
specified in paragraph 1 of subsection D of Article 3 of
this Agreement. Each contract shall include provisions that
provide:
(i) for indemnification or insurance arrangements (or any
combination of the foregoing) so that the Fund will be
adequately protected against the risk of loss of the
Foreign Assets held in accordance with the contract;
(ii) that the Foreign Assets will not be subject to any
right, security interest, lien or claim of any kind in
favor of the Eligible Foreign Custodian or its creditors
except a claim of payment for their safe custody or
administration or, in the case of cash deposits, liens or
rights in favor of creditors of the Eligible Foreign
Custodian arising under bankruptcy, insolvency or similar
laws;
(iii) that beneficial ownership of the Foreign Assets will
be freely transferable without the payment of money or
value other than for safe custody or administration;
(iv) that adequate records will be maintained identifying
the Foreign Assets as belonging to the Fund or as being
held by a third party for the benefit of the Fund;
(v) that the Fund's independent public accountants will be
given access to those records or confirmation of the
contents of those records; and
(vi) that the Fund will receive periodic reports with
respect to the safekeeping of the Foreign Assets,
including, but not limited to, notification of any
transfer of the Foreign Assets to or from the Fund's
account or a third party account containing the Foreign
Assets held for the benefit of the Fund, or, in lieu of
any or all of the provisions set forth in (i) through (vi)
above, such other provisions that the Foreign Custody
Manager determines will provide, in their entirety, the
same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (i) through
(vi) above in their entirety.
3) Monitoring In each case in which the Foreign Custody
Manager maintains Foreign Assets with an Eligible Foreign
Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to
monitor at reasonable intervals the initial and continued
appropriateness of (i) maintaining the Foreign Assets with
the Eligible Foreign Custodian and (ii) the contract
governing the custody arrangements established by the
Foreign Custody Manager with the Eligible Foreign
Custodian. The Foreign Custody Manager shall consider all
factors and criteria set forth in subparagraphs 1 and 2 of
subsection D of Article 3 of this Agreement.
6
<PAGE>
E. Standard of Care as Foreign Custody Manager of the Fund In
performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and
diligence as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
Investment Company Act of 1940, as amended, would exercise. The
Foreign Custody Manager agrees to notify immediately the Adviser
and the Board if, at any time, the Foreign Custody Manager
believes it cannot perform, in accordance with the foregoing
standard of care, its duties hereunder generally or with respect
to any country specified in Schedule A.
F. Reporting Requirements The Foreign Custody Manager shall list on
Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the Fund's assets. The Foreign Custody
Manager shall report the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of the Foreign Assets
with another Eligible Foreign Custodian by providing to the
Adviser an amended Schedule A promptly. The Foreign Custody
Manager shall make written reports notifying the Adviser and the
Board of any other material change in the foreign custody
arrangements of the Fund described in this Article 3. Amended
Schedules A or B and material change reports shall be provided to
the Board quarterly, provided that, if the Foreign Custody Manager
or the Adviser determines that any matter should be reported
sooner, the Foreign Custody Manager shall promptly, following the
occurrence of the event, direct the report to the Fund's Secretary
for forwarding to the Board. At least annually, the Foreign
Custody Manager shall provide the Adviser and the Board a
written statement enabling the Board to determine that it is
reasonable to rely on the Foreign Custody Manager to perform its
delegated duties under this Article 3 and that the foreign custody
arrangements delegated to the Foreign Custody Manager continue to
meet the requirements of Rule 17f-5 under the Investment Company
Act of 1940, as amended. The Foreign Custody Manager will also
provide monthly reports on each Eligible Foreign Custodian listing
all holdings and current market values.
G. Representations with respect to Rule 17f-5 The Foreign Custody
Manager represents to the Fund that it is a U.S. Bank as defined
in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined
that it is reasonable for the Board to rely on the Custodian to
perform the responsibilities delegated pursuant to this Article as
the Foreign Custody Manager of the Fund.
H. Effective Date and Termination of the Custodian as Foreign Custody
Manager The Board's delegation to the Custodian as Foreign Custody
Manager of the Fund shall be effective as of the date of execution
of this amended and restated Agreement and shall remain in effect
until terminated at any time, without penalty, by written notice
from the terminating party to the non-terminating party.
Termination will become effective sixty days after receipt by the
non-terminating party of the notice.
7
<PAGE>
I. Withdrawal of Custodian as Foreign Custody Manager with respect to
Designated Countries and with respect to Eligible Foreign
Custodians Following the receipt of Proper Instructions directing
the Foreign Custody Manager to close the account of the Fund with
the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country and to remove that country from
Schedule A, the delegation by the Board to the Custodian as
Foreign Custody Manager for that country shall be deemed to have
been withdrawn with respect to that country and the Custodian
shall cease to be the Foreign Custody Manager of the Fund with
respect to that country after settlement of all pending trades.
The Foreign Custody Manager may withdraw its acceptance of
delegated responsibilities with respect to a country listed on
Schedule A upon written notice to the Fund in accordance with
subsection F. Sixty days (or other period agreed to by the parties
in writing) after receipt of any notice by the Fund, the Custodian
shall have no further responsibility as Foreign Custody Manager to
the Fund with respect to that country.
In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has
selected are no longer appropriate because the applicable Eligible
Foreign Custodian is no longer able to provide reasonable care for
Foreign Assets held in the country, or an arrangement no longer
meets the requirements of Rule 17f-5, the Foreign Custody Manager
shall notify the Adviser, the Board and the Fund in accordance
with subsection F hereunder. If the Adviser determines that
withdrawal is in the best interest of the Fund, the Foreign
Custody Manager shall withdraw all Foreign Assets from the
Eligible Foreign Custodian, as soon as reasonably practicable, and
shall provide alternative safe keeping acceptable to the Foreign
Custody Manager. If the Adviser determines that it is in the best
interest of the Fund to withdraw all Foreign Assets and this
withdrawal would require liquidation of any Foreign Assets or
would materially and adversely impair the liquidity, value or
other investment characteristic of any Foreign Assets, the Foreign
Custody Manager shall immediately provide information regarding
the particular circumstances to the Adviser and to the Board and
shall act in accordance with instructions received from an
Authorized Officer, with respect to the liquidation or other
withdrawal.
J. Guidelines for the Exercise of Delegated Authority and Provision
of Information Regarding Country Risk Nothing in this Article 3
shall require the Foreign Custody Manager to consider Country Risk
as part of its delegated responsibilities under subsection D of
Article 3. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be responsible for, or
liable for any loss in connection with the placement of Foreign
Assets with or withdrawal of Foreign Assets from a Mandatory
Securities Depository nor be delegated any responsibilities under
this Article 3 with respect to Mandatory Securities Depositories
other than those set forth below.
8
<PAGE>
With respect to the countries listed in Schedule A, or added
thereto, the Foreign Custody Manager agrees to provide annually to
the Board and the Adviser, information relating to the Country
Risks of holding Foreign Assets in such countries, including but
not limited to, the Mandatory Securities Depositories, if any,
operating in the country. In addition, the Foreign Custody Manager
shall use reasonable care in the gathering of this information and
with regard to, among other things, the completeness and accuracy
of this information. The information furnished annually by the
Foreign Custody Manager to the Board should include but not be
limited to the following, if available:
(i) Legal Opinion regarding whether applicable foreign law
would restrict the access of the Fund's independent public
accountants to the books and records of the foreign
custodian, whether applicable foreign law would restrict
the Fund's ability to recover its assets in the event of
bankruptcy of the foreign custodian, whether applicable
foreign law would restrict the Fund's ability to recover
assets lost while under the foreign custodian's control,
the likelihood of expropriation, nationalization, freezes
or confiscation of the Fund's assets and whether there are
reasonably foreseeable difficulties in converting the
Fund's cash into U.S. dollars, or such other form of Legal
Opinion as is customary in association with Rule 17f-5
from time to time,
(ii) audit report of the Foreign Custody Manager,
(iii) copy of balance sheet from annual report of the
custodian,
(iv) summary of Central Depository Information,
(v) country profile materials containing market practice
for: delivery versus payment, settlement method, currency
restrictions, buy-in practice, Foreign ownership limits
and unique market arrangements,
(vi) The Foreign Custody Manager shall also provide such
other information as may be reasonably available relating
to Mandatory Securities Depositories, and, in accordance
with applicable requirements promulgated by the SEC from
time to time, to the criteria as set forth on Appendix B
hereto, as such Appendix may be revised by the parties
hereto from time to time; and,
(vii) such other materials as the Board may reasonably
request from time to time, including copies of contracts
with the subcustodians.
K. Most Favored Client If at any time the Foreign Custody Manager
shall be a party to an agreement, to serve as a Foreign Custody
Manager to an investment company, that provides for either (a) a
standard of care with respect to the selection of Eligible
Foreign Custodians in any jurisdiction higher than that set forth
in paragraph 1 of subsection D of Article 3 of this Agreement or
(b) a standard of care with respect to the exercise of the Foreign
Custody Manager's duties other than that set forth in subsection F
of Article 3 of this Agreement, the Foreign Custody Manager
9
<PAGE>
agrees to notify the Fund of this fact and to negotiate in good
faith the applicable standard of care hereunder to the standard
specified in the other agreement. In the event that the Foreign
Custody Manager shall in the future offer review or information
services with respect to Mandatory Securities Depositories in
addition to any services provided hereunder, the Foreign Custody
Manager agrees that it shall notify the Fund of this fact and
shall offer these services to the Fund.
L. Direction as to Eligible Foreign Custodians Notwithstanding
Article 3 of this Agreement, the Fund or the Adviser may direct
the Custodian to place and maintain Foreign Assets with a
particular Eligible Foreign Custodian acceptable to the Foreign
Custody Manager. In such event, the Custodian shall be entitled to
rely on any instruction as a Proper Instruction and may limit its
duties under this Article 3 of the Agreement with respect to such
arrangements by describing any limitations in writing with respect
to each instance.
4. Duties of the Custodian with Respect to Property of the Fund
A. Safekeeping and Holding of Property The Custodian shall keep
safely all property of the Fund and on behalf of the Fund shall
from time to time receive delivery of Fund property for
safekeeping. The Custodian shall hold, earmark and segregate on
its books and records for the account of the Fund all property of
the Fund, including all securities, participation interests and
other assets of the Fund (1) physically held by the Custodian,
(2) held by any subcustodian referred to in Section 2 hereof or by
any agent referred to in Paragraph K hereof, (3) held by or
maintained in The Depository Trust Company or in Participants
Trust Company or in an Approved Clearing Agency or in the Federal
Book-Entry System or in an Approved Foreign Securities Depository,
each of which from time to time is referred to herein as a
"Securities System", and (4) held by the Custodian or by any
subcustodian referred to in Section 2 hereof and maintained in any
Approved Book-Entry System for Commercial Paper.
B. Delivery of Securities The Custodian shall release and deliver
securities or participation interests owned by the Fund held (or
deemed to be held) by the Custodian or maintained in a Securities
System account or in an Approved Book-Entry System for Commercial
Paper account only upon receipt of proper instructions, which may
be continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities or participation interests
for the account of the Fund, but only against receipt of
payment therefor; if delivery is made in Boston or New
York City, payment therefor shall be made in accordance
with generally accepted clearing house procedures or by
use of Federal Reserve Wire System procedures; if delivery
is made elsewhere payment therefor shall be in accordance
with the then current "street delivery" custom or in
accordance with such procedures
10
<PAGE>
agreed to in writing from time to time by the parties
hereto; if the sale is effected through a Securities
System, delivery and payment therefor shall be made in
accordance with the provisions of Paragraph L hereof; if
the sale of commercial paper is to be effected through an
Approved Book-Entry System for Commercial Paper,
delivery and payment therefor shall be made in accordance
with the provisions of Paragraph M hereof; if the
securities are to be sold outside the United States,
delivery may be made in accordance with procedures
agreed to in writing from time to time by the parties
hereto; for the purposes of this subparagraph, the
term "sale" shall include the disposition of a portfolio
security (i) upon the exercise of an option written by the
Fund and (ii) upon the failure by the Fund to make a
successful bid with respect to a portfolio security, the
continued holding of which is contingent upon the making
of such a bid;
2) Upon the receipt of payment in connection with any
repurchase agreement or reverse repurchase agreement
relating to such securities and entered into by the Fund;
3) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
4) To the issuer thereof or its agent when such securities or
participation interests are called, redeemed, retired or
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
5) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Paragraph K hereof or into the name
or nominee name of any subcustodian employed pursuant to
Section 2 hereof; or for exchange for a different number
of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities or
participation interests are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
6) To the broker selling the same for examination in
accordance with the "street delivery" custom; provided
that the Custodian shall adopt such procedures as the Fund
from time to time shall approve to ensure their prompt
return to the Custodian by the broker in the event the
broker elects not to accept them;
11
<PAGE>
7) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion of
such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof;
8) In the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such
warrants, rights or similar securities, or the surrender
of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian or any subcustodian employed pursuant to Section
2 hereof;
9) For delivery in connection with any loans of securities
made by the Fund (such loans to be made pursuant to the
terms of the Fund's current registration statement), but
only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities.
10) For delivery as security in connection with any borrowings
by the Fund requiring a pledge or hypothecation of assets
by the Fund (if then permitted under circumstances
described in the current registration statement of the
Fund), provided, that the securities shall be released
only upon payment to the Custodian of the monies borrowed,
except that in cases where additional collateral is
required to secure a borrowing already made, further
securities may be released for that purpose; upon receipt
of proper instructions, the Custodian may pay any such
loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
11) When required for delivery in connection with any
redemption or repurchase of Shares of the Fund in
accordance with the provisions of Paragraph J hereof;
12) For delivery in accordance with the provisions of any
agreement between the Custodian (or a subcustodian
employed pursuant to Section 2 hereof) and a broker-dealer
registered under the Securities Exchange Act of 1934 and,
if necessary, the Fund, relating to compliance with the
rules of The Options Clearing Corporation or of any
registered national securities exchange, or of any similar
organization or organizations, regarding deposit or escrow
or other arrangements in connection with options
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian (or a subcustodian
employed pursuant to Section 2 hereof), and a futures
commission merchant, relating to compliance with the rules
of the Commodity Futures Trading
12
<PAGE>
Commission and/or of any contract market or commodities
exchange or similar organization, regarding futures
margin account deposits or payments in connection with
futures transactions by the Fund;
14) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose
to be proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
C. Registration of Securities Securities held by the Custodian (other
than bearer securities) for the account of the Fund shall be
registered in the name of the Fund or in the name of any nominee
of the Fund or of any nominee of the Custodian, or in the name or
nominee name of any agent appointed pursuant to Paragraph K
hereof, or in the name or nominee name of any subcustodian
employed pursuant to Section 2 hereof, or in the name or nominee
name of The Depository Trust Company or Participants Trust Company
or Approved Clearing Agency or Federal Book-Entry System or
Approved Book-Entry System for Commercial Paper; provided, that
securities are held in an account of the Custodian or of such
agent or of such subcustodian containing only assets of the Fund
or only assets held by the Custodian or such agent or such
subcustodian as a custodian or subcustodian or in a fiduciary
capacity for customers. All certificates for securities accepted
by the Custodian or any such agent or subcustodian on behalf of
the Fund shall be in "street" or other good delivery form or shall
be returned to the selling broker or dealer who shall be advised
of the reason thereof.
D. Bank Accounts The Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to
draft or order by the Custodian acting in pursuant to the terms
of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or
for the account of the Fund other than cash maintained by the Fund
in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as the Custodian may in its
discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each
such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved in writing by two
officers of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be subject to
withdrawal only by the Custodian in that capacity.
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<PAGE>
The Custodian may, on behalf of any Fund, open and cause to be
maintained outside the United States a bank account with (a) an
Eligible Foreign Custodian (as defined in Article 3) or (b) any
person with whom property of the Fund may be placed and maintained
outside of the United States under (i) ss.17(f) or 26(a) of the
1940 Act, without regard to Rule 17f-5 or (ii) an order of the
U.S. Securities and Exchange Commission (a "Permissible Foreign
Custodian"). Such account(s) shall be subject only to draft or
order by the Custodian or Eligible Foreign Custodian or
Permissible Foreign Custodian acting pursuant to the terms of this
Agreement to hold cash received by or from or for the account of
the Fund.
E. Payment for Shares of the Fund The Custodian shall make
appropriate arrangements with the Transfer Agent and the principal
underwriter of the Fund to enable the Custodian to make certain it
promptly receives the cash or other consideration due to the Fund
for such new or treasury Shares as may be issued or sold from time
to time by the Fund, in accordance with the governing documents
and offering prospectus and statement of additional information of
the Fund. The Custodian will provide prompt notification to the
Fund of any receipt by it of payments for Shares of the Fund.
F. Investment and Availability of Federal Funds Upon agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties, invest in
such securities and instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and the
Fund.
G. Collections The Custodian shall promptly collect all income and
other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall promptly
collect all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or agent thereof and shall
credit such income, as collected, to the Fund's custodian account.
The Custodian shall do all things necessary and proper in connection with such
prompt collections and, without limiting the generality of the foregoing, the
Custodian shall
1) Present for payment all coupons and other income items
requiring presentations;
2) Present for payment all securities which may mature or be
called, redeemed, retired or otherwise become payable;
3) Endorse and deposit for collection, in the name of the
Fund, checks, drafts or other negotiable instruments;
14
<PAGE>
4) Credit income from securities maintained in a Securities
System or in an Approved Book-Entry System for Commercial
Paper at the time funds become available to the Custodian;
in the case of securities maintained in The Depository
Trust Company funds shall be deemed available to the Fund
not later than the opening of business on the first
business day after receipt of such funds by the Custodian.
The Custodian shall notify the Fund as soon as reasonably practicable whenever
income due on any security is not promptly collected. In any case in which the
Custodian does not receive any due and unpaid income after it has made demand
for the same, it shall immediately so notify the Fund in writing, enclosing
copies of any demand letter, any written response thereto, and memoranda of all
oral responses thereto and to telephonic demands, and await instructions from
the Fund; the Custodian shall in no case have any liability for any nonpayment
of such income provided the Custodian meets the standard of care set forth in
Section 8 hereof. The Custodian shall not be obligated to take legal action for
collection unless and until reasonably indemnified to its satisfaction.
The Custodian shall also receive and collect all stock dividends, rights and
other items of like nature, and deal with the same pursuant to proper
instructions relative thereto.
H. Payment of Fund Moneys Upon receipt of proper instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
1) Upon the purchase of securities, participation interests,
options, futures contracts, forward contracts and options
on futures contracts purchased for the account of the Fund
but only (a) against the receipt of
(i) such securities registered as provided in
Paragraph C hereof or in proper form for transfer
or
(ii) detailed instructions signed by an officer of the
Fund regarding the participation interests to be
purchased or
(iii) written confirmation of the purchase by the Fund
of the options, futures contracts, forward
contracts or options on futures contracts
by the Custodian (or by a subcustodian employed pursuant
to Section 2 hereof or by a clearing corporation of a
national securities exchange of which the Custodian is a
member or by any bank, banking institution or trust
company doing business in the United States or abroad
which is qualified under the Investment Company Act of
1940 to act as a custodian and which has been designated
by the Custodian as its agent for this purpose or by the
agent specifically designated in such instructions as
representing the purchasers of a new issue of privately
placed securities); (b) in the case of a purchase effected
through a Securities System, upon receipt of the
15
<PAGE>
securities by the Securities System in accordance with the
conditions set forth in Paragraph L hereof; (c) in the
case of a purchase of commercial paper effected through an
Approved Book-Entry System for Commercial Paper, upon
receipt of the paper by the Custodian or subcustodian in
accordance with the conditions set forth in Paragraph M
hereof; (d) in the case of repurchase agreements entered
into between the Fund and another bank or a broker-dealer,
against receipt by the Custodian of the securities
underlying the repurchase agreement either in certificate
form or through an entry crediting the Custodian's
segregated, non-proprietary account at the Federal Reserve
Bank of Boston with such securities along with written
evidence of the agreement by the bank or broker-dealer to
repurchase such securities from the Fund; or (e) with
respect to securities purchased outside of the United
States, in accordance with written procedures agreed to
from time to time in writing by the parties hereto;
2) When required in connection with the conversion, exchange
or surrender of securities owned by the Fund as set forth
in Paragraph B hereof;
3) When required for the redemption or repurchase of Shares
of the Fund in accordance with the provisions of Paragraph
J hereof;
4) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: advisory fees,
distribution plan payments, interest, taxes, management
compensation and expenses, accounting, transfer agent and
legal fees, and other operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends or other distributions to
holders of Shares declared or authorized by the Board; and
6) For any other proper corporate purpose, but only upon
receipt of, in addition to proper instructions, a
certified copy of a vote of the Board, specifying the
amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person or
persons to whom such payment is to be made.
I. Liability for Payment in Advance of Receipt of Securities
Purchased In any and every case where payment for purchase of
securities for the account of the Fund is made by the Custodian in
advance of receipt of the securities purchased in the absence of
specific written instructions signed by two officers of the Fund
to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the
securities had been received by the Custodian; except that in the
case of a repurchase agreement entered into by the Fund with a
bank which is a member of the Federal Reserve System, the
Custodian may transfer funds
16
<PAGE>
to the account of such bank prior to the receipt of (i) the
securities in certificate form subject to such repurchase
agreement or (ii) written evidence that the securities subject to
such repurchase agreement have been transferred by book-entry into
a segregated non-proprietary account of the Custodian maintained
with the Federal Reserve Bank of Boston or (iii) the safekeeping
receipt, provided that such securities have in fact been so
transferred by book-entry and the written repurchase agreement is
received by the Custodian in due course. With respect to
securities and funds held by a subcustodian, either directly or
indirectly (including by a Securities Depository or clearing
corporation), notwithstanding any provisions of this Agreement to
the contrary, payment for securities purchased and delivery of
securities sold may be made prior to receipt of securities or
payment respectively, and securities or payment may be received in
a form in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally
accepted trade practice in the applicable local market, (d) the
terms and characteristics of the particular investment, or (e) the
terms of instructions.
J. Payments for Repurchases or Redemptions of Shares of the Fund From
such funds as may be available for the purpose, but subject to any
applicable votes of the Board and the current redemption and
repurchase procedures of the Fund, the Custodian shall, upon
receipt of written instructions from the Fund or from the Fund's
transfer agent or from the principal underwriter, make funds
and/or portfolio securities available for payment to holders of
Shares who have caused their Shares to be redeemed or repurchased
by the Fund or for the Fund's account by its transfer agent or
principal underwriter.
The Custodian may maintain a special checking account upon which
special checks may be drawn by shareholders of the Fund holding
Shares for which certificates have not been issued. Such checking
account and such special checks shall be subject to such rules and
regulations as the Custodian and the Fund may from time to time
adopt. The Custodian or the Fund may suspend or terminate use of
such checking account or such special checks (either generally or
for one or more shareholders) at any time. The Custodian and the
Fund shall notify the other immediately of any such suspension or
termination.
K. Appointment of Agents by the Custodian The Custodian may at any
time or times in its discretion appoint (and may at any time
remove) any other bank or trust company (provided such bank or
trust company is itself qualified under the Investment Company Act
of 1940 to act as a custodian or is itself an eligible foreign
custodian within the meaning of Rule 17f-5 under said Act) as the
agent of the Custodian to carry out such of the duties and
functions of the Custodian described in this Section 3 as the
Custodian may from time to time direct; provided, however, that
the appointment of any such agent shall not relieve the Custodian
of any of its responsibilities or liabilities hereunder, and as
between the Fund and the Custodian the Custodian shall be fully
responsible for the acts and omissions of any such agent. For the
purposes of this Agreement, any property of the Fund held by any
such agent shall be deemed to be held by the Custodian hereunder.
17
<PAGE>
L. Deposit of Fund Portfolio Securities in Securities Systems The
Custodian may deposit and/or maintain securities owned by the Fund
(1) in The Depository Trust Company;
(2) in Participants Trust Company;
(3) in any other Approved Clearing Agency;
(4) in the Federal Book-Entry System; or
(5) in a Securities Depository (as defined in
Article 3).
in each case only in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, and at all times subject to the following
provisions:
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep securities of
the Fund in a Securities System provided that such securities are
maintained in a non-proprietary account ("Account") of the
Custodian or such subcustodian in the Securities System which
shall not include any assets of the Custodian or such subcustodian
or any other person other than assets held by the Custodian or
such subcustodian as a fiduciary, custodian, or otherwise for its
customers.
(b) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund, and the
Custodian shall be fully and completely responsible for
maintaining a recordkeeping system capable of accurately and
currently stating the Fund's holdings maintained in each such
Securities System.
(c) The Custodian shall pay for securities purchased in book-entry
form for the account of the Fund only upon (i) receipt of notice
or advice from the Securities System that such securities have
been transferred to the Account, and (ii) the making of any entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund only upon (i)
receipt of notice or advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for
18
<PAGE>
the account of the Fund. Copies of all notices or advises from
the Securities System of transfers of securities for the account
of the Fund shall identify the Fund, be maintained for the Fund by
the Custodian and be promptly provided to the Fund at its request.
The Custodian shall promptly send to the Fund confirmation of each
transfer to or from the account of the Fund in the form of a
written advice or notice of each such transaction, and shall
furnish to the Fund copies of daily transaction sheets reflecting
each day's transactions in the Securities System for the account
of the Fund on the next business day.
(d) The Custodian shall promptly send to the Fund any report or other
communication received or obtained by the Custodian relating to
the Securities System's accounting system, system of internal
accounting controls or procedures for safeguarding securities
deposited in the Securities System; the Custodian shall promptly
send to the Fund any report or other communication relating to the
Custodian's internal accounting controls and procedures for
safeguarding securities deposited in any Securities System; and
the Custodian shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant to
Section 2 hereof shall promptly send to the Fund and to the
Custodian any report or other communication relating to such
agent's or subcustodian's internal accounting controls and
procedures for safeguarding securities deposited in any Securities
System. The Custodian's books and records relating to the Fund's
participation in each Securities System will at all times during
regular business hours be open to the inspection of the Fund's
authorized officers, employees or agents.
(e) The Custodian shall not act under this Paragraph L in the absence
of receipt of a certificate of an officer of the Fund that the
Board has approved the use of a particular Securities System; the
Custodian shall also obtain appropriate assurance from the
officers of the Fund that the Board has annually reviewed and
approved the continued use by the Fund of each Securities System,
so long as such review and approval is required by Rule 17f-4
under the Investment Company Act of 1940, and the Fund shall
promptly notify the Custodian if the use of a Securities System is
to be discontinued; at the request of the Fund, the Custodian will
terminate the use of any such Securities System as promptly as
practicable.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or subcustodians or of any of its or their employees
or from any failure of the Custodian or any such agent or
subcustodian to enforce effectively such rights as it may have
against the Securities System or any other person; at the election
of the Fund, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that
the Fund has not been made whole for any such loss or damage.
M. Deposit of Fund Commercial Paper in an Approved Book-Entry System for
Commercial Paper Upon receipt of proper instructions with respect to
each issue of direct issue commercial paper purchased by the Fund, the
Custodian may deposit and/or maintain direct issue commercial paper
owned by the Fund in any Approved Book-Entry System for Commercial
Paper, in each case only in accordance with applicable Securities and
Exchange Commission rules, regulations, and no-action correspondence,
and at all times subject to the following provisions:
19
<PAGE>
(a) The Custodian may (either directly or through one or more
subcustodians employed pursuant to Section 2) keep
commercial paper of the Fund in an Approved Book-Entry
System for Commercial Paper, provided that such paper is
issued in book entry form by the Custodian or subcustodian
on behalf of an issuer with which the Custodian or
subcustodian has entered into a book-entry agreement and
provided further that such paper is maintained in a
non-proprietary account ("Account") of the Custodian or
such subcustodian in an Approved Book-Entry System for
Commercial Paper which shall not include any assets of the
Custodian or such subcustodian or any other person other
than assets held by the Custodian or such subcustodian as
a fiduciary, custodian, or otherwise for its customers.
(b) The records of the Custodian with respect to commercial
paper of the Fund which is maintained in an Approved
Book-Entry System for Commercial Paper shall identify by
book-entry each specific issue of commercial paper
purchased by the Fund which is included in the System and
shall at all times during regular business hours be open
for inspection by authorized officers, employees or agents
of the Fund. The Custodian shall be fully and completely
responsible for maintaining a recordkeeping system capable
of accurately and currently stating the Fund's holdings of
commercial paper maintained in each such System.
(c) The Custodian shall pay for commercial paper purchased in
book-entry form for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice from the
issuer that such paper has been issued, sold and
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
purchase, payment and transfer for the account of the
Fund. The Custodian shall transfer such commercial paper
which is sold or cancel such commercial paper which is
redeemed for the account of the Fund only upon
contemporaneous (i) receipt of notice or advice that
payment for such paper has been transferred to the
Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer or redemption and
payment for the account of the Fund. Copies of all
notices, advises and confirmations of transfers of
commercial paper for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be promptly provided to the Fund at its
request. The Custodian shall promptly send to the Fund
confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice of each
such transaction, and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transactions in the System for the account of the Fund o
the next business day.
20
<PAGE>
(d) The Custodian shall promptly send to the Fund any report
or other communication received or obtained by the
Custodian relating to each System's accounting system,
system of internal accounting controls or procedures for
safeguarding commercial paper deposited in the System;
the Custodian shall promptly send to the Fund any report
or other communication relating to the Custodian's
internal accounting controls and procedures for
safeguarding commercial paper deposited in any Approved
Book-Entry System for Commercial Paper; and the Custodian
shall ensure that any agent appointed pursuant to
Paragraph K hereof or any subcustodian employed pursuant
to Section 2 hereof shall promptly send to the Fund and to
the Custodian any report or other communication relating
to such agent's or subcustodian's internal accounting
controls and procedures for safeguarding securities
deposited in any Approved Book-Entry System for Commercial
Paper.
(e) The Custodian shall not act under this Paragraph M in the
absence of receipt of a certificate of an officer of the
Fund that the Board has approved the use of a particular
Approved Book-Entry System for Commercial Paper; the
Custodian shall also obtain appropriate assurance from the
officers of the Fund that the Board has annually reviewed
and approved the continued use by the Fund of each
Approved Book-Entry System for Commercial Paper, so long
as such review and approval is required by Rule 17f-4
under the Investment Company Act of 1940, and the Fund
shall promptly notify the Custodian if the use of an
Approved Book-Entry System for Commercial Paper is to be
discontinued; at the request of the Fund, the Custodian
will terminate the use of any such System as promptly as
practicable.
(f) The Custodian (or subcustodian, if the Approved Book-Entry
System for Commercial Paper is maintained by the
subcustodian) shall issue physical commercial paper or
promissory notes whenever requested to do so by the Fund
or in the event of an electronic system failure which
impedes issuance, transfer or custody of direct issue
commercial paper by book-entry.
(g) Anything to the contrary in this Agreement
notwithstanding, the Custodian shall be liable to the Fund
for any loss or damage to the Fund resulting from use of
any Approved Book-Entry System for Commercial Paper by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or subcustodians or of any
of its or their employees or from any failure of the
Custodian or any such agent or subcustodian to enforce
effectively such rights as it may have against the System,
the issuer of the commercial paper or any other person; at
the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to
any claim against the System, the issuer of the commercial
paper or any other person which the Custodian may have as
a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such
loss or damage.
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N. Segregated Account The Custodian shall upon receipt of proper
instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Paragraph L hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and any registered
broker-dealer (or any futures commission merchant), relating to
compliance with the rules of the Options Clearing Corporation and
of any registered national securities exchange (or of the
Commodity Futures Trading Commission or of any contract market or
commodities exchange), or of any similar organization or
organizations, regarding escrow or deposit or other arrangements
in connection with transactions by the Fund, (ii) for purposes of
segregating cash or U.S. Government securities in connection with
options purchased, sold or written by the Fund or futures
contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
purposes, but only, in the case of clause (iv), upon receipt of,
in addition to proper instructions, a certificate signed by two
officers of the Fund, setting forth the purpose such segregated
account and declaring such purpose to be a proper purpose.
O. Ownership Certificates for Tax Purposes The Custodian shall
execute ownership and other certificates and affidavits for all
foreign, federal and state tax purposes in connection with
receipt of income or other payments with respect to securities
of the Fund held by it and in connection with transfers of
securities.
P. Proxies The Custodian shall, with respect to the securities
held by it hereunder, cause to be promptly delivered to the Fund
all forms of proxies and all notices of meetings and any
other notices or announcements or other written information
affecting or relating to the securities, and upon receipt of
proper instructions shall execute and deliver or cause its
nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor
its nominee shall vote upon any of the securities or
execute any proxy to vote thereon or give any consent or take
any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper
instructions.
Q. Communications Relating to Fund Portfolio Securities The Custodian
shall deliver promptly to the Fund all written information
(including, without limitation, pendency of call and maturities
of securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers and other
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<PAGE>
persons relating to the securities and participation
interests being held for the Fund. With respect to tender or
exchange offers, the Custodian shall deliver promptly to the Fund
all written information received by the Custodian from
issuers and other persons relating to the securities and
participation interests whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange
offer.
R. Exercise of Rights; Tender Offers In the case of tender offers,
similar offers to purchase or exercise rights (including,
without limitation, pendency of calls and maturities of
securities and participation interests and expirations of
rights in connection therewith and notices of exercise of call
and put options and the maturity of futures contracts) affecting
or relating to securities and participation interests held by
the Custodian under this Agreement, the Custodian shall have
responsibility for promptly notifying the Fund of all such
offers in accordance with the standard of reasonable care set
forth in Section 8 hereof. For all such offers for which the
Custodian is responsible as provided in this Paragraph R, the
Fund shall have responsibility for providing the Custodian with
all necessary instructions in timely fashion. Upon receipt of
proper instructions, the Custodian shall timely deliver to the
issuer or trustee thereof, or to the agent of either,
warrants, puts, calls, rights or similar securities for
the purpose of being exercised or sold upon proper receipt
therefor and upon receipt of assurances satisfactory to the
Custodian that the new securities and cash, if any, acquired by
such action are to be delivered to the Custodian or any
subcustodian employed pursuant to Section 2 hereof. Upon receipt
of proper instructions, the Custodian shall timely deposit
securities upon invitations for tenders of securities upon proper
receipt therefor and upon receipt of assurances satisfactory to
the Custodian that the consideration to be paid or delivered or
the tendered securities are to be returned to the Custodian or
subcustodian employed pursuant to Section 2 hereof.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary by proper instructions, to comply with
the terms of all mandatory or compulsory exchanges, calls,
tenders, redemptions, or similar rights of security ownership, and
shall thereafter promptly notify the Fund in writing of such
action.
S. Depository Receipts The Custodian shall, upon receipt of proper
instructions, surrender or cause to be surrendered foreign
securities to the depository used by an issuer of American
Depository Receipts, European Depository Receipts or International
Depository Receipts (hereinafter collectively referred to as
"ADRs") for such securities, against a written receipt therefor
adequately describing such securities and written evidence
satisfactory to the Custodian that the depository has acknowledged
receipt of instructions to issue with respect to such securities
ADRs in the name of a nominee of the Custodian or in the name or
nominee name of any subcustodian employed pursuant to Section 2
hereof, for delivery to the Custodian or such subcustodian at such
place as the Custodian or such subcustodian may from time to time
designate. The Custodian shall, upon receipt of proper
instructions, surrender ADRs to the issuer thereof against a
written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian
that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities
underlying such ADRs to the Custodian or to a subcustodian
employed pursuant to Section 2 hereof.
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T. Interest Bearing Call or Time Deposits The Custodian shall, upon
receipt of proper instructions, place interest bearing fixed ter
and call deposits with the banking department of such banking
institution (other than the Custodian) and in such amounts as
the Fund may designate. Deposits may be denominated in U.S.
Dollars or other currencies. The Custodian shall include in
its records with respect to the assets of the Fund appropriate
notation as to the amount and currency of each such deposit, the
accepting banking institution and other appropriate details
and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Custodian by the
banking institution. Such deposits shall be deemed portfolio
securities of the applicable Fund for the purposes of this
Agreement, and the Custodian shall be responsible for the
collection of income from such accounts and the transmission of
cash to and from such accounts.
U. Options, Futures Contracts and Foreign Currency Transactions
1. Options. The Custodians shall, upon receipt of proper
instructions and in accordance with the provisions of any
agreement between the Custodian, any registered broker-dealer
and, if necessary, the Fund, relating to compliance with the
rules of the Options Clearing Corporation or of any registered
national securities exchange or similar organization or
organizations, receive and retain confirmations or other
documents, if any, evidencing the purchase or writing of an
option on a security, securities index, currency or other
financial instrument or index by the Fund; deposit and
maintain in a segregated account for each Fund separately,
either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the
Fund; and release and/or transfer such securities or other
assets only in accordance with a notice or other communication
evidencing the expiration, termination or exercise of such
covered option furnished by the Options Clearing Corporation,
the securities or options exchange on which such covered
option is traded or such other organization as may be
responsible for handling such options transactions. The
Custodian and the broker-dealer shall be responsible for the
sufficiency of assets held in each Fund's segregated account
in compliance with applicable margin maintenance requirements.
2. Futures Contracts The Custodian shall, upon receipt of
proper instructions, receive and retain confirmations and
other documents, if any, evidencing the purchase or sale of a
futures contract or an option on a futures contract by the
Fund; deposit and maintain in a segregated account, for the
benefit of any futures commission merchant, assets designated
by the Fund as initial, maintenance or variation "margin"
deposits (including mark-to-market payments) intended to
secure the Fund's performance of its obligations under any
futures contracts purchased
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<PAGE>
or sold or any options on futures contracts written by Fund,
in accordance with the provisions of any agreement or
agreements among the Fund, the Custodian and such futures
commission merchant, designed to comply with the rules of the
Commodity Futures Trading Commission and/or of any contract
market or commodities exchange or similar organization
regarding such margin deposits or payments; and release and/or
transfer assets in such margin accounts only in accordance
with any such agreements or rules. The Custodian and the
futures commission merchant shall be responsible for the
sufficiency of assets held in the segregated account in
compliance with the applicable margin maintenance and
mark-to-market payment requirements.
3. Foreign Exchange Transactions The Custodian shall, pursuant
to proper instructions, enter into or cause a subcustodian to
enter into foreign exchange contracts, currency swaps or
options to purchase and sell foreign currencies for spot and
future delivery on behalf and for the account of the Fund.
Such transactions may be undertaken by the Custodian or
subcustodian with such banking or financial institutions or
other currency brokers, as set forth in proper instructions.
Foreign exchange contracts, swaps and options shall be deemed
to be portfolio securities of the Fund; and accordingly, the
responsibility of the Custodian therefor shall be the same as
and no greater than the Custodian's responsibility in respect
of other portfolio securities of the Fund. The Custodian shall
be responsible for the transmittal to and receipt of cash from
the currency broker or banking or financial institution with
which the contract or option is made, the maintenance of
proper records with respect to the transaction and the
maintenance of any segregated account required in connection
with the transaction. The Custodian shall have no duty with
respect to the selection of the currency brokers or banking or
financial institutions with which the Fund deals or for their
failure to comply with the terms of any contract or option.
Without limiting the foregoing, it is agreed that upon receipt
of proper instructions, the Custodian may, and insofar as
funds are made available to the Custodian for the purpose, (if
determined necessary by the Custodian to consummate a
particular transaction on behalf and for the account of the
Fund) make free outgoing payments of cash in the form of U.S.
dollars or foreign currency before receiving confirmation of a
foreign exchange contract or swap or confirmation that the
countervalue currency completing the foreign exchange contract
or swap has been delivered or received. The Custodian shall
not be responsible for any costs and interest charges which
may be incurred by the Fund or the Custodian as a result of
the failure or delay of third parties to deliver foreign
exchange; provided that the Custodian shall nevertheless be
held to the standard of care set forth in, and shall be liable
to the Fund in accordance with, the provisions of Section 9.
V. Actions Permitted Without Express Authority The Custodian may in its
discretion, without express authority from the Fund:
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<PAGE>
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided, that all such
payments shall be accounted for by the Custodian to the
Treasurer of the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all nondiscretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Fund except as otherwise directed by
the Fund.
5. Duties of Bank with Respect to Books of Account and Calculations of Net
Asset Value
The Bank shall as Agent (or as Custodian, as the case may be) keep such books of
account and render as at the close of business on each day a detailed statement
of the amounts received or paid out and of securities received or delivered for
the account of the Fund during said day and such other statements, including a
daily trial balance and inventory of the Fund's portfolio securities; and shall
furnish such other financial information and data as from time to time requested
by the Treasurer or any authorized officer of the Fund; and shall compute and
determine, as of the close of regular trading on the New York Stock Exchange, or
at such other time or times as the Board may determine, the net asset value of a
Share in the Fund, such computation and determination to be made in accordance
with the governing documents of the Fund and the votes and instructions of the
Board at the time in force and applicable, and promptly notify the Fund and its
investment adviser and such other persons as the Fund may request of the result
of such computation and determination. In computing the net asset value the
Custodian may rely upon security quotations received by telephone or otherwise
from sources or pricing services designated by the Fund by proper instructions,
and may further rely upon information furnished to it by any authorized officer
of the Fund relative (a) to liabilities of the Fund not appearing on its books
of account, (b) to the existence, status and proper treatment of any reserve or
reserves, (c) to any procedures established by the Board regarding the valuation
of portfolio securities, and (d) to the value to be assigned to any bond, note,
debenture, Treasury bill, repurchase agreement, subscription right, security,
participation interest or other asset or property for which market quotations
are not readily available.
6. Records and Miscellaneous Duties
The Bank shall create, maintain and preserve all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All books of account and
records maintained by the Bank in connection with the performance of its duties
under this Agreement shall be the property of the Fund, shall at all times
during the regular business hours of the Bank be open for inspection by
authorized officers, employees or agents of the Fund, and in the event of
termination of this Agreement
26
<PAGE>
shall be delivered to the Fund or to such other person or persons as shall be
designated by the Fund. Disposition of any account or record after any required
period of preservation shall be only in accordance with specific instructions
received from the Fund. The Bank shall assist generally in the preparation of
reports to shareholders, audits of accounts, and other ministerial matters of
like nature; and, upon request, shall furnish the Fund's auditors with an
attested inventory of securities held with appropriate information as to
securities in transit or in the process of purchase or sale and with such other
information as said auditors may from time to time request. The Custodian shall
also maintain records of all receipts, deliveries and locations of such
securities, together with a current inventory thereof, and shall conduct
periodic verifications (including sampling counts at the Custodian) of
certificates representing bonds and other securities for which it is responsible
under this Agreement in such manner as the Custodian shall determine from time
to time to be advisable in order to verify the accuracy of such inventory. The
Bank shall not disclose or use any books or records it has prepared or
maintained by reason of this Agreement in any manner except as expressly
authorized herein or directed by the Fund, and the Bank shall keep confidential
any information obtained by reason of this Agreement.
7. Opinion of Fund's Independent Public Accountants
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to enable the Fund to obtain from year to year favorable opinions
from the Fund's independent public accountants with respect to its activities
hereunder in connection with the preparation of the Fund's registration
statement and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
8. Compensation and Expenses of Bank
The Bank shall be entitled to reasonable compensation for its services as
Custodian and Agent, as agreed upon from time to time between the Fund and the
Bank. The Bank shall entitled to receive from the Fund on demand reimbursement
for its cash disbursements, expenses and charges, including counsel fees, in
connection with its duties as Custodian and Agent hereunder, but excluding
salaries and usual overhead expenses.
9. Responsibility of Bank
So long as and to the extent that it is in the exercise of reasonable care, the
Bank as Custodian and Agent shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties.
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<PAGE>
The Bank as Custodian and Agent shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
The Bank as Custodian and Agent shall be held to the exercise of reasonable care
in carrying out the provisions of this Agreement but shall be liable only for
its own negligent or bad faith acts or failures to act. Notwithstanding the
foregoing, nothing contained in this paragraph is intended to nor shall it be
construed to modify the standards of care and responsibility set forth in
Section 2 hereof with respect to subcustodians and in subparagraph f of
Paragraph L of Section 3 hereof with respect to Securities Systems and in
subparagraph g of Paragraph M of Section 3 hereof with respect to an Approved
Book-Entry System for Commercial Paper.
The Custodian shall be liable for the acts or omissions of a foreign banking
institution to the same extent as set forth with respect to subcustodians
generally in Section 2 hereof, provided that, regardless of whether assets are
maintained in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from, or caused by,
the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign county including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
acts of war, civil war or terrorism, insurrection, revolution, military or
usurped powers, nuclear fission, fusion or radiation, earthquake, storm or other
disturbance of nature or acts of God.
If the Fund requires the Bank in any capacity to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Bank, result in the Bank or its nominee assigned to the Fund
being liable for the payment of money or incurring liability of some other form,
the Fund, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
Except as may arise from the Custodian's own negligence or bad faith, the
Custodian shall be without liability to any Fund for any loss, liability, claim
or expense resulting from or caused by anything which is (a) part of Country
Risk or (b) part of the "prevailing country risk" of the Fund, as that term is
used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as that term is now
or in the future interpreted by the U.S. Securities and Exchange Commission or
by the staff of the Division of Investment Management of the Commission.
10. Persons Having Access to Assets of the Fund
(i) No trustee, director, general partner, officer, employee
or agent of the Fund shall have physical access to the
assets of the Fund held by the Custodian or be authorized
or permitted to withdraw any investments of the Fund, nor
shall the Custodian deliver any assets of the Fund to any
such person. No officer or director, employee or agent of
the Custodian who holds any similar position with the Fund
or the investment adviser of the Fund shall have access to
the assets of the Fund.
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(ii) Access to assets of the Fund held hereunder shall only be
available to duly authorized officers, employees,
representatives or agents of the Custodian or other
persons or entities for whose actions the Custodian shall
be responsible to the extent permitted hereunder, or to
the Fund's independent public accountants in connection
with their auditing duties performed on behalf of the
Fund.
(iii) Nothing in this Section 9 shall prohibit any officer,
employee or agent of the Fund or of the investment adviser
of the Fund from giving instructions to the Custodian or
executing a certificate so long as it does not result in
delivery of or access to assets of the Fund prohibited by
paragraph (i) of this Section 9.
11. Effective Period, Termination and Amendment; Successor Custodian
This Agreement shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, that the Fund may at any
time by action of its Board, (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Federal Deposit Insurance
Corporation or by the Banking Commissioner of The Commonwealth of Massachusetts
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction. Upon termination of the
Agreement, the Fund shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
Unless the holders of a majority of the outstanding Shares of the Fund vote to
have the securities, funds and other properties held hereunder delivered and
paid over to some other bank or trust company, specified in the vote, having not
less than $2,000,000 of aggregate capital, surplus and undivided profits, as
shown by its last published report, and meeting such other qualifications for
custodians set forth in the Investment Company Act of 1940, the Board shall,
forthwith, upon giving or receiving notice of termination of this Agreement,
appoint as successor custodian, a bank or trust company having such
qualifications. The Bank, as Custodian, Agent or otherwise, shall, upon
termination of the Agreement, deliver to such successor custodian, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank hereunder and all books of account and
records kept by the Bank pursuant to this Agreement, and all documents held by
the Bank relative thereto. In the event that no such vote has been adopted by
the shareholders and that no written order designating a successor custodian
shall have been delivered to the Bank on or before the date when such
termination shall become effective, then the Bank shall not deliver the
securities, funds and other properties of the Fund to the Fund but shall have
the right to deliver to a bank or trust company doing business in Boston,
Massachusetts of its own selection, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all funds, securities and properties of the Fund held by or
deposited with the Bank, and all books of account and records kept by the Bank
pursuant to this Agreement, and all documents held by the Bank relative thereto.
Thereafter such bank or trust company shall be the successor of the Custodian
under this Agreement.
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12. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and the Fund
may from time to time agree on such provisions interpretive of or in addition to
the provisions of this Agreement as may in their joint opinion be consistent
with the general tenor of this Agreement. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
governing instruments of the Fund. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
13. Certification as to Authorized Officers
The Secretary of the Fund shall at all times maintain on file with the Bank his
certification to the Bank, in such form as may be acceptable to the Bank, of the
names and signatures of the authorized officers of each fund, it being
understood that upon the occurence of any change in the information set forth in
the most recent certification on file (including without limitation any person
named in the most recent certification who has ceased to hold the office
designated therein), the Secretary of the Fund shall sign a new or amended
certification setting forth the change and the new, additional or ommitted names
or signatures. The Bank shall be entitled to rely and act upon any officers
named in the most recent certification.
14. Notices
Notices and other writings delivered or mailed postage prepaid to the Fund
addressed to Susan S. Newton, John Hancock Advisers, Inc., 101 Huntington
Avenue, Boston, Massachusetts 02199, or to such other address as the Fund may
have designated to the Bank, in writing, or to Investors Bank & Trust Company,
200 Clarendon Street, Boston, Massachusetts 02116, with a copy to its General
Counsel at the same address, or such other address as the Custodian may
designate to the Fund in writing, shall be deemed to have been properly
delivered or given hereunder to the respective addressees.
15. Massachusetts Law to Apply; Limitations on Liability
This Agreement shall be construed and the provisions thereof interpreted under
and in accordance with the laws of The Commonwealth of Massachusetts.
If the Fund is a Massachusetts business trust, the Custodian expressly
acknowledges the provision in the Fund's declaration of trust limiting the
personal liability of the trustees and shareholders of the Fund; and the
Custodian agrees that it shall have recourse only to the assets of the Fund for
the payment of claims or obligations as between the Custodian and the Fund
arising out of this Agreement, and the Custodian
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<PAGE>
shall not seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. Each Fund, and each series or portfolio of a Fund,
shall be liable only for its own obligations to the Custodian under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
16. Adoption of the Agreement by the Fund
The Fund represents that its Board has approved this Agreement and has duly
authorized the Fund to adopt this Agreement. This Agreement shall be deemed to
supersede and terminate, as of the date first written above, all prior
agreements between the Fund and the Bank relating to the custody of the Fund's
assets.
In Witness Whereof, the parties hereto have caused this agreement to be executed
in duplicate as of the date first written above by their respective officers
thereunto duly authorized.
John Hancock Funds
By: /s/ Osbert Hood
---------------
Osbert Hood
Senior Vice President and Chief Financial Officer
Attest:
Investors Bank & Trust Company
By: /s/ Robert D. Mancuso
---------------------
Name: Robert D. Mancuso
Title: Senior Vice President
Attest:
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Appendix B
Additional Information Relating to Mandatory Securities Depositories
The Foreign Custody Manager shall furnish annually to the Board such
information as may be reasonably available relating to the proposed
"safeharbor" criteria with respect to Mandatory Securities Depositories
as set forth below:
(a) whether an Eligible Foreign Custodian or a U.S. bank holding
assets at the depository undertakes to adhere to the rules, practices
and procedures of the depository;
(b) whether a regulatory authority with oversight responsibility for
the depository has issued a public notice that the depository is not in
compliance with any material capital, solvency, insurance, or other
similar financial strength requirements imposed by such authority, or,
in the case of such a notice having been issued, that such notice has
been withdrawn or the remedy of such noncompliance has been publicly
announced by the depository;
(c) whether a regulatory authority with oversight responsibility over
the depository has issued a public notice that the depository is not in
compliance with any material internal controls requirement imposed by
such authority, or, in the case of such notice having been issued, that
such notice has been withdrawn or the remedy of such noncompliance has
been publicly announced by the depository;
(d) whether the depository maintains the assets of the Fund's depositor
under no less favorable safekeeping conditions than those that apply
generally to depositors;
(e) whether the depository maintains records that segregate the
depository's own assets from the assets of depositors;
(f) whether the depository maintains records that identify the assets
of each of its depositors;
(g) whether the depository provides periodic reports to its depositors
with respect to the safekeeping of assets maintained by the depository,
including, but not limited to, notification of any transfer to or from
a depositor's account; and
(h) whether the depository is subject to periodic review, such as
audits by independent accountants or inspections by regulatory
authorities, and
B-1
August 27, 1999
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/Alfred Ouellette
- -------------------
Attorney and Assistant Secretary
John Hancock Advisers, Inc.
[PRINTED ON HALE AND DORR LETTERHEAD]
60 State Street, Boston, Massachusetts 02109
617-526-6000 o fax 617-526-5000
DRAFT
October 22, 1999
Board of Trustees
John Hancock Investment Trust III, on behalf of
John Hancock Short-Term Strategic Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
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 Short-Term Strategic Income 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, Class B and Class C 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").
In rendering this opinion, we have examined and relied upon the facts
stated and representations made in (i) the combined prospectus for Acquiring
<PAGE>
Boards of Trustees
Jon Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 2
Fund and certain other John Hancock mutual funds, dated April 1, 1999, (ii) the
statement of additional information for Acquiring Fund, dated April 1, 1999,
(iii) the combined prospectus for Acquired Fund and certain other John Hancock
mutual funds, dated March 1, 1999, (iv) the statement of additional information
for Acquired Fund, dated March 1, 1999, (v) the Notice of Meeting of
Shareholders Scheduled for October 13, 1999 and the accompanying proxy statement
and prospectus relating to the transaction dated August 27, 1999 (the "Proxy
Statement"), (vi) the Agreement and Plan of Reorganization, made June 9, 1999,
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
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 3
and does not constitute any representation or warranty that such position, if so
challenged, will not be rejected by a court.
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 from developed
and emerging markets, (2) United States ("U.S.") Government and U.S. Government
agency securities and (3) lower-rated, high yield, high risk U.S. debt
securities (i.e., "junk bonds"). Under normal circumstances, Acquiring Fund's
assets will be invested in each of the foregoing three sectors, but it may
invest up to 100% of its assets in any one sector. Acquiring Fund generally
intends to keep its average credit quality in the investment-grade range, but it
may invest in junk bonds rated as low as CC/Ca and their unrated equivalents.
There is no limit on its average maturity.
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
1990. Acquired Fund is one of five 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.
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 4
The investment objective of Acquired Fund is to seek a high level of
current income. Acquired Fund seeks to achieve this objective by investing
primarily in (1) foreign government and corporate debt securities from developed
and emerging markets, (2) U.S. Government and U.S. Government agency securities
and (3) U.S. corporate debt securities. Under normal circumstances, Acquired
Fund invests assets in all three of these sectors, but it may invest up to 100%
of its assets in any one sector. Acquired Fund maintains an average portfolio
quality rating of A, which is an investment-grade rating, but may invest up to
67% of its assets in junk bonds rated as low as B and their unrated equivalents.
Acquired Fund maintains an average portfolio maturity of three years or less.
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"), 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") and holders of Acquired Fund Shares designated as Class C ("Class C
Acquired Fund Shares") will receive Acquiring Fund Shares designated as Class C
("Class C Acquiring Fund Shares").
(iii) After such exchanges, liquidation and distribution, the existence
of Acquired Fund will be promptly terminated in accordance with Massachusetts
law.
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 5
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 June 8, 1999. 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 June 8, 1999, subject to the
approval of Acquired Fund shareholders. Acquired Fund shareholders approved the
transaction at a meeting held on October 13, 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.
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.
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 6
(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.
(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.
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 7
(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 eliminate
adverse effects on the marketing and asset growth of Acquiring Fund and Acquired
Fund that may result from the existence of competing funds with generally
similar investment characteristics within the same fund complex, to benefit from
the anticipated better performance of Acquiring Fund, and to increase
diversification.
(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, 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, and
the fair market value of the Class C Acquiring Fund Shares received by each
shareholder that holds Class C Acquired Fund Shares is approximately equal to
the fair market value of the Class C 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.
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 8
(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.
(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.
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 9
(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).
(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).
<PAGE>
Boards of Trustees
John Hancock Investment Trust III
John Hancock Strategic Series
October 22, 1999
Page 10
(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 11, 1998, relating to the financial statements and
financial highlights appearing in the October 31, 1998 Annual Report to
Shareholders of John Hancock Short-Term Strategic Income 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 April 1, 1999 for the John
Hancock Strategic Income Fund and March 1, 1999 for the John Hancock Short-Term
Strategic Income 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 April
1, 1999 for the John Hancock Strategic Income Fund and April 30, 1999 for the
John Hancock Short-Term Strategic Income Fund, which are included as Exhibits A
and B, respectively, to the Statement of Additional Information.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 20, 1999
