John Hancock Funds
High Yield
Bond
Fund
ANNUAL REPORT
October 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Richard S. Scipione
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in
the mutual fund industry. At that time, Securities and Exchange
Commission Chairman Arthur Levitt called on fund companies to make
their prospectuses more user-friendly. He noted that prospectuses
are often overloaded with technical detail and are hard for most
investors to understand. Many industry observers agreed, and rightly
so.
So it is my pleasure to let you know that after being under
development for a year, John Hancock Funds has introduced new
simplified and consolidated prospectuses. The prospectuses feature
shorter, clearer language with a streamlined design, and they
incorporate several funds with similar investment objectives into
one document. They cover our income, growth, growth and income, tax-
free income, international/global and money market funds. We are
gratified at the favorable reviews that our new prospectuses have
received from shareholders, financial advisers, industry analysts
and the press. We believe they are a bold but sensible step forward.
And while they are easier to read, they still comply with all
federal and state guidelines.
We have taken the initiative to create a prospectus that
dramatically departs from the norm. Among its most innovative
features is a two-page spread highlighting each fund's goals and
investment strategy, the types of securities it buys, its portfolio
management and risk factors, all in plainer language. Fund expenses
and financial highlights are now found here, too, as is a new bar
chart that shows year-to-year volatility for each fund. Other
features include a better presentation of fund services, a new
glossary of investment risks and a discussion about how funds are
organized, including a diagram showing the connection of the various
players that provide services to your Hancock fund(s).
We believe we have made a significant advancement in the drive
toward better mutual fund prospectuses. We hope you will agree
because in the end, we did it for you, our shareholders.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.
BY ARTHUR CALAVRITINOS, CFA, PORTFOLIO MANAGER
John Hancock
High Yield Bond Fund
High yield bonds are winners during
roller coaster period for most other bonds
The last 12 months have been good for high- yield bond investors,
prompted by record-setting amounts of cash that poured into the
high-yield market from investors searching for yield in a relatively
low interest-rate environment. This robust demand for high-yield
bonds, also known as junk bonds, occurred at the same time the
overall supply of high-yield securities remained constant, providing
a very attractive fundamental environment. The Fund fared
particularly well because lower-quality high-yield bonds, those with
a credit rating of single B that are the Fund's focus, outperformed
higher-rated BB junk bonds for several reasons. First, single B's were
particularly cheap at the beginning of the period and then advanced on
favorable earnings reports. Second, the BB bonds, although still rated
below investment grade, have interest rates that are closer to Treasury
bonds and they move more in tandem. So their prices lagged along with
Treasuries when interest rates rose earlier in the year.
"...junk bonds were the bright spot
in the period for bond-
holders..."
A 2 1/4" x 3 3/4" photo of fund management team at bottom right. Caption
reads: Fund management team members (seated, l-r) Beverly Cleathero,
Arthur Calavritinos, Fred Cavanaugh (standing l-r) Tom Huggins, Bruce
Martin, Lester Duke, Linda Carter. "
Overall, junk bonds were the bright spot in the period for
bondholders who otherwise had a choppy ride as signs of a stronger
growing economy prompted inflation fears and sent interest rates up
and bond prices down. For instance, Treasury bonds with maturities
ranging from five to 10 years gained 4.7% for the 12 months ended
October 31, 1996, while the broad high-yield market returned 10.8%
and single B bonds returned 12.0%, as measured by the Merrill Lynch
high-yield bond index. In this environment, John Hancock High Yield
Bond Fund turned in a strong performance on both an absolute and
relative basis. For the 12 months ended October 31, 1996, the Fund's
Class A and Class B shares posted total returns of 16.06% and 15.24%
respectively, at net asset value. That outperformed the average high
current yield bond fund's average 12.65% return, according to Lipper
Analytical Services.1 We are pleased with this result and believe
it is the cumulative result of the rigorous credit analysis we
conduct on a daily basis. Please see pages six and seven for longer-
term performance information.
Chart with heading "Top Five Holdings" at top of left hand column. The
chart lists five holdings: 1) Nextel Communications 3.0% 2) Algoma
Steel 3.0% 3) Northwest Airlines 2.9% 4) Haynes International 2.8% 5)
NS Group 2.7%. A footnote below reads "As a percentage of net assets on
October 31, 1996."
"...basic
industrial
companies
were some
of the
strongest
contributors..."
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investments"; the header for the right column is
"Recent performance ... and what's behind the numbers. The first listing
is Big 5 Holdings followed by an up arrow and the phrase "Boosted by
rebounding California economy." The second listing is Indah Kiat
followed by an up arrow and the phrase "Rising Indonesian paper demand
increases profits." The third listing is Northwest Airlines followed by
a down arrow and the phrase "Negative performance comparisons hurt stock
price." Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
Themes emerge from bottom-up analysis
We continue to take a bottom-up approach to building the portfolio,
searching for suitable companies across the broad high-yield bond
market. This is important because by definition, high-yield bonds
carry greater risk because their issuers have credit ratings below
investment grade, meaning they're considered at greater risk of
defaulting on their obligations than an investment-grade company.
Investors should be aware that the high-yield bond market is subject
to greater fluctuations than less aggressive bond funds and
therefore may not be for everyone. In our view, the key is to find
what we consider to be good credits, those we believe have the
ability to thrive and meet their obligations. Often this bottom-up
approach leads us to different investment themes. One has been our
paper holdings, which we began buying after our analysis showed that
the industry was becoming far less cyclical -- that is, tied to the
economy -- than it traditionally had been. Signs of upcoming
consolidation in the industry also appeared promising.
A strong performer was cardboard box maker Gaylord Container, whose
bonds rose by more than 10% during the period despite falling paper
prices and earnings. But on an absolute basis, earnings were
acceptable. What's more, the company bought back some of its stock
and it's also an attractive acquisition candidate. Another was
Indonesian giant Indah Kiat International, which produces white
paper. The company has benefited from access to Indonesian fast-
growing trees and a huge increase in demand from a burgeoning, well-
educated middle class. In fact, basic industrial companies were some
of the strongest contributors to Fund performance. Others included
our steel companies, such as NS Group, which makes pipes used in
transporting and drilling gas, and Algoma Steel.
Another theme we like is gaming companies. This industry features a
fairly fixed number of markets, growing demand and players that will
either thrive or be acquired. We did well with GNF Corp., a company
within the well-known Bally fold that was sold to Hilton along with
Bally. Its bonds had risen by more than 20% when we sold them. We
also did well with our California holdings which are benefiting from
the state's rebounding economy. These include homebuilder JM Peters
Company, and retailer Big 5 Holdings, a sporting goods company.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the fiscal year ended October
31, 1996." The chart is scaled in increments of 5% from bottom to top,
with 20% at the top and 0% at the bottom. Within the chart there are
three solid bars. The first represents the 16.06% total return for the
John Hancock High Yield Bond Fund, Class A. The second represents the
15.24% total return for John Hancock High Yield Bond Fund, Class B. The
third represents the 12.65% total return for the average high current
yield fund. A footnote below reads: "Total returns for John Hancock High
Yield Bond Fund are at net asset value with all distributions
reinvested. The average high current yield fund is tracked by Lipper
Analytical Services. (1) See following two pages for historical
performance information."
A word about common stocks
One basic industrial company that served us well was USX-Delhi
Group, a gas processor whose common stock has risen by more than 30%
since we bought it. As indicated in the Fund's prospectus, we have
the flexibility to buy stocks on a case-by-case basis as we believe
market conditions warrant, up to a maximum 20% of the Fund's net
assets. We took advantage of that flexibility to buy stock in USX-
Delhi after looking at a comparable company that had issued high-
yield bonds, which USX-Delhi does not. That analysis convinced us
that USX-Delhi was trading very inexpensively, so we bought some
shares. It was a perfect example of how our knowledge of high-yield
companies has led us to other attractive common stocks, which
currently make up 6% of the Fund's net assets. Another was our
familiarity with the airline industry which led us to the common
stock of Swiss Air at a time when its price was depressed because of
some negative sentiment in Europe. But we knew the company had a
solid balance sheet and a strong franchise. So we took it as a
buying opportunity and were not proven wrong.
Yet a major disappointment during the period was our Northwest
Airlines stock, which suffered for several reasons. Those included
fear of labor cost increases, concerns about future earnings after
reinstating the excise tax -- which had been suspended as part of
the government budget process -- and negative reaction to the
airline's recent performance comparisons. We're sticking with the
stock because we're comfortable with the company's value, its strong
cash flow and excellent route structure. Another disappointment was
our South African bonds, which were hurt by a sharp decline in the
value of the South African rand.
"Careful credit
selection
remains the
watchword."
Outlook
After the strong performance we've seen this year in the high yield
bond market, we're taking a more cautious view for now. It's not
going to be as easy to find as many good credit stories, high yields
and cheap prices as we did this year. If the economy gets any
stronger and interest rates rise again, some investors might move
away from high yield-bonds and upgrade the credit quality of their
portfolios. In any event, we'll continue to focus on active company
analysis to help us choose only those with solid fundamentals.
Careful credit selection remains the watchword. With that
philosophy, we continue to believe high yield-bonds have room to
perform, especially if the favorable supply/demand scenario remains
in place.
- -------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through
the end of the Fund's period discussed in this report. Of course,
the manager's views are subject to change as market and other
conditions warrant.
See the Fund's prospectus for a detailed discussion of the risks of
investing in high-yield bonds.
1Figures from Lipper Analytical Services 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 High Yield Bond
Fund. Total return is a performance measure that equals the sum of
all income and capital gain distributions, assuming reinvestment of
these distributions and the change in the price of the Fund's
shares, expressed as a percentage of the Fund's net asset value per
share. Performance figures include the maximum applicable sales
charge of 4.50% for Class A shares. (Prior to May 15, 1995, the
maximum applicable sales charge for Class A shares was 4.75%.) The
effect of the maximum contingent deferred sales charge for Class B
shares (maximum 5% and declining to 0% over six years) is included
in Class B performance. Remember that all figures represent past
performance and are no guarantee of how the Fund will perform in the
future. Also, 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.
CUMULATIVE TOTAL RETURNS
For the period ended September 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
-------- --------- ---------
John Hancock High Yield Bond
Fund: Class A 10.21% 25.15%(1) N/A
John Hancock High Yield Bond
Fund: Class B 9.57% 67.89% 113.76%(2)
AVERAGE ANNUAL TOTAL RETURNS
For the period ended September 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
-------- --------- ---------
John Hancock High Yield Bond
Fund: Class A 10.21% 7.15%(1) N/A
John Hancock High Yield Bond
Fund: Class B 9.57% 10.92% 8.88%(2)
YIELDS
As of October 31, 1996
SEC 30-Day
Yield
------------
John Hancock High Yield Bond Fund: Class A 9.73%
John Hancock High Yield Bond Fund: Class B 9.44%
Notes to Performance
(1) Class A shares commenced on June 30, 1993.
(2) Class B shares commenced on October 26, 1987.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the
John Hancock High Yield Bond Fund would be worth on October 31,
1996, assuming you had invested on the day each class of shares
started and reinvested all distributions. For comparison, we've
shown the same $10,000 investment in the Lehman Brothers High Yield
Bond Index -- an unmanaged index of fixed-income securities that are
similar, but not identical, to the bonds in the Fund's portfolio.
High Yield Bond Fund Fund
Class A shares
Line chart with the heading High Yield Bond Fund Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the
life of the fund. Within the chart are three lines. The first line
represents the value of the Lehman Brothers High Yield Bond Index and is
equal to $13,239 as of October 31, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the High Yield Bond
Fund on June 30, 1993, before sales charge, and is equal to $13,213 as
of October 31, 1996. The third line represents the High Yield Bond Fund,
after sales charge, and is equal to $12,621 as of October 31, 1996.
High Yield Bond Fund
Class B shares
Line chart with the heading High Yield Bond Fund Fund: Class B*,
representing the growth of a hypothetical $10,000 investment over the
life of the fund. Within the chart are two lines. The first line
represents the value of the Lehman Brothers High Yield Bond Index and is
equal to $23,749 as of October 31, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the High Yield Bond
Fund on October 26, 1987, before sales charge, and is equal to $21,545
of October 31, 1996.
*No contingent sales charge applicable.
FINANCIAL STATEMENTS
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
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, 1996. 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, 1996
- -----------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value -- Note C:
Bonds (cost -- $242,993,070) $ 247,225,216
Common stocks, preferred stocks
and warrants (cost -- $29,269,866) $ 32,684,764
Joint repurchase agreement (cost -- $8,520,000) 8,520,000
Corporate savings account 81,493
-------------
288,511,473
Receivable for shares sold 1,958,919
Receivable for investments sold 7,054,682
Receivable for forward foreign currency exchange
contracts sold -- Note A 15,973
Interest receivable 7,447,278
Dividend receivable 82,659
Miscellaneous assets 82,758
-------------
Total Assets 305,153,742
- -----------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 9,047,271
Payable for shares repurchased 34,405
Dividend payable 80,756
Payable to John Hancock Advisers, Inc.
and affiliates -- Note B 191,122
Accounts payable and accrued expenses 64,570
-------------
Total Liabilities 9,418,124
- -----------------------------------------------------------------------------
Net Assets:
Capital paid-in 300,915,279
Accumulated net realized loss on investments and
foreign currency transactions ( 12,710,642)
Net unrealized appreciation of investments and
foreign currency transactions 7,582,656
Distributions in excess of net investment income ( 51,675)
-------------
Net Assets $ 295,735,618
=============================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of
beneficial interest outstanding -- 125,000,000 shares
authorized with $0.01 per share par
value, respectively)
Class A -- $52,792,025 / 6,993,073 $ 7.55
=============================================================================
Class B -- $242,943,593 / 32,181,511 $ 7.55
=============================================================================
Maximum Offering Price Per Share*
Class A -- ($7.55 x 104.71%) $ 7.91
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
See notes to financial statements.
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<CAPTION>
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses)
for the period stated.
Statement of Operations
Year ended October 31, 1996
- -----------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $26,344,513
Dividends (net of foreign withholding taxes of $688) 516,328
-----------
26,860,841
-----------
Expenses:
Investment management fee -- Note B 1,326,701
Distribution/service fee -- Note B
Class A 94,091
Class B 1,940,909
Transfer agent fee -- Note B 318,480
Custodian fee 99,931
Registration and filing fees 85,256
Auditing fee 48,290
Financial services fee -- Note B 37,927
Printing 36,514
Trustees' fees 26,487
Advisory board fee 15,911
Legal fees 10,110
Miscellaneous 4,379
-----------
Total Expenses 4,044,986
- -----------------------------------------------------------------------------
Net Investment Income 22,815,855
- -----------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions
Net realized gain on investments sold 8,079,688
Net realized loss on foreign currency transactions ( 50,098)
Change in net unrealized appreciation/depreciation
of investments 3,036,975
Change in net unrealized appreciation/depreciation
of foreign currency transactions 48,361
-----------
Net Realized and Unrealized Gain
on Investments and Foreign
Currency 11,114,926
- -----------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $33,930,781
=============================================================================
See notes to financial statements.
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<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------
1995 1996
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 17,462,118 $ 22,815,855
Net realized gain (loss) on investments sold
and foreign currency transactions ( 12,008,875) 8,029,590
Change in net unrealized appreciation/depreciation
of investments and foreign currency transactions 9,302,593 3,085,336
------------ ------------
Net Increase in Net Assets Resulting from Operations 14,755,836 33,930,781
------------ ------------
Distributions to Shareholders:
Dividends from net investment income:
Class A - ($0.7310 and $0.7560 per share, respectively) ( 1,845,748) ( 3,878,979)
Class B - ($0.6738 and $0.7024 per share, respectively) ( 15,681,410) ( 18,935,736)
------------ ------------
Total Distributions to Shareholders ( 17,527,158) ( 22,814,715)
------------ ------------
From Fund Share Transactions - Net* : 37,374,759 77,581,499
------------ ------------
Net Assets:
Beginning of period 172,434,616 207,038,053
End of period (including undistributed net ------------ ------------
investment income of $21,206 and distributions in excess
of net investment income of $51,675, respectively) $207,038,053 $295,735,618
============ ============
* Analysis of Fund Share Transactions:
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1995 1996
------------------------------ ---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
CLASS A
Shares sold 6,078,825 $43,382,586 8,767,330 $ 65,045,830
Shares issued to shareholders
in reinvestment of distributions 135,872 966,256 274,586 2,040,722
---------- ----------- ---------- ------------
6,214,697 44,348,842 9,041,916 67,086,552
---------- ----------- ---------- ------------
Less shares repurchased ( 4,135,476) ( 29,488,564) (5,722,882) ( 42,359,728)
---------- ----------- ---------- ------------
Net increase 2,079,221 $14,860,278 3,319,034 $ 24,726,824
========== =========== ========== ============
CLASS B
Shares sold 10,103,871 $71,810,000 16,014,384 $119,134,111
Shares issued to shareholders
in reinvestment of distributions 1,007,375 7,154,628 1,109,704 8,233,250
---------- ----------- ---------- ------------
11,111,246 78,964,628 17,124,088 127,367,361
---------- ----------- ---------- ------------
Less shares repurchased ( 7,937,826) ( 56,450,147) (10,029,960) ( 74,512,686)
---------- ----------- ---------- ------------
Net increase 3,173,420 $22,514,481 7,094,128 $52,854,675
========== =========== ========== ============
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the
previous period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders, and any increase or decrease in money shareholders invested in the Fund. The footnote
illustrates the number of Fund shares sold, reinvested and redeemed during the last two periods, along with the
corresponding dollar value.
See notes to financial statements.
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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:
- -----------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM JUNE 30, 1993 YEAR ENDED OCTOBER 31,
(COMMENCEMENT OF OPERATIONS) -------------------------------------
TO OCTOBER 31, 1993 1994 1995(1) 1996
---------------------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 8.10 $ 8.23 $ 7.33 $ 7.20
-------- -------- -------- --------
Net Investment Income 0.33 0.80(2) 0.72 0.76(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency Transactions 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 (3) 4.96%(4) ( 0.59%) 8.83% 16.06%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $ 2,344 $ 11,696 $ 26,452 $ 52,792
Ratio of Expenses to Average Net Assets 0.91%(5) 1.16% 1.16% 1.10%
Ratio of Net Investment Income
to Average Net Assets 12.89%(5) 10.14% 10.23% 10.31%
Portfolio Turnover Rate 204% 153% 98% 113%
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.
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<CAPTION>
Financial Highlights (continued)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1992 1993 1994 1995(1) 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 7.44 $ 7.43 $ 8.23 $ 7.33 $ 7.20
-------- -------- -------- -------- --------
Net Investment Income 0.87 0.80 0.74(2) 0.67 0.70(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions ( 0.04) 0.75 ( 0.83) ( 0.13) 0.35
-------- -------- -------- -------- --------
Total from Investment Operations 0.83 1.55 ( 0.09) 0.54 1.05
-------- -------- -------- -------- --------
Less Distributions
Dividends from Net Investment Income ( 0.84) ( 0.75) ( 0.76) ( 0.67) ( 0.70)
Distributions from Net Realized Gain
on Investments Sold -- -- ( 0.05) -- --
-------- -------- -------- -------- --------
Total Distributions ( 0.84) ( 0.75) ( 0.81) ( 0.67) ( 0.70)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 7.43 $ 8.23 $ 7.33 $ 7.20 $ 7.55
======== ======== ======== ======== ========
Total Investment Return
at Net Asset Value (3) 11.56% 21.76% ( 1.33%) 7.97% 15.24%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $ 98,560 $154,214 $160,739 $180,586 $242,944
Ratio of Expenses to Average Net Assets 2.25% 2.08% 1.91% 1.89% 1.82%
Ratio of Net Investment Income
to Average Net Assets 11.09% 10.07% 9.39% 9.42% 9.49%
Portfolio Turnover Rate 206% 204% 153% 98% 113%
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) Annualized.
See notes to financial statements.
</TABLE>
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<CAPTION>
Schedule of Investments
October 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the High Yield Bond Fund on October 31, 1996.
It's divided into 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 the bonds owned by the Fund.
Short-term investments, which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C>
BONDS
Advertising (1.32%)
Jordan Industries, Inc., Sr Sub Deb 08-01-05,
Stepped Coupon (11.75%, 8-01-98) (A) Zero % B- $ 5,000 $ 3,900,000
------------
Aerospace (1.11%)
Rohr, Inc., Sr Note 05-15-03 11.625 BB- 3,000 3,292,500
------------
Agricultural Operations (.99%)
Iowa Select Farms, L.P., Sr Note Ser A 02-15-04 17.250 B 5,000 2,942,500
------------
Automobile Parts (1.87%)
Harvard Industries, Inc., Sr Note 07-15-04 12.000 B+ 6,000 5,520,000
------------
Automobile/Truck (3.06%)
Fruehauf Trailer Corp., Sr Note 04-30-02 14.750 D 1,649 1,335,690
Great Dane Holdings,
Sr Sub Deb 08-01-01 12.750 B- 4,685 4,614,725
Sub Deb 01-01-06 14.500 CCC 3,132 3,085,020
------------
9,035,435
------------
Banks - Foreign (.16%)
Sumitomo Bank International Finance N.V.,
Sub Gtd Note 05-31-01 (Japan) # (R) 0.750 A2 50,000 479,947
------------
Banks -- U.S. (.81%)
First Nationwide Holdings, Inc., Sr Note 04-15-03 12.500 B 1,000 1,085,000
First Nationwide Escrow Corp., Sr Sub Note 10-01-03 (R) 10.625 BA3 1,250 1,318,750
------------
2,403,750
------------
Broadcasting (.66%)
CBS, Inc., Deb 06-01-22 8.875 BB 2,000 1,968,280
------------
Building (1.89%)
Fortress Group, Inc., Sr Note 05-15-03 13.750 B3 3,000 3,165,000
Olympia & York Maiden Lane Finance Corp.,
Mtg Backed 12-31-96 Zero D 2,000 630,000
Waxman Industries, Inc., Sr Note Ser B 06-01-04,
Stepped Coupon (12.75%, 06-01-99) (A) Zero CCC+ 2,500 1,793,750
------------
5,588,750
------------
Cable TV (.78%)
Australis Media Ltd., Units (Sr Sub Disc Note
05-15-03 & Warr.) (Australia) (F) Zero CCC 3,000 1,755,000
Scandinavian Broadcasting System S.A.,
Conv Sub Deb 08-01-05 (Netherlands) (F) 7.250 B 555 561,938
------------
2,316,938
------------
Chemicals (.86%)
OPP Petroquimica S.A., Bond 10-29-04 (Brazil) (F) (R) 11.000 NR 2,000 1,985,000
Sterling Chemicals Holdings, Sr Disc Note 08-15-08,
Stepped Coupon (13.50%, 08-15-01) (A) Zero B+ 1,000 570,000
------------
2,555,000
------------
Computers (0.71%)
Computervision Corp., Sr Sub Note 08-15-99 11.375 B- 2,000 2,090,000
------------
Construction (0.37%)
Primeco, Inc., Sr Sub Note 03-01-05 12.750 B 1,000 1,105,000
------------
Containers (2.23%)
Gaylord Container Corp., Sr Sub Disc Deb 05-15-05,
Stepped Coupon (12.75%, 05-15-96) (A) Zero B- 6,000 6,585,000
------------
Cosmetics & Toiletries (0.73%)
Renaissance Cosmetics, Sr Note 08-15-01 13.750 B 2,000 2,155,000
------------
Diversified Operations (1.59%)
Reeves Industries, Inc., Sr Note 07-15-02 11.000 B- 5,000 4,700,000
------------
Financial (1.37%)
Intertek Finance plc, Sr Sub Note 11-01-06 (R) + 10.250 B2 1,150 1,150,000
Trump Holdings & Funding Corp., Sr Note 06-15-05 15.500 B+ 2,500 2,900,000
------------
4,050,000
------------
Foods (4.71%)
Americold Corp., Sr Sub Note 05-01-08 12.875 B- 2,000 2,065,000
Di Giorgio Corp., Sr Note 02-15-03 12.000 B 4,250 4,250,000
International Home Foods, Sr Sub Note 11-01-06 (R) 10.375 B- 2,000 2,017,500
Specialty Foods Acquisition Corp.,
Sr Sub Note Ser B 08-15-03 11.250 B- 4,000 3,250,000
White Rose Foods, Inc., Sr Note Ser B 11-01-98 Zero B- 3,000 2,355,000
------------
13,937,500
------------
Glass Products (1.33%)
Owens-Illinois, Inc.,
Deb 12-01-03 11.000 BB 2,000 2,197,500
Sr Sub Note 04-01-99 10.250 B+ 1,700 1,725,500
------------
3,923,000
------------
Governmental - Foreign (1.63%)
Italy, Republic of, Privatization
Exchangeable Note 06-28-01 (Italy) (F) 5.000 AA3 1,000 986,250
Land & Agricultural Bank of South
Africa, Bond 11-15-96 (South Africa) # 16.000 BBB 18,000 3,830,725
------------
4,816,975
------------
Leisure & Recreation (10.15%)
Argosy Gaming Co., 1st Mtg 06-01-04 13.250 B+ 3,000 2,880,000
Aztar Corp., Sr Sub Note 10-01-04 13.750 B 2,000 2,200,000
Casino America, Inc., Sr Secured Note 08-01-03 12.500 B 2,200 2,255,000
Claridge Hotel & Casino Corp., (The), 1st Mtg 02-01-02 11.750 CCC+ 580 417,600
Coast Hotels & Casinos, Inc., 1st Mtg Ser B 12-15-02 13.000 B 3,000 3,225,000
GB Property Funding Corp., 1st Mtg 01-15-04 10.875 B 6,000 5,460,000
Lady Luck Gaming Corp., 1st Mtg Ser Qtr 03-01-01 11.875 B- 2,750 2,695,000
Mohegan Tribal Gaming Authority, Sr Note Ser B 11-15-02 13.500 BB+ 3,400 4,335,000
Showboat, Inc., Sr Sub Note 08-01-09 13.000 B 2,000 2,240,000
Showboat Marina Casino/Finance, 1st Mtg Ser B 03-15-03 13.500 B 4,000 4,300,000
------------
30,007,600
------------
Metals (.72%)
Alpine Group, Inc., (The), Sr Note Ser B 07-15-03 12.250 B 1,995 2,134,650
------------
Oil & Gas (4.47%)
Kelly Oil & Gas Partners Ltd.,
Sub Note Convertible 12-15-99 7.875 B- 4,550 4,186,000
Deb 04-01-00 8.500 B- 1,500 1,425,000
Maxus Energy Corp., Deb 11-15-15 11.500 BB- 2,000 2,102,500
Tokheim Corp., Sr Sub Note 08-01-06 (R) 11.500 B 1,500 1,582,500
TransAmerican Refining Corp., 1st Mtg Ser 1 02-15-02,
Stepped Coupon (18.50%, 2/98, 18.00%, 8/98) (A) Zero CCC+ 5,000 3,925,000
------------
13,221,000
------------
Paper (2.48%)
American Pad & Paper Co., Sr Sub Note Ser B 11-15-05 13.000 B 780 895,050
APP International Finance Co. B.V., Gtd Sec
Note 10-01-05 (Indonesia) (F) 11.750 BB 750 776,250
Grupo Industrial Durango, S.A., Note 08-01-03
(Mexico) (F) 12.625 BB- 615 642,675
Indah Kiat International Finance Co.,
Sr Sec Note 06-15-06 (Indonesia) (F) 12.500 BB 2,500 2,718,750
Riverwood International Corp., Sr Sub Note 04-01-08 10.875 B 2,500 2,287,500
------------
7,320,225
------------
Pollution Control (0.99%)
ICF Kaiser International, Inc., Unit
(Sr Sub Note & Warr.) 12-31-03 13.000 B- 3,000 2,932,500
------------
Printing (1.12%)
Sullivan Graphics, Inc., Sr Sub Note 08-01-05 12.750 CAA 2,000 1,920,000
United States Banknote Corp., Sr Note
Ser B 08-01-02 11.625 B- 1,500 1,380,000
------------
3,300,000
------------
Protection (0.94%)
Mosler, Inc., Sr Note Ser A 04-15-03 11.000 CCC- 3,000 2,767,500
------------
Publishing - Newspapers (1.06%)
Affiliated Newspapers Investments Inc.,
Sr Disc Note 07-01-06, Stepped Coupon
(13.25%, 07-01-99) (A) Zero B 4,000 3,140,000
------------
Real Estate (0.96%)
JM Peters Company, Inc., Sr Note 05-01-02 12.750 B- 3,000 2,850,000
------------
Retail (9.63%)
American Restaurant Group, Inc.,
Sr Note Ser 92 09-15-98 13.000 CC 1,561 1,451,611
Barry's Jewelers, Inc., Sr Note 12-22-00 11.000 B3 5,000 4,643,750
Big 5 Holdings, Sr Sub Note Ser B 09-15-02 13.625 B- 6,805 6,736,950
Duane Reade Corp., Sr Note 09-15-02 12.000 B- 636 616,920
Duane Reade Holding Corp., Sub Note 09-15-04,
Stepped Coupon (15.00%, 09-15-99) (A) Zero CAA 2,000 960,000
Flagstar Corp., Sr Note 09-15-01 10.750 B- 3,915 3,406,050
Hills Stores Co., Sr Note Ser B 07-01-03 12.500 B1 2,000 1,800,000
International Semi-Tech Microelectronics Inc.,
Sr Disc Note 08-15-03, Stepped Coupon
(11.50%, 08-15-00) (A) Zero B+ 3,000 1,830,000
Lechters, Inc., Sub 09-27-01 5.000 B 500 335,000
Petro PSC / Properties, L.P., Sr Note 06-01-02 12.500 B 1,950 2,008,500
Remington Arms Company, Inc., Sr Sub Note 12-01-03 (R) 10.000 B 3,000 2,505,000
Star Markets Company, Inc., Sr Sub Note 11-01-04 13.000 CCC+ 2,000 2,180,000
------------
28,473,781
------------
Steel (11.97%)
Algoma Steel, Inc., 1st Mtg 07-15-05 12.375 B 8,500 8,797,500
Gulf States Steel, Inc. of Alabama, 1st Mtg 04-15-03 13.500 B 8,250 7,837,500
Haynes International, Inc., Sr Note 09-01-04 11.625 B- 8,000 8,320,000
NS Group, Inc., Unit (Sr Sec Note 07-15-03 & Warr.) 13.500 B- 8,000 7,980,000
Sheffield Steel Corp., Sr Note 11-01-01 12.000 B3 2,000 1,850,000
Weirton Steel Corp., Sr Note 03-01-98 11.500 B 580 600,300
------------
35,385,300
------------
Telecommunications (7.48%)
Comunicacion Celular S.A., Bond 11-15-03,
Stepped Coupon (13.125%, 11-15-00) (A) Zero B+ 3,250 1,998,750
EchoStar Communications Corp.,
Sr Disc Note 06-01-04, Stepped Coupon
(12.875%, 06-01-99) (A) Zero B 393 314,400
EchoStar Satellite Broadcasting Corp.,
Sr Disc Note 03-15-04, Stepped Coupon
(13.125%, 03-15-00) (A) Zero B- 10,300 7,210,000
Fonorola, Inc., Sr Note 08-15-02 12.500 B+ 1,500 1,631,250
Impsat Corp., Sr Gtd Note 07-15-03 (R) 12.125 BB- 835 868,400
Nextel Communications, Inc., Sr Disc Note 08-15-04 Zero CCC- 13,900 8,826,500
Shared Technologies Fairchild, Inc.,
Sr Sub Disc Note 03-01-06, Stepped Coupon
(12.25%, 03-01-99) (A) Zero CAA 1,600 1,264,000
------------
22,113,300
------------
Textiles (0.60%)
Apparel Ventures, Inc., Sr Note 12-31-00 12.250 B- 2,350 1,786,000
------------
Tobacco ( 0.26%)
Liggett Group, Inc., Sr Note Ser B 02-01-99 11.500 B 1,000 760,000
------------
Transportation (1.86%)
AM General Corp., Sr Note Ser B 05-01-02 12.875 B 4,000 3,800,000
Burlington Motor Holdings, Inc., Sr Sub Note 11-01-03 11.500 CCC+ 2,000 12,500
Jet Equipment Trust Ser 1995-B, Cert 08-15-14 (R) 10.910 BB+ 1,500 1,687,785
------------
5,500,285
------------
Utilities (0.73%)
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A 11-15-05 11.450 BB 2,000 2,167,500
------------
TOTAL BONDS
(Cost $242,993,070) (83.60%) 247,225,216
------ ------------
NUMBER OF SHARES
OR WARRANTS
----------------
COMMON AND PREFERRED STOCKS AND WARRANTS
American Telecasting, Warrants** 2,000 7,000
AVI Holdings Inc., Warrants (R) ** 1,500 7,500
Barry's Jewelers, Inc., Common Stock** 40,000 95,000
Bowater Inc., Ser B Conv Pref Stock 101,000 2,979,500
Browne Bottling Co., Warrants ** 237 2
Canadian National Railway Co., Common Stock (Canada) (F) 20,000 550,000
Casino Magic Finance Corp., Warrants** 9,000 90
Chancellor Broadcasting, Ser A Pref Stock 20,000 2,190,000
CHC Helicopter Corp., Warrants (Canada) (F)** 16,000 8,000
Comunicacion Celular SA, Warrants** 32,500 195,000
Continental Air Finance Trust, Pref Stock (R) 45,500 2,849,438
Crown Packaging Holdings Ltd., Common Stock (Canada) (F)** 2,750 22,000
Decorative Home Accents, Common Stock** 1,000 6,000
Farm Fresh Holdings Corp., Common Stock (Class B)** 1,000 10,000
Haynes Holdings, Inc., Common Stock** 67,938 696,364
Lady Luck Gaming Corp., Common Stock** 31,786 1,001,259
Newcourt Credit Group, Inc., Common Stock (Canada)# 25,000 775,498
Northwest Airlines Corp., Common Stock (Class A)** 260,000 8,612,500
Qantas Airways Ltd., Common Stock American Depositary Shares
(ADS) (Australia) (F) (R) 32,200 469,849
Renaissance Cosmetics, Warrants** 4,000 200,000
Sterling Chemicals Holdings, Warrants** 1,000 35,000
Swissair Schweizerische Luftverkehr AG Reg Shares, (Switzerland)**# 3,400 2,660,639
USX-Delhi Group, Common Stock 221,400 2,905,875
US Air Group, Inc., Ser B Pref Stock 16,000 842,000
Wang Laboratories Inc., Ser B Conv Pref Stock (R) 100,000 5,275,000
Weirton Steel Corp., Common Stock** 100,000 212,500
Western Pacific Airlines, Inc., Common Stock** 10,000 78,750
------------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $29,269,866) (11.05%) 32,684,764
------ ------------
PAR VALUE
INTEREST (000'S MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---------- ------------ --------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.88%)
Investment in a joint repurchase agreement transaction with
SBC Capital Markets Inc., Dated 10-31-96, Due 11-01-96
(secured by U.S. Treasury Bonds 10.375%, 11.250%, 12.000%,
and 6.250%, Due 11-15-12, 2-15-15, 8-15-13,
and 8-15-23, respectively) - Note A 5.54% $8,520 $ 8,520,000
------------
Corporate Savings Account (0.03%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 81,493
------------
TOTAL SHORT TERM INVESTMENTS (2.91%) 8,601,493
------ ------------
TOTAL INVESTMENTS ( 97.56%) $288,511,473
====== ============
NOTES TO THE SCHEDULE OF INVESTMENTS
(A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date.
(F) Parenthetical disclosure of a foreign country in the security description represents country of a
foreign issuer, however, security is U.S. dollar denominated.
# Par value of foreign bonds and common stocks is expressed in local currency, as shown parenthetically
in security description.
(R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such
securities may be resold, normally to qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $22,196,669 as of October 31, 1996.
* Credit Ratings are unaudited and rated by Moody's Investor Services or John Hancock Advisers, Inc. where
Standard and Poors ratings are not available.
** Non-income producing security.
+ The security having an aggregate value of $1,150,000 or .39% of the Fund's net assets, has been
purchased on a delayed delivery basis. The Fund has instructed its Custodian Bank to segregate assets
with a current value at least equal to its unfunded commitment. Accordingly, the market value of
$1,402,500 of Mohegan Tribal Gaming Authority 13.50%, 11/15/02 has been segregated to cover the unfunded
commitment. The sale of this security has certain restrictions.
The percentage shown for each investment category is the total value of that category as a percentage of the
net assets of the Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Portfolio Concentration
October 31, 1996
- ------------------------------------------------------------------------------------------------
The High Yield Bond 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 of the
countries within 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, concentration of investments can be aggregated by various countries. The table
below shows the percentage of the Fund's investments at October 31, 1996 assigned to country
categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ---------------
<S> <C>
Australia 0.75%
Brazil 0.67
Canada 0.46
Indonesia 1.18
Italy 0.33
Japan 0.16
Mexico 0.22
Netherlands 0.19
South Africa 1.30
Switzerland 0.90
United States 91.40%
-----
TOTAL INVESTMENTS 97.56%
=====
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- --------------------- ---------------
AA 0.33%
A 0.16
BBB 1.30
BB 7.70
B 62.51
CAA 1.40
CCC 8.37
CC 0.49
D 0.67
NR 0.67%
-----
TOTAL BONDS 83.60%
=====
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - High Yield Bond Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is a diversified, open-end
management investment company, registered under the Investment
Company Act of 1940. Until August 31, 1996, the Fund was a series of
John Hancock Series, Inc. The Trust consists of three series: John
Hancock High Yield Bond Fund (the "Fund"), John Hancock Intermediate
Government Fund, and John Hancock Government Income Fund
(collectively, the "Funds"). The other two series of the Trust are
reported in separate financial statements. The investment objective
of the Fund is to maximize current income without assuming undue
risk by investing in a diversified portfolio consisting primarily of
lower-rated, high yielding, debt securities.
The Trustees have authorized the issuance of multiple classes of
shares of the Fund, designated as Class A and Class B shares. The
shares of each class represent an interest in the same portfolio of
investments of the Fund and have equal rights to voting,
redemptions, dividends, and liquidation, except that certain
expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current
regulations of the Securities and Exchange Commission and the
Internal Revenue Service. Shareholders of a class which bears
distribution and service expenses under terms of a distribution plan
have exclusive voting rights to that distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are
valued on the basis of market quotations, valuations provided by
independent pricing services or, at fair value as determined in good
faith in accordance with procedures approved by the Board of
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.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by
the Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with
John Hancock Advisers, Inc. (the "Adviser"), a wholly-owned
subsidiary of The Berkeley Financial Group, may participate in a
joint repurchase agreement. 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.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $20,457,110
of a capital loss carryforward available, to the extent provided by
regulations, to offset future net realized capital gains. If such
carryforward is used by the Fund, no capital gains distributions
will be made. The carryforward expires as follows: December 31, 2002
- -- $9,184,252 and December 31, 2003 -- $11,272,858. The Fund's tax
year end is December 31.
DIVIDENDS, DISTRIBUTIONS AND INTEREST 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 amount, except for the effect of expenses that
may be applied differently to each class as explained previously.
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.
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.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or 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.
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 other than
that offset by the currency amount of the underlying transaction.
Open foreign currency forward sell contracts at October 31, 1996,
were as follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT MONTH APPRECIATION
- -------- -------------------- -------- ------------
South African
Rand 19,440,000 Nov 96 $ 8,092
Swiss Franc 3,546,000 Jan 97 7,881
-------
$15,973
=======
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) 0.625% of
the first $75,000,000 of the Fund's average daily net asset value,
(b) 0.5625% of the next $75,000,000 and (c) 0.50% of the Fund's
average daily net asset value in excess of $150,000,000.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of the most
restrictive state limit where the Fund is registered to sell shares,
the fee payable to the Adviser will be reduced to the extent of such
excess, and the Adviser will make additional arrangements necessary
to eliminate any remaining excess expenses. The current limits are
2.5% of the first $30,000,000 of the Fund's average daily net asset
value, 2.0% of the next $70,000,000, and 1.5% of the remaining
average daily net asset value.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the
period ended October 31, 1996, net sales charges received with
regard to sales of Class A shares amounted to $696,959. Out of this
amount, $72,220 was retained and used for printing prospectuses,
advertising, sales literature and other purposes, $458,039 was paid
as sales commissions to unrelated broker-dealers and $166,700 was
paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated
("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of which are
broker dealers. The Adviser's indirect parent, John Hancock Mutual
Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will
be subject to a contingent deferred sales charge ("CDSC") at
declining rates beginning at 5.0% of the lesser of the current
market value at the time of redemption or the original purchase cost
of the shares being redeemed. Proceeds from 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
October 31, 1996, contingent deferred sales charges paid to JH Funds
amounted to $555,251.
In addition, to reimburse 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 and Class B 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 0.25% of Class A average
daily net assets and 1.00% of Class B average daily net assets to
reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.25% of such payments may 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 Investor
Services Corporation ("Investor Services"), a wholly-owned
subsidiary of The Berkeley Financial Group. The Fund pays Investor
Services a fee based on the number of shareholder accounts and
certain out-of-pocket expenses.
On March 26, 1996, the Board of Trustees approved retroactively to
January 1, 1996, an agreement with the Adviser to perform necessary
tax and financial management services for the Funds. The
compensation for 1996 is estimated to be at an annual rate of
0.01875% of the average net assets of each Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are trustees and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Directors is borne by the Fund. Effective with the fees
paid for 1995, 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 October 31,
1996, the Fund's investments to cover the deferred compensation
liability had unrealized appreciation of $793.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than
obligations of the U.S. government and its agencies and short-term
securities, during the period ended October 31, 1996, aggregated
$331,916,727 and $256,041,689, respectively.
The cost of investments owned at October 31, 1996 for federal income
tax purposes was $280,782,936. Gross unrealized appreciation and
depreciation of investments aggregated $14,609,409 and $6,962,365,
respectively, resulting in net unrealized appreciation of
$7,647,044.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the period ended October 31, 1996, the Fund has reclassified
amounts to reflect a decrease in undistributed net investment income
of $74,021, a decrease in accumulated net realized investment loss
of $513,447 and a decrease in capital paid-in of $439,426. This
represents the amount necessary to report these balances on a tax
basis, excluding certain temporary differences, as of October 31,
1996. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net
asset value of the Fund, are primarily attributable to certain
differences in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting
principles. The calculation of net investment income per share
excludes these adjustments.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
John Hancock High Yield Bond Fund
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of the John
Hancock High Yield Bond Fund (the "Fund"), one of the portfolios
constituting John Hancock Bond Trust, Inc. as of October 31, 1996,
and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian and brokers,
and other auditing procedures when replies from brokers were not received.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock High Yield Bond Fund
portfolio of John Hancock Bond Trust at October 31, 1996, the
results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended,
and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
December 10, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is
furnished with respect to the dividends of the Fund during its
fiscal year ended October 31, 1996. All of the dividends paid for
the fiscal year are taxable as ordinary income. None of the 1996
dividends qualify for the dividends received deduction available to
corporations.
Shareholders will be mailed a 1996 U.S. Treasury Department Form
1099-DIV in January of 1997. This will reflect the total of all
distributions which are taxable for calendar year 1996.
SHAREHOLDER MEETING (UNAUDITED)
On July 2, 1996, a special meeting of John Hancock High Yield Bond
Fund was held.
The Shareholders approved an Agreement and Plan of Reorganization
for the Fund. The shareholder votes were 15,440,381 FOR, 441,685
AGAINST and 1,378,497 ABSTAINING.
The Shareholders redesignated as nonfundamental the Fund's
fundamental investment restriction on investing in other investment
companies. The shareholder votes were 15,314,425 FOR, 558,488
AGAINST, and 1,387,651 ABSTAINING.
The Shareholders elected the following Trustees with the votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- -------------- --------------
Edward J. Boudreau, Jr. 19,670,794 648,121
James F. Carlin 19,669,794 649,121
William H. Cunningham 19,669,775 649,139
Charles F. Fretz 19,663,179 655,736
Harold R. Hiser, Jr. 19,669,776 649,139
Anne C. Hodsdon 19,670,114 648,801
Charles L. Ladner 19,669,794 649,121
Leo E. Linbeck, Jr. 19,669,757 649,157
Patricia P. McCarter 19,669,114 649,801
Steven R. Pruchansky 19,669,096 649,819
Richard S. Scipione 19,664,160 654,754
Norman H. Smith 19,669,775 649,139
John P. Toolan 19,667,962 650,952
NOTES
John Hancock Funds - High Yield Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - High Yield Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - High Yield Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the
page. A box sectioned in quadrants with a triangle in upper left, a
circle in upper right, a cube in lower left and a diamond in lower
right. A tag line below reads: "A Global Investment Management Firm."
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Randolph, MA
Permit No. 75
This report is for the information of shareholders of the John
Hancock High Yield Bond Fund. It may be used as sales literature
when preceded or accompanied by the current prospectus, which
details charges, investment objectives and operating policies.
A recycled logo in lower left hand corner with caption "Printed on
Recycled Paper." 5700A 10/96
12/96
John Hancock Funds
Government
Income
Fund
ANNUAL REPORT
October 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Richard S. Scipione
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and
Chief Executive Officer, flush right, next to second
paragraph.
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in the
mutual fund industry. At that time, Securities and Exchange Commission
Chairman Arthur Levitt called on fund companies to make their
prospectuses more user-friendly. He noted that prospectuses are often
overloaded with technical detail and are hard for most investors to
understand. Many industry observers agreed, and rightly so.
So it is my pleasure to let you know that after being under development
for a year, John Hancock Funds has introduced new simplified and
consolidated prospectuses. The prospectuses feature shorter, clearer
language with a streamlined design, and they incorporate several funds
with similar investment objectives into one document. They cover our
income, growth, growth and income, tax-free income, international/global
and money market funds. We are gratified at the favorable reviews that
our new prospectuses have received from shareholders, financial
advisers, industry analysts and the press. We believe they are a bold
but sensible step forward. And while they are easier to read, they still
comply with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page
spread highlighting each fund's goals and investment strategy, the types
of securities it buys, its portfolio management and risk factors, all in
plainer language. Fund expenses and financial highlights are now found
here, too, as is a new bar chart that shows year-to-year volatility for
each fund. Other features include a better presentation of fund services,
a new glossary of investment risks and a discussion about how funds are
organized, including a diagram showing the connection of the various
players that provide services to your Hancock fund(s).
We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in the
end, we did it for you, our shareholders.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY BARRY EVANS, PORTFOLIO MANAGER
John Hancock
Government Income Fund
Bond investors tugged in opposite directions on
mixed economic news
Events in the bond market during the past 12 months can be characterized
by two major interest rate moves: rising rates in early 1996 and falling
rates in October. In between those two periods, the market moved
constantly within a very tight range, depending on the economic news
coming out of Washington.
When the Fund's fiscal year began in late 1995, the bond market was
rallying, with falling interest rates and rising bond prices, in
anticipation of a balanced budget accord that would have been very
positive news for the economy. But by late February the market
slowly began to realize that a balanced budget wasn't going to happen
and that the economy, in fact, was beginning to accelerate instead
of slowing down as many market participants had believed it would.
This market shift prompted interest rates to move up and sent bond
prices down as many investors began to fear that a faster-growing
economy would spark inflation, bondholders' nemesis because it erodes
the value of their fixed-income stream. When the period began, the yield
on the bellwether 30-year Treasury was at 6% and rose as high as 7.2%
before settling down around 6.6%. The bond market staged a comeback in
September once inflation fears dissipated somewhat after the Federal
Reserve declined to raise rates and the economy slowed down in the third
quarter.
A 2 1/4" x 3 1/2" photo of portfolio management team at
bottom right. Caption reads: "Barry Evans (seated) and
management team members Roger Hamilton (left) and Seth
Robbins (right)".
Two major
interest rate
moves occurred
during the
Fund's fiscal
year.
Pie chart with the heading 'Portfolio Diversification" at top
of left hand column. The chart is divided into four sections.
Going from top left to right: Short-term Investments & Other
7%; Foreign Bank and Government Bonds 12%; U.S. Treasury
Bonds 23%; U.S. Government Agencies 49%. A footnote below
states "As a percentage of net assets on October 31, 1996."
"We
maintained
performance
by successfully
managing the
Fund's
duration."
In this challenging environment, John Hancock Government Income Fund
performed well. For the 12 months ended October 31, 1996, John Hancock
Government Income Fund's Class A and Class B shares had total returns of
4.49% and 3.84%, respectively, at net asset value. These compared to the
average general U.S. government fund's return of 4.04%, according to
Lipper Analytical Services.1 Please see pages six and seven for longer-
term performance information. We maintained performance by successfully
managing the Fund's duration. Duration measures how sensitive a bond's
price is to changes in interest rates. The longer a bond's duration, the
more its price will rise as interest rates fall (or fall as rates rise).
We shortened the Fund's duration to 4.8 years in the rising rate
environment of February and March and lengthened it to 5.2 years in the
falling rate period from August through October.
Mortgage strategy
Generally, when the market stays within a narrow range, as it did for
most of the last six months, bond investors can benefit from holding
securities that offer yield over and above that offered by U.S. Treasury
bonds. So as rates began rising, we pared our Treasury holdings and
bought mortgage-backed securities, specifically GNMA 7 1/2% and 8%
mortgages. By owning current coupon mortgages, those with rates similar
to prevailing interest rates, we were able to take advantage of their
yields, while limiting our prepayment risk -- the risk that homeowners
will prepay their mortgages and refinance at a lower rate. When rates
fall and homeowners pay off their mortgages to refinance at lower rates,
the investors holding the original mortgages lose that higher yield and
are forced to reinvest the mortgage proceeds at a lower rate. As
expected, mortgages did well during the last six months when rates
stayed within a narrow range and the risk of prepayment declined.
During the past 12 months we also added to the Fund's investment in
planned amortization classes (PACs). Issued by government agencies such
as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, PACs are portions of higher-quality collateralized
mortgage obligations (CMOs) that have a lower probability of prepayment.
CMOs separate the cash flows of mortgage pools into different classes of
various maturities. Our PACs helped boost the Fund's yield, while being
more insulated from the threat of prepayment in a falling rate
environment.
Our stake in mortgage bonds rose to as much as 53% of the Fund's net
assets before we began to reduce it in August, bringing it back to about
25% by the end of October. Because interest rates had begun to fall,
mortgages no longer provided the yield that they had during mid year. In
their place, we increased the Fund's holdings in foreign bonds,
particularly Canadian Provincial debt -- debt obligations of the
Canadian provinces. The climate for Canadian bonds is favorable because
Canada has been fairly aggressive about lowering its interest rates and
strengthening its budget in an effort to stimulate the domestic economy.
Our top holding includes Province of Ontario bonds, which have a high
coupon and relatively short maturity.
Bar chart with heading "Fund Performance" at top of left hand
column. Under the heading is the footnote: "For the year
ended October 31, 1996." The chart is scaled in increments of
1% from bottom to top, with 5% at the top and 0% at the
bottom. Within the chart there are three solid bars. The
first represents the 4.49% total return for the John Hancock
Government Income Fund: Class A. The second represents the
3.84% total return for the John Hancock Government Income
Fund: Class B. The third represents the 4.04% total return
for the average general U.S. government fund. A footnote
below reads: "Total returns for John Hancock Government
Income Fund are at net asset value with all distributions
reinvested. The average general U.S. government fund is
tracked by Lipper Analytical Services. (1) See following two
pages for historical performance information."
Looking ahead
Our outlook for bonds remains favorable. In our view, the most likely
scenario over the next six months is for the economy to continue to grow
at a modest pace. Consumer spending should bounce back enough from its
third quarter lull to prevent the economy from slipping into a recession.
While it's possible that we'll see some periodic inflation scares as the
market struggles with wage concerns, we remain convinced that there isn't
a real inflation threat, only a perceived one. The bond market should
also be pleased with the status quo of the 1996 elections. This environment
suggests that interest rates still have room to come down somewhat,
although on a more modest scale. Given that scenario, we'll maintain a
slightly aggressive posture and keep the Fund's duration slightly longer
than average. But once the yield on the 30-year Treasury bond falls to
around 6.4%, we'll begin shortening our duration and buying mortgages
again, unless we see further signs that lead us to believe that interest
rates could go even lower.
"Our outlook
for bonds
remains
favorable."
- --------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
1Figures from Lipper Analytical Services 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 Government Income
Fund. Total return is a performance measure that equals the sum of all
income and capital gain distributions, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 4.50%
for Class A shares. (Prior to May 15, 1995, the maximum applicable sales
charge for Class A shares was 4.75%.) The effect of the maximum
contingent deferred sales charge for Class B shares (maximum 5% and
declining to 0% over six years) is included in Class B performance.
Remember that all figures represent past performance and are no
guarantee of how the Fund will perform in the future. Also, 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.
CUMULATIVE TOTAL RETURNS
For the period ended September 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---------- --------- -----------
John Hancock Government Income
Fund: Class A (0.93%) N/A 12.20%(1)
John Hancock Government Income
Fund: Class B(2) (1.99%) 28.75% 74.57%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended September 30, 1996
ONE FIVE LIFE OF
YEAR YEARS FUND
---------- --------- -----------
John Hancock Government Income
Fund: Class A (0.93%) N/A 5.92%(1)
John Hancock Government Income
Fund: Class B(2) (1.99%) 5.18% 6.69%
YIELDS
As of October 31, 1996
SEC 30-DAY
YIELD
----------
John Hancock Government Income Fund: Class A 5.91%
John Hancock Government Income Fund: Class B 5.44%
Notes to Performance
(1) Class A shares commenced on September 30, 1994.
(2) Class B shares commenced on February 23, 1988.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Government Income Fund would be worth on October 31, 1996,
assuming you had invested on the day each class of shares started and
reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Treasury Composite Index -- an
unmanaged index of fixed-income securities that are similar, but not
identical, to the bonds in the Fund's portfolio.
Government Income Fund
Class A shares
Line chart with the heading Government Income Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the
life of the fund. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Treasury
Composite Index and is equal to $12,114 as of October 31, 1996. The
second line represents the value of the hypothetical $10,000 investment
made in the Government Income Fund on September 30, 1994, before sales
charge, and is equal to $11,994 as of October 31, 1996. The third line
represents the Government Income Fund, after sales charge and is equal
to $11,451 as of October 31, 1996.
Government Income Fund
Class B shares
Line chart with the heading Government 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 Lehman Brothers Treasury
Composite Index and is equal to $20,510 as of October 31, 1996. The
second line represents the value of the hypothetical $10,000 investment
made in the Government Income Fund on February 23, 1988, and is equal to
$17,801 as of October 31, 1996.
* No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
John Hancock Funds - Government Income Fund
</TABLE>
<TABLE>
<CAPTION>
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,
1996. 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, 1996
- ----------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value -- Note C:
U.S. government and agencies securities
(cost -- $ 452,275,470) $ 455,853,949
Foreign government bonds (cost -- $67,402,079) 68,081,868
Multi-family mortgage backed bonds
(cost -- $9,562,460) 9,565,111
Joint repurchase agreement (cost -- $2,284,000) 2,284,000
Corporate savings account 65,159
-------------
535,850,087
Receivable for investments sold 33,598,640
Receivable for shares sold 37,267
Interest receivable 9,920,977
Receivable for variation margin -- Note A 34,531
Other assets 165,547
-------------
Total Assets 579,607,049
- ---------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 4,178,115
Payable for shares repurchased 201,332
Dividend payable 117,700
Payable to John Hancock Advisers, Inc.
and affiliates -- Note B 491,660
Accounts payable and accrued expenses 170,985
-------------
Total Liabilities 5,159,792
- ---------------------------------------------------------------------------
Net Assets:
Capital paid-in 592,951,338
Accumulated net realized loss on investments
and financial futures contracts ( 22,835,854)
Net unrealized appreciation of investments and
financial futures contracts 4,340,819
Distributions in excess of net investment income ( 9,046)
-------------
Net Assets $ 574,447,257
===========================================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding -- 1,000,000,000 shares
authorized with $0.01 par value, respectively)
Class A -- $396,323,045/43,691,328 $ 9.07
============================================================================
Class B -- $178,124,212/19,626,997 $ 9.08
============================================================================
Maximum Offering Price Per Share*
Class A -- ($9.07 x 104.71%) $ 9.50
============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or
more and on group sales the offering price is reduced.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows net
gains (losses) for the period stated.
Statement of Operations
Year ended October 31, 1996
- ----------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $52,084,692
-----------
Expenses:
Investment management fee -- Note B 3,952,669
Distribution/service fee -- Note B
Class A 1,066,882
Class B 1,972,552
Transfer agent fee -- Note B 1,098,875
Custodian fee 161,369
Printing 103,680
Financial services fee -- Note B 96,304
Miscellaneous 88,326
Trustees' fees 86,595
Registration and filing fees 78,049
Auditing fee 62,382
Advisory board fee 51,407
Legal fees 39,250
-----------
Total Expenses 8,858,340
- ---------------------------------------------------------------------------
Net Investment Income 43,226,352
- ---------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized loss on investments sold ( 3,115,736)
Net realized gain on financial futures contracts 54,519
Change in net unrealized appreciation/depreciation
of investments ( 15,006,957)
Change in net unrealized appreciation/depreciation
of financial futures contracts 24,624
-----------
Net Realized and Unrealized Loss
on Investments ( 18,043,550)
- ---------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $25,182,802
===========================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Increase in Net Assets:
From Operations:
Net investment income $ 21,225,641 $ 43,226,352
Net realized loss on investments sold and financial futures contracts ( 6,768,941) ( 3,061,217)
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts 49,303,120 ( 14,982,333)
------------- -------------
Net Increase in Net Assets Resulting from Operations 63,759,820 25,182,802
------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($0.7182 and $0.6475 per share, respectively) ( 4,353,217) ( 30,301,964)
Class B -- ($0.6528 and $0.5817 per share, respectively) ( 16,866,998) ( 12,924,388)
Distributions in excess of net investment income
Class A -- (none and $0.0006 per share, respectively) -- ( 24,790)
Class B -- (none and $0.0003 per share, respectively) -- ( 6,308)
------------- -------------
Total Distributions to Shareholders ( 21,220,215) ( 43,257,450)
------------- -------------
From Fund Share Transactions -- Net* 413,699,323 ( 105,001,453)
------------- -------------
Net Assets:
Beginning of period 241,284,430 697,523,358
------------- -------------
End of period (including undistributed net investment
income and distributions in excess of
net investment income of $5,426 and $9,046, respectively) $697,523,358 $574,447,257
============= =============
* Analysis of Fund Share Transactions:
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1995 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 316,821 $ 2,814,999 2,410,470 $ 21,862,541
Shares issued in reorganization -- Note E 51,435,148 464,795,225 -- --
Shares issued to shareholders in reinvestment of distributions 217,963 2,023,104 1,608,652 14,641,736
----------- ------------- ----------- ------------
51,969,932 469,633,328 4,019,122 36,504,277
Less shares repurchased ( 1,498,883) ( 13,909,339) (10,824,321) ( 98,756,948)
----------- ------------- ----------- ------------
Net increase (decrease) 50,471,049 $455,723,989 ( 6,805,199) ($62,252,671)
=========== ============= =========== ============
CLASS B
Shares sold 2,414,651 $ 21,569,979 1,969,851 $ 18,166,729
Shares issued in reorganization -- Note E 243,005 2,166,726 -- --
Shares issued to shareholders in reinvestment of distributions 973,020 8,764,619 734,239 6,692,313
----------- ------------- ----------- ------------
3,630,676 32,501,324 2,704,090 24,859,042
Less shares repurchased ( 6,837,005) ( 74,525,990) ( 7,418,441) ( 67,607,824)
----------- ------------- ----------- ------------
Net decrease ( 3,206,329) ($ 42,024,666) ( 4,714,351) ($42,748,782)
=========== ============= =========== ============
The Statement of Changes in Net Assets shows how the value of the Fund's
net assets has changed since the end of the previous period. The
difference reflects earnings less expenses, any investment and foreign
currency gains and losses, distributions paid to shareholders, and any
increase or decrease in money shareholders invested in the Fund. The
footnote illustrates the number of Fund shares sold, reinvested and
redeemed 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:
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
SEPTEMBER 30, 1994
(COMMENCEMENT OF YEAR ENDED OCTOBER 31,
OPERATIONS) TO ---------------------------
OCTOBER 31, 1994 1995(1) 1996
---------------- --------- ---------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 8.85 $ 8.75 $ 9.32
--------- --------- ---------
Net Investment Income 0.06 0.72 0.65(5)
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 (2)(3) ( 0.45%)(4) 15.32% 4.49%
Total Adjusted Investment Return at Net Asset Value (3) ( 0.46%)(4) 15.28% --
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $ 223 $470,569 $396,323
Ratio of Expenses to Average Net Assets (2) 0.12%(4) 1.19% 1.17%
Ratio of Net Investment Income to Average Net Assets (2) 0.71%(4) 7.38% 7.10%
Portfolio Turnover Rate 92% 102% 106%
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>
Financial Highlights (continued)
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
1992 1993 1994 1995(1) 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 9.79 $ 9.83 $ 10.05 $ 8.75 $ 9.32
--------- --------- --------- --------- ---------
Net Investment Income 0.80 0.70 0.65 0.65 0.58(5)
Net Realized and Unrealized Gain (Loss) on
Investments, Options and Financial
Futures Contracts 0.03 0.24 ( 1.28) 0.57 ( 0.24)
--------- --------- --------- --------- ---------
Total from Investment Operations 0.83 0.94 ( 0.63) 1.22 0.34
--------- --------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ( 0.79) ( 0.72) ( 0.65) ( 0.65) ( 0.58)
Distributions from Net Realized
Gains on Investments
Sold and Financial Futures Contracts -- -- ( 0.02) -- --
--------- --------- --------- --------- ---------
Total Distributions ( 0.79) ( 0.72) ( 0.67) ( 0.65) ( 0.58)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 9.83 $ 10.05 $ 8.75 $ 9.32 $ 9.08
========= ========= ========= ========= =========
Total Investment Return at
Net Asset Value (2)(3) 8.81% 9.86% ( 6.42%) 14.49% 3.84%
Total Adjusted Investment
Return at Net Asset Value (3) 8.66% 9.85% ( 6.43%) 14.47% --
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $225,540 $293,413 $241,061 $226,954 $178,124
Ratio of Expenses to Average Net Assets (2) 2.00% 2.00% 1.93% 1.89% 1.90%
Ratio of Net Investment Income to
Average Net Assets (2) 8.03% 7.06% 6.98% 7.26% 6.37%
Portfolio Turnover Rate 112% 138% 92% 102% 106%
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
(2) Excluding interest expense, which equalled 0.04% for Class A for the year ended October 31, 1995
and 0.15%, 0.01%, 0.01% and 0.02% for Class B
for the years ended October 31, 1992, 1993, 1994 and 1995, respectively.
(3) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized
(5) On average month-end shares outstanding.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
October 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Government
Income Fund on October 31, 1996. It's divided into four main categories: U.S. Government
and Agencies Securities, Foreign Government Bonds, Multi-family Mortgage Backed Bonds and
Short-term Investments. Short-term Investments, which represent the Fund's "cash" position,
are listed last.
PAR VALUE
INTEREST MATURITY (000'S MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Governmental -- U.S. (30.71%)
United States Treasury,
Bond 15.750% 11-15-01 $ 34,340 $ 48,537,530
Bond 11.875 11-15-03 17,550 23,086,499
Bond* 12.750 11-15-10 20,000 28,537,400
Bond 12.000 08-15-13 28,700 41,319,103
Bond 8.125 08-15-19 19,000 22,013,210
Note 8.000 05-15-01 12,000 12,909,360
------------
176,403,102
------------
Governmental -- U.S. Agencies (48.65%)
Federal Home Loan Bank,
Bond 6.645 10-29-01 25,000 24,949,250
Federal Home Loan Mortgage Corp.,
CMO Remic 1094-K 7.000 06-15-21 2,300 2,281,301
CMO Remic 1608-L 6.500 09-15-23 7,000 6,468,420
CMO Remic 1634-PN 4.500 12-15-23 10,575 7,719,750
CMO Remic 1667-PE 6.000 03-15-08 11,750 11,492,910
Federal Judiciary Office Building,
Zero Coupon Bond Zero 02-15-01 250 190,156
Federal National Mortgage Assn.,
10 Yr SF Pass Thru Ctf 7.875 02-24-05 10,000 10,840,600
30 Yr SF Pass Thru Ctf 8.500 09-01-24 to 14,468 14,990,225
10-01-24
GTD Remic Pass Thru Ctf 1990-51-H 7.500 05-25-20 200 202,874
GTD Remic Pass Thru Ctf 1990-58-J 7.000 05-25-20 3,700 3,649,125
GTD Remic Pass Thru Ctf 1990-94-D 6.500 08-25-20 1,660 1,624,725
GTD Remic Pass Thru Ctf 1991-56-M 6.750 06-25-21 4,000 3,900,000
GTD Remic Pass Thru Ctf 1994-36-N 6.500 03-25-24 18,645 16,739,667
Medium Term Note 11.875 05-19-00 6,800 8,023,252
Financing Corp.,
Bond 9.400 02-08-18 4,000 5,023,120
Bond 9.650 11-02-18 1,600 2,061,248
Government National Mortgage Assn.,
30 Yr SF Pass Thru Ctf 7.500 05-15-23 to 97,243 97,837,466
12-15-25
30 Yr SF Pass Thru Ctf 8.000 09-15-23 to 44,328 45,438,198
08-15-25
30 Yr SF Pass Thru Ctf 11.000 01-15-14 to 9,266 10,479,660
12-15-15
Tennessee Valley Authority,
Bond 8.250 04-15-42 5,000 5,538,900
------------
279,450,847
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $452,275,470) ( 79.36%) 455,853,949
-------- ------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar Denominated Foreign
Government Bonds (11.85%)
Argentina, Republic of,
Bond 6.625# 03-31-05 8,820 7,265,475
Brazil, Republic of,
Bond DISC ZL 6.500# 04-15-24 5,000 3,687,500
IDU Ser A 6.688# 01-01-01 9,237 8,867,040
Hydro-Quebec Corp.,
Deb Ser HK 9.375 04-15-30 5,440 6,582,781
Deb Ser HS 9.400 02-01-21 10,000 12,017,400
International Bank for Reconstruction and Development,
Deb 8.875 03-01-26 5,200 6,369,480
Landeskreditbank Baden -- Wurttemberg,
Sub Note 7.625 02-01-23 13,650 14,429,552
Ontario, Province of,
30 Yr Deb 11.500 03-10-13 8,000 8,862,640
------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $67,402,079) ( 11.85%) 68,081,868
-------- ------------
MULTI-FAMILY MORTGAGE BACKED BONDS (1.66%)
DLJ Mortgage Acceptance Corp.,
CMO Remic 1993-M10-A2 7.200 07-15-03 4,595 4,681,651
CMO Remic 1993-MF7-A1 7.400 06-18-03 4,747 4,883,460
------------
TOTAL MULTI-FAMILY MORTGAGE BACKED BONDS
(Cost $9,562,460) ( 1.66%) 9,565,111
-------- ------------
TOTAL LONG-TERM BONDS
(Cost $529,240,009) ( 92.87%) 533,500,928
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.40%)
Investment in a joint repurchase
agreement transaction with
SBC Capital Markets Inc.,
Dated 10-31-96, Due 11-01-96
(secured by U.S. Treasury Bonds,
6.25% thru 12.00%,due 11-15-12
thru 8-15-23) Note A 5.540% 11-01-96 $ 2,284 $ 2,284,000
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account Current Rate 4.75% 65,159
------------
TOTAL SHORT-TERM INVESTMENTS ( 0.41%) 2,349,159
-------- ------------
TOTAL INVESTMENTS ( 93.28%) $535,850,087
======== ============
*U.S. Treasury Bonds with a value of $718,700 owned by the Fund were designated as
margin deposits for future contracts at October 31, 1996.
# Represents rates effective on October 31, 1996.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
NOTE A --
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is a diversified, open-end
management investment company, registered under the Investment Company
Act of 1940. The Trust consists of three series: John Hancock Government
Income Fund (the "Fund"), John Hancock High Yield Bond Fund, and John
Hancock Intermediate Maturity Government Fund (collectively the
"Funds"). Until August 30, 1996, the Fund was a series of John Hancock
Series, Inc. The other two series of the Trust are reported in separate
financial statements. The investment objective of the Fund is to earn a
high level of current income consistent with preservation of capital by
investing primarily in securities that are issued or guaranteed as to
principal and interest by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities").
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A and Class B shares. The shares of
each class represent an interest in the same portfolio of investments of
the Fund and have equal rights to voting, redemptions, dividends, and
liquidation, except that certain expenses, subject to the approval of
the Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution and service expenses under terms of a
distribution plan have exclusive voting rights to that distribution
plan. Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or, at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which
approximates market value.
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., a wholly-owned subsidiary of The Berkeley
Financial Group, may participate in a joint repurchase agreement
transaction. Aggregate cash balances are invested in one or more
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 for
both financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investments, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $16,766,596 of a capital
loss carryforward available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforward is used
by the Fund, no capital gains distributions will be made. The
carryforwards expire as follows: $15,347,195, December 31, 2002 and
$1,419,401, December 31, 2003. The Fund's tax year end is December 31.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment
securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid by
the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and will be in the same
amount, except for effect of expenses that may be applied differently to
each class as explained previously.
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 fund.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are determined at the Fund level and allocated daily to
each class of shares based on the relative net assets of the respective
classes. Distribution and service fees if any, are calculated daily at
the class level based on the appropriated net assets of each class and
the specific expense rate(s) applicable to each class.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or the date of purchase over
the life of the security, as required by the Internal Revenue Code.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
could differ from these estimates.
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 will be valued at
the official settlement price of the board of trade or U.S. commodities
exchange. Subsequent payments, known as "variation margin", to and from
the broker will be 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 will recognize 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 fluctuations 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, 1996, open positions in financial futures contracts were
as follows:
UNREALIZED
APPRECIATION/
EXPIRATION OPEN CONTRACTS POSITION (DEPRECIATION)
- ---------- ------------------ ----------- -------------
DEC 96 125 Treasury Bond LONG $172,655
DEC 96 70 Treasury Bond SHORT (96,250)
--------
$ 76,405
========
OPTIONS Listed options will be valued at the last quoted sales price on
the exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid"
prices obtained from two independent brokers. Written put or call over-
the-counter options will be valued at the average of the "asked" prices
obtained from two independent brokers. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund will be
included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be
subsequently marked-to-market to reflect the current market value of the
written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument and buying puts and writing calls
will tend to decrease the Fund's exposure to the underlying instrument,
or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the
face (or "notional") amount of each contract at value will reflect the
maximum exposure of the Fund in these contracts, but the actual exposure
will be limited to the change in value of the contract over the period
the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset a
contract with a counterparty on a timely basis ("liquidity risk").
Exchange-traded options have minimal credit risk as the exchanges act as
counterparties to each transaction, and only present liquidity risk in
highly unusual market conditions. To minimize credit and liquidity risks
in over-the-counter option contracts, the Fund will continuously monitor
the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's
period-end Statement of Assets and Liabilities.
There were no written option transactions for the period ended October
31, 1996.
NOTE B --
MANAGEMENT FEE, ADMINISTRATIVE SERVICES 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, to 0.650% of the first $200,000,000 of the Fund's
average daily net asset value, 0.625% of the next $300,000,000 and
0.600% of the Fund's average daily net asset value in excess of
$500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent
of such excess and the Adviser will make additional arrangements
necessary to eliminate any remaining excess expenses. The current limits
are 2.5% of the first $30,000,000 of the Fund's average daily net asset
value, 2.0% of the next $70,000,000 and 1.5% of the remaining average
daily net asset value.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended
October 31, 1996, net sales charges received with regard to sales of
Class A shares amounted to $236,024. Out of this amount, $65,449 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $144,458 was paid as sales commissions to
unrelated broker-dealers and $26,117 was paid as sales commissions to
sales personnel of John Hancock Distributors, Inc. ("Distributors"),
Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc.
("Sutro"), all of which are broker dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities
Corporation and its subsidiaries, which include Tucker Anthony and
Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from 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 B
shares. For the period ended October 31, 1996, contingent deferred sales
charges paid to JH Funds amounted to $573,615.
In addition, to reimburse 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 and Class B 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 0.25% of Class A average daily net assets and 1.00%
of Class B average daily net assets to reimburse JH Funds for its
distribution and service costs. Up to a maximum of 0.25% of such
payments may 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 Investor
Services Corporation ("Investor Services"), a wholly owned subsidiary of
The Berkeley Financial Group. The Fund pays transfer agent fees based on
the number of shareholder accounts and certain out-of-pocket expenses.
On March 26, 1996 the Board of Trustees approved retroactively to
January 1, 1996, an agreement with the Adviser to perform necessary tax
and financial management services for the Fund. The compensation for
1996 is estimated to be at an annual rate of 0.01875% of the average net
assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione, and Ms. Anne C.
Hodsdon are directors and officers of the Adviser and its affiliates as
well as Trustees of the Fund. The compensation of unaffiliated Trustees
is borne by the Fund. Effective with the fees paid for 1995, 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
October 31, 1996, the Fund's investment to cover the deferred
compensation had unrealized appreciation of $3,495.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
obligations, during the period ended October 31, 1996 aggregated
$654,936,756 and $787,212,791 respectively.
The cost of investments owned at October 31, 1996 for Federal income tax
purposes was $531,589,389. Gross unrealized appreciation and depreciation
of investments aggregated $12,160,858 and $7,965,319, respectively,
resulting in net unrealized appreciation of $4,195,539.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the tax year ended December 31, 1995, the Fund has reclassified
amounts to reflect an increase in accumulated net realized loss on
investments of $283,265, a decrease in accumulated net investment loss
of $16,626 and an increase in capital paid-in of $266,639. This
represents the cumulative amount necessary to report these balances on a
tax basis, excluding certain temporary differences, as of October 31,
1996. 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
operating losses in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting
principle. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
NOTE E --
REORGANIZATION
On September 8, 1995, the shareholders of John Hancock Government
Securities Trust (JHGST) approved a plan of reorganization between JHGST
and the Fund providing for the transfer of substantially all of the
assets and liabilities of JHGST to the Fund in exchange sole for Class A
shares and Class B shares of the Fund. The acquisition was accounted for
as a tax free exchange of 51,435,148 Class A shares, and 243,005 Class B
shares of the John Hancock Government Income Fund for the net assets of
JHGST, which amounted to $477,611,353 and $2,257,707 for Class A and
Class B shares, respectively, including $12,907,109 of unrealized
appreciation, after the close of business at September 15, 1995.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
John Hancock Government Income Fund
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the John Hancock Government
Income Fund (the "Fund"), one of the portfolios constituting John
Hancock Bond Trust as of October 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the
financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1996, by
correspondence with the custodian and brokers, and other auditing
procedures when replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock Government Income Fund portfolio
of John Hancock Bond Trust at October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Boston, Massachusetts
December 10, 1996
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, 1996. All of the dividends paid for the fiscal year are
taxable as ordinary income. None of the 1996 dividends qualify for the
dividends received deduction available to corporations.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-DIV
in January of 1997. This will reflect the total of all distributions
which are taxable for calendar year 1996.
SHAREHOLDER MEETING (UNAUDITED)
On June 26, 1996, a special meeting of John Hancock Government Income
Fund was held.
The Shareholders approved an Agreement and Plan of Reorganization for
the Fund. The shareholder votes were 36,895,710 FOR, 902,981 AGAINST and
3,789,607 ABSTAINING.
The Shareholders also redesignated as nonfundamental the Fund's
fundamental investment restriction on investing in other investment
companies. The shareholder votes were 36,058,271 FOR, 1,482,866 AGAINST
and 4,047,160 ABSTAINING.
The Shareholders elected the following Trustees with the votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- ----------- -----------
Edward J. Boudreau, Jr. 46,184,111 1,377,975
James F. Carlin 46,195,361 1,366,726
William H. Cunningham 46,163,340 1,398,747
Charles F. Fretz 46,157,333 1,404,753
Harold R. Hiser, Jr. 46,151,871 1,410,215
Anne C. Hodsdon 46,160,849 1,401,237
Charles L. Ladner 46,184,812 1,377,274
Leo E. Linbeck, Jr. 46,186,918 1,375,168
Patricia P. McCarter 46,190,917 1,371,169
Steven R. Pruchansky 46,173,180 1,388,907
Richard S. Scipione 46,161,074 1,401,012
Norman H. Smith 46,195,884 1,366,202
John P. Toolan 46,178,820 1,383,266
NOTES
John Hancock Funds - Government Income Fund
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NOTES
John Hancock Funds - Government Income Fund
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John Hancock Funds - Government Income Fund
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12/96
