FILE NO. 2-66906
FILE NO. 811-3006
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 35 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 39 (X)
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JOHN HANCOCK BOND FUND
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (617) 375-1700
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SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
(X) on August 30, 1996 pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
( ) on (date) pursuant to paragraph (a) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
The Registrant filed the notice required by Rule 24f-2 for the most recent
fiscal year of John Hancock Intermediate Maturity Government Fund on or about
May 22, 1996. The Registrant filed the notice required by Rule 24f-2 for the
most recent fiscal year of John Hancock U.S. Government Income Fund and John
Hancock High Yield Bond Fund on or about December 26, 1995.
<PAGE>
John Hancock
Income Funds
[Logo]
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Prospectus
August 30, 1996
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank
or government agency
o are not guaranteed to achieve their goal(s)
Some of these funds may invest up to 100% in junk bonds; read risk information
carefully.
Like all mutual fund shares, these securities have not been approved
or disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Government Income Fund
High Yield Bond Fund
Intermediate Maturity
Government Fund
Limited-Term Government Fund
Sovereign Bond Fund
Sovereign U.S. Government
Income Fund
Strategic Income Fund
[Logo] John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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A fund-by-fund look Government Income Fund 4
at goals, High Yield Bond Fund 6
strategies, risks, Intermediate Maturity Government Fund 8
expenses and Limited-Term Government Fund 10
financial history. Sovereign Bond Fund 12
Sovereign U.S. Government Income Fund 14
Strategic Income Fund 16
Policies and Your account
instructions for Choosing a share class 18
opening, maintaining How sales charges are calculated 18
and closing an Sales charge reductions and waivers 19
account in any Opening an account 20
income fund. Buying shares 21
Selling shares 22
Transaction policies 24
Dividends and account policies 24
Additional investor services 25
Details that apply Fund details
to the income funds Business structure 26
as a group. Sales compensation 27
More about risk 29
For more information back cover
<PAGE>
Overview
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FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Icon]Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Icon]Portfolio securities The primary types of securities in which the fund
invests. Secondary investments are described in "More about risk" at the end of
the prospectus.
[Icon]Risk factors The major risk factors associated with the fund.
[Icon]Portfolio management The individual or group designated by the investment
adviser to handle the fund's day-to-day management.
[Icon]Expenses The overall costs borne by an investor in the fund, including
sales charges and annual expenses.
[Icon]Financial highlights A table showing the fund's financial performance for
up to ten years, by share class. A bar chart showing total return allows you to
compare the fund's historical risk level to those of other funds.
GOAL OF THE INCOME FUNDS
John Hancock income funds seek current income without
sacrificing total return. Some of the funds also invest for
stability of principal. Each fund employs its own strategy and has its own
risk/reward profile. Because you could lose money by investing in these funds,
be sure to read all risk disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking a regular stream of income
o are seeking higher potential returns than money market funds and are
willing to accept moderate risk of volatility
o want to diversify their portfolios
o are seeking a mutual fund for the income portion of an asset allocation
portfolio
o are retired or nearing retirement
Income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $19 billion in assets.
<PAGE>
Government Income Fund
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: JHGIX CLASS B: TSGIX
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GOAL AND STRATEGY
[Icon] The fund seeks to earn a high level of current income consistent with
preservation of capital. To pursue this goal, the fund invests primarily in U.S.
Government and agency securities of any maturity, as described below. Stability
of share price is a secondary goal.
PORTFOLIO SECURITIES
[Icon]Under normal circumstances, the fund invests at least 80% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include
Treasuries, mortgage-backed securities such as Ginnie Maes and Fannie Maes, and
repurchase agreements and forward commitments involving these securities.
For liquidity and flexibility, the fund may place up to 20% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including asset-backed
securities,U.S. dollar-denominated foreign government securities and derivative
and leveraged investments, and may engage in other investment practices.
Investments in asset-backed and foreign government securities must be in the two
highest and four highest rating categories respectively, or if unrated, be of
comparable quality. Up to 10% of assets may be invested in foreign government
bonds rated BB/Ba or B (junk bonds).
RISK FACTORS
[Icon]As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's
securities, including investor demand and domestic and worldwide economic
conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Icon]Barry H. Evans, leader of the fund's portfolio management team since
January 1995, is a senior vice president of the adviser. He has been in the
investment business since joining John Hancock Funds in 1986.
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INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.63% 0.63%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.27% 0.27%
Total fund operating expenses 1.15% 1.90%
Example The table below shows what you would pay
if you invested $1,000 over the various time frames indicated. The example
assumes you reinvested all dividends and that the average annual return was 5%.
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Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $80 $105 $178
Class B shares
Assuming redemption
at end of period $69 $90 $123 $203
Assuming no redemption $19 $60 $103 $203
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
4 GOVERNMENT INCOME FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
[Icon]The figures below have been audited
by the fund's independent auditors, Ernst & Young LLP.
[The table below was represented by a bar graph in the printed material]
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 2.40(6) 10.22 3.71 14.38 8.81 9.86 (6.42) 14.49 (0.58)(6)
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Class A - year ended October 31, 1994(1) 1995(2) 1996(3)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 8.85 $ 8.75 $ 9.32
Net investment income (loss) 0.06 0.72 0.32
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.34)
Total from investment operations (0.04) 1.29 (0.02)
Less distributions:
Dividends from net investment income (0.06) (0.72) (0.32)
Net asset value, end of period $ 8.75 $ 9.32 $ 8.98
Total investment return at net asset value(4,5) (%) (0.45) 15.32 (0.23)
Total adjusted investment return at net asset value(4,7) (%) -- 15.28 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 223 470,569 419,147
Ratio of expenses to average net assets (%) 0.12(6) 1.19(5) 1.16(8)
Ratio of adjusted expenses to average net assets (%) -- 1.23 --
Ratio of net investment income (loss) to average net assets (%) 0.71(6) 7.38(5) 6.99(8)
Ratio of adjusted net investment income (loss) to average net assets (%) -- 7.34 --
Portfolio turnover rate (%) 92 102 49
Fee reduction per share ($) 0.01(8) 0.004 --
Debt outstanding at end of period(10) (000s omitted) ($) 0.0 0 0
Average daily amount of debt outstanding during
the period (000s omitted)(10) ($) 349 N/A N/A
Average monthly number of shares outstanding during
the period (000s omitted) 28,696 N/A N/A
Average daily amount of debt outstanding per share
during the period(10) ($) 0.01 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
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Class B - year ended October 31, 1988(1) 1989 1990 1991 1992 1993 1994 1995(2) 1996(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.58 $ 10.01 $ 9.98 $ 9.37 $ 9.79 $ 9.83 $ 10.05 $ 8.75 $ 9.32
Net investment income (loss) 0.69(11) 0.98 0.88 0.89 0.80 0.70 0.65 0.65 0.29
Net realized and unrealized gain
(loss) on investments (0.45) (0.01) (0.54) 0.40 0.03 0.24 (1.28) 0.57 (0.34)
Total from investment operations 0.24 0.97 0.34 1.29 0.83 0.94 (0.63) 1.22 (0.05)
Less distributions
Dividends from net investment income (0.64) (1.00) (0.95) (0.87) (0.79) (0.72) (0.65) (0.65) (0.29)
Distributions from net realized gain
on investments sold (0.17) -- -- -- -- -- (0.02) -- --
Total distributions (0.81) (1.00) (0.95) (0.87) (0.79) (0.72) (0.67) (0.65) (0.29)
Net asset value, end of period $ 10.01 $ 9.98 $ 9.37 $ 9.79 $ 9.83 $ 10.05 $ 8.75 $ 9.32 $ 8.98
Total investment return at
net asset value(4,5) (%) 2.40(6) 10.22 3.71 14.38 8.81 9.86 (6.42) 14.49 (0.58)(6)
Total adjusted investment return
at net asset value(4,7) (%) 1.02(6) 9.40 3.67 -- 8.66 9.85 (6.43) 14.47 --
Ratios and supplemental data
Net assets end of period
(000s omitted) ($) 6,966 26,568 64,707 129,014 225,540 293,413 241,061 226,954 199,361
Ratio of expenses to average
net assets (%) 1.38(6) 2.00 2.00 2.00 2.00(5) 2.00(5) 1.93(5) 1.89(5) 1.85(8)
Ratio of adjusted expenses
to average net assets (%) 2.76(6) 2.82 2.04 -- 2.15 2.01 1.94 1.91 --
Ratio of net investment income
(loss) to average net assets (%) 6.34(6) 9.64 9.22 9.09 8.03(5) 7.06(5) 6.98(5) 7.26(5) 6.28(8)
Ratio of adjusted net investment income
(loss) to average net assets (%) 4.96(6) 8.82 9.18 -- 7.88 7.05 6.97 7.24 --
Portfolio turnover rate (%) 174 151 83 162 112 138 92 102 49
Fee reduction per share ($) 0.15 0.08 0.004 -- 0.01 0.001 0.001 0.002 --
Debt outstanding at end of period
(000s omitted)(10) ($) -- -- -- -- 0 0 0 0 0
Average daily amount of debt
outstanding during the
period (000s omitted)(10) ($) -- -- -- -- 6,484 503 349 N/A N/A
Average monthly number of shares
outstanding during
the period (000s omitted) -- -- -- -- 18,572 26,378 28,696 N/A N/A
Average daily amount of debt
outstanding per share
during the period(10) ($) -- -- -- -- 0.35 0.02 0.01 N/A N/A
</TABLE>
(1) Class A and Class B shares commenced operations on September 30, 1994 and
February 23, 1988, respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Six months ended April 30, 1996. (Unaudited.)
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Excludes interest expense, which equals 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.
(6) Not annualized.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Less than one cent per share.
(10) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
(11) Based on the average of the shares outstanding at the end of each month.
GOVERNMENT INCOME FUND 5
<PAGE>
HIGH YIELD BOND FUND
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: JHHBX CLASS B: TSHYX
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GOAL AND STRATEGY
[Icon]The fund seeks to maximize current income without assuming undue risk. To
pursue this goal, the fund invests primarily in junk bonds, i.e. lower-rated,
higher-yielding debt securities.
Because the performance of junk bonds has historically been influenced by
economic conditions, the fund may rotate securities selection by business sector
according to the economic outlook.
The fund also seeks capital appreciation, but only when consistent with its
primary goal.
PORTFOLIO SECURITIES
[Icon]Under normal circumstances, the fund invests at least 65% of assets in
bonds rated lower than BBB/Baa and their unrated equivalents. Up to 10% of
assets may be invested in bonds rated CC/Ca. Up to 40% of assets may be invested
in the securities of issuers in the electric utility and telephone industries.
For all other industries, the limitation is 25% of assets.
Types of bonds include, but are not limited to, domestic and foreign corporate
bonds, debentures, notes, convertible securities, preferred stocks, municipal
obligations and government obligations.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including restricted securities, and
may engage in other investment practices.
RISK FACTORS
[Icon]Investors should expect greater fluctuations in share price, yield and
total return compared to less aggressive bond funds. These fluctuations, whether
positive or negative, may be sharp and unanticipated.
Issuers of junk bonds are typically in weak financial health and their ability
to pay interest and principal is uncertain. Compared to issuers of
investment-grade bonds, they are more likely to encounter financial difficulties
and to be materially affected by these difficulties when they do encounter them.
Junk bond markets may react strongly to adverse news about an issuer or the
economy, or to the perception or expectation of adverse news. Before you invest,
please read "More about risk" starting on page 29.
PORTFOLIO MANAGEMENT
[Icon]Arthur N. Calavritinos, leader of the fund's portfolio management team
since July 1995, is a second vice president of the adviser. He joined John
Hancock Funds in 1988 and has been in the investment business since 1987.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.58% 0.58%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.35% 0.35%
Total fund operating expenses 1.18% 1.93%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $ 56 $ 81 $107 $182
Class B shares
Assuming redemption
at end of period $ 70 $ 91 $124 $206
Assuming no redemption $ 20 $ 61 $104 $206
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Icon]The figures below have been audited
by the fund's independent auditors, Ernst & Young LLP.
[The table below was represented by a bar graph in the printed material]
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B (0.10)(6) 9.77 (4.51) (8.04) 34.21 11.56 21.76 (1.33) 7.97 8.30(6)
year-by-year total investment return (%)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended October 31, 1993(1) 1994 1995(2) 1996(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 8.10 $ 8.23 $ 7.33 $ 7.20
Net investment income (loss) 0.33 0.80(4) 0.72 0.36(4)
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12) 0.25
Total from investment operations 0.42 (0.03) 0.6 0.61
Less distributions:)
Dividends from net investment income (0.29) (0.82) (0.73) (0.36)
Distributions from net realized gain on investments sold -- (0.05) -- --
Total distributions (0.29) (0.87) (0.73) (0.36)
Net asset value, end of period $ 8.23 $ 7.33 $ 7.20 $ 7.45
Total investment return at net asset value(5) (%) 4.96(6) (0.59) 8.83 8.67(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 36,452
Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16 1.13(7)
Ratio of net investment income (loss) to average net assets (%) 12.89(7) 10.14 10.23 9.94(7)
Portfolio turnover rate (%) 204 153 98 56
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1987(1) 1988 1989 1990 1991 1992 1993 1994 1995(2) 1996(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 9.95 $ 9.94 $ 9.70 $ 8.14 $ 6.45 $ 7.44 $ 7.43 $ 8.23 $ 7.33 $ 7.20
Net investment income (loss) 0.01 1.07(4) 1.16 1.09 0.98 0.87 0.80 0.74(4) 0.67 0.33(4)
Net realized and unrealized gain
(loss) on investments (0.02) (0.14) (1.55) (1.68) 1.06 (0.04) 0.75 (0.83) (0.13) 0.26
Total from investment operations (0.01) 0.93 (0.39) (0.59) 2.04 0.83 1.55 (0.09) 0.54 0.59
Less distributions:
Dividends from net investment income -- (1.17) (1.14) (1.09) (0.98) (0.84) (0.75) (0.76) (0.67) (0.34)
Distributions from net realized gain
on investments sold -- -- -- -- -- -- -- (0.05) -- --
Distributions from capital paid-in -- -- (0.03) (0.01) (0.07) -- -- -- -- --
Total distributions -- (1.17) (1.17) (1.10) (1.05) (0.84) (0.75) (0.81) (0.67) (0.34)
Net asset value, end of period $ 9.94 $ 9.70 $ 8.14 $ 6.45 $ 7.44 $ 7.43 $ 8.23 $ 7.33 $ 7.20 $ 7.45
Total investment return at net
asset value(5) (%) (0.10)(6) 9.77 (4.51) (8.04) 34.21 11.56 21.76 (1.33) 7.97 8.30(6)
Total adjusted investment return at
net asset value(5,8) (%) (0.41)(6) 9.01 (4.82) (8.07) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 110 20,852 33,964 37,097 72,023 98,560 154,214 160,739 180,586 191,964
Ratio of expenses to average
net assets (%) 0.03(7) 2.00 2.20 2.22 2.24 2.25 2.08 1.91 1.89 1.83(7)
Ratio of adjusted expenses to average
net assets(9) (%) 0.34(7) 2.76 2.51 2.25 -- -- -- -- -- --
Ratio of net investment income (loss)
to average net assets (%) 0.09(7) 10.97 12.23 14.59 13.73 11.09 10.07 9.39 9.42 9.16(7)
Ratio of adjusted net investment income
(loss) to average
net assets(9) (%) (0.22)(7) 10.21 11.92 14.56 -- -- -- -- -- --
Portfolio turnover rate (%) 0 60 100 96 93 206 204 153 98 56
Fee reduction per share ($) 0.03 0.07 0.03 0.002 -- -- -- -- -- --
</TABLE>
(1) Class A and Class B shares commenced operations on June 30, 1993 and
October 26, 1987, respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Six months ended April 30, 1996. (Unaudited.)
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(9) Unreimbursed, without fee reduction.
HIGH YIELD BOND FUND 7
<PAGE>
Intermediate Maturity Government Fund
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: TAUSX CLASS B: TSUSX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Icon]The fund seeks to earn a high level of current income consistent with
preservation of capital and maintenance of liquidity. To pursue this goal, the
fund invests primarily in U.S. Government securities of
any maturity, as described below. The fund's weighted average
maturity will typically be between three and ten years.
PORTFOLIO SECURITIES
[Icon]Under normal circumstances, the fund invests at least 65% of assets
in securities that are issued, or guaranteed as to principal and interest, by
the U.S. Government, its agencies or instrumentalities. These may include
Treasuries and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
The fund may invest up to 35% in asset-backed securities or corporate debt
securities rated AAA/Aaa and their unrated equivalents.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including derivative and leveraged
investments, and may engage in other investment practices.
RISK FACTORS
[Icon]As with most income funds, the value of your investment in the fund will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's
securities, including investor demand and domestic and worldwide economic
conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Icon]Roger C. Hamilton, leader of the fund's portfolio management team since
January 1992 (with the fund's previous adviser), is a vice president of the
adviser. He joined John Hancock Funds in December 1994 and has been in the
investment business since 1980.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.25% 0.90%
Other expenses (after limitation)(3) 0.50% 0.50%
Total fund operating expenses (after limitation)(3) 0.75% 1.40%
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $37 $53 $70 $120
Class B shares
Assuming redemption
at end of period $44 $64 $69 $118
Assuming no redemption $14 $44 $69 $118
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and other class-specific expenses). Without this limitation,
management fees would be 0.40% for each class, other expenses would be
0.72% for each class and total fund operating expenses would be 1.37% for
Class A and 2.02% for Class B.
(4) Class B fee will be increased from 0.90% to 1.00% after December 23, 1996.
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 INTERMEDIATE MATURITY GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Icon]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
[The table below was represented by a bar graph in the printed material]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Volatility, as indicated by Class A
year-by-year total investment return (%) 1.96(4) 6.08 2.51 3.98 5.60
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended March 31, 1992(1) 1993 1994 1995(2) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.00 $ 10.03 $ 10.05 $ 9.89 $ 9.79
Net investment income (loss) 0.17 0.58 0.41 0.49 0.62
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.08)
Total from investment operations 0.20 0.60 0.25 0.38 0.54
Less distributions:
Dividends from net investment income (0.17) (0.58) (0.41) (0.48) (0.64)
Net asset value, end of period $ 10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69
Total investment return at net asset value(3) (%) 1.96(4) 6.08 2.51 3.98 5.60
Total adjusted investment return at net asset value(3,5) 0.84(4) 5.53 2.27 3.43 4.83
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 13,775 33,273 24,310 12,950 29,024
Ratio of expenses to average net assets(6) (%) 0.50(7) 0.50 0.75 0.80 0.75
Ratio of adjusted expenses to average net assets(6,8) (%) 1.62(7) 1.05 0.99 1.35 1.45
Ratio of net investment income (loss) to average net assets (%) 6.47(7) 5.47 4.09 4.91 6.49
Ratio of adjusted net investment income (loss) to average assets(8) (%) 5.35(7) 4.92 3.85 4.36 5.79
Portfolio turnover rate (%) 1 186 244 341 423
Fee reduction per share ($) 0.11(7) 0.06 0.02 0.05 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended March 31, 1992(1) 1993 1994 1995(2) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 10.00 $ 10.03 $ 10.05 $ 9.89 $ 9.79
Net investment income (loss) 0.15 0.51 0.34 0.43 0.57
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.10)
Total from investment operations 0.18 0.53 0.18 0.32 0.47
Less distributions:
Dividends from net investment income (0.15) (0.51) (0.34) (0.42) (0.57)
Net asset value, end of period $ 10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69
Total investment return at net asset value(3) (%) 1.80(4) 5.40 1.85 3.33 4.92
Total adjusted investment return at net asset value(3,5) 0.68(4) 4.85 1.61 2.78 4.15
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,630 13,753 11,626 9,506 8,532
Ratio of expenses to average net assets(6) (%) 1.15(7) 1.15 1.40 1.45 1.40
Ratio of adjusted expenses to average net assets(6,8) (%) 2.27(7) 1.70 1.64 2.00 2.10
Ratio of net investment income (loss) to average net assets (%) 5.85(7) 4.82 3.44 4.26 5.80
Ratio of adjusted net investment income (loss) to average assets(8) (%) 4.73(7) 4.27 3.20 3.71 5.10
Portfolio turnover rate (%) 1 186 244 341 423
Fee reduction per share ($) 0.11(7) 0.06 0.02 0.05 0.07
</TABLE>
(1) Class A and Class B shares commenced operations on December 31, 1991.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
fund plus expenses incurred indirectly from the Adjustable U.S. Government
fund (the "Portfolio"), the mutual fund in which the fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended March
31, 1996 include the expenses of the Portfolio through September 22, 1995.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
INTERMEDIATE MATURITY GOVERNMENT FUND 9
<PAGE>
Limited-Term Government Fund
REGISTRANT NAME: JOHN HANCOCK LIMITED-TERM GOVERNMENT FUND
TICKER SYMBOL CLASS A: JHNLX CLASS B: JHLBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Icon]The fund seeks to provide current income and security of principal. To
pursue this goal, the fund invests primarily in U.S. Government and agency
securities, as described below. The fund's securities may be of any maturity,
although a substantial portion typically will have maturities of ten years or
less.
PORTFOLIO SECURITIES
[Icon]Under normal circumstances, the fund invests at least 80% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 20% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, and may engage in other investment
practices.
RISK FACTORS
[Icon]In seeking to maintain a relatively stable share price, the fund may
sacrifice opportunities for higher yields. At the same time, its share price
will fluctuate to some extent with changes in interest rates. Typically, a rise
in interest rates causes a decline in the market value of debt securities
(including U.S. Government and mortgage-backed securities). To the extent that
the fund invests in mortgage-backed securities, it may also be subject to
extension and prepayment risks. These risks are defined in "More about risk"
starting on page 29.
Other factors may affect the market price and yield of the fund's securities,
including investor demand and domestic and worldwide economic conditions. The
U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Icon]Barry H. Evans, leader of the fund's portfolio management team since
January 1995, is a senior vice president of the adviser. He has been in the
investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.60% 0.60%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.47% 0.47%
Total fund operating expenses 1.37% 2.07%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $44 $72 $103 $190
Class B shares
Assuming redemption
at end of period $51 $85 $111 $198
Assuming no redemption $21 $65 $111 $198
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 LIMITED-TERM GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Icon]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
[The table below was represented by a bar graph in the printed material]
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 14.59 (0.49) 5.67 11.59 7.75 12.54 4.19 7.13 (1.31) 11.23
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 9.24 $ 9.71 $ 8.83 $ 8.56 $ 8.73 $ 8.61 $ 8.97 $ 8.77 $ 8.80 $ 8.31
Net investment income (loss) 0.83 0.78 0.77 0.79 0.74 0.67 0.54 0.48 0.38(1) 0.50(1)
Net realized and unrealized gain
(loss) on investments 0.47 (0.83) (0.28) 0.18 (0.11) 0.36 (0.18) 0.14 (0.49) 0.42
Total from investment operations 1.30 (0.05) 0.49 0.97 0.63 1.03 0.36 0.62 (0.11) 0.92
Less distributions:
Dividends from net investment income (0.83) (0.83) (0.76) (0.80) (0.75) (0.67) (0.54) (0.48) (0.38) (0.50)
Distributions from net realized
gain on investments sold -- -- -- -- -- -- (0.02) (0.11) -- --
Total distributions (0.83) (0.83) (0.76) (0.80) (0.75) (0.67) (0.56) (0.59) (0.38) (0.50)
Net asset value, end of period $ 9.71 $ 8.83 $ 8.56 $ 8.73 $ 8.61 $ 8.97 $ 8.77 $ 8.80 $ 8.31 $ 8.73
Total investment return at net
asset value(2) (%) 14.59 (0.49) 5.67 11.59 7.75 12.54 4.19 7.13 (1.31) 11.23
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 201,293 202,924 192,315 179,065 176,329 211,322 259,170 262,903 218,846 198,681
Ratio of expenses to average
net assets (%) 0.90 0.97 1.02 1.01 1.53 1.44 1.55 1.51 1.41 1.36
Ratio of net investment income (loss)
to average net assets (%) 8.82 8.52 8.71 8.98 8.56 7.72 6.13 5.34 4.39 5.76
Portfolio turnover rate (%) 6 7 12 26 75 134 185 175 155 105
</TABLE>
- --------------------------------------------------------------------------------
Class B - year ended December 31, 1994(3) 1995
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 8.77 $ 8.31
Net investment income (loss) 0.30(1) 0.45(1)
Net realized and unrealized gain (loss) on investment (0.46) 0.42
Total from investment operations (0.16) 0.87
Less distributions:
Dividends from net investment income (0.30) (0.45)
Net asset value, end of period $ 8.31 $ 8.73
Total investment return at net asset value(2) (%) (1.84)(4) 10.60
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 7,111 10,765
Ratio of expenses to average net assets (%) 2.12(5) 1.93
Ratio of net investment income (loss)
to average net assets (%) 3.70(5) 5.21
Portfolio turnover rate (%) 155 105
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Class B shares commenced operations on January 3, 1994.
(4) Not annualized.
(5) Annualized.
LIMITED-TERM GOVERNMENT FUND 11
<PAGE>
Sovereign Bond Fund
REGISTRANT NAME: SOVEREIGN BOND FUND
TICKER SYMBOL CLASS A: JHNBX CLASS B: JHBBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Icon]The fund seeks to generate a high level of current income consistent with
prudent investment risk. To pursue this goal, the fund invests in a diversified
portfolio of marketable debt securities. These securities are primarily
investment grade, although up to 25% of them may be junk bonds rated as low as
CC/Ca and their unrated equivalents. The fund does not concentrate its
investments in any particular industry.
PORTFOLIO SECURITIES
[Icon]Under normal circumstances, the fund invests at least 65% of assets in
corporate and government bonds and debentures. Typically, at least
three-quarters of these debt securities (excluding commercial paper) will be:
o securities of any type of issuer that are rated among the four highest
Moody's or S&P rating categories and their unrated equivalents
o U.S. Government and agency securities
The fund may invest up to 25% of assets in U.S. dollar-denominated foreign
securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including asset-backed securities and
derivatives and leveraged investments, and may engage in other investment
practices.
RISK FACTORS
[Icon]Investors should expect fluctuations in share price, yield and total
return, particularly with changes in interest rates. Typically, a rise in
interest rates causes a decline in the market value of debt securities. To the
extent that it invests in certain securities, the fund may be affected by
additional risks:
o junk bonds: above-average credit, market and other risks
o foreign securities: currency, information, natural event and political
risks
o mortgage-backed securities: extension and prepayment risks
These risks are defined in "More about risk" starting on page 29. The longer the
fund's average weighted maturity, the more it is likely to be affected by a
change in interest rates. Please read "More about risk" carefully before
investing.
PORTFOLIO MANAGEMENT
[Icon]James K. Ho, leader of the fund's portfolio management team since March
1988, is an executive vice president of the adviser. He joined John Hancock
Funds in 1985 and has been in the investment business since 1977.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.35% 0.35%
Total fund operating expenses 1.15% 1.85%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $80 $105 $178
Class B shares
Assuming redemption
at end of period $69 $88 $120 $199
Assuming no redemption $19 $58 $100 $199
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 SOVEREIGN BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Icon]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
[The table below was represented by a bar graph in the printed material]
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 13.67 1.58 9.82 12.13 6.71 16.59 8.08 11.80 (2.75) 19.40
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value,
beginning of period $ 15.85 $ 15.89 $ 14.53 $ 14.51 $ 14.77 $ 14.33 $ 15.31 $ 15.29 $ 15.53 $ 13.90
Net investment income (loss) 1.55 1.40 1.44 1.43 1.32 1.29 1.20 1.14 1.12 1.12
Net realized and unrealized gain
(loss) on investments and
financial futures contracts 0.52 (1.17) (0.06) 0.27 (0.40) 0.98 (0.01) 0.62 (1.55) 1.50
Total from investment operations 2.07 0.23 1.38 1.70 0.92 2.27 1.19 1.76 (0.43) 2.62
Less distributions:
Dividends from net
investment income (1.53) (1.53) (1.40) (1.44) (1.35) (1.29) (1.21) (1.14) (1.12) (1.12)
Distributions from net realized
gain on investments sold
and financial futures contracts (0.50) (0.06) -- -- -- -- -- (0.38) (0.08) --
Distributions from
capital paid-in -- -- -- -- (0.01) -- -- -- -- --
Total distributions (2.03) (1.59) (1.40) (1.44) (1.36) (1.29) (1.21) (1.52) (1.20) (1.12)
Net asset value, end of period $ 15.89 $ 14.53 $ 14.51 $ 14.77 $ 14.33 $ 15.31 $ 15.29 $ 15.53 $ 13.90 $ 15.40
Total investment return at net
asset value(1) (%) 13.67 1.58 9.82 12.13 6.71 16.59 8.08 11.80 (2.75) 19.40
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 1,152,407 1,095,208 1,103,691 1,110,394 1,103,391 1,249,980 1,386,260 1,505,754 1,326,058 1,535,204
Ratio of expenses to average
net assets (%) 0.72 0.82 0.82 0.80 1.31 1.27 1.44 1.41 1.26 1.13
Ratio of net investment income
(loss) to average net assets (%) 9.65 9.32 9.77 9.68 9.18 8.81 7.89 7.18 7.74 7.58
Portfolio turnover rate (%) 163 159 66 64 92 90 87 107 85 103
</TABLE>
- --------------------------------------------------------------------------------
Class B - year ended December 31, 1993(2) 1994 1995
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 15.90 $ 15.52 $ 13.90
Net investment income (loss) 0.11 1.04 1.02
Net realized and unrealized gain
(loss) on investments and
financial futures contracts -- (1.54) 1.50
Total from investment operations 0.11 (0.50) 2.52
Less distributions:
Dividends from net investment income (0.11) (1.04) (1.02)
Distributions from net realized
gain on investments sold
and financial futures contracts (0.38) (0.08) --
Total distributions (0.49) (1.12) (1.02)
Net asset value, end of period $ 15.52 $ 13.90 $ 15.40
Total investment return at net asset value(1) (%) 0.90(3) (3.13) 18.66
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739
Ratio of expenses to average net assets (%) 1.63(4) 1.78 1.75
Ratio of net investment income
(loss) to average net assets (%) 0.57(4) 7.30 6.87
Portfolio turnover rate (%) 107 85 103
(1) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(2) Class B shares commenced operations on November 23, 1993.
(3) Not annualized.
(4) Annualized.
SOVEREIGN BOND FUND 13
<PAGE>
Sovereign U.S. Government Income Fund
REGISTRANT NAME: JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHSGX CLASS B: FGOPX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Icon]The fund seeks to provide as high a level of income as is consistent with
long-term total return. To pursue this goal, the fund invests in U.S.
Government and agency securities, as described below.
PORTFOLIO SECURITIES
[Icon]Under normal circumstances, the fund invests at least 65% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including derivative and leveraged
investments, and may engage in other investment practices.
RISK FACTORS
[Icon]As with most income investments, the value of your investment in the fund
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's
securities, including investor demand and economic conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Icon]Barry H. Evans, leader of the fund's portfolio management team since
January 1995, is a senior vice president of the adviser. He has been in the
investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.32% 0.32%
Total fund operating expenses 1.12% 1.82%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $79 $104 $175
Class B shares
Assuming redemption
at end of period $68 $87 $119 $195
Assuming no redemption $18 $57 $ 99 $195
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
14 SOVEREIGN U.S. GOVERNMENT INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Icon]The figures below have been audited by the fund's independent accountants,
Price Waterhouse LLP.
[The table below was represented by a bar graph in the printed material]
<TABLE>
<CAPTION>
1987 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 2.61 3.70 11.53 11.52 6.24 14.46 7.58 12.66 (7.05) 15.27 (0.79)(5)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended October 31, 1992(1) 1993 1994 1995 1996(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.51 $ 10.29 $ 10.89 $ 9.24 $ 10.01
Net investment income (loss) 0.64 0.68(3) 0.65 0.65 0.32
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.22) 0.61 (1.34) 0.77 (0.36)
Total from investment operations 0.42 1.29 (0.69) 1.42 (0.04)
Less distributions:
Dividends from net investment income (0.64) (0.68) (0.65) (0.65) (0.32)
Distributions from net realized gain on investments sold -- (0.01) (0.31) -- --
Total distributions (0.64) (0.69) (0.96) (0.65) (0.32)
Net asset value, end of period $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.65
Total investment return at net asset value(4) (%) 5.33(5) 12.89 (6.66) 15.90 (0.46)(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 350,907 375,416 315,372 370,966 343,842
Ratio of expenses to average net assets (%) 1.06(6) 1.30 1.23 1.17 1.13(6)
Ratio of net investment income (loss) to average net assets (%) 7.11(6) 6.47 6.62 6.76 6.43(6)
Portfolio turnover rate (%) 140 273 127 94 51
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1987(7) 1987(8) 1988 1989 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.00 $ 10.28 $ 9.45 $ 9.73 $ 10.01 $ 9.83 $ 10.29
Net investment income (loss) 0.56 0.48 0.78 0.81 0.85 0.85 0.76
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.36 (0.75) 0.28 0.25 (0.25) 0.51 --
Total from investment operations 0.92 (0.27) 1.06 1.06 0.60 1.36 0.76
Less distributions:
Dividends from net investment income (0.57) (0.48) (0.77) (0.77) (0.78) (0.90) (0.77)
Distributions from net realized gain on
investments sold (0.07) (0.08) (0.01) (0.01) -- -- --
Total distributions (0.64) (0.56) (0.78) (0.78) (0.78) (0.90) (0.77)
Net asset value, end of period $ 10.28 $ 9.45 $ 9.73 $ 10.01 $ 9.83 $ 10.29 $ 10.28
Total investment return at net asset value(4) (%) 2.61 3.70 11.53 11.52 6.24 14.46 7.58
Total adjusted investment return at
net asset value(4,9) (%) -- 3.62 11.47 11.29 6.23 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 164,001 170,030 161,163 144,756 133,778 164,347 197,032
Ratio of expenses to average net assets (%) 1.26(6) 1.24(6) 1.29 1.35 1.54 1.51 1.55
Ratio of adjusted expenses to
average net assets(10) (%) -- 1.32(6) 1.35 1.58 1.55 -- --
Ratio of net investment income (loss) to
average net assets (%) 7.56(6) 7.94(6) 8.09 8.34 8.54 8.53 7.35
Ratio of adjusted net investment income
(loss) to average net assets(10) (%) -- 7.86(6) 8.03 8.11 8.53 -- --
Portfolio turnover rate (%) 108(6) 83(6) 79 45 63 62 140
Fee reduction per share ($) -- 0.01 0.01 0.02 0.01 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1993 1994 1995 1996(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 10.28 $ 10.88 $ 9.23 $ 10.00
Net investment income (loss) 0.66(2) 0.61 0.60 0.29
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.61 (1.34) 0.77 (0.36)
Total from investment operations 1.27 (0.73) 1.37 (0.07)
Less distributions:
Dividends from net investment income (0.66) (0.61) (0.60) (0.29)
Distributions from net realized gain on
investments sold (0.01) (0.31) -- --
Total distributions (0.67) (0.92) (0.60) (0.29)
Net asset value, end of period $ 10.88 $ 9.23 $ 10.00 $ 9.64
Total investment return at net asset value(4) (%) 12.66 (7.05) 15.27 (0.79)(5)
Total adjusted investment return at
net asset value(4,9) (%) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 244,133 196,899 130,824 119,489
Ratio of expenses to average net assets (%) 1.51 1.64 1.72 1.78(6)
Ratio of adjusted expenses to
average net assets(10) (%) -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) 6.23 6.19 6.24 5.78(6)
Ratio of adjusted net investment income
(loss) to average net assets(10) (%) -- -- -- --
Portfolio turnover rate (%) 273 127 94 51
Fee reduction per share ($) -- -- -- --
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(2) Six months ended April 30, 1996. (Unaudited.)
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) Annualized.
(7) For the period June 5, 1986 (commencement of operations) to March 31, 1987.
(8) For the period April 1, 1987 to October 31, 1987.
(9) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(10) Unreimbursed, without fee reduction.
SOVEREIGN U.S. GOVERNMENT INCOME FUND 15
<PAGE>
Strategic Income Fund
REGISTRANT NAME: JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHFIX CLASS B: STIBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Icon]The fund seeks a high level of current income. To
pursue this goal, the fund invests primarily in three sectors:
o foreign government and corporate debt securities
o U.S. Government and agency securities
o junk bonds rated as low as CC/Ca and their unrated equivalents.
Under normal circumstances, the fund's assets will be invested in all three
sectors. However, the weighting of assets among sectors will be adjusted to
reflect current or anticipated market behavior, and the fund may invest up to
100% of assets in any sector.
PORTFOLIO SECURITIES
[Icon]The fund may invest in debt securities of all maturities and types,
including bonds, debentures, notes, preferred stock, mortgage-backed and
asset-backed securities and others. The fund may also invest up to 10% of net
assets in U.S. or foreign equities.
For liquidity and flexibility, the fund may invest in investment-grade
short-term securities. In abnormal market conditions, it may invest more assets
in these securities as a defensive tactic. The fund also may invest in certain
higher-risk investments, including derivative and leveraged investments, and may
engage in other investment practices.
RISK FACTORS
[Icon]Investors should expect fluctuations in share price, yield and total
return that are above-average for bond funds. Typically, a rise in interest
rates causes a decline in the market value of debt securities. The longer the
fund's average weighted maturity, the more it is likely to be affected by a
change in interest rates. To the extent that the fund invests in mortgage-backed
securities, it may also be subject to extension and prepayment risks. These
risks are defined in "More about risk" starting on page 29. Foreign securities
carry additional risks, including currency, information, natural event and
political risks. Issuers of junk bonds are typically in weak financial health,
and their ability to pay interest and principal is uncertain, especially in an
adverse economy. Junk bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception or expectation of adverse news.
Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Icon]Frederick L. Cavanaugh, Jr., leader of the fund's portfolio management
team since 1986, is a senior vice president of the adviser. He joined John
Hancock Funds in 1986 and has been in the investment business since 1973.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Icon]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.45% 0.45%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.28% 0.28%
Total fund operating expenses 1.03% 1.73%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $55 $76 $99 $165
Class B shares
Assuming redemption
at end of period $68 $84 $114 $186
Assuming no redemption $18 $54 $94 $186
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
16 STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The figures below have been audited
by the fund's independent accountants, Price Waterhouse LLP.
[The table below was represented by a bar graph in the printed material]
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 4.81(5) 6.89 9.72 (7.36) 12.31 19.92 6.81 4.54 9.33 11.37
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended May 31, 1987(1) 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value,
beginning of period $ 10.00 $ 9.71 $ 9.24 $ 8.98 $ 7.33 $ 7.20 $ 7.78 $ 7.55 $ 7.17 $ 7.15
Net investment income (loss) 0.79 1.13 1.12 1.04 0.93 0.80 0.71 0.68 0.64 0.66(2)
Net realized and unrealized gain
(loss) on investments, foreign
currency transactions and
financial futures contracts (0.29) (0.47) (0.26) (1.65) (0.13) 0.52 (0.22) (0.33) (0.02) 0.12
Total from investment operations 0.50 0.66 0.86 (0.61) 0.80 1.32 0.49 0.35 0.62 0.78
Less distributions:
Dividends from net
investment income (0.79) (1.13) (1.12) (1.04) (0.93) (0.74)(3) (0.72) (0.58)(3) (0.55) (0.66)
Distributions in excess of net
investment income -- -- -- -- -- -- -- (0.05) -- --
Distributions from
capital paid-in -- -- -- -- -- -- -- (0.10) (0.09) --
Total distributions (0.79) (1.13) (1.12) (1.04) (0.93) (0.74) (0.72) (0.73) (0.64) (0.66)
Net asset value, end of period $ 9.71 $ 9.24 $ 8.98 $ 7.33 $ 7.20 $ 7.78 $ 7.55 $ 7.17 $ 7.15 $ 7.27
Total investment return at net
asset value(4) (%) 4.81(5) 6.89 9.72 (7.36) 12.31 19.92 6.81 4.54 9.33 11.37
Total adjusted investment return
at net asset value(4,6) (%) 3.64 6.49 9.58 (7.45) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 30,260 67,140 95,430 80,890 79,272 153,568 262,137 335,261 327,876 369,127
Ratio of expenses to average
net assets (%) 1.00(7) 1.09 1.33 1.53 1.75 1.69 1.58 1.32 1.09 1.03
Ratio of adjusted expenses to
average net assets (%) 2.17(7) 1.49 1.47 1.62 -- -- -- -- -- --
Ratio of net investment income
(loss) to average
net assets (%) 10.87(7) 12.07 12.28 12.60 13.46 10.64 9.63 8.71 9.24 9.13
Ratio of adjusted net investment
income (loss) to average
net assets (%) 9.70(7) 11.67 12.14 12.51 -- -- -- -- -- --
Portfolio turnover rate (%) 207 67 125 81 60 80 97 91 55 78
Fee reduction per share ($) 0.09 0.04 0.01 0.01 -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Class B - year ended May 31, 1994(1) 1995 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.58. $7.17 $7.15
Net investment income (loss) 0.40 0.60(2) 0.61(2)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12
Total from investment operations (0.01) 0.58 0.73
Less distributions:
Dividends from net investment income (0.32)(3) (0.52) (0.61)
Distributions in excess of net investment income (0.03)(3) -- --
Distributions from capital paid-in (0.05) (0.08) --
Total distributions (0.40) (0.60) (0.61)
Net asset value, end of period $7.17 $7.15 $7.27
Total investment return at net asset value(4) (%) (0.22)(5) 8.58 10.61
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751
Ratio of expenses to average net assets (%) 1.91(7) 1.76 1.73
Ratio of net investment income (loss) to average net assets (%) 8.12(7) 8.55 8.42
Portfolio turnover rate (%) 91 55 78
</TABLE>
(1) Class A and Class B shares commenced operations on August 18, 1986 and
October 4, 1993, respectively.
(2) Based on the average of the shares outstanding at the end of each month.
(3) The dividend policy of the fund was changed, effective August 1, 1991, from
one that utilized daily dividend declarations to one that declares
dividends monthly. Additionally, the dividend policy of the fund was
changed, effective October 1, 1993, from one that declared dividends
monthly to daily dividend declarations.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
STRATEGIC INCOME FUND 17
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock income funds offer two classes of shares, Class A and Class B.
Each class has its own cost structure, allowing you to choose the one that best
meets your requirements. Your financial representative can help you decide.
- --------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------
o Front-end sales charges, as o No front-end sales charge; all
described below. There are your money goes to work for
several ways to reduce these you right away.
charges, also described below.
o Higher annual expenses than
o Lower annual expenses than Class A shares.
Class B shares.
o A deferred sales charge, as
described below.
o Automatic conversion to Class
A shares after either five
years (Group 1) or eight years
(Group 2) (see below), thus
reducing future annual
expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Use the table below to find out which group the fund is in, then consult the
sales charge information for that group.
- --------------------------------------------------------------------------------
Group 1 Group 2
- --------------------------------------------------------------------------------
o Intermediate Maturity Government o Government Income
o Limited-Term Government o High-Yield Bond
o Sovereign Bond
o Sovereign U.S. Government Income
o Strategic Income
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges - Group 1
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - Group 2
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments (Groups 1 and 2)
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the last day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
18 YOUR ACCOUNT
<PAGE>
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) on shares you sell within a certain time after you bought them, as
described in the table below. There is no CDSC on shares acquired through
reinvestment of dividends. The CDSC is based on the original purchase cost or
the current market value of the shares being sold, whichever is less. The longer
the time between the purchase and the sale of shares, the lower the rate of the
CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on Group 1 CDSC on Group 2
purchase shares being sold shares being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege-- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
o Letter of Intention-- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Investor Services to add these options (see the
back cover of this prospectus).
Group Investment Program Allows established groups of four or more investors to
invest as a group. Each investor has an individual account, but for sales charge
purposes the group's investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250), and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC waivers As long as Investor Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Investor Services, or consult the SAI (see the back
cover of this prospectus).
Reinstatement privilege If you sell shares in a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. If you paid a CDSC when you sold
your shares, you will be credited with the amount of the CDSC. All accounts
involved must have the same registration.
To utilize: contact your financial representative or Investor Services.
19 YOUR ACCOUNT
<PAGE>
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o government entities that are prohibited from paying mutual fund sales
charges
o financial institutions or common trust funds investing $1 million or more
for non-discretionary accounts
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets to a John Hancock income fund from an
employee benefit plan that has John Hancock funds
o members of an approved affinity group financial services program
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 members
(one-year CDSC applies)
o in the case of Limited-Term Government Fund, anyone investing the proceeds
from any non-John Hancock mutual fund, as long as that fund had sales
charges and the investor paid them; investors must supply a copy of the
redemption check or confirmation statement, and must remain invested in
Limited-Term Government Fund for at least 15 days
To utilize: if you think you may be eligible for a sales charge waiver, contact
Investor Services or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges
later.
5 Make your initial investment using the table on the next page. You can
initiate any purchase, exchange or sale of shares through your financial
representative.
20 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account
- --------------------------------------------------------------------------------
By check
- --------------------------------------------------------------------------------
[Icon]
o Make out a check for the investment amount, payable to "John Hancock
Investor Services Corporation."
o Deliver the check and your completed application to your financial
representative, or mail to Investor Services (address below).
Adding to an account
o Make out a check for the investment amount payable to "John Hancock
Investor Services Corporation."
o Fill out the detachable investment slip from an account statement. If
no slip is available, include a note specifying the fund name, your
share class, your account number and the name(s) in which the account
is registered.
o Deliver the check and your investment slip or note to your financial
representative, or mail to Investor Services (address below).
- --------------------------------------------------------------------------------
By exchange
- --------------------------------------------------------------------------------
Opening an account
[Icon]
o Call your financial representative or Investor Services to request an
exchange.
Adding to an account
o Call Investor Services to request an exchange.
- --------------------------------------------------------------------------------
By wire
- --------------------------------------------------------------------------------
Opening an account
[Icon]
o Deliver your completed application to your financial representative,
or mail it to Investor Services.
o Obtain your account number by calling your financial representative or
Investor Services.
o Instruct your bank to wire the amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your choice of share class, the new account
number and the name(s) in which the account is registered. Your bank
may charge a fee to wire funds.
Adding to an account
o Instruct your bank to wire the amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your share class, your account number and the
name(s) in which the account is registered. Your bank may charge a fee
to wire funds.
- --------------------------------------------------------------------------------
By phone
- --------------------------------------------------------------------------------
Opening an account
[Icon]
See "By wire" and "By exchange."
Adding to an account
o Verify that your bank or credit union is a member of the Automated
Clearing House (ACH) system.
o Complete the "Invest-By-Phone" and "Bank Information" sections on your
account application.
o Call Investor Services to verify that these features are in place on
your account.
o Tell the Investor Services representative the fund name, your share
class, your account number, the name(s) in which the account is
registered and the amount of your investment.
Address
John Hancock Investor Services Corporation
P.O. Box 9116 Boston, MA 02205-9116
Phone number
1-800-225-5291
Or contact your financial representative for instructions and assistance.
To open or add to an account using the Monthly Automatic Accumulation
Program, see "Additional investor services."
21 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for
- --------------------------------------------------------------------------------
By letter
- --------------------------------------------------------------------------------
[Icon]
o Accounts of any type.
o Sales of any amount.
To sell some or all of your shares
o Write a letter of instruction or complete a stock power indicating the
fund name, your share class, your account number, the name(s) in which
the account is registered and the dollar value or number of shares you
wish to sell.
o Include all signatures and any additional documents that may be
required (see next page).
o Mail the materials to Investor Services.
o A check will be mailed to the name(s) and address in which the account
is registered, or otherwise according to your letter of instruction.
- --------------------------------------------------------------------------------
By phone
- --------------------------------------------------------------------------------
[Icon]
Designed for
o Most accounts.
o Sales of up to $100,000.
To sell some or all of your shares
o For automated service 24 hours a day using your touch-tone phone, call
the EASI-Line at 1-800-338-8080.
o To place your order with a representative at John Hancock Funds, call
Investor Services between 8 a.m. and 4 p.m. on most business days.
- --------------------------------------------------------------------------------
By wire or electronic funds transfer (EFT)
- --------------------------------------------------------------------------------
[Icon]
Designed for
o Requests by letter to sell any amount (accounts of any type).
o Requests by phone to sell up to $100,000 (accounts with telephone
redemption privileges).
To sell some or all of your shares
o Fill out the "Telephone Redemption" section of your new account
application.
o To verify that the telephone redemption privilege is in place on an
account, or to request the forms to add it to an existing account,
call Investor Services.
o Amounts of $1,000 or more will be wired on the next business day. A $4
fee will be deducted from your account.
o Amounts of less than $1,000 may be sent by EFT or by check. Funds from
EFT transactions are generally available by the second business day.
Your bank may charge a fee for this service.
- --------------------------------------------------------------------------------
By exchange
- --------------------------------------------------------------------------------
[Icon]
Designed for
o Accounts of any type.
o Sales of any amount.
To sell some or all of your shares
o Obtain a current prospectus for the fund into which you are exchanging
by calling your financial representative or Investor Services.
o Call Investor Services to request an exchange.
- --------------------------------------------------------------------------------
By check
- --------------------------------------------------------------------------------
[Icon]
Designed for
o Government Income, Limited-Term Government, Sovereign U.S. Government
and Strategic Income Funds only.
o Any account with checkwriting privileges.
o Sales of over $100.
To sell some or all of your shares
o Request checkwriting on your account application.
o Verify that the shares to be sold were purchased more than 15 days
earlier or were purchased by wire.
o Write a check for any amount over $100.
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
Address
John Hancock Investor Services Corporation
P.O. Box 9116 Boston, MA 02205-9116
Phone number
1-800-225-5291
Or contact your financial representative for instructions and assistance.
22 YOUR ACCOUNT
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s) You can generally obtain a
signature guarantee from the following sources:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests [Icon]
- --------------------------------------------------------------------------------
Owners of individual, joint, sole
proprietorship, UGMA/UTMA
(custodial accounts for minors) or
general partner accounts. o Letter of instruction.
o On the letter, the signatures
and titles of all persons
authorized to sign for the
account, exactly as the
account is registered.
o Signature guarantee if
applicable (see above).
Owners of corporate or association
accounts. o Letter of instruction.
o Corporate resolution,
certified within the past 90
days.
o On the letter and the
resolution, the signature of
the person(s) authorized to
sign for the account.
o Signature guarantee if
applicable (see above).
Owners or trustees of trust
accounts. o Letter of instruction.
o On the letter, the
signature(s) of the
trustee(s).
o If the names of all trustees
are not registered on the
account, please also provide a
copy of the trust document
certified within the past 60
days.
o Signature guarantee if
applicable (see above).
Joint tenancy shareholders whose
co-tenants are deceased. o Letter of instruction signed
by surviving tenant.
o Copy of death certificate.
o Signature guarantee if
applicable (see above).
Executors of shareholder estates. o Letter of instruction signed
by executor.
o Copy of order appointing
executor.
o Signature guarantee if
applicable (see above).
Administrators, conservators,
guardians and other sellers or
account types not listed above. o Call 1-800-225-5291 for
instructions.
23 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 p.m. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Investor Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Investor Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, Investor Services is
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
Exchanges You may exchange shares of your John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
Class B shares will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange, except that the rate will change
to that of the new fund if the new fund's rate is higher. A CDSC rate that has
increased will drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Investor Services. Certificated
shares can only be sold by returning the certificates to Investor Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten calendar days after
the purchase.
Eligibility by state You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively,
24 YOUR ACCOUNT
<PAGE>
you can choose to have a check for your dividends mailed to you. However, if the
check is not deliverable, your dividends will be reinvested.
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. Some dividends paid in January may be
taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Investor Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Investor Services
Corporation." Deliver your check and application to your financial
representative or Investor Services.
Systematic withdrawal plan This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they are
all on the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Investor Services.
Retirement plans John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, SARSEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund with a low minimum investment of $250 or, for
some group plans, no minimum investment at all. To find out more, call Investor
Services at 1-800-225-5291.
25 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock income fund is an open-end
management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock income funds may include
individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
--------------
Shareholders
--------------
-----------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-----------------------------------------------
Distribution and
shareholder services
- -------------------------------- --------------------------------------------
Principal distributor Travel Agent
John Hancock Funds, Inc. John Hancock Investor Services Corporation
101 Huntington Avenue P.O. Box 9115
Boston, MA 02199-7603 Boston, MA 02205-9116
Markets the funds and distributes Handles shareholder services,
shares through selling brokers, including record-keeping and
financial planners and other statements, distribution of
financial representatives. dividends and processing of buy and
sell requests.
- -------------------------------- --------------------------------------------
Asset Management
- ---------------------------------- --------------------------------------
Investment adviser Custodian
John Hancock Advisers, Inc. Investors Bank & Trust Co.
101 Huntington Avenue 89 South Street
Boston, MA 02199-7603 Boston, MA 02111
Manages the funds' business and Holds the funds' assets, settles all
investment activities. portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
- ---------------------------------- --------------------------------------
--------------------------------
Trustees
Supervise the funds' activities.
--------------------------------
26 FUND DETAILS
<PAGE>
Accounting compensation The funds compensate the adviser for performing tax and
financial management services. Annual compensation for 1996 will not exceed
0.02% of each fund's average net assets.
Portfolio trades In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
Investment goals Except for Government Income Fund, High Yield Bond Fund and
Intermediate Maturity Government Fund, each fund's investment goal is
fundamental and may only be changed with shareholder approval.
Diversification All of the income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the fund in assets ("12b-1" refers to the
federal securities regulation that authorizes annual fees of this type). The
12b-1 fee rates vary by fund and by share class, according to Rule 12b-1 plans
adopted by the funds' respective boards. The sales charges and
12b-1 fees paid by investors are detailed in the fund-by-fund information. The
portions of these expenses that are reallowed to financial services firms are
shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
Government Income $8,575,319 3.69%
High Yield Bond $6,471,589 3.90%
Intermediate Maturity Gov. $253,107 2.30%
Limited-Term Government $195,672 2.31%
Sovereign Bond $2,970,686 4.64%
Sovereign U.S. Gov. Income $5,318,736 3.16%
Strategic Income $5,169,665 3.18%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Initial compensation Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
Annual compensation Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
To compensate for continuing services, John Hancock Funds will pay Merrill
Lynch, Pierce, Fenner & Smith, Inc. an annual fee equal to 0.15% of the value of
Class A shares held by its customers for more than four years.
FUND DETAILS 27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Group 1 funds
Up to $99,999 3.00% 2.26% 0.25% 2.50%
$100,000 - $499,999 2.50% 2.01% 0.25% 2.25%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Group 2 funds
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of $1 million
or more (Groups 1 and 2)
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 and more above that -- 0.00% 0.25% 0.25%
Waiver investments(2) -- 0.00% 0.25% 0.25%
</TABLE>
- --------------------------------------------------------------------------------
Class B investments
- --------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
Group 1 funds
All amounts 2.75% 0.25% 3.00%
Group 2 funds
All amounts 3.75% 0.25% 4.00%
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to fund commission
payments when there is no initial sales charge.
28 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and investment practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that a John Hancock income fund
will earn income or show a positive total return over any period of time --
days, months or years.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative affect on fund management or
performance.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
FUND DETAILS 29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Higher-risk securities and practices
- ------------------------------------------------------------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semi-annual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
o No policy limitation on usage; fund may be using currently
o Permitted, but has not typically been used
- -- Not permitted
Sovereign
High Intermediate Limited- U.S.
Government Yield Maturity Term Sovereign Gov't Strategic
Income Bond Gov't Government Bond Income Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment practices
Borrowing; reverse repurchase agreements
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks. 33.3 33.3 33.3 33.3 33.3 33.3 33
Covered mortgage dollar roll
transactions The sale of mortgage-backed
securities with the commitment to buy
back similar securities at a future
date. Credit, interest rate, leverage,
market, opportunity risks. o o o o o o o
Repurchase agreements The purchase of a
security that must later be sold back to
the issuer at the same price plus
interest. Credit risk. o o o o o o o
Securities lending The lending of
securities to financial institutions,
which provide cash or government
securities as collateral. Credit risk. 30 30 33.3 33.3 33.3 30 33.3
Short-term trading Selling a security
soon after purchase. A portfolio
engaging in short-term trading will have
higher turnover and transaction
expenses. Market risk. o o o o o o l
When-issued securities and forward
commitments The purchase or sale of
securities for delivery at a future
date; market value may change before
delivery. Market, opportunity, leverage
risks. o o o o o o l
- ------------------------------------------------------------------------------------------------------------------------------------
Conventional securities
Brady bonds Dollar-denominated
securities issued to refinance foreign
government bank loans and other debt.
Credit, interest rate, market, political
risks. 10 l(1) -- -- 25 -- l(1)
Foreign debt securities Debt securities
issued by foreign governments or
companies. Credit, currency, interest rate, market,
political risks. 20 l(1) -- -- 25 -- l(1)
In-kind, delayed and zero coupon debt
securities Securities offering non-cash
or delayed-cash payment. Their prices
are typically more volatile than those
of conventional debt securities. Credit,
interest rate, market risks. o o o o o o l
Restricted and illiquid securities
Securities not traded on the open
market. May include illiquid Rule 144A
securities. Liquidity, valuation, market
risks. 10 10 15 15 15 15 15
- ------------------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Asset-backed securities Securities
backed by unsecured debt, such as credit
card debt; these securities are often
guaranteed or over-collateralized to
enhance their credit quality. Credit,
interest rate risks. 20 o 35 20 o 35 l
Mortgage-backed securities Securities
backed by pools of mortgages, including
passthrough certificates, PACs, TACs and
other senior classes of collateralized
mortgage obligations (CMOs). Credit,
extension, prepayment, interest rate
risks. o o o o o o l
Participation interests Securities
representing an interest in another
security or in bank loans. Credit,
interest rate, liquidity, valuation
risks. -- 10(2) -- -- 15(2) -- 15(2)
Rights and warrants Securities offering
the right, or involving the promise, to
buy or sell certain securities at a
future date. Market risk. 5 5 5 5 5 -- 5
</TABLE>
(1) No more than 25% of the fund`s assets will be invested in government
securities of any one foreign country.
(2) Part of the 10% or 15% limitation on illiquid securities.
(3) Applies to purchased options only.
30 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Higher-risk securities and practices (cont'd)
- ------------------------------------------------------------------------------------------------------------------------------------
Sovereign
High Intermediate Limited- U.S.
Government Yield Maturity Term Sovereign Gov't Strategic
Income Bond Gov't Government Bond Income Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leveraged derivative securities
Currency contracts Contracts involving
the right or obligation to buy or sell a
given amount of foreign currency at a
specified price and future date.
o Hedged. Currency, hedged leverage,
correlation, liquidity, opportunity
risks. -- o -- -- -- -- l
o Speculative. Currency, speculative
leverage, liquidity risks. -- -- -- -- -- -- l
Financial futures and options;
securities and index options Contracts
involving the right or obligation to
deliver or receive assets or money
depending on the performance of one or
more assets or an economic index.
oFutures and related options. Interest
rate, currency, market, hedged or
speculative leverage, correlation,
liquidity, opportunity risks. o o o o o o l
o Options on securities and indices
Interest rate, currency, market, hedged
or speculative leverage, correlation,
liquidity, credit, opportunity risks. 5(3) 5(3) 5(3) 5(3) 5(3) 5(3) 5(3)
Structured securities Indexed and/or
leveraged mortgage-backed and other debt
securities, including principal-only and
interest-only securities, leveraged
floating rate securities, and others
These securities tend to be highly
sensitive to interest rate movements and
their performance may not correlate to
such movements in a conventional
fashion. Credit, interest rate,
extension, prepayment, market,
speculative leverage, liquidity,
valuation risks. o 10 10 10 10 10 l
Swaps, caps, floors, collars OTC
contracts involving the right or
obligation to receive or make payments
based on two different income streams
Correlation, credit, currency, interest
rate, hedged or speculative leverage,
liquidity, valuation risks. o o o o o o l
</TABLE>
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
Quality rating High Yield Sovereign Strategic
(S&P/Moody's)(2) Bond Fund Bond Fund Income Fund
AAA/Aaa 2.0% 42.2% 25.13%
AA/Aa 0.0% 9.1% 8.4%
A/A 0.0% 14.6% 4.2%
BBB/Baa 1.7% 12.5% 1.4%
BB/Ba 14.7% 11.1% 8.11%
B/B 63.7% 7.8% 41.1%
CCC/Caa 5.6% 0.2% 1.5%
CC/Ca 0.0% 0.0% 0.0%
C/C 0.0% 0.0% 0.0%
D 0.0% 0.0% 0.1%
% of portfolio in bonds 87.7% 97.5% 92.1%
n Rated by S&P or Moody's n Rated by the adviser
(1) Data as of fund's last fiscal year end.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
FUND DETAILS 31
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/ semi-annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semi-annual report or the SAI,
please write or call:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[Logo] John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock(R)
Financial Services
(C) 1996 John Hancock Funds, Inc.
INCPN 8/96
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JOHN HANCOCK INTERMEDIATE MATURITY GOVERNMENT FUND
Class A and Class B Shares
Statement Of Additional Information
August 30, 1996
This Statement of Additional Information ("SAI") provides information about
the John Hancock Intermediate Maturity Government Fund (the "Fund"), a
diversified series of John Hancock Bond Fund, in addition to the information
that is contained in the Fund's Class A and Class B Prospectus (the
"Prospectus"), dated August 30, 1996.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Statement of
Additional
Information
Page
Organization of the Trust 3
Investment Objective and Policies 3
Certain Investment Practices 3
Investment Restrictions 19
Those Responsible for Management 22
Investment Advisory and Other Services 33
Distribution Contracts 36
Net Asset Value 39
Initial Sales Charge on Class A Shares 40
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Deferred Sales Charge on Class B Shares 42
Special Redemptions 45
Additional Services and Programs 45
Description of the Fund's Shares 47
Tax Status 48
Calculation of Performance 53
Brokerage Allocation 55
Transfer Agent Services 57
Custody of The Fund 57
Independent Auditors 57
Appendix A A-1
Financial Statements F-1
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ORGANIZATION OF THE TRUST
The John Hancock Bond Fund (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust under a
Declaration of Trust dated December 12, 1984. The Trust currently has only one
series, the Fund. Prior to September 22, 1995, the Fund was called John Hancock
Adjustable U.S. Government Trust. Prior to December 22, 1994, the Fund was
called Transamerica Adjustable U.S. Government Trust.
The Fund is managed by John Hancock Advisers, Inc. (the "Adviser"), a
wholly-owned indirect subsidiary of John Hancock Mutual Life Insurance Company
(the "Life Company"), a Massachusetts life insurance company chartered in 1862,
with national headquarters at John Hancock Place, Boston, Massachusetts. John
Hancock Funds, Inc. ("John Hancock Funds") acts as principal distributor of the
shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to achieve a high level of current income, consistent with
preservation of capital and maintenance of liquidity. The Fund seeks to achieve
its investment objective by investing primarily in U.S. Government securities,
including U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities greater than ten years) and mortgage-backed securities issued or
guaranteed by U.S. Government agencies. Since the U.S. Government has never
defaulted on its obligations, its securities are considered unmatched as a safe
and reliable income source. The Fund may also invest in obligations of the
Tennessee Valley Authority and the World Bank and medium-term debt obligations
of governmental issuers. Under normal market conditions, the Fund intends to
maintain a weighted average remaining maturity or average remaining life of
three to ten years. In general, investments in shorter and intermediate term
(three to ten years) debt securities are less sensitive to interest rate changes
and provide more stability than longer-term (ten years or more) investments.
There is no assurance that the Fund will achieve its investment objective.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government agency.
CERTAIN INVESTMENT PRACTICES
Mortgage Backed Securities. The Fund may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
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mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-
through securities represent participation interests in pools of residential
mortgage loans and are issued by U.S. Governmental or private lenders and
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
including but not limited to the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). GNMA certificates are guaranteed by
the full faith and credit of the U.S. Government for timely payment of principal
and interest on the certificates. FNMA certificates are guaranteed by FNMA, a
federally chartered and privately owned corporation, for full and timely payment
of principal and interest on the certificates. FHLMC certificates are guaranteed
by FHLMC, a corporate instrumentality of the U.S. Government, for timely payment
of interest and the ultimate collection of all principal of the related mortgage
loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage
Obligations. CMOs and REMIC pass-through or participation certificates may be
issued by, among others, U.S. Government agencies and instrumentalities as well
as private lenders. CMOs and REMIC certificates are issued in multiple classes
and the principal of and interest on the mortgage assets may be allocated among
the several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but
also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided from
payments of principal and interest on collateral of mortgaged assets and any
reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code of 1986, as amended (the "Code") and invests in certain
mortgages primarily secured by interests in real property and other permitted
investments. Investors may purchase "regular" or "residual" interest in REMICS,
although the Fund does not intend, absent a change in current tax law, to invest
in residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
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interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the
Securities and Exchange Commission ("SEC") considers privately issued SMBS to be
illiquid.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter- party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed-income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, the Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When the Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment
rate will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated With Specific Types of Derivative Debt Securities.
Different types of derivative debt securities are subject to different
combinations of prepayment, extension and/or interest rate risk. Conventional
mortgage pass- through securities and sequential pay CMOs are subject to all of
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these risks, but are typically not leveraged. Thus, the magnitude of exposure
may be less than for more leveraged Mortgage-Backed Securities.
Planned amortization class ("PAC") and target amortization class ("TAC")
CMO bonds involve less exposure to prepayment, extension and interest rate risk
than other Mortgage-Backed Securities, provided that prepayment rates remain
within expected prepayment ranges or "collars." To the extent that prepayment
rates remain within these prepayment ranges, the residual or support tranches of
PAC and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
The risk of early prepayments is the primary risk associated with interest
only debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of
Funds Index ("COFI floaters"), other "lagging rate" floating rate securities,
floating rate securities that are subject to a maximum interest rate ("capped
floaters"), Mortgage- Backed Securities purchased at a discount, leveraged
inverse floating rate securities ("inverse floaters"), principal only debt
securities ("POs"), certain residual or support tranches of CMOs and index
amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but
are subject to extension risk resulting from the issuer's failure to exercise
its option to call or redeem the notes before their stated maturity date.
Leveraged inverse IOs combine several elements of the Mortgage- Backed
Securities described above and thus present an especially intense combination of
prepayment, extension and interest rate risks.
Other types of floating rate derivative debt securities present more
complex types of interest rate risks. For example, range floaters are subject to
the risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset- backed securities which are rated in the highest rating category by a
nationally recognized statistical rating organization (e.g., Standard & Poor's
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Corporation or Moody's Investors Services, Inc.) or if not so rated, of
equivalent investment quality in the opinion of the Adviser.
Asset-backed securities are often subject to more rapid repayment than
their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, the Fund's ability to maintain positions in
these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 ("1933
Act"), including securities offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act. However, the Fund will not invest more than
15% of its net assets in illiquid investments, which include repurchase
agreements maturing in more than seven days, securities that are not readily
marketable and restricted securities. However, if the Board of Trustees
determines, based upon a continuing review of the trading markets for specific
Rule 144A securities, that they are liquid, then such securities may be
purchased without regard to the 15% limit. The Trustees may adopt guidelines and
delegate to the Adviser the daily function of determining the monitoring and
liquidity of restricted securities. The Trustees, however, will retain
sufficient oversight and be ultimately responsible for the determinations. The
Trustees will carefully monitor the Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund if qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
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The Fund may acquire other restricted securities including securities for
which market quotations are not readily available. These securities may be sold
only in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933.
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair market value as determined in good faith by the Fund's
Trustees.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Short Term Trading and Portfolio Turnover. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. The Fund does not invest for the purpose of
seeking short-term profits. The Fund's investment securities may be changed,
however, without regard to the holding period of these securities (subject to
certain tax restrictions), when the Adviser deems that this action will help
achieve the Fund's objective given a change in an issuer's operations or changes
in general market conditions. Short-term trading may have the effect of
increasing portfolio turnover rate. A high rate of portfolio turnover (100% or
greater) involves corresponding higher transaction expenses and may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes.
When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
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considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the issuer
or seller to consummate the transaction may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Repurchase Agreements. The Fund may invest in repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a security
for a relatively short period (usually not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with securities dealers. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
The Fund has established a procedure providing that the securities serving
as collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the period in
which the Fund seeks to enforce its rights thereto, possible subnormal levels of
income and lack of access to income during this period, and the expense of
enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of securities held in its portfolio
to a bank or securities firm with an agreement that the Fund will buy back the
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securities at a fixed future date at a fixed price plus an agreed amount of
interest which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. The Fund will use
proceeds obtained from the sale of securities pursuant to reverse repurchase
agreements to purchase other investments. The use of borrowed funds to make
investments is a practice known as "leverage," which is considered speculative.
Use of reverse repurchase agreements is an investment technique that is intended
to increase income. Thus, the Fund will enter into a reverse repurchase
agreement only when the Adviser determines that the interest income to be earned
from the investment of the proceeds is greater than the interest expense of the
transaction. However, there is a risk that interest expense will nevertheless
exceed the income earned. Reverse repurchase agreements involve the risk that
the market value of securities purchased by the Fund with proceeds of the
transaction may decline below the repurchase price of the securities sold by the
Fund which it is obligated to repurchase. The Fund would also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. The Fund will not enter into reverse repurchase agreements
exceeding in the aggregate 33 1/3% of the value of its total assets (including
for this purpose other borrowings of the Fund). The Fund will enter into reverse
repurchase agreements only with selected registered broker/dealers or with
federally insured banks or savings and loan associations which are approved in
advance as being creditworthy by the Trustees. Under procedures established by
the Trustees, the Adviser will monitor the creditworthiness of the firms
involved.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage
"dollar roll" transactions with selected banks and broker-dealers pursuant to
which the Fund sells mortgage-backed securities and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction. Covered rolls are not
treated as a borrowing or other senior security and will be excluded from the
calculation of the Fund's borrowings and other senior securities. For financial
reporting and tax purposes, the Fund treats mortgage dollar rolls as two
separate transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
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Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price. Generally, warrants and stock
purchase rights to not carry with them the right to receive dividends or
exercise voting rights with respect to the underlying securities, and they do
not represent any rights in the assets of the issuer. As a result, an investment
in warrants and rights may be considered to entail greater investment risk than
certain other types of investments. In addition, the value of warrants and
rights does not necessarily change with the value of the underlying securities,
and they cease to have value if they are not exercised on or prior to their
expiration date. Investment in warrants and rights increases the potential
profit or loss to be realized from the investment of a given amount of the
Fund's assets as compared with investing the same amount in the underlying
stock.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in a foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an effect
similar to buying or writing options. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
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Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. The Fund will maintain in a segregated account
with its custodian, cash or liquid securities equal to the net amount, if any,
of the excess of the Fund's obligations over its entitlements with respect to
swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in
pay-in-kind, delayed and zero coupon bonds. These are securities issued at a
discount from their face value because interest payments are typically postponed
until maturity. The amount of the discount rate varies depending on factors
including the time remaining until maturity, prevailing interest rates, the
security's liquidity and the issuer's credit quality. These securities also may
take the form of debt securities that have been stripped of their interest
payments. A portion of the discount with respect to stripped tax-exempt
securities or their coupons may be taxable. The market prices in pay-in-kind,
delayed and zero coupon bonds generally are more volatile than the market prices
of interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
Financial Futures Contracts. The Fund may buy and sell futures contracts
(and related options) on securities in which it may invest, interest rate
indices, and other instruments. The Fund may hedge its portfolio by selling or
purchasing financial futures contracts as an offset against the effects of
changes in interest rates or in security values. Although other techniques could
be used to reduce exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
financial futures contracts. The Fund may enter into financial futures contracts
for hedging and speculative purposes to the extent permitted by regulations of
the Commodity Futures Trading Commission ("CFTC").
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Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills, 90-day commercial paper, bank
certificates of deposit and Eurodollar certificates of deposit. It is expected
that if other financial futures contracts are developed and traded the Fund may
engage in transactions in such contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than a Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. Each Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
of transactions in financial futures contracts, see the information under the
caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin", ranging upward from 1.1% of
the value of the financial futures contract being traded. The margin required
for a financial futures contract is set by the board of trade or exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the financial futures contract which is returned to the Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. Each day, the futures contract is valued at the official settlement
price of the board of trade or exchange on which it is traded. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
This process is known as "mark to market." Variation margin does not represent a
borrowing or lending by the Fund but is instead settlement between the Fund and
the broker of the amount one would owe the other if the financial futures
contract expired. In computing net asset value, the Fund will mark to market its
open financial future positions.
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Successful hedging depends on a strong correlation between the market for
the underlying securities and the futures contract market for those securities.
There are several factors that may prevent this correlation from being perfect,
and even a correct forecast of general interest rate trends may not result in a
successful hedging transaction. There are significant differences between the
securities and futures markets which could create an imperfect correlation
between the markets and which could affect the success of a given hedge. The
degree of imperfection will be affected by variations in speculative market
demand for financial futures and debt securities, including technical influences
in futures trading. Differences between the financial instruments being hedged
and the instruments underlying the standard financial futures contracts
available for trading will be affected by interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated and, therefore, subject to
greater fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected interest rate trends. The Fund
will bear the risk that the price of the securities being hedged will not move
in complete correlation with the price of the futures contracts used as a
hedging instrument. Although the Adviser believes that the use of financial
futures contracts will benefit the Fund, an incorrect prediction could result in
a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
14
<PAGE>
Finally, although the Fund engages in financial futures transactions only
on boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it will be required to
continue to meet margin requirements until the position is closed.
Options on Financial Futures Contracts. The Fund may buy and sell options
on financial futures contracts on securities in which it may invest, interest
rate indices, and other instruments. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time during the period of
the option. Upon exercise, the writer of the option delivers the futures
contract to the holder at the exercise price. The Fund would be required to
deposit with its custodian initial and variation margin with respect to put and
call options on futures contracts written by it. Options on futures contracts
involve risks similar to the risks relating to transactions in financial futures
contracts. Also, an option purchased by the Fund may expire worthless, in which
case the Fund would lose the premium it paid for the option.
Other Considerations. The Fund will engage in futures and options
transactions for bona fide hedging or speculative purposes to the extent
permitted by CFTC regulations. The Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, the Fund's
futures transactions will be entered into for traditional hedging purposes --
i.e., futures contracts will be sold to protect against a decline in the price
of securities that the Fund owns, or futures contracts will be purchased to
protect the Fund against an increase in the price of securities the Fund intends
to purchase. As evidence of this hedging intent, the Fund expects that on 75% or
more of the occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the Fund will have purchased, or
will be in the process of purchasing equivalent amounts of related securities at
the time when the futures contract or option position is closed out. However, in
particular cases, when it is economically advantageous for the Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
15
<PAGE>
As an alternative to literal compliance with the bona fide hedging
definition, a FTC regulation permits the Fund to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish speculative positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Fund will engage in transactions in options and futures contracts only to the
extent such transactions are consistent with the requirements of the Code for
maintaining its qualification as a regulated investment company for Federal
income tax purposes.
When the Fund purchases financial futures contracts, or writes put options
or purchases call options thereon, cash or liquid securities will be deposited
in a segregated account with the Fund's custodian in an amount that, together
with the amount of initial and variation margin held in the account of its
broker, equals the market value of the futures contracts.
Options Transactions. The Fund may write listed and over-the-counter
covered call options and covered put options on securities in order to earn
additional income from the premiums received. In addition, the Fund may purchase
listed and over-the-counter call and put options. The extent to which covered
options will be used by the Fund will depend upon market conditions and the
availability of alternative strategies. The Fund may write listed and
over-the-counter call and put options on up to 100% of its net assets.
The Fund will write listed and over-the-counter call options only if they
are "covered," which means that the Fund owns or has the immediate right to
acquire the securities underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund may also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities where
(i) the exercise price of the covering call held is equal to or less than the
exercise price of the call written or, if the exercise price of the covering
call is greater than that of the call written, maintained by the Fund in cash or
liquid securities in a segregated account with the Fund's custodian, and (ii)
the covering call expires at the same time as or later than the call written. If
a covered call option is not exercised, the Fund would keep both the option
premium and the underlying security. If the covered call option written by the
Fund is exercised and the exercise price, less the transaction costs, exceeds
the cost of the underlying security, the Fund would realize a gain in addition
to the amount of the option premium it received. If the exercise price, less
transaction costs, is less than the cost of the underlying security, the Fund's
loss would be reduced by the amount of the option premium.
16
<PAGE>
As the writer of a covered put option, the Fund will write a put option
only with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash, U.S. Government
securities or high- grade liquid debt securities with a value equal to the price
at which the underlying security may be sold to the Fund in the event the put
option is exercised by the purchaser. The Fund may also write a "covered" put
option by purchasing on a share-for-share basis a put on the same security as
the put written by the Fund if the exercise price of the covering put held is
equal to or greater than the exercise price of the put written and the covering
put expires at the same time as or later than the put written.
When writing listed and over-the-counter covered put options on securities,
the Fund would earn income from the premiums received. If a covered put option
is not exercised, the Fund would keep the option premium and the assets
maintained to cover the option. If the option is exercised and the exercise
price, including transaction costs, exceeds the market price of the underlying
security, the Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Fund will realize a loss from a closing transaction if the cost of the
17
<PAGE>
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
illiquid securities subject to the restriction that illiquid securities are
limited to not more than 15% of the Fund's net assets. The SEC, however, has a
partial exemption from the above restrictions on transactions in OTC options.
The SEC allows the Fund to exclude from the 15% limitation on illiquid
securities a portion of the value of the OTC options written by the Fund,
provided that certain conditions are met. First, the other party to the OTC
options has to be a primary U.S. Government securities dealer designated as such
by the Federal Reserve Bank. Second, the Fund must have an absolute contractual
right to repurchase the OTC options at a formula price. If the above conditions
are met, the Fund may treat as illiquid only that portion of the OTC option's
value (and the value of its underlying securities) which is equal to the formula
price for repurchasing the OTC option, less the OTC option's intrinsic value.
Risks Associated with Options, Futures and Other Derivative Instruments.
The risks associated with the Fund's transactions in options, futures and other
derivative instruments, including mortgage-backed securities, may include some
or all of the following:
Market Risk. Options and futures transactions, as well as other derivative
instruments, involve the risk that the applicable market will move against the
Fund's derivative position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund. Investments in
mortgage-backed securities are subject to the prepayment, extension, interest
rate and other market risks described above.
18
<PAGE>
Leverage and Volatility Risk. Derivative instruments may increase or
leverage the Fund's exposure to a particular market risk, which may increase the
volatility of the Fund's net asset value. The Fund may partially offset the
leverage inherent in derivative instruments by maintaining a segregated account
consisting of cash and liquid securities, by holding offsetting portfolio
securities or currency positions or by covering written options.
Correlation Risk. The Fund's success in using derivative instruments to
hedge portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instruments, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Over-the-counter instruments involve a risk that the issuer or
counterparty will fail to perform its contractual obligations.
Liquidity and Valuation Risk. Some derivative instruments are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, an exchange may suspend or limit
trading in an exchange-traded derivative instrument, which may make the contract
temporarily illiquid and difficult to price. The staff of the SEC takes the
position that certain over-the-counter options are subject to the Fund's 15%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative instruments may depend on the cooperation of the counterparties to
these instruments. For derivative instruments that are not heavily traded, the
only source of price quotations may be the selling dealer or counterparty.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions.
These restrictions may not be changed without approval by holders of a "majority
of the outstanding shares" of the Fund. A majority for this purpose means the
holders of: (a) more than 50% of the outstanding shares, or (b) 67% or more of
the shares represented at a meeting where more that 50% of the outstanding
shares are represented, whichever is less.
The Fund may not:
1. borrow money, except that as a temporary measure for extraordinary or
emergency purposes the Fund may borrow from banks in aggregate amounts at
any one time outstanding not exceeding 33 1/3% of the total assets
(including the amount borrowed) of the Fund valued at market; and the Fund
may not purchase any securities at any time when borrowings exceed 5% of
19
<PAGE>
the total assets of the Fund (taken at market value). This borrowing
restriction does not prohibit the use of reverse repurchase agreements (see
"Reverse Repurchase Agreements"). For purposes of this investment
restriction, forward commitment transactions shall not constitute
borrowings. Interest paid on any borrowings will reduce the Fund's net
investment income;
2. make short sales of securities or purchase any security on margin, except
that the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities (this restriction does not
apply to securities purchased on a when-issued basis);
3. underwrite securities issued by other persons, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a security, and except that the Fund may invest all or
substantially all of its assets in another registered investment company
having substantially the same investment objectives as the Fund;
4. make loans to other persons except (a) through the lending of securities
held by the Fund, (b) through the purchase of debt securities in accordance
with the investment policies of the Fund (the entry into repurchase
agreements is not considered a loan for purposes of this restriction);
5. with respect to 75% of its total assets, purchase the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government and
its agencies or instrumentalities, as to which there are no percentage
limits or restrictions) if immediately after and as a result of such
purchase (a) more than 5% of the value of its assets would be invested in
that issuer, or (b) the Fund would hold more than 10% of the outstanding
voting securities of that issuer, except that the Fund may invest all or
substantially all of its assets in another registered investment company
having substantially the same investment objectives as the Fund;
6. purchase or sell real estate (including limited partnership interests)
other than securities secured by real estate or interests therein including
mortgage-related securities or interests in oil, gas or mineral leases in
the ordinary course of business (the Fund reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of
securities);
7. invest more than 25% of its total assets in the securities of issuers whose
principal business activities are in the same industry (excluding
obligations of the U.S. Government, its agencies and instrumentalities and
repurchase agreements) except that the Fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same objectives as the Fund;
20
<PAGE>
8. issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act")) if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder; or
9. invest in securities of any company if, to the knowledge of the Trust, any
officer or director of the Trust or its Adviser owns more than 1/2 of 1% of
the outstanding securities of such company, and all such officers and
directors own in the aggregate more than 5% of the outstanding securities
of such company.
The following restrictions are designated as nonfundamental and may be
changed by the Board of Trustees without shareholder approval.
The Fund may not:
(a) invest in companies for the purpose of exercising control or management,
except that the Fund may invest all or substantially all of its assets in
another registered investment company having substantially the same
investment restrictions as the Fund;
(b) make investments in the securities of other investment companies, except as
otherwise permitted by the 1940 Act or in connection with a merger,
consolidation, or reorganization;
(c) purchase a security if, as a result, (i) more than 10% of the Fund's total
assets wold be invested in the securities of other investment companies,
(ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the
Fund's total assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the investment of
cash collateral, received by the Fund in connection with lending the Fund's
portfolio securities, in the securities of open-end investment companies or
(b) the purchase of shares of any investment company in connection with a
merger, consolidation, reorganization or purchase of substantially all of
the assets of another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Directors,
21
<PAGE>
purchase securities of other investment companies within the John Hancock
Group of Funds. The Fund may not purchase the shares of any closed-end
investment company except in the open market where no commission or profit
to a sponsor or dealer results from the purchase, other than customary
brokerage fees.
(d) invest in commodities, except that the Fund may purchase and sell: options
on securities and securities indices, futures contracts on securities and
securities indices and options on these futures, forward commitments,
when-issued securities, securities index put or call warrants and
repurchase agreements entered into in accordance with the Fund's investment
policies;
(e) mortgage, pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned by the Fund except as may be necessary
in connection with borrowings mentioned in investment restriction no. 1
above;
(f) purchase warrants of any issuer, except on a limited basis, if, as a
result, more than 2% of the value of its total assets would be invested in
warrants which are not listed on the New York Stock Exchange and more than
5% of the value of its total assets would be invested in warrants, whether
or not so listed, such warrants in each case to be valued at the lesser of
cost or market, but assigning no value in each case to warrants acquired by
the Fund in units or attached to debt securities; or
(g) purchase any security, including any repurchase agreement maturing in more
than seven days, which is not readily marketable, if more than 15% of the
net assets of the Fund, taken at market value, would be invested in such
securities.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
22
<PAGE>
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers and directors of the Adviser or officers and directors of
John Hancock Funds.
Set forth below is the principal occupation or employment of the Trustees
and officers of the Trust during the past five years.
<TABLE>
<CAPTION>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer(3)(4) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("The
October 1944 Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital") and John Hancock Advisers
International Limited ("Advisers
International"); Chairman, Chief
Executive Officer and President,
John Hancock Funds, Inc. ("John
Hancock Funds"); John Hancock
Investor Services Corporation
("Investor Services"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp"); Director,
John Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation and New England/ Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
23
<PAGE>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
James F. Carlin Trustee(1)(2) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) and Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee(1)(2) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Harold R. Hiser, Jr. Trustee(1)(2) Executive Vice President,
Schering-Plough Corporation Schering-Plough Corporation
One Giralda Farms (pharmaceuticals) (retired 1996);
Madison, NJ 07940-1000 Director, ReCapital Corporation
October 1931 (reinsurance) (until 1995).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
24
<PAGE>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
Charles F. Fretz Trustee(1)(2) Retired; self-employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Forster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Anne C. Hodsdon* President and President and Chief Operating
101 Huntington Avenue Trustee(3)(4) Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
April 1953 December 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Charles L. Ladner Trustee(1)(2) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company)(until 1992); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
February 1938 (holding company, public utilities,
LPGAS).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
25
<PAGE>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
Leo E. Linbeck, Jr. Trustee(1)(2) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
August 1934 company engaged in various phases
of the construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980- 1993); Director,
Greater Houston Partnership.
Patricia P. McCarter Trustee(1)(2) Director and Secretary, The
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer).
Malvern, PA 19355
May 1928
Steven R. Pruchansky Trustee(1)(2) Director and President, Mast
360 Horse Creek Drive, #208 Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust
(1982-1994); President, Maxwell
Building Corp. (until 1991).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
26
<PAGE>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
Richard S. Scipione* Trustee(3) General Counsel, John Hancock
John Hancock Place Mutual Life Insurance Company;
P.O. Box 111 Director, the Adviser, Advisers
Boston, MA 02199 International, John Hancock Funds,
August 1937 Investor Services, John Hancock
Distributors, Inc., John Hancock
Subsidiaries, Inc., John Hancock
Property and Casualty Insurance and
its affiliates (until November
1993), SAMCorp and NM Capital;
Trustee, The Berkeley Group;
Director, JH Networking Insurance
Agency, Inc.
Norman H. Smith Trustee(1)(2) Lieutenant General, USMC, Deputy
Rt. 1, Box 249 E Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
March 1933 Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
27
<PAGE>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
John P. Toolan Trustee(1)(2) Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Fund, Inc., Vantage
September 1930 Money Market Funds (mutual funds),
The Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired 1991);
Director, Smith Barney, Inc.,
Mutual Management Company and
Smith, Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman* Vice Chairman and Chief Vice Chairman and Chief Investment
101 Huntington Avenue Investment Officer(4) Officer, the Adviser; President,
Boston, MA 02199 the Adviser (until December 1994);
July 1938 Director, the Adviser, Advisers
International, John Hancock Funds
Investor Services, SAMCorp and NM
Capital; Senior Vice President, The
Berkeley Group.
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
28
<PAGE>
Name, Address and Position Held Principal Occupation(s)
Date of Birth with the Trust During Past Five Years
- ------------- -------------- ----------------------
James B. Little* Senior Vice President and Senior Vice President, the Adviser,
101 Huntington Avenue Chief Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services
February 1935
James J. Stokowski* Vice President and Vice President, the Adviser.
101 Huntington Avenue Treasurer
Boston, MA 02199
November 1946
Susan S. Newton* Vice President and Vice President and Assistant
101 Huntington Avenue Secretary Secretary, the Adviser; Vice
Boston, MA 02199 President and Secretary, John
March 1950 Hancock Funds, Investor Services
and John Hancock Distributors, Inc.
(until 1994); Secretary, SAMCorp;
Vice President, The Berkeley Group.
John A. Morin* Vice President Vice President, the Adviser,
101 Huntington Avenue Investor Services and John Hancock
Boston, MA 02199 Funds; Counsel, John Hancock Mutual
July 1950 Life Insurance Company; Vice
President and Assistant Secretary,
The Berkeley Group.
</TABLE>
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
29
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of August 5, 1996, the officers and trustees of the Fund as a group
beneficially owned less than 1% of the Fund's outstanding shares. At such date,
the following shareholders held, as record owner, 5% or more of the Fund's
shares:
Percentage Ownership
Class A Shares Held of Outstanding Shares
- ------- ----------- ---------------------
Merrill Lynch Pierce 367,598 13.28%
Fenner & Smith Inc.
Trade House Account-Book Entry
Team B - 3rd Floor
4800 Deer Lake Dr East
Jacksonville, FL 32246-6484
Merchants & Marine Bank 244,105 8.82%
Attn Mike Dickson
PO Box 729
Pascagoula, MS 39568-0729
River Production Co. Inc. 161,749 5.84%
PO Box 909
Columbia, MS 39429-0909
Class B
- -------
Merrill Lynch Pierce 60,328 7.58%
Fenner & Smith Inc.
Trade House Account-Book Entry
Team B - 3rd Floor
4800 Deer Lake Dr East
Jacksonville, FL 32246-6484
At such date, no other person owned of record or beneficially as much as 5%
of the outstanding shares of the Fund.
30
<PAGE>
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser of the Fund, and the Adviser. The members of the Advisory
Board are distinct from the Board of Trustees, do not serve the Fund in any
other capacity and are persons who have no power to determine what securities
are purchased or sold on behalf of the Fund. Each member of the Advisory Board
may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations
during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas; co-
founder, Houston Parents' League; former board member of various civic and
cultural organizations in Houston, including the Houston Symphony, Museum
of Fine Arts and YWCA. Mrs. Bentsen is presently active in various civic
and cultural activities in the Washington, D.C. area, including membership
on the Area Board for The March of Dimes and is a National Trustee for the
Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company Institute;
formerly, President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
Compensation of the Board of Trustees and Advisory Board. The following
table provides information regarding the compensation paid by the Fund during
the Fund's most recently completed fiscal year and the other investment
companies in the John Hancock Fund Complex to the Independent Trustees and the
Advisory Board members for their services. The three non Independent Trustees,
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<PAGE>
Messrs. Boudreau, Scipione, and Ms. Hodsdon and each of the officers of the Fund
who are interested persons of the Adviser, are compensated by the Adviser and/or
its affiliates and received no compensation from the Fund for their services.
Aggregate Total Compensation from all
Compensation Funds in John Hancock Fund
Trustees from the Fund Complex to Trustees*
- -------- ------------- --------------------
James F. Carlin $ 281 $ 60,700
William H. Cunningham(**) 375 69,700
Charles F. Frez 281 56,200
Harold R. Hiser, Jr. (**) 281 60,200
Charles L. Ladner 281 60,700
Leo E. Linbeck, Jr. 375 73,200
Patricia P. McCarter 281 60,700
Steven R. Pruchansky 281 62,700
Norman H. Smith 281 62,700
John P. Toolan (**) 281 60,700
------ --------
TOTAL $2,998 $627,500
* The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees was $627,500 as of the calendar year ended December
31, 1995. All Trustees/Directors except Messrs. Cunningham and Linbeck are
Trustees/Directors of 31 fund in the John Hancock Fund Complex. Messrs.
Cunningham and Linbeck are Trustees/Directors of 30 funds.
** As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock fund complex for Mr.
Cunningham was $54,413, for Mr. Hiser was $31,324, and for Mr. Toolan was
$71,437 under the John Hancock Deferred Compensation Plan for Independent
Trustees (the "Plan").
Aggregate Total Compensation from all
Compensation Funds in John Hancock Fund
Trustees from the Fund Complex to Trustees*
- -------- ------------- --------------------
R. Trent Campbell $ 541 $ 54,000
Mrs. Lloyd Bentsen 541 54,000
Thomas R. Powers 541 54,000
Thomas B. McDade 541 54,000
------ --------
TOTAL $2,164 $216,000
*** For the calendar year December 31, 1995.
32
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Management Contract. As described in the Prospectus, the Fund
receives investment advice from the Adviser. Investors should refer to the
Prospectus and below for a description of certain information concerning the
investment management contract. Each of the Trustees and principal officers
affiliated with the Fund who is also an affiliated person of the Adviser is
named above, together with the capacity in which such person is affiliated with
the Fund, the Adviser or TFMC (the Fund's prior investment adviser).
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-
7603, was organized in 1968 and has more than $18 billion in assets under
management in its capacity as investment adviser to the Fund and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds, having a combined total of over 1,080,000 shareholders. The Adviser is
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States and carries high ratings from Standard & Poor's and A.M. Best.
Founded in 1862, the Life Company has been serving clients for over 130 years.
The Trust on behalf of the Fund has entered into an investment management
contract with the Adviser. Under the investment management contract, the Adviser
provides the Fund with (i) a continuous investment program, consistent with the
Fund's stated investment objective and policies and (ii) supervision of all
aspects of the Fund's operations except those that are delegated to a custodian,
transfer agent or other agent. See "Organization and Management of the Fund" and
"The Fund's Expenses" in the Prospectus for a description of certain information
concerning the Fund's investment management contract.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
Under the terms of the investment management contract with the Trust on
behalf of the Fund, all expenses which are not specifically paid by the Adviser
and which are incurred in the operation of the Fund including, but not limited
to, (i) the fees of the Independent Trustees of the Trust, (ii) the fees of the
members of the Fund's Advisory Board (described above) and (iii) the continuous
public offering of the shares of the Fund are borne by the Fund. Subject to the
requirements the Internal Revenue Service imposes on funds that have a
33
<PAGE>
multiple-class structure, class expenses properly allocable to any Class A or
Class B shares will be borne exclusively by such class of shares.
As provided by the investment management contract, the Fund pays the
Adviser an investment management fee, which is accrued daily and paid monthly in
arrears, equal on an annual basis to 0.40% of the Fund's average daily net asset
value. From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of average
daily net assets. The Adviser retains the right to re-impose a fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
If the total of all ordinary business expenses of the Fund for any fiscal
year exceeds the limitations prescribed by any state in which shares of the Fund
are qualified for sale, the fee payable to the Adviser will be reduced to the
extent required by these limitations. Currently, the most restrictive limit
imposed by a state is 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2% of the next $70,000,000 and 1.5% of the remaining average
daily net asset value. When calculating this limit, the Fund may include
interest, brokerage commissions and extraordinary expenses.
Pursuant to the investment management contract, the Adviser is not liable
to the Fund or its shareholders for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which the
investment management contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from its reckless disregard by the Adviser of its
obligations and duties under the investment management contract.
The initial term of the investment management contract expires on September
25, 1997 and the investment management contract will continue in effect from
year to year thereafter if approved annually by a vote of a majority of the
Independent Trustees of the Trust cast in person at a meeting called for the
purpose of voting on such approval, and by either a majority of the Trustees or
the holders of a majority of the Fund's outstanding voting securities. The
management contract may, on 60 days' written notice, be terminated at any time
without the payment of any penalty to the Fund by vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the Adviser.
The management contract terminates automatically in the event of its assignment.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
34
<PAGE>
more other funds or clients are selling the same security. If opportunities for
purchase or sale of securities by the Adviser or for other funds or clients, for
which the Adviser renders investment advice, arise for consideration at or about
the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its respective affiliates may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
applicable investment management contract or any extension, renewal or amendment
thereof remains in effect. If the Fund's investment management contract is no
longer in effect, the Fund (to the extent that it lawfully can) will cease to
use such name or any other name indicating that it is advised by or otherwise
connected with the Adviser. In addition, the Adviser or the Life Company may
grant the non-exclusive right to use the name "John Hancock" or any similar name
to any other corporation or entity, including but not limited to any investment
company of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
Under the Fund's master/feeder structure (which was terminated on September
22, 1995 pursuant to an Agreement and Plan of Liquidation and Termination dated
June 13, 1995) existing for the fiscal years ended March 31, 1994, 1995 and 1996
(until September 22, 1995), the Fund invested all of its assets in Adjustable
U.S. Government Fund (the "Portfolio"). During these years, advisory fees
payable by the Portfolio to TFMC, the Portfolio's former investment adviser, and
borne indirectly by the Fund, amounted to $184,072, $86,085 and $0,
respectively. During the fiscal year ended March 31, 1996, advisory fees paid by
the Portfolio to the Adviser and borne indirectly by the Fund, amounted to
$137,927. A portion of these fees paid to TFMC and the Adviser during these
periods was not imposed pursuant to the expense limitation arrangements in
effect.
Administration Agreement. Pursuant to an administration agreement, dated
December 22, 1994, the Adviser provided the Fund with general office facilities
and supervised the overall administration of the Fund including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of the independent contractors and agents of the
Fund, the preparation and filing of all documents required for compliance by the
Fund with applicable laws and regulations and arranging for the maintenance of
books and records (other than accounting books and records) of the Fund. The
Adviser paid all compensation of the Trustees, officers and employees of the
Fund who were affiliated persons of the Adviser. The administration agreement
35
<PAGE>
terminated in September 1995. Under the administration agreement, the Adviser
would have received from the Fund, a fee at an annual rate of 0.10% of the
Fund's average daily net assets, subject to the expense limitation provisions
described below. For the fiscal years ended March 31, 1994 and 1995,
respectively, administration fees paid by the Fund to TFMC, the Fund's former
administrator would have amounted to $46,091 and $21,511, respectively; and the
Adviser would have received $7,171 for the year ended March 31, 1995; however,
all such fees were not imposed pursuant to the fee and expense limitation
arrangements then in effect.
Under the administration agreement, neither the Adviser nor its personnel
was liable for any error of judgment or mistake of law or for any act or
omission in the administration of the Fund except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or from reckless
disregard of its obligations and duties under the administration agreement.
Administrative Services Agreement. During the fiscal years ended March 31,
1994 and 1995, the Fund was a party to an administrative services agreement with
TFMC (the "Services Agreement"), pursuant to which TFMC performed bookkeeping
and accounting services and functions, including preparing and maintaining
various accounting books, records and other documents and keeping such general
ledgers and portfolio accounts as are reasonably necessary for the operation of
the Fund. Other administrative services included communications in response to
shareholder inquiries and certain printing expenses of various financial
reports. In addition, such staff and office space, facilities and equipment was
provided as necessary to provide the required administrative services. The
Services Agreement was amended in connection with the appointment of the Adviser
as administrator to the Fund to permit services under the Agreement to be
provided by the Adviser and its affiliates. The Services Agreement was
terminated during the fiscal year ended March 31, 1995.
For the fiscal years ended March 31, 1994 and 1995, the Fund paid to TFMC
(pursuant to the Services Agreement), $18,021 and $9,604, respectively, of which
$14,730 and $8,164, respectively, was paid to TFMC and $3,291 and $1,440,
respectively, was paid for certain data processing and pricing information
services.
For the fiscal years ended March 31, 1994 and 1995, the Portfolio paid TFMC
(pursuant to the Services Agreement), $38,012 and $24,461, respectively, of
which $26,722 and $17,704, respectively, was paid to TFMC and $11,290 and
$6,757, respectively, were paid for certain data processing and pricing
information services.
DISTRIBUTION CONTRACTS
Distribution Contracts. The Fund has a distribution contract with John
Hancock Funds. This contract was initially adopted on behalf of the Fund by the
Trustees on December 22, 1994. Under the contract, John Hancock Funds is
36
<PAGE>
obligated to use its best efforts to sell shares on behalf of the Fund. Shares
of the Fund are also sold by selected broker-dealers (the "Selling Brokers")
which have entered into selling agency agreements with John Hancock Funds. John
Hancock Funds accepts orders for the purchase of the shares of the Fund which
are continually offered at net asset value next determined, plus any applicable
sales charge. In connection with the sale of Class A or Class B shares, John
Hancock Funds and Selling Brokers receive compensation in the form of a sales
charge imposed, in the case of Class A shares, at the time of sale or, in the
case of Class B shares, on a deferred basis. The sales charges are discussed
further in the Prospectus.
Total underwriting commissions for sales of the Fund's Class A shares for
the fiscal years ended March 31, 1994, 1995 and 1996 were $59,793, $24,555 and
$4,976, respectively. Of such amounts, $7,455, $4,090 and $0, respectively, were
retained by the Fund's former distributor, Transamerica Fund Distributors, Inc.
or the current distributor in 1995 and 1996, as the case may be, and the
remainder was reallowed to dealers.
Distribution Plans. The Board of Trustees, including the Independent
Trustees of the Fund, approved new distribution plans pursuant to Rule 12b-1
under the 1940 Act. Such Plans were approved by a majority of the outstanding
shares of each respective class on December 16, 1994 and became effective on
December 22, 1994.
Under the Class A Plan, the distribution or service fee will not exceed an
annual rate of 0.25% of the average daily net asset value of the Class A shares
of the Fund. Any expenses under the Fund's Class A Plan not reimbursed within 12
months of being presented to the Fund for repayment are forfeited and not
carried over to future years. Under the Class B Plan, the distribution or
service fee to be paid by the Fund will not exceed an annual rate of 1.00% of
the average daily net assets of the Class B shares of the Fund; provided that
the portion of such fee used to cover Service Expenses (described below) shall
not exceed an annual rate of 0.25% of the average daily net asset value of the
Class B shares of the Fund. The Fund has determined that it will pay up to 0.90%
to John Hancock Funds but may in the future determine to pay up to 1.00% under
the Class B Plan. Under the Class B Plan, the fee covers the Distribution and
Service Expenses (described below) and interest expenses on unreimbursed
distribution expenses. In accordance with generally accepted accounting
principles, the Fund does not treat unreimbursed distribution expenses
attributable to Class B shares as a liability of the Fund and does not reduce
the current net assets of Class B by such amount although the amount may be
payable in the future.
The fee may be spent by John Hancock Funds on Distribution Expenses or
Service Expenses. "Distribution Expenses" include any activities or expenses
primarily intended to result in the sale of shares of the relevant class of the
37
<PAGE>
Fund, including, but not limited to: (i) initial and ongoing sales compensation
payable out of such fee as such compensation is received by John Hancock Funds
or by Selling Brokers, (ii) direct out-of-pocket expenses incurred in connection
with the distribution of shares, including expenses related to printing of
prospectuses and reports; (iii) preparation, printing and distribution of sales
literature and advertising material; (iv) an allocation of overhead and other
branch office expenses of John Hancock Funds related to the distribution of Fund
shares; (v) distribution expenses that were incurred by the Fund's former
distributor and not recovered through payments under the Class A or Class B
former plans or through receipt of contingent deferred sales charges; and (vi)
in the event that any other investment company (the "Acquired Fund") sells all
or substantially all of its assets to, merges with or otherwise engages in a
combination with the Fund, distribution expenses originally incurred in
connection with the distribution of the Acquired Fund's shares. Service Expenses
under the Plans include payments made to, or on account of, account executives
of selected broker-dealers (including affiliates of John Hancock Funds) and
others who furnish personal and shareholder account maintenance services to
shareholders of the relevant class of the Fund.
Total payments made under the current Class A Rule 12b-1 plan to the
distributor during the fiscal year ended March 31, 1996 amounted to $56,470 and,
of such amount, (1) $2,093 represented payments for advertising and promotion
expenses, (2) $2,242 represented payments for the cost of printing and mailing
of prospectuses to other than current shareholders, (3) $45,993 represented
payments for compensation to selling brokers, (4) $6,142 represented expenses of
the distributor, and (5) $0 represented interest, carrying, or other finance
charges.
Total payments made under the current Class B Rule 12b-1 plan to the
distributor during the fiscal year ended March 31, 1996 amounted to $83,126 and,
of such amount, (1) $478 represented payments for advertising and promotion
expenses, (2) $1,154 represented payments for the cost of printing and mailing
of prospectuses to other than current shareholders, (3) $74,107 represented
payments for compensation to selling brokers, (4) $1,940 represented expenses of
the distributor, and (5) $5,447 represented interest, carrying, or other finance
charges.
For the fiscal year ended March 31, 1996, the distributor received an
aggregate of $34,262 in contingent deferred sales charges from redemption of the
Class B shares.
Each Plan provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. Each Plan provides that it may be terminated (a) at
any time by vote of a majority of the Trustees, a majority of the Independent
Trustees, or a majority of the respective Class' outstanding voting securities
or (b) by John Hancock Funds on 60 days' notice in writing to the Fund. Each
Plan further provides that it may not be amended to increase the maximum amount
38
<PAGE>
of the fees for the services described therein without the approval of a
majority of the outstanding shares of the class of the Fund which has voting
rights with respect to the Plan. Each Plan provides that no material amendment
to the Plan will, in any event, be effective unless it is approved by a majority
vote of the Trustees and the Independent Trustees of the Trust. The holders of
Class A and Class B shares have exclusive voting rights with respect to the Plan
applicable to their respective class of shares. By adopting the Plans, the Board
of Trustees has determined that, in its judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
Information regarding the services rendered under the Plans and the amounts
paid by each Class of the Fund are reviewed by the Trustees on a quarterly
basis.
When the Trust seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plan, committed to the discretion
of the Committee on Administration of the Trustees. The members of the Committee
on Administration are all Independent Trustees and identified in this Statement
of Additional Information under the heading "Those Responsible for Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished
by a principal market maker or a pricing service, both of which generally
utilize electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost, which approximates market value. If
market quotations are not readily available or if in the opinionof the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
The Fund will not price its securities on the following national holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day.
39
<PAGE>
INITIAL SALES CHARGE ON CLASS A SHARES
Class A shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive a Fund's minimum investment requirements and to reject
any order to purchase shares (including purchase by exchange) when in the
judgment of the Adviser such rejection is in the Fund's best interest. The sales
charges applicable to purchases of Class A shares of the Fund are described in
the Prospectus. Methods of obtaining reduced sales charges referred to generally
in the Prospectus are described in detail below. In calculating the sales charge
applicable to current purchases of Class A shares of the Fund, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of the Fund owned by the investor, or if
John Hancock Investor Services, Inc. ("Investor Services") is notified by the
investor's dealer or the investor at the time of the purchase, the cost of the
Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined if made by
(a) an individual, his or her spouse and their children under the age of 21,
purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates or Selling Brokers; employees or sales representatives of
40
<PAGE>
any of the foregoing; retired officers, employees or Directors of any of
the foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, for each Fund other than Money Market Fund, if the shares are
redeemed within 12 months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 million to $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Accumulation Privilege. Investors (including investors combining purchases)
who are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current account value of the Class A shares already
held by such person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. Reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
specified period of thirteen (13) months. Investors who are using the Fund as a
funding medium for a qualified retirement plan, however, may opt to make the
necessary investments called for by the LOI over a forty-eight (48) month
period. These qualified retirement plans include IRA's, SEP, SARSEP, 401(k)
plans, 403(b) plans (including TSAs) and 457 plans. Such an investment
(including accumulations and combinations) must aggregate $50,000 or more
invested during the specified period from the date of the LOI or from a date
within ninety (90) days prior thereto, upon written request to Investor
Services. The sales charge applicable to all amounts invested under the LOI is
computed as if the aggregate amount intended to be invested had been invested
immediately. If such aggregate amount is not actually invested, thedifference in
41
<PAGE>
the sales charge actually paid and the sales charge payable had the LOI not been
in effect is due from the investor. However, for the purchases actually made
within the specified period (either 13 or 48 months), the sales charge
applicable will not be higher than that which would have been applied (including
accumulations and combinations) had the LOI been for the amount actually
invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Investor Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of an initial sales charge so that the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will
be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six- year CDSC redemption period or those you acquired
42
<PAGE>
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please indicate
if you require the proceeds to equal the dollar amount requested. If not
indicated, only the specified dollar amount will be redeemed from your account
and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC (dividend
reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
43
<PAGE>
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor Services.
(Please note, this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions under
the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under section 401(a) of the Code
(such as 401k, Money Purchase Pension Plan, Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992.
Please see matrix for reference.
44
<PAGE>
CDSC Waiver Matrix for Class B Funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic payments periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of
Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, he would incur a brokerage charge. Any such
securities would be valued for the purposes of making such payment at the same
value as used in determining net asset value. The Fund has elected to be
governed by Rule 18f-1 under the 1940 Act. Under that rule, the Fund must redeem
its shares for cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described in the Prospectus, the Fund permits
exchanges of shares of any class of the Fund for shares of the same class in any
other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the
Fund permits the establishment of a Systematic Withdrawal Plan. Payments under
this plan represent proceeds arising from the redemption of shares of the Fund.
Since the redemption price of shares of the Fund may be more or less than the
shareholder's cost, depending upon the market value of the securities owned by
the Fund at the time of redemption, the distribution of cash pursuant to this
45
<PAGE>
plan may result in recognition of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A shares and the CDSC imposed on redemptions
of Class B shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Class A and Class B shares at the same time a
Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). The program, as it relates
to automatic investment checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or any other John Hancock funds, subject to the minimum investment
limit of that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A shares of
the Fund or in Class A shares of other John Hancock funds. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from this redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
46
<PAGE>
A redemption or exchange of the Fund is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
the Fund will be treated for tax purposes as described under the caption "Tax
Status."
DESCRIPTION OF THE FUND'S SHARES
The Declaration of Trust permits the Trustees to create an unlimited number
of series and classes of shares of the Trust and to issue an unlimited number of
full or fractional shares and to divide or combine the shares into a greater or
lesser number of shares without changing the proportionate beneficial interests
of the series.
Each share represents an equal proportionate interest in the aggregate net
assets attributable to each class or series. The interest of investors in the
various series or classes of the Trust is separate and distinct. All
consideration received for the sales of shares of a particular series or class
of the Trust, all assets in which such consideration is invested and all income,
earnings and profits derived from such investments will be allocated to and
belong to that series or class. As such, each such share is entitled to
dividends and distributions out of the net income belonging to that series or
class as declared by the Board of Trustees. Shares of the Trust have a par value
of $0.01 per share. The assets of each series are segregated on the Trust's
books and are charged with the liabilities of that series and with a share of
the Trust's general liabilities. The Board of Trustees determines those assets
and liabilities deemed to be general assets or liabilities of the Trust, and
these items are allocated among each series in proportion to the relative total
net assets of each series.
Pursuant to the Declaration of Trust, the Trustees have established the
Fund and may authorize the creation of additional series of shares (the proceeds
of which would be invested in separate, independently managed portfolios) and
additional classes within any series (which would be used to distinguish among
the rights of different categories of shareholders, as might be required by
future regulations or other unforeseen circumstances). As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of two classes of shares of the Fund, designated as Class A and Class B. The
shares of each class of the Fund represent an equal proportionate interest in
the aggregate net assets attributable to that class of the Fund.
The holders of Class A and Class B shares each have certain exclusive
voting rights on matters relating to their respective Rule 12b-1 distribution
plans. The different classes of the Fund may bear different expenses relating to
the cost of holding shareholder meetings necessitated by the exclusive voting
rights of any class of shares.
47
<PAGE>
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences resulting from the facts that
(i) the distribution and service fees relating to Class A and Class B shares
will be borne exclusively by such class, (ii) Class B shares will pay higher
distribution and service fees than Class A shares and (iii) each class of shares
will bear any other class expenses properly attributable to that class of
shares, subject to certain conditions imposed by the Internal Revenue Service in
issuing rulings to funds with a multiple- class structure. Similarly, the net
asset value per share may vary depending on the class of shares purchased.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations and affairs of
the Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. Liability is therefore
limited to circumstances in which the Trust itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
Notwithstanding the fact that the Prospectus is a combined prospectus for
the Fund and other John Hancock mutual funds, the Fund shall not be liable for
the liabilities of any other John Hancock mutual fund.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
TAX STATUS
The Fund has qualified and has elected to be treated as a "regulated
investment company" under Subchapter M of the Code intends to continue to so
qualify for each taxable year. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its taxable income (including net realized
capital gains) which is distributed to shareholders in accordance with the
timing requirements of the Code.
48
<PAGE>
The Fund will be subject to a 4% nondeductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
The amount of net realized capital gains, if any, in any given year will
vary depending upon the Adviser's current investment strategy and whether the
Adviser believes it to be in the best interests of the Fund to dispose of
portfolio securities or enter into options or futures transactions that will
generate capital gains. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions on
these shares from such appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
49
<PAGE>
assets in the shareholder's hands and will be long-term or short-term, depending
upon the shareholder's tax holding period for the shares and subject to the
special rules described below. A sales charge paid in purchasing Class A shares
of the Fund cannot be taken into account for purposes of determining gain or
loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares in the Fund by
the difference between his pro rata share of such excess and his pro rata share
of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $15,486,880 of capital loss carryforwards as of
the tax year ended December 31, 1995, of which $3,014,883 expires in 1996,
50
<PAGE>
$5,412,804 expires in 1997, $653,763 expires in 1998, $2,152,064 expires in
1999, $3,826,207 expires in 2001, and $427,159 expires in 2002, available to
offset future net capital gains.
The Fund's dividends and capital gain distributions will not qualify for
the corporate dividends-received deduction.
The Fund is required to accrue income on any debt securities that have more
than a de minimis amount of original issue discount (or debt securities acquired
at a market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts, may also
require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Fund will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the
"IRS") all taxable distributions to shareholders, as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
51
<PAGE>
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The Fund may be required to account for its transactions in forward rolls
in a manner that, under certain circumstances, may limit the extent of its
participation in such transactions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Certain of these transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred.
Certain of the applicable tax rules may be modified if the Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures contracts in order to seek to minimize any potential adverse
tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
52
<PAGE>
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended March 31, 1996, the annualized yield for the
Fund's Class A shares and Class B shares were 5.69% and 5.21%, respectively.
Average annual return for the Fund's Class A and Class B shares for the period
from December 31, 1991 (inception of the Fund) through March 31, 1996 was 3.99%
and 3.65%, respectively. For the one year period ended March 31, 1996 annual
returns were 2.43% and 1.90%, respectively, for Class A and Class B shares of
the Fund.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2([(a - b) + 1] 6 - 1)
-----
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of shares of the Fund outstanding during the
period that would be entitled to receive dividends.
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<PAGE>
d = the maximum offering price per share on the last day of the period (NAV
where applicable).
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV= ending redeemable value of a hypothetical $1,000 investment made at
designated periods or fraction thereof.
In the case of Class A shares or Class B shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A shares or the CDSC on Class B shares into account. Excluding
the Fund's sales charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total return figure.
54
<PAGE>
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibbotson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, may also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, which consists of officers and
directors of the Adviser and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market maker to
reflect a "spread." Investments in debt securities are generally traded on a net
basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
55
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Dealers, Inc. and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will not make any commitments to allocate portfolio transactions upon any
prescribed basis. While the Adviser will be primarily responsible for the
allocation of the Fund's brokerage business, their policies and practices of the
Adviser in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees. For the years ended March 31, 1996,
1995, and 1994, no negotiated brokerage commissions were paid on portfolio
transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended March 31, 1996, the
Fund did not pay commissions to compensate any brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony
Incorporated ("Tucker Anthony") and Sutro & Company, Inc. ("Sutro"),
(collectively "Affiliated Brokers"). Pursuant to procedures established by the
Trustees and consistent with the above policy of obtaining best net results, the
Fund may execute portfolio transactions with or through Affiliated Brokers. For
the years ended March 31, 1996, 1995 and 1994, the Fund did not execute any
portfolio transactions with any Affiliated Brokers.
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<PAGE>
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Fund will not effect principal transactions with
Affiliated Brokers. The Fund may, however, purchase securities from other
members of underwriting syndicates of which Tucker Anthony, Sutro and John
Hancock Distributors are members, but only in accordance with the policy set
forth above and procedures adopted and reviewed periodically by the Trustees.
The turnover rates for the Fund for the fiscal years ended March 31, 1994,
1995, and 1996 were 244%, 341%, and 423%, respectively. Such rates reflect the
difference between the years' varying market conditions.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205- 9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays an annual fee of
$20.00 for each Class A shareholder and $22.50 for each Class B shareholder,
plus certain out-of- pocket expenses. These expenses are aggregated and charged
to the Fund and allocated to each class on the basis of the relative net asset
values.
CUSTODY OF THE FUND
Portfolio securities of the Fund are held pursuant to custodian agreements
between the Trust on behalf of the Fund and Investors Bank & Trust Company
("IBT"), 24 Federal Street, Boston, Massachusetts 02110. Under the custodian
agreements, IBT performs custody, portfolio and fund accounting services.
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INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. Ernst & Young LLP audits and renders an
opinion of the Fund's annual financial statements and prepares the Fund's annual
Federal income tax return.
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APPENDIX A
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation represent their opinions as to the quality of various debt
instruments. Their ratings are a generally accepted barometer of credit risk.
They are, however, subject to certain limitations from an investor's standpoint.
Such limitations include the following: the rating of an issue is heavily
weighted by past developments and does not necessarily reflect probable future
conditions; there is frequently a lag between the time a rating is assigned and
the time it is updated; and there are varying degrees of difference in credit
risk of securities in each rating category. Therefore, it should be understood,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different yields
while debt instruments of the same maturity and coupon with different ratings
may have the same yield.
Description of Bond Ratings Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
A-1
<PAGE>
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated b generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principle or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Standard & Poor's Ratings Group
AAA: Bonds rated AAA have the higher rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
A-2
<PAGE>
C: The rating C is reserved for income bonds on which no interest is being paid.
A-3
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK BOND TRUST
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock Government Income Fund
John Hancock High Yield Bond Fund
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 30, 1996
This Statement of Additional Information ("SAI") provides information about John
Hancock Government Income Fund and John Hancock High Yield Bond Fund
(individually a "Fund" and collectively, the "Funds"), each a diversified series
of John Hancock Bond Trust (the "Trust"), in addition to the information that is
contained in the Funds' Prospectus dated August 30, 1996 (the "Prospectus").
This SAI is not a prospectus. It should be read in conjunction with the
Prospectus, a copy of which can be obtained free of charge by writing or
telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
----
Organization of the Trust.......................................... 2
Investment Objectives and Policies................................. 2
Certain Investment Practices....................................... 2
Investment Restrictions............................................ 20
Those Responsible for Management................................... 23
Investment Advisory and Other Services............................. 32
Distribution Agreement............................................. 35
Net Asset Value.................................................... 37
Initial Sales Charge on Class A Shares............................. 38
Deferred Sales Charge on Class B Shares............................ 41
Special Redemptions................................................ 43
Additional Services and Programs................................... 44
Description of the Funds' Shares................................... 45
Tax Status......................................................... 46
Calculation of Performance......................................... 51
Brokerage Allocation............................................... 53
Transfer Agent Services............................................ 55
Custody of Portfolio............................................... 56
Independent Auditors............................................... 56
Appendix........................................................... 57
Financial Statements
<PAGE>
ORGANIZATION OF THE TRUST
The Trust is an open-end management investment company organized as a
Massachusetts business trust under a Declaration of Trust dated December 12,
1984. Prior to December 22, 1994, John Hancock Government Income Fund was called
Transamerica Government Income Fund and John Hancock High Yield Bond Fund was
called Transamerica High Yield Bond Fund. Prior to August 30, 1996, the Funds
were series of John Hancock Series, Inc., a Maryland corporation.
Each Fund is managed by John Hancock Advisers, Inc. (the "Adviser"), a wholly-
owned indirect subsidiary of John Hancock Mutual Life Insurance Company (the
"Life Company"), chartered in 1862 with national headquarters at John Hancock
Place, Boston, Massachusetts. John Hancock Funds, Inc. ("John Hancock Funds")
acts as principal distributor of the shares of the Funds.
INVESTMENT OBJECTIVES AND POLICIES
John Hancock Government Income Fund's investment objective 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. The Fund may
seek to enhance its current return and may seek to hedge against changes in
interest rates by engaging in transactions involving options (subject to certain
limits), futures and options on futures. The Fund expects that under normal
market conditions it will invest at least 80% of its total assets in U.S.
Government securities (and related repurchase agreements and forward
commitments).
John Hancock High Yield Bond Fund's primary investment objective is to maximize
current income without assuming undue risk by investing in a diversified
portfolio consisting primarily of lower-rated, high yielding, fixed income
securities, such as: domestic and foreign corporate bonds; debentures and notes;
convertible securities; preferred stocks; and domestic and foreign government
obligations. As a secondary objective, the Fund seeks capital appreciation, but
only when it is consistent with the primary objective of maximizing current
income. The Fund's investment objectives may not be changed without 30 days'
prior written notice first having been given to shareholders.
The Adviser follows a policy under which it will not cause the Fund to invest
more than 25% of its total assets in the securities of issuers engaged in the
electric utility industry or the telephone industry unless yields available for
four consecutive weeks in the four highest rating categories on new issue bonds
in this industry (issue size of $50 million or more) have averaged greater than
the yields of new issue long-term industrial bonds similarly rated (issue size
of $50 million or more) and, in the opinion of the Adviser, the relative return
available from the electric utility or telephone industry and the relative risk,
marketability, quality and availability of securities of this industry justifies
such an investment.
There can be no assurance that either Fund will achieve its respective
investment objective.
CERTAIN INVESTMENT PRACTICES
Government Securities. Each Fund may invest in U.S. Government securities, which
are obligations issued or guaranteed by the U.S. Government and its agencies,
authorities or instrumentalities. Certain U.S. Government securities, including
U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities, issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
2
<PAGE>
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Custodial Receipts. The Funds may each acquire custodial receipts in respect of
U.S. government securities. Such custodial receipts evidence ownership of future
interest payments, principal payments or both on certain notes or bonds. These
custodial receipts are known by various names, including Treasury Receipts,
Treasury Investors Growth Receipts ("TIGRs"), and Certificates of Accrual on
Treasury Securities ("CATS"). For certain securities law purposes, custodial
receipts are not considered U.S. government securities.
Bank and Corporate Obligations. Each of the Funds may invest in commercial
paper. Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Funds consists of direct U.S.
dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which a Fund may invest include certificates of deposit, bankers' acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Municipal Obligations. High Yield Bond Fund may invest in a variety of municipal
obligations which consist of municipal bonds, municipal notes and municipal
commercial paper.
Municipal Bonds. Municipal bonds are issued to obtain funds for various public
purposes including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
exempt from federal income tax. The payment of principal and interest by issuers
of certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. Such guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
3
<PAGE>
Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
Federal tax legislation enacted in the 1980s placed substantial new restrictions
on the issuance of the bonds described above and in some cases eliminated the
ability of state or local governments to issue municipal obligations for some of
the above purposes. Such restrictions do not affect the Federal income tax
treatment of municipal obligations in which the Fund may invest which were
issued prior to the effective dates of the provisions imposing such
restrictions. The effect of these restrictions may be to reduce the volume of
newly issued municipal obligations.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any one or more issuers to pay when due
the principal of and interest on their municipal obligations may be affected.
The yields of municipal bonds depend upon, among other things, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service,
Inc. ("Moody's") and Fitch Investors Service ("Fitch") represent their
respective opinions on the quality of the municipal bonds they undertake to
rate. It should be emphasized, however, that ratings are general and not
absolute standards of quality. Consequently, municipal bonds with the same
maturity, coupon and rating may have different yields and municipal bonds of the
same maturity and coupon with different ratings may have the same yield. See the
Appendix for a description of ratings. Many issuers of securities choose not to
have their obligations rated. Although unrated securities eligible for purchase
by the Fund must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
Mortgage-Backed Securities. The Funds may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the Government National Mortgage Association ("Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by
the full faith and credit of the U.S. Government for timely payment of principal
and interest on the certificates. Fannie Mae certificates are guaranteed by
Fannie Mae, a federally chartered and privately owned corporation, for full and
4
<PAGE>
timely payment of principal and interest on the certificates. Freddie Mac
certificates are guaranteed by Freddie Mac, a corporate instrumentality of the
U.S. Government, for timely payment of interest and the ultimate collection of
all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass-through securities. Debt service on CMOs is
provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), and invests in certain mortgages
primarily secured by interests in real property and other permitted investments.
Investors may purchase "regular" or "residual" interests in REMICs, although the
Funds do not intend, absent a change in current tax law, to invest in residual
interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
Structured or Hybrid Notes. Government Income Fund and High Yield Bond Fund may
invest in "structured" or "hybrid" notes. The distinguishing feature of a
structured or hybrid note is that the amount of interest and/or principal
payable on the note is based on the performance of a benchmark asset or market
other than fixed income securities or interest rates. Examples of these
benchmarks include stock prices, currency exchange rates and physical commodity
prices. Investing in a structured note allows a Fund to gain exposure to the
benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, a Fund may forego all or part of the interest and principal that would
be payable on a comparable conventional note; a Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
5
<PAGE>
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage pass-
through securities and sequential pay CMOs are subject to all of these risks,
but are typically not leveraged. Thus, the magnitude of exposure may be less
than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage-Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only debt securities ("POs"),
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage-Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
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Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to different
types of investments, each Fund may enter into interest rate swaps, and other
types of swap agreements such as caps, collars and floors. Only High Yield Fund
may enter into currency swaps, caps, collars and floors. In a typical interest
rate swap, one party agrees to make regular payments equal to a floating
interest rate times a "notional principal amount," in return for payments equal
to a fixed rate times the same amount, for a specified period of time. If a swap
agreement provides for payment in different currencies, the parties might agree
to exchange the notional principal amount as well. Swaps may also depend on
other prices or rates, such as the value of an index or mortgage prepayment
rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payment to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. For example, if a Fund agreed to exchange payments in
dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. Each Fund will maintain in a segregated account
with its custodian, cash or liquid securities equal to the net amount, if any,
of the excess of the Fund's obligations over its entitlements with respect to
swap, cap, collar or floor transactions.
Asset-Backed Securities. Government Income Fund and High Yield Bond Fund may
invest a portion of their assets in asset-backed securities which are rated in
one of the two highest rating categories by a nationally recognized statistical
rating organization (e.g., S&P or Moody's) or if not so rated, of equivalent
investment quality in the opinion of the Adviser.
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
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Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Foreign Securities and Emerging Countries. Government Income Fund may invest in
U.S. dollar denominated securities of foreign governments considered stable by
the Adviser. Such securities will generally be rated within the four highest
rating categories by a nationally recognized rating organization (e.g., Standard
& Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"))
or if not so rated, determined to be of equivalent quality in the opinion of the
Adviser; provided that Government Income Fund may invest up to 10% of its total
assets in securities which may be rated B or better by a nationally recognized
rating organization. High Yield Bond Fund may invest in securities of foreign
issuers, including debt and equity securities of corporate and governmental
issuers in countries with emerging economies or securities markets.
Investing in obligations of non-U.S. issuers and foreign banks, particularly
securities of issuers located in emerging countries, may entail greater risks
than investing in similar securities of U.S. issuers. These risks include (i)
social, political and economic instability; (ii) the small current size of the
markets for many such securities and the currently low or nonexistent volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
Investing in securities of non-U.S. companies may entail additional risks due to
the potential political and economic instability of certain countries and the
risks of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
In addition, even though opportunities for investment may exist in foreign
countries, and in particular emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian regimes,
the governments of a number of Latin American countries previously expropriated
large quantities of real and personal property similar to the property which may
be represented by the securities purchased by High Yield Bond Fund. The claims
of property owners against those governments were never finally settled. There
can be no assurance that any property represented by foreign securities
purchased by either Fund will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, a Fund could lose a
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substantial portion of its investments in such countries. A Fund's investments
may similarly be adversely affected by exchange control regulation in any of
those countries.
Certain countries in which the Funds may invest may have vocal minorities that
advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for widespread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of a
Fund's investment in those countries.
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets by foreign entities such as the Funds. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most foreign securities held by the Funds will not be
registered with the SEC and such issuers thereof will not be subject to the
SEC's reporting requirements. Thus, there will be less available information
concerning foreign issuers of securities held by the Funds than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately the financial situation of the
issuer, the Adviser will take appropriate steps to evaluate the proposed
investment, which may include on-site inspection of the issuer, interviews with
its management and consultations with accountants, bankers and other
specialists. There is substantially less publicly available information about
foreign companies than there are reports and ratings published about U.S.
companies and the U.S. government. In addition, where public information is
available, it may be less reliable than such information regarding U.S. issuers.
Because High Yield Bond Fund may invest a substantial portion of its total
assets in securities which are denominated or quoted in foreign currencies, the
strength or weakness of the U.S. dollar against such currencies may account for
part of the Fund's investment performance. A decline in the value of any
particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
any net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Funds value their respective assets daily in terms of U.S. dollars,
High Yield Bond Fund does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. However, the Fund may do so from
time to time, and investors should be aware of the costs of currency conversion.
Although currency dealers do not charge a fee for conversion, they do realize a
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profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to sell that currency to the dealer.
Securities of foreign issuers, and in particular many emerging country issuers,
may be less liquid and their prices more volatile than securities of comparable
U.S. issuers. In addition, foreign securities exchanges and brokers are
generally subject to less governmental supervision and regulation than in the
U.S., and foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a Fund due
to subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security could result in possible liability
to the purchaser.
The Funds' investment income or, in some cases, capital gains from foreign
issuers may be subject to foreign withholding or other foreign taxes, thereby
reducing the Funds' net investment income and/or net realized capital gains. See
"Tax Status."
Brady Bonds. The Funds may also invest in so-called "Brady Bonds." The Funds may
invest in Brady Bonds and other soverign debt securities of countries that have
restructured or are in the process of restructuring soverign debt pursuant to
the Brady Plan. Brady Bonds are debt securities issued under the framework of
the Brady Plan, an initiative announced by U.S. Treasury Secretary Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their outstanding
external indebtedness (generally, commercial bank debt). In restructuring its
external debt under the Brady Plan framework, a debtor nation negotiates with
its existing bank lenders as well as multilateral institutions such as the World
Bank and the International Monetary Fund (the "IF"). The Brady Plan framework,
as it has developed, contemplates the exchange of commercial bank debt for newly
issued bonds (Brady Bonds). The World Bank and/or the IF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank and/or the IF, debtor nations have been required to agree to
the implementation of certain domestic monetary and fiscal reforms. Such reforms
have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's ability to service its external obligations and promote its economic
growth and development. Investors should recognize that the Brady Plan only sets
forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors. The Adviser believes that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds make the
debt of countries which have issued or have announced plans to issue Brady Bonds
an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Phillipines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January 1, 1996, the Funds are not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have along payment
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history. Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt, bonds issued at a discount of face value of such debt, bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Certain Brady Bonds have been
collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IF, the World Bank and the
debtor nations' reserves. In addition, the first two or three interest payments
on certain types of Brady Bonds may be collateralized by cash or securities
agreed upon by creditors. Although Brady Bonds may be collateralized by U.S.
Government securities, repayment of principal and interest is not guaranteed by
the U.S. Government.
Depositary Receipts. High Yield Bond Fund may invest in the securities of
foreign issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted but rather in the
currency of the market in which they are traded. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe by banks or depositories which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs, in bearer form, are designed for use in European
securities markets.
Foreign Currency Transactions. High Yield Bond Fund may engage in foreign
currency transactions. The foreign currency exchange transactions of the Fund
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may also
enter into forward foreign currency exchange contracts involving currencies of
the different countries in which it may invest as a hedge against possible
variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
The Fund's transactions in forward foreign currency exchange contracts will be
limited to hedging either specified transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities denominated
in foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in such
foreign currencies. The Fund will not attempt to hedge all of its foreign
portfolio positions and will enter into such transactions only to the extent, if
any, deemed appropriate by the Adviser.
If High Yield Bond Fund enters into a forward contract requiring it to purchase
foreign currency, its custodian bank will segregate cash or liquid securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. Those
assets will be valued at market daily and if the value of the securities in the
separate account declines, additional cash or securities will be placed in the
account so that the value of the account will be equal to the amount of the
Fund's commitment with respect to such contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
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anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency exchange transactions
varies with such factors as the currency involved, the length of the contract
period and the market conditions then prevailing. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Repurchase Agreements. Each Fund may invest in repurchase agreements. A
repurchase agreement is a contract under which a Fund acquires a security for a
relatively short period (usually not more than 7 days) subject to the obligation
of the seller to repurchase and the Fund to resell such security at a fixed time
and price (representing the Fund's cost plus interest). Each Fund will enter
into repurchase agreements only with member banks of the Federal Reserve System
and with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Funds
enter into repurchase agreements.
Each Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income and lack of
access to income during this period and the expense of enforcing its rights.
Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase
agreements which involve the sale of government securities held in its portfolio
to a bank with an agreement that the Fund will buy back the securities at a
fixed future date at a fixed price plus an agreed amount of "interest" which may
be reflected in the repurchase price. Reverse repurchase agreements are
considered to be borrowings by the Fund. Reverse repurchase agreements involve
the risk that the market value of securities purchased by a Fund with proceeds
of the transaction may decline below the repurchase price of the securities sold
by the Fund which it is obligated to repurchase. A Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. A Fund will not enter into reverse repurchase agreements and
other borrowings exceeding in the aggregate more than 33 1/3% of the market
value of its total assets. Government Income Fund will not make additional
investments while borrowings (including reverse repurchase agreements) are in
excess of 5% of the Fund's total assets. A Fund will enter into reverse
repurchase agreements only with federally insured banks or savings and loan
associations which are approved in advance as being creditworthy by the Board of
Trustees. Under procedures established by the Board of Trustees, the Adviser
will monitor the creditworthiness of the banks involved.
Forward Commitment and When-Issued Securities. Each Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
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When a Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Funds losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a when-
issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, a Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Lower Rated High Yield Debt Obligations. Government Income Fund and High Yield
Bond Fund may invest in high yielding, fixed income securities rated below
investment grade (e.g., rated below Baa by Moody's or below BBB by S&P). No more
than 10% of Government Income Fund's total assets may be invested in such
securities, and Government Income Fund may not invest in securities rated lower
than B by a nationally recognized rating organization. Ratings are based largely
on the historical financial condition of the issuer. Consequently, the rating
assigned to any particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate.
See the Appendix to this SAI which describes the characteristics of corporate
bonds in the various rating categories. High Yield Bond Fund may invest in
comparable quality unrated securities which, in the opinion of the Adviser,
offer comparable yields and risks to those securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The high yield fixed income market is relatively new and
its growth occurred during a period of economic expansion. The market has not
yet been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities generally
respond to short term corporate and market developments to a greater extent than
do the price and liquidity of higher rated securities because such developments
are perceived to have a more direct relationship to the ability of an issuer of
such lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately a Fund's assets. The reduced availability of
reliable, objective data may increase a Fund's reliance on management's judgment
in valuing high yield bonds. In addition, a Fund's investments in high yield
securities may be susceptible to adverse publicity and investor perceptions,
whether or not justified by fundamental factors. A Fund's investments, and
consequently its net asset value, will be subject to the market fluctuations and
risks inherent in all securities.
Credit and Interest Rate Risks. In addition to the information contained in the
Prospectus, investors should note that while ratings by a rating institution
provide a generally useful guide to credit risks, they do not, nor do they
purport to, offer any criteria for evaluating interest rate risk. Changes in the
general level of interest rates cause fluctuations in the prices of fixed-income
securities already outstanding and will therefore result in fluctuation in net
asset value of the shares of Funds to the extent the Funds invest in these
securities. The extent of the fluctuation is determined by a complex interaction
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of a number of factors. The Adviser will evaluate those factors it considers
relevant and will make portfolio changes when it deems it appropriate in seeking
to reduce the risk of depreciation in the value of a Fund's portfolio. However,
in seeking to achieve a Fund's primary objectives, there will be times, such as
during periods of rising interest rates, when depreciation and realization of
comparable losses on securities in the portfolio will be unavoidable. Moreover,
medium and lower-rated securities and unrated securities of comparable quality
tend to be subject to wider fluctuations in yield and market values than higher
rated securities. Such fluctuations after a security is acquired do not affect
the cash income received from that security but are reflected in the net asset
value of the Fund's portfolio. Other risks of lower quality securities include:
(i) subordination to the prior claims of banks and other senior lenders
and
(ii) the operation of mandatory sinking fund or call/redemption provisions
during periods of declining interest rates whereby the Funds may
reinvest premature redemption proceeds in lower yielding portfolio
securities.
In determining which securities to purchase or hold in a Fund's portfolio
(including, in the case of High Yield Bond Fund, investments in either unrated
or rated securities which are in default) and in seeking to reduce credit and
interest rate risk consistent with a Fund's investment objective and policies,
the Adviser will rely on information from various sources, including: the rating
of the security; research, analysis and appraisals of brokers and dealers; the
views of the Fund's Trustees and others regarding economic developments and
interest rate trends; and the Adviser's own analysis of factors it deems
relevant as it pertains to achieving a Fund's investment objective(s).
Convertible Securities. High Yield Bond Fund may invest in convertible
securities. Convertible securities are securities that may be converted at
either a stated price or stated rate into underlying shares of common stock of
the same issuer. Convertible securities have general characteristics similar to
both fixed income and equity securities. Although to a lesser extent than with
straight debt securities, the market value of convertible securities tends to
decline as interest rates increase, and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and therefore will also react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and consequently may not experience market value declines to the same
extent as the underlying common stock. When the market price of the underlying
common stock increases, the prices of the convertible securities tend to rise as
a reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer. However,
the issuers of convertible securities may default on their obligations.
Mortgage "Dollar Roll" Transactions. The Funds may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which a
Fund sells Mortgage-Backed Securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Funds will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of a Fund's borrowing and other senior securities. For financial reporting and
tax purposes, each Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. Neither Fund currently intends to enter into
mortgage rolls that are accounted for as financings.
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Financial Futures Contracts. The Funds may buy and sell futures contracts (and
related options) on debt securities, interest rate indices and other
instruments. Each Fund may hedge its portfolio by selling or purchasing
financial futures contracts as an offset against the effects of changes in
interest rates or in security values. Although other techniques could be used to
reduce exposure to interest rate fluctuations, a Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using financial futures
contracts. The Funds may enter into financial futures contracts for hedging and
other purposes to the extent permitted by regulations of the Commodity Futures
Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which have
been designated "contract markets" by the CFTC. Futures contracts are traded on
these markets in a manner that is similar to the way a stock is traded on a
stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit. It is expected that if other financial futures
contracts are developed and traded the Funds may engage in transactions in such
contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than a Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than a Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. Each Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
associated with trading in financial futures contracts, see the information
under the caption "Tax Status" below.
At the time a Fund enters into a financial futures contract, it is required to
deposit with its custodian a specified amount of cash or U.S. Government
securities, known as "initial margin," ranging upward from 1.1% of the value of
the financial futures contract being traded. The margin required for a financial
futures contract is set by the board of trade or exchange on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
financial futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Funds
expect to earn interest income on their initial margin deposits. Each day, the
futures contract is valued at the official settlement price of the board of
trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "mark to market." Variation margin does not represent a borrowing or lending
by the Funds but is instead settlement between the Funds and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Funds will mark to market their respective open
financial futures positions.
Successful hedging depends on a strong correlation between the market for the
underlying securities and the futures contract market for those securities.
There are several factors that will probably prevent this correlation from being
a perfect one, and even a correct forecast of general interest rate trends may
not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
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imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower- rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends. The Funds will
bear the risk that the price of the securities being hedged will not move in
complete correlation with the price of the futures contracts used as a hedging
instrument. Although the Adviser believes that the use of financial futures
contracts will benefit the Funds, an incorrect prediction could result in a loss
on both the hedged securities in the respective Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Funds engage in financial futures transactions only on
boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Funds could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If a Fund cannot close out a position, it will be required to
continue to meet margin requirements until the position is closed.
Options on Financial Futures Contracts. The Funds may buy and sell options on
financial futures contracts on debt securities, interest rate indices and other
instruments. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise, the writer of the option delivers the futures contract to the holder
at the exercise price. The Funds would be required to deposit with their
custodian initial and variation margin with respect to put and call options on
futures contracts written by them. Options on futures contracts involve risks
similar to the risks relating to transactions in financial futures contracts.
Also, an option purchased by a Fund may expire worthless, in which case a Fund
would lose the premium it paid for the option.
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Other Considerations. The Funds will engage in futures and options transactions
for bona fide hedging or other non-speculative purposes to the extent permitted
by CFTC regulations. A Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to purchase. Except as stated below, the Funds' futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that the Funds own, or futures contracts will be purchased to protect
the Funds against an increase in the price of securities the Fund intends to
purchase. As evidence of this hedging intent, the Funds expect that on 75% or
more of the occasions on which they take a long futures or option position
(involving the purchase of futures contracts), the Funds will have purchased, or
will be in the process of purchasing equivalent amounts of related securities or
assets denominated in the related currency in the cash market at the time when
the futures contract or option position is closed out. However, in particular
cases, when it is economically advantageous for a Fund to do so, a long futures
position may be terminated or an option may expire without the corresponding
purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test,
under which the aggregate initial margin and premiums required to establish
nonhedging positions in futures contracts and options on futures will not exceed
5% of the net asset value of the respective Fund's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts only to the extent such
transactions are consistent with the requirements of the Code for maintaining
their qualifications as regulated investment companies for Federal income tax
purposes.
When the Funds purchase financial futures contracts, or write put options or
purchase call options thereon, cash or liquid securities will be deposited in a
segregated account with the Funds' custodian in an amount that, together with
the amount of initial and variation margin held in the account of their broker,
equals the market value of the futures contracts.
Options Transactions. The Funds may write listed and over-the-counter covered
call options and covered put options on debt securities in order to earn
additional income from the premiums received. In addition, the Funds may
purchase listed and over-the-counter call and put options on debt securities.
High Yield Bond Fund may also write and purchase listed and over-the-counter
covered options on securities indices. The extent to which covered options will
be used by the Funds will depend upon market conditions and the availability of
alternative strategies.
A Fund will write listed and over-the-counter call options only if they are
"covered," which means that the Fund owns or has the immediate right to acquire
the securities underlying the options without additional cash consideration upon
conversion or exchange of other securities held in its portfolio. A call option
written by a Fund may also be "covered" if the Fund holds on a share-for-share
basis a covering call on the same securities where (i) the exercise price of the
covering call held is equal to or less than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. Treasury bills
or liquid securities in a segregated account with the Fund's custodian, and (ii)
the covering call expires at the same time as the call written. If a covered
call option is not exercised, a Fund would keep both the option premium and the
underlying security. If the covered call option written by a Fund is exercised
and the exercise price, less the transaction costs, exceeds the cost of the
underlying security, the Fund would realize a gain in addition to the amount of
the option premium it received. If the exercise price, less transaction costs,
is less than the cost of the underlying security, a Fund's loss would be reduced
by the amount of the option premium.
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As the writer of a covered put option, each Fund will write a put option only
with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash, U.S. Government
securities or liquid securities with a value equal to the price at which the
underlying security may be sold to the Fund in the event the put option is
exercised by the purchaser. The Funds may also write a "covered" put option by
purchasing on a share-for-share basis a put on the same security as the put
written by the Fund if the exercise price of the covering put held is equal to
or greater than the exercise price of the put written and the covering put
expires at the same time or later than the put written.
When writing listed and over-the-counter covered put options on securities, the
Funds would earn income from the premiums received. If a covered put option is
not exercised, the Funds would keep the option premium and the assets maintained
to cover the option. If the option is exercised and the exercise price,
including transaction costs, exceeds the market price of the underlying
security, a Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its obligation
prior to its exercise, it may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that a Fund's position will be offset by
the Options Clearing Corporation. The Funds may not effect a closing purchase
transaction after they have been notified of the exercise of an option. There is
no guarantee that a closing purchase transaction can be effected. Although the
Funds will generally write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange or board of trade will exist for any particular option or at any
particular time, and for some options no secondary market on an exchange may
exist.
In the case of a written call option, effecting a closing transaction will
permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or short-
term securities. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other investments. If a Fund desires to sell a particular security from
its portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
A Fund will realize a gain from a closing transaction if the cost of the closing
transaction is less than the premium received from writing the option. The Funds
will realize a loss from a closing transaction if the cost of the closing
transaction is more than the premium received for writing the option. However,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
Over-the-Counter Options. The Funds may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. A Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Funds will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
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illiquid securities subject to each Fund's restriction that illiquid securities
are limited to not more than 10% of the Fund's net assets. The SEC, however, has
a partial exemption from the above restrictions on transactions in OTC options.
The SEC allows a Fund to exclude from the 10% limitation on illiquid securities
a portion of the value of the OTC options written by the Fund, provided that
certain conditions are met. First, the other party to the OTC options has to be
a primary U.S. Government securities dealer designated as such by the Federal
Reserve Bank. Second, the Fund must have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
a Fund may treat as illiquid only that portion of the OTC option's value (and
the value of its underlying securities) which is equal to the formula price for
repurchasing the OTC option, less the OTC option's intrinsic value.
Restricted Securities. The Funds may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. However, a Fund will not invest more than 10% of
its assets in illiquid investments, which include repurchase agreements maturing
in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 10% limit. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining and monitoring the liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor each Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
Each Fund may acquire other restricted securities including securities for which
market quotations are not readily available. These securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair market value as determined in good faith by the Fund's
Trustees.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. Each Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income. Short
term trading may have the effect of increasing portfolio turnover rate. A high
rate of portfolio turnover (100% or greater) involves correspondingly higher
transaction expenses and may make it more difficult for a Fund to qualify as a
regulated investment company for federal income tax purposes.
Lending of Securities. The Funds may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. A
Fund may reinvest any cash collateral in short-term securities. When a Fund
lends portfolio securities, there is a risk that the borrower may fail to return
the securities involved in the transaction. As a result, the Fund may incur a
loss or, in the event of the borrower's bankruptcy, the Fund may be delayed in
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or prevented from liquidating the collateral. It is a fundamental policy of each
Fund not to lend portfolio securities having a total value exceeding 30% of its
total assets.
Pay-In-Kind, Delayed and Zero Coupon Bonds. Each Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices of pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. A Fund's investments in pay-in-kind, delayed and
zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status." At times when a Fund invests in pay-in-kind,
delayed and zero coupon bonds, it will not be pursuing its primary objective of
maximizing current income.
Indexed Securities. High Yield Bond Fund may invest in indexed securities,
including floating rate securities that are subject to a maximum interest rate
("capped floaters") and leveraged inverse floating rate securities ("inverse
floaters") (up to 10% of the Fund's total assets). The interest rate or, in some
cases, the principal payable at the maturity of an indexed security may change
positively or inversely in relation to one or more interest rates, financial
indices or other financial indicators ("reference prices"). An indexed security
may be leveraged to the extent that the magnitude of any change in the interest
rate or principal payable on an indexed security is a multiple of the change in
the reference price. Thus, indexed securities may decline in value due to
adverse market changes in interest rates or other reference prices.
Purchases of Warrants. Each Fund may purchase rights and warrants, which
represent rights to purchase the securities of issuers at designated prices. No
such purchase will be made by a Fund, however, if the Fund's holdings of
warrants (valued at lower of cost or market) would exceed 5% of the value of the
Fund's net assets as a result of the purchase. In addition, no Fund will
purchase a warrant or right which is not listed on the New York or American
Stock Exchanges if the purchase would result in the Fund's owning unlisted
warrants in an amount exceeding 2% of its net assets.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Each Fund has adopted certain fundamental investment restrictions upon its
investments as set forth below which cannot be changed as to either Fund without
the approval of the holders of a majority of that Fund's outstanding shares. A
majority for this purpose means: (a) more than 50% of the outstanding shares of
a Fund, or (b) 67% or more of the shares represented at a meeting where more
than 50% of the outstanding shares of a Fund are represented, whichever is less.
If a percentage restriction or rating restriction on investment or utilization
of assets is adhered to at the time an investment is made or assets are so
utilized, a later change in percentage resulting from changes in the value of a
Fund's portfolio securities or a later change in the rating of a portfolio
security will not be considered a violation of policy.
Each Fund may not:
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(1) Borrow money in an amount in excess of 33-1/3% of its total assets, and then
only as a temporary measure for extraordinary or emergency purposes (except that
it may enter into a reverse repurchase agreement within the limits described in
the Prospectus or this SAI), or pledge, mortgage or hypothecate an amount of its
assets (taken at market value) in excess of 15% of its total assets, in each
case taken at the lower of cost or market value. For the purpose of this
restriction, collateral arrangements with respect to options, futures contracts,
options on futures contracts and collateral arrangements with respect to initial
and variation margins are not considered a pledge of assets.
(2) Underwrite securities issued by other persons except insofar as such Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Purchase or retain real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein and securities secured by real estate),
or mineral leases, commodities or commodity contracts (except contracts for the
future delivery of fixed income securities, stock index and currency futures and
options on such futures) in the ordinary course of its business. Each Fund
reserves the freedom of action to hold and to sell real estate or mineral
leases, commodities or commodity contracts acquired as a result of the ownership
of securities.
(4) Invest in direct participation interests in oil, gas or other mineral
exploration or development programs.
(5) Make loans to other persons except by the purchase of obligations in which
such Fund is authorized to invest and by entering into repurchase agreements;
provided that a Fund may lend its portfolio securities not in excess of 30% of
its total assets (taken at market value). Not more than 10% of a Fund's total
assets (taken at market value) will be subject to repurchase agreements maturing
in more than seven days. For these purposes the purchase of all or a portion of
an issue of debt securities shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time thereof,
would cause more than 5% of its total assets (taken at market value) to be
invested in the securities of such issuer, other than securities issued or
guaranteed by the United States or any state or political subdivision thereof,
or any political subdivision of any such state, or any agency or instrumentality
of the United States, any state or political subdivision thereof, or any
political subdivision of any such state. In applying these limitations, a
guarantee of a security will not be considered a security of the guarantor,
provided that the value of all securities issued or guaranteed by that
guarantor, and owned by the Fund, does not exceed 10% of the Fund's total
assets. In determining the issuer of a security, each state and each political
subdivision agency, and instrumentality of each state and each multi- state
agency of which such state is a member is a separate issuer. Where securities
are backed only by assets and revenues of a particular instrumentality, facility
or subdivision, such entity is considered the issuer.
(7) Invest in companies for the purpose of exercising control or management.
(8) Purchase or retain in its portfolio any securities issued by an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of such Fund, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by such Fund one
or more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
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(9) Purchase any securities or evidences of interest therein on margin, except
that each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and each Fund may make deposits
on margin in connection with futures contracts and related options.
(10) Sell any security which such Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon equivalent conditions.
(11) Knowingly invest in securities which are subject to legal or contractual
restrictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or market makers do not exist or will not
entertain bids or offers), except for repurchase agreements, if, as a result
thereof more than 10% of such Fund's total assets (taken at market value) would
be so invested.
(12) Issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act") if such issuance is specifically prohibited
by the 1940 Act or the rules and regulations promulgated thereunder. For the
purpose of this restriction, collateral arrangements with respect to options,
futures contracts and options on futures contracts and collateral arrangements
with respect to initial and variation margins are not deemed to be the issuance
of a senior security.
In addition, Government Income Fund may not invest more than 25% of its total
assets (taken at market value) in the securities of issuers engaged in any one
industry. High Yield Bond Fund may not invest more than 25% of its total assets
(taken at market value) in the securities of issuers engaged in any one
industry, except that High Yield Bond Fund may invest up to 40% of the value of
its total assets in the securities of issuers engaged in the electric utility
and telephone industries. Obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities are not subject to either Fund's
limitations on industry concentration. Also, a Fund may not purchase securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities) if such purchase, at the time thereof,
would cause a Fund to hold more than 10% of any class of securities of such
issuer. For this purpose, all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a single class.
Other Operating Policies
Government Income Fund will not invest more than 5% of its total assets in
companies which, including their respective predecessors, have a record of less
than three years' continuous operation.
In order to comply with certain state regulatory policies, neither Fund will, as
a matter of operating policy, pledge, mortgage or hypothecate its portfolio
securities if the percentage of securities so pledged, mortgaged or hypothecated
would exceed 15%.
In order to comply with certain state regulatory policies, the cost of
investments in options, financial futures, stock index futures and currency
futures, other than those acquired for hedging purposes, may not exceed 10% of a
Fund's total net assets.
Neither Fund may purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the Fund's
total assets would be invested in the securities of any one investment company.
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These limitations do not apply to (a) the investment of cash collateral,
received by the Fund in connection with lending of the Fund's portfolio
securities, in the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the assets of
another investment company. Subject to the above percentage limitations, each
Fund may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase securities of
other investment companies within the John Hancock Group of Funds. Neither Fund
may purchase the shares of any closed-end investment company except in the open
market where no commission or profit to a sponsor or dealer results from the
purchase, other than customary brokerage fees.
These operating policies are not fundamental and may be changed without
shareholder approval. In order to comply with certain state regulatory
practices, certain policies, if changed, would require advance written notice to
shareholders.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by the Trust's Trustees who elect officers
who are responsible for the day-to-day operations of each Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Trust are officers and directors of the Adviser or officers and directors of the
Funds' principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
Set forth below is the principal occupation or employment of the Trustees and
principal officers of the Trust during the past five years:
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<TABLE>
<CAPTION>
Position Held with Principal Occupation(s)
Name and Address the Trust During Past Five Years
- ---------------- --------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer(1)(2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("The
(age 51) Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital") and John Hancock Advisers
International Limited ("Advisers
International"); Chairman, Chief
Executive Officer and President,
John Hancock Funds, Inc. ("John
Hancock Funds"); John Hancock
Investor Services Corporation
("Investor Services"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp"); Director,
John Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation and New England/ Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
- -------------------
* An "interested person" of the Funds, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Position Held with Principal Occupation(s)
Name and Address the Trust During Past Five Years
- ---------------- --------- ----------------------
James F. Carlin Trustee(3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
(age 56) Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) and Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee(3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
(age 52) Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
Schering-Plough Corporation Schering-Plough Corporation
One Giralda Farms (pharmaceuticals) (retired 1996);
Madison, NJ 07940-1000 Director, ReCapital Corporation
(age 64) (reinsurance) (until 1995).
- -------------------
* An "interested person" of the Funds, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Position Held with Principal Occupation(s)
Name and Address the Trust During Past Five Years
- ---------------- --------- ----------------------
Charles F. Fretz Trustee(3) Retired; self-employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Forster & Crosby, Inc.
Malvern, PA 19355 (international management
(age 67) consultants) (1952-1985).
Anne C. Hodsdon* President and President and Chief Operating
101 Huntington Avenue Trustee(1)(2) Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
(age 42) December 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Charles L. Ladner Trustee (3) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company)(until 1992); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
(age 58) (holding company, public utilities,
LPGAS).
Leo E. Linbeck, Jr. Trustee(3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
(age 62) company engaged in various phases
of the construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980-1993); Director,
Greater Houston Partnership.
- -------------------
* An "interested person" of the Funds, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Position Held with Principal Occupation(s)
Name and Address the Trust During Past Five Years
- ---------------- --------- ----------------------
Patricia P. McCarter Trustee(3) Director and Secretary, The
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer).
Malvern, PA 19355
(age 68)
Steven R. Pruchansky Trustee(1)(3) Director and President, Mast
360 Horse Creek Drive, #208 Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
(age 51) Trust Company (until August 1991);
Director, Mast Realty Trust (1982-
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione* Trustee General Counsel, John Hancock
John Hancock Place Mutual Life Insurance Company;
P.O. Box 111 Director, the Adviser, Advisers
Boston, MA 02199 International, John Hancock Funds,
(age 58) Investor Services, John Hancock
Distributors, Inc., John Hancock
Subsidiaries, Inc., John Hancock
Property and Casualty Insurance and
its affiliates (until November
1993), SAMCorp and NM Capital;
Trustee, The Berkeley Group;
Director, JH Networking Insurance
Agency, Inc.
- -------------------
* An "interested person" of the Funds, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
27
<PAGE>
Position Held with Principal Occupation(s)
Name and Address the Trust During Past Five Years
- ---------------- --------- ----------------------
Norman H. Smith Trustee (3) Lieutenant General, USMC, Deputy
Rt. 1, Box 249 E Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
(age 63) Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
John P. Toolan Trustee(3) Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Fund, Inc., Vantage
(age 65) Money Market Funds (mutual funds),
The Inefficient- Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired 1991);
Director, Smith Barney, Inc.,
Mutual Management Company and
Smith, Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman* Vice Chairman and Chief Vice Chairman and Chief Investment
101 Huntington Avenue Investment Officer(2) Officer, the Adviser; President,
Boston, MA 02199 the Adviser (until December 1994);
(age 57) Director, the Adviser, Advisers
International, John Hancock Funds
Investor Services, SAMCorp and NM
Capital; Senior Vice President, The
Berkeley Group.
- -------------------
* An "interested person" of the Funds, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Position Held with Principal Occupation(s)
Name and Address the Trust During Past Five Years
- ---------------- --------- ----------------------
James B. Little* Senior Vice President and Senior Vice President, the Adviser,
101 Huntington Avenue Chief Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services
(age 61)
James J. Stokowski* Vice President and Vice President, the Adviser.
101 Huntington Avenue Treasurer
Boston, MA 02199
(age 49)
Susan S. Newton* Vice President and Vice President and Assistant
101 Huntington Avenue Secretary Secretary, the Adviser; Vice
Boston, MA 02199 President and Secretary, John
(age 46) Hancock Funds, Investor Services
and John Hancock Distributors, Inc.
(until 1994); Secretary, SAMCorp;
Vice President, The Berkeley Group.
John A. Morin* Vice President Vice President, the Adviser,
101 Huntington Avenue Investor Services and John Hancock
Boston, MA 02199 Funds; Counsel, John Hancock Mutual
(age 45) Life Insurance Company; Vice
President and Assistant Secretary,
The Berkeley Group.
</TABLE>
- -------------------
* An "interested person" of the Funds, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
29
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Directors and officers may also be officers
and/or Directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of August 5, 1996, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the Trust and of
each of the Funds. On such date, the following shareholders were the only record
holders and beneficial owners of 5% or more of the shares of the respective
Funds:
Number of Shares held (expressed as Percentage
of each Fund's outstanding shares)
<TABLE>
<CAPTION>
Number of Percentage
Name and Address Fund and Class Shares of Outstanding Shares
of Shareholder of Shares Owned of Class of Fund
- -------------- --------- ----- ----------------
<S> <C> <C> <C>
Merrill Lynch Pierce Government 2,707,455 13.19%
Fenner & Smith, Inc. Income Fund
4800 Deerlake Dr. East Class B
Jacksonville, FL
32246-6484
Novell Incorporated High Yield 722,740 11.77%
1555 North Technology Way Bond Fund
Mail Stop Q-240 Class A
Orem, UT 84057-2395
Merrill Lynch Pierce High Yield 335,926 5.47%
Fenner & Smith, Inc. Bond Fund
4800 Deerlake Dr. East Class A
Jacksonville, FL
32246-6484
Merrill Lynch Pierce High Yield 3,096,889 11.04%
Fenner & Smith, Inc. Bond Fund
4800 Deerlake Dr. East Class B
Jacksonville, FL
32246-6484
</TABLE>
At such date, no other person(s), owned of record or was known by the Trust to
beneficially own as much as 5% of the outstanding shares of the Trust or of
either of the Funds.
As of December 22, 1994, the Trustees have established an Advisory Board which
acts to facilitate a smooth transition of management over a two-year period
(between Transamerica Fund Management Company ("TFMC"), the prior investment
adviser, and the Adviser). The members of the Advisory Board are distinct from
the Board of Trustees, do not serve the Funds in any other capacity and are
persons who have no power to determine what securities are purchased or sold and
behalf of the Funds. Each member of the Advisory Board may be contacted at 101
Huntington Avenue, Boston, Massachusetts 02199.
30
<PAGE>
Members of the Advisory Board and their respective principal occupations during
the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company Institute;
formerly, President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
Compensation of the Board of Trustees and Advisory Board. The following tables
provide information regarding the compensation paid by the Funds and the other
investment companies in the John Hancock Fund Complex to the Independent
Directors and the Advisory Board members for their services for the Funds' most
recently completed fiscal year. Ms. Hodsdon and Messrs. Boudreau and Scipione,
each a non-Independent Trustee, and each of the officers of the Trust are
interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates and receive no compensation from the Funds for their services.
Aggregate Aggregate Total Compensation
Compensation Compensation from all Funds in
from from High John Hancock Fund
Government Yield Complex to
Income Fund Bond Fund Trustees**
----------- --------- ----------
James F. Carlin $ 1,854 $ 1,314 $ 60,700
William H. Cunningham* 5,202 3,930 69,700
Charles F. Fretz 149 124 56,200
Harold R. Hiser. Jr.* 442 131 60,200
Charles L. Ladner 2,357 1,695 60,700
Leo E. Linbeck, Jr. 5,452 4,180 73,200
Patricia P. McCarter 2,357 1,695 60,700
Steven R. Pruchansky 2,441 1,755 62,700
Norman H. Smith 2,441 1,755 62,700
John P. Toolan* 1,854 1,314 60,700
------- ------- --------
Totals $24,549 $17,893 $627,500
31
<PAGE>
* As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock fund complex for Mr.
Cunningham was $54,413, for Mr. Hiser was $31,324, and for Mr. Toolan was
$71,437 under the John Hancock Deferred Compensation Plan for Independent
Trustees (the "Plan").
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is $627,500 as of the calendar year ended December 31,
1995. All Trustees/Directors are Trustees/Directors of 33 funds in the John
Hancock Fund Complex.
Total Compensation
from all Funds in
Aggregate John Hancock
Compensation Fund Complex to
Advisory Board*** from the Funds* Board Members**
- ----------------- --------------- ---------------
R. Trent Campbell $2,500 $ 54,000
Mrs. Lloyd Bentsen 1,500 54,000
Thomas R. Powers 1,500 54,000
Thomas B. McDade 1,500 54,000
------ --------
TOTALS $7,000 $216,000
* For the fiscal year ended October 31, 1995.
** As of December 31, 1995.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Funds receive their investment advice from
the Adviser. Investors should refer to the Prospectus for a description of
certain information concerning the Funds' investment management contracts. Each
of the Trustees and principal officers of the Trust who is also an affiliated
person of the Adviser is named above, together with the capacity in which such
person is affiliated with the Trust and the Adviser.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-
7603, was organized in 1968 and has more than $18 billion in total assets under
management in its capacity as investment adviser to the Funds and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over 1,080,000 shareholders. The Adviser is
a wholly-owned subsidiary of The Berkeley Financial Group, which is in turn a
wholly-owned subsidiary of John Hancock Subsidiaries, Inc., which is in turn a
wholly-owned subsidiary of John Hancock Mutual Life Insurance Company (the "Life
Company"), one of the most recognized and respected financial institutions in
the nation. With total assets under management of more than $80 billion, the
Life Company is one of the ten largest life insurance companies in the United
States, and carries high ratings from Standard & Poor's and A.M. Best's. Founded
in 1862, the Life Company has been serving clients for over 130 years.
As described in the Prospectus, the Trust, on behalf of each Fund, has entered
into investment management contracts with the Adviser. Under each investment
32
<PAGE>
management contract, the Adviser provides the Funds with (i) a continuous
investment program, consistent with each Fund's stated investment objective and
policies, (ii) supervision of all aspects of each Fund's operations except those
that are delegated to a custodian, transfer agent or other agent and (iii) such
executive, administrative and clerical personnel, officers and equipment as are
necessary for the conduct of their business. The Adviser is responsible for the
day-to- day management of each Fund's portfolio assets.
No person other than the Adviser and its directors and employees regularly
furnish advice to the Funds with respect to the desirability of a Fund investing
in, purchasing or selling securities. The Adviser may from time to time receive
statistical or other similar factual information, and information regarding
general economic factors and trends, from the Life Company and its affiliates.
Under the terms of the investment management contracts with the Trust, on behalf
of each Fund, the Adviser provides the Funds with office space, equipment and
supplies and other facilities required for the business of the Funds. The
Adviser pays the compensation of all officers and employees of the Trust, and
pays the expenses of clerical services relating to the administration of the
Funds. All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Funds including, but not limited to, (i) the
fees of the Trustees who are not "interested persons," as such term is defined
in the 1940 Act (the "Independent Trustees"), (ii) the fees of the members of
the Trust's Advisory Board (described above) and (iii) the continuous public
offering of the shares of each Fund are borne by the Funds.
As provided by the investment management contracts, each Fund pays the Adviser
an investment management fee, which is accrued daily and paid monthly in arrears
at the following rates of the Funds' average daily net assets:
John Hancock Government Income Fund
Fee
Average Daily Net Assets (Annual Rate)
- ------------------------ -------------
The first $200 million 0.65%
The next $300 million 0.625%
Over $500 million 0.60%
John Hancock High Yield Bond Fund
Fee
Average Daily Net Assets (Annual Rate)
- ------------------------ -------------
The first $75 million 0.625%
The next $75 million 0.5625%
Over $150 million 0.50%
The Adviser may temporarily reduce its advisory fee or make other arrangements
to reduce a Fund's expenses to a specified percentage of average daily net
assets. The Adviser retains the right to re-impose the advisory fee and recover
any other payments to the extent that, at the end of any fiscal year, a Fund's
annual expenses fall below this limit.
In the event normal operating expenses of a Fund, exclusive of certain expenses
prescribed by state law, are in excess of any state limit where such Fund is
registered to sell shares of common stock, the fee payable to the Adviser will
be reduced to the extent of such excess and the Adviser will make any additional
arrangements necessary to eliminate any remaining excess expenses, if required
by law. The most restrictive limit applicable to the Funds is 2.5% of the first
33
<PAGE>
$30,000,000 of a Fund's average daily net asset value, 2% of the next
$70,000,000 of such assets and 1.5% of the remaining average daily net asset
value.
Pursuant to the investment management contracts, the Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which their respective contracts relate, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from its reckless
disregard of the obligations and duties under the applicable contract.
The initial term of the investment management contracts expires on August 30,
1998, and will continue in effect from year to year thereafter if approved
annually by a vote of a majority of the Independent Trustees, cast in person at
a meeting called for the purpose of voting on such approval, and by either a
majority of the Trustees or the holders of a majority of the affected Fund's
outstanding voting securities. Each management contract may be terminated
without penalty on 60 days' notice at the option of either party or by vote of a
majority of the outstanding voting securities of the Fund. Each management
contract terminates automatically in the event of its assignment.
Securities held by a Fund may also be held by other funds or investment advisory
clients for which the Adviser or its affiliates provide investment advice.
Because of different investment objectives or other factors, a particular
security may be bought for one or more funds or clients when one or more are
selling the same security. If opportunities for purchase or sale of securities
by the Adviser for the Funds or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Under the investment management contracts, the Funds may use the name "John
Hancock" or any name derived from or similar to it only for as long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If a Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
For the period from November 1, 1994 to December 22, 1994(a) and for the fiscal
years ended October 31, 1994(b), and 1993(c) advisory fees payable by the Funds
to TFMC, each Fund's former investment adviser, were as follows:
(1) Government Income Fund - (a) $256,721 (b) $1,728,997 and (c) $1,698,937
(2) High Yield Bond Fund - (a) $162,374 (b) $976,834 and (c) $777,673
For the period from December 22, 1994 to October 31, 1995, advisory fees payable
by the Funds to the Adviser, were as follows:
(1) Government Income Fund - $1,612,806
(2) High Yield Bond Fund - $897,349
34
<PAGE>
Administrative Services Agreement. Each Fund previously was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Funds. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment was provided as necessary to provide
administrative services to the Funds. The Services Agreement was amended in
connection with the appointment of the Adviser as adviser to the Fund to permit
services under the Agreement to be provided to the Funds by the Adviser and its
affiliates. The Services Agreement was terminated during the 1995 fiscal year.
The following amounts for each of the Funds for their respective periods reflect
the total of administrative services fees paid to TFMC ( and to the Adviser
during the period December 22, 1994 to January 16, 1995):
Government Income Fund - For the fiscal years ended October 31, 1995, 1994
and 1993 fees paid were $16,694, $132,786 , and $116,354, respectively.
High Yield Bond Fund -For the fiscal years ended October 31, 1995, 1994,
and 1993 fees paid were $13,697, $100,822, and $82,030.
DISTRIBUTION AGREEMENT
Distribution Agreement. As discussed in the Prospectus, each Fund's shares are
sold on a continuous basis at the public offering price. John Hancock Funds, a
wholly-owned subsidiary of the Adviser, has the exclusive right, pursuant to a
Distribution Agreement dated August 30, 1996 (the "Distribution Agreement"), to
purchase shares from the Funds at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
with whom it has sales agreements ("Selling Brokers"), John Hancock Funds may
allow such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Agreement was initially adopted by the affirmative vote of the
Trust's Board of Trustees including the vote of a majority of Trustees who are
not parties to the agreement or interested persons of any such party, cast in
person at a meeting called for such purpose. The Distribution Agreement shall
continue in effect with respect to each Fund until August 30, 1998 and from year
to year if approved by either the vote of the Fund's shareholders or the Board
of Trustees including the vote of a majority of the Trustees who are not parties
to the agreement or interested persons of any such party, cast in person at a
meeting called for such purpose. The Distribution Agreement may be terminated at
any time as to one or both Funds, without penalty, by either party upon sixty
(60) days' written notice or by a vote of a majority of the outstanding voting
securities of the affected Fund and terminates automatically in the case of an
assignment by John Hancock Funds.
For the fiscal year ended October 31, 1995, the following amounts reflect (a)
the total underwriting commissions for sales of the Fund's Class A shares and
(b) the portion of such amount retained by the Fund's distributor, John Hancock
Funds and the former distributor, Transamerica Fund Distributors, Inc. In each
case, the remainder of such underwriting commissions was reallowed to dealers.
35
<PAGE>
High Yield Bond Fund
(a) $239,238 and (b) $19,285
Government Income Fund
(a) $35,314 and (b) $6,442
Distribution Plans. The Board of Trustees approved distribution plans pursuant
to Rule 12b-1 under the 1940 Act for Class A Shares ("Class A Plans") and Class
B Shares ("Class B Plans") of each Fund. Such Plans were approved by a majority
of the outstanding shares of each respective class of each Fund on August 30,
1996 and became effective on the same date.
Under each Class A Plan, the distribution or service fee will not exceed an
annual rate of 0.25% of the average daily net asset value of the Class A shares
of a Fund. Any expenses under the Class A Plan not reimbursed within 12 months
of being presented to the Fund for repayment are forfeited and not carried over
to future years. Under each Class B Plan, the distribution or service fee to be
paid by the applicable Fund will not exceed an annual rate of 1.00% of the
average daily net assets of the Class B shares of the Fund (in each case,
determined in accordance with such Fund's prospectus as from time to time in
effect); provided that the portion of such fee used to cover Service Expenses
(described below) shall not exceed an annual rate of 0.25% of the average daily
net asset value of the Class B Shares of the Fund. In accordance with generally
accepted accounting principles, the Fund does not treat unreimbursed
distribution expenses attributable to Class B shares as a liability of the Fund
and does not reduce the current net assets of Class B by such amount although
the amount may be payable under the Class B Plan in the future.
Under the Plans, expenditures shall be calculated and accrued daily and paid
monthly or at such other intervals as the Trustees shall determine. The fee may
be spent by John Hancock Funds on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, including, but
not limited to: (i) initial and ongoing sales compensation to Selling Brokers
and others (including affiliates of John Hancock Funds) engaged in the sale of
Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B shares only, interest expenses on unreimbursed distribution expenses. Service
Expenses under the Plans include payments made to, or on account of, account
executives of selected broker- dealers (including affiliates of John Hancock
Funds) and others who furnish personal and shareholder account maintenance
services to shareholders of the relevant class of the Fund. For the fiscal year
ended October 31, 1995, an aggregate of $8,575,319 of distribution expenses or
3.69% of the average net assets of Government Income Fund's Class B shares was
not reimbursed or recovered by John Hancock Funds through the receipt of
deferred sales charges or Rule 12b-1 fees in prior periods. For the same period,
an aggregate of $6,471,589 of distribution expenses or 3.90% of the average net
assets of High Yield Bond Fund's Class B shares was not reimbursed or recovered
by John Hancock Funds through the receipt of deferred sales charges or Rule
12b-1 fees in prior periods.
During the fiscal year ended October 31, 1995, the Funds paid the Distributors
the following amounts of expenses with respect to the Class A shares and Class B
shares of each of the Funds:
36
<PAGE>
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Carrying or
Prospectuses to Compensation to Expenses of Other Finance
Advertising New Shareholders Selling Brokers John Hancock Funds Charges
----------- ---------------- --------------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Government Income Fund
- ----------------------
Class A Shares $ 18,322 $ 5,106 $ 65,653 $ 58,444 NONE
Class B Shares $ 41,081 $ 3,224 $985,054 $153,625 $1,109,310
High Yield Bond Fund
- --------------------
Class A Shares $ 11,193 $ 1,229 $ 3,830 $ 30,680 NONE
Class B Shares $113,854 $10,183 $529,660 $365,332 $ 601,737
</TABLE>
Each of the Plans provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. Each of the Plans provides that it may be terminated
without penalty (a) by vote of a majority of the Independent Trustees, (b) by a
majority of the respective Class' outstanding voting securities upon 60 days'
written notice to John Hancock Funds, and (c) automatically in the event of
assignment. Each of the Plans further provides that it may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to the Plan. Each of the Plans
provides that no material amendment to the Plan will, in any event, be effective
unless it is approved by a majority vote of the Trustees and the Independent
Trustees of the Trust. The holders of Class A Shares and Class B Shares have
exclusive voting rights with respect to the Plan applicable to their respective
class of shares. In adopting the Plans, the Board of Trustees has determined
that, in their judgment, there is a reasonable likelihood that each Plan will
benefit the holders of the applicable class of shares of the affected Fund.
Information regarding the services rendered under the Plans and the Distribution
Agreement and the amounts paid therefor by the respective class of the Funds is
provided to, and reviewed by, the Board of Trustees on a quarterly basis. In its
quarterly review, the Board of Trustees considers the continued appropriateness
of the Plans and the Distribution Agreement and the level of compensation
provided therein.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of the
Funds, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
37
<PAGE>
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of the Fund's NAV.
The Funds will not price their securities on the following national holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day. On any day an international
market is closed and the New York Stock Exchange is open, any foreign securities
will be valued at the prior day's close with the current day's exchange rate.
Trading of foreign securities may take place on Saturdays and U.S. business
holidays on which a Fund's NAV is not calculated. Consequently, a Fund's
portfolio securities may trade and the NAV of the Fund's redeemable securities
may be significantly affected on days when a shareholder has no access to the
Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Class A shares of the Funds are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then only will be issued for full shares. The Trustees reserve the right to
change or waive a Fund's minimum investment requirements and to reject any order
to purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Funds are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of the Fund, or if Investor Services is
notified by the investor's dealer or the investor at the time of the purchase,
the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his or her spouse and their children under the age of 21
purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
38
<PAGE>
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates or Selling Brokers; employees or sales representatives of
any of the foregoing; retired officers, employees or Directors of any of
the foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, for each Fund other than Money Market Fund, if the shares are
redeemed within 12 months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 million to $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
39
<PAGE>
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or value of the Class A shares already held by such
person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectuses) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of a
Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales loads are also applicable to investments
made over a specified period pursuant to a Letter of Intention (LOI), which
should be read carefully prior to its execution by an investor. Each Fund offers
two options regarding the specified period for making investments under the LOI.
All investors have the option of making their investments over a period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRA's, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
Section 457 plans. Such an investment (including accumulations and combinations)
must aggregate $100,000 or more invested during the specified period from the
date of the LOI or from a date within ninety (90) days prior thereto, upon
written request to Investor Services. The sales charge applicable to all amounts
invested under the LOI is computed as if the aggregate amount intended to be
invested had been invested immediately. If such aggregate amount is not actually
invested, the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However, for
the purchases actually made with the specified period (either 13 or 48 months),
the sales charge applicable will not be higher than that which would have been
applied (including accumulations and combinations) had the LOI been for the
amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A shares
(approximately 5% of the aggregate) to make up any difference in sales charges
on the amount intended to be invested and the amount actually invested, until
such investment is completed within the specified period, at which time the
escrow shares will be released. If the total investment specified in the LOI is
not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by a Fund to sell, any additional shares and may be terminated at
any time.
40
<PAGE>
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of an initial sales charge so that the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will
be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six- year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please indicate
if you require the proceeds to equal the dollar amount requested. If not
indicated, only the specified dollar amount will be redeemed from your account
and the proceeds will be less any applicable CDSC.
Example:
41
<PAGE>
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC (dividend
reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor Services.
(Please note, this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions under
the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under section 401(a) of the Code
(such as 401k, Money Purchase Pension Plan, Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992.
Please see matrix for reference.
42
<PAGE>
CDSC Waiver Matrix for Class B Funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic payments periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of
Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, he would incur a brokerage charge. Any such
security would be valued for the purpose of making such payment at the same
value as used in determining the Fund's net asset value. Each Fund has elected
to be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90- day period for any one account.
43
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Funds permit
exchanges of shares of any class for shares of the same class in any other John
Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the Funds
permit the establishment of a Systematic Withdrawal Plan. Payments under this
plan represent proceeds arising from the redemption of Fund shares. Since the
redemption price of Fund shares may be more or less than the shareholder's cost,
depending upon the market value of the securities owned by the Fund at the time
of redemption, the distribution of cash pursuant to this plan may result in
recognition of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of a Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
such purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Fund shares at the same time as a Systematic Withdrawal Plan
is in effect. Each Fund reserves the right to modify or discontinue the
Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice
to such shareholder, or to discontinue the availability of such plan in the
future. The shareholder may terminate the plan at any time by giving proper
notice to Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained fully
in the Prospectus and the Account Privileges Application. The program, as it
relates to automatic investment checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic Accumulation
Program may be revoked by Investor Services without prior notice if any
investment is not honored by the shareholder's bank. The bank shall be under no
obligation to notify the shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Investor
Services or upon written notice to Investor Services which is received at least
five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may, within
120 days after the date of redemption, reinvest without payment of a sales
charge any part of the redemption proceeds in shares of the same class of the
Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A Shares of
the Fund or in Class A shares of another John Hancock mutual fund. If a CDSC was
paid upon a redemption, a shareholder may reinvest the proceeds from that
44
<PAGE>
redemption at net asset value in additional shares of the class from which the
redemption was made. The shareholder's account will be credited with the amount
of any CDSC charged upon the prior redemption and the new shares will continue
to be subject to the CDSC. The holding period of the shares acquired through
reinvestment will, for purposes of computing the CDSC payable upon a subsequent
redemption, include the holding period of the redeemed shares. The Fund may
modify or terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes, even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "Tax
Status."
DESCRIPTION OF THE FUNDS' SHARES
Ownership in the Funds is represented by transferable shares of beneficial
interest. The Declaration of Trust permits the Trustees to create an unlimited
number of series and classes of shares of the Trust and, with respect to each
series and class, to issue an unlimited number of full or fractional shares and
to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests of the series.
Each share of each series or class of the Trust represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Trust is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Trust, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Board of Trustees. Shares of the Trust have a
par value of $0.01 per share. The assets of each series are segregated on the
Trust's books and are charged with the liabilities of that series and with a
share of the Trust's general liabilities. The Board of Trustees determines those
assets and liabilities deemed to be general assets or liabilities of the Trust,
and these items are allocated among each series in proportion to the relative
total net assets of each series. In the unlikely event that the liabilities
allocable to a series exceed the assets of that series, all or a portion of such
liabilities may have to be borne by the other series.
Pursuant to the Declaration of Trust, the Trustees have established three series
of shares, including the Funds, and may authorize the creation of additional
series of shares (the proceeds of which would be invested in separate,
independently managed portfolios) and additional classes within any series
(which would be used to distinguish among the rights of different categories of
shareholders, as might be required by future regulations or other unforeseen
circumstances). The other series of the Trust is John Hancock Intermediate
Maturity Government Fund. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Funds, designated as Class A and Class B. Class A and Class B shares of
each Fund represent an equal proportionate interest in the aggregate net asset
values attributable to that class of such Fund. Holders of Class A shares and
Class B shares each have certain exclusive voting rights on matters relating to
the Class A Plan and the Class B Plan, respectively, of the applicable Fund. The
different classes of the Funds may bear different expenses relating to the cost
of holding shareholder meetings necessitated by the exclusive voting rights of
any class of shares.
Dividends paid by the Funds, if any, with respect to each class of shares will
be calculated in the same manner, at the same time and on the same day and will
be in the same amount, except that (i) the distribution and service fees
relating to Class A and Class B shares will be borne exclusively by that Class,
(ii) Class B shares will pay higher distribution and service fees than Class A
45
<PAGE>
shares and (iii) each of Class A shares and Class B shares will bear any class
expenses properly allocable to such class of shares, subject to the conditions
set forth in a private letter ruling that the Funds have received from the
Internal Revenue Service relating to their multiple-class structure.
Accordingly, the net asset value per share may vary depending whether Class A
shares or Class B shares are purchased.
Voting Rights. Shareholders are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that at all times at least a majority of
the Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50% of the shares
voting can, if they choose, elect all Trustees being voted upon, while the
holders of the remaining shares would be unable to elect any Trustees. Although
the Trust need not hold annual meetings of shareholders, the Trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholder's
meeting must be called if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Trust. In addition, the Trustees
may be removed by the action of the holders of record of two-thirds or more of
the outstanding shares.
Shareholder Liability. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Trust is liable to the Trust or any series or
to a shareholder, nor is any Trustee, officer, employee or agent liable to any
third persons in connection with the affairs of the Trust, except as such
liability may arise from his or its own bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties. It also provides that all third
persons shall look solely to the particular series' property for satisfaction of
claims arising in connection with the affairs of that series. With the
exceptions stated, the Declaration of Trust provides that a Trustee, officer,
employee or agent is entitled to be indemnified against all liability in
connection with the affairs of the Trust.
As a Massachusetts business trust, the Trust is not required to issue share
certificates. The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations and affairs of the
Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which the
Trust itself would be unable to meet its obligations, and the possibility of
this occurrence is remote.
Notwithstanding the fact that the Prospectus is a combined prospectus for the
Funds and other John Hancock mutual funds, neither Fund shall be liable for the
liabilities of any other John Hancock mutual fund.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes. Each
Fund has qualified and elected to be treated as a "regulated investment company"
under Subchapter M of the Code, and intends to continue to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
46
<PAGE>
the diversification of its assets, each Fund will not be subject to Federal
income tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
Each Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. Each Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax.
Distributions from a Fund's current or accumulated earnings and profits ("E&P")
will be taxable under the Code for investors who are subject to tax. If these
distributions are paid from the Fund's "investment company taxable income," they
will be taxable as ordinary income; and if they are paid from the Fund's "net
capital gain," they will be taxable as long-term capital gain (net capital gain
is the excess (if any) of net long-term capital gain over net short-term capital
loss, and investment company taxable income is all taxable income and capital
gains, other than net capital gain, after reduction by deductible expenses).
Some distributions from investment company taxable income and/or net capital
gain may be paid in January but may be taxable to shareholders as if they had
been received on December 31 of the previous year. Neither Fund's dividends or
other distributions will generally qualify for the dividends-received deduction
available to corporations. The tax treatment described above will apply without
regard to whether distributions are received in cash or reinvested in additional
shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by High Yield Bond Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of distributions to shareholders. Any
such transactions that are not directly related to a Fund's investment in stock
or securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments or derivatives held for
less than three months, which gain is limited under the Code to less than 30% of
gross income for each taxable year, and could under future Treasury regulations
produce income not among the types of "qualifying income" from which the Fund
must derive at least 90% of its gross income for each taxable year. If the net
foreign exchange loss for a year treated as ordinary loss under Section 988 were
to exceed a Fund's investment company taxable income computed without regard to
such loss but after considering the post-October loss regulations the resulting
overall ordinary loss for such year would not be deductible by the Fund or its
shareholders in future years.
Government Income Fund and High Yield Bond Fund may be subject to withholding
and other taxes imposed by foreign countries with respect to their investments
in foreign securities. Tax conventions between certain countries and the U.S.
may reduce or eliminate such taxes. Investors may be entitled to claim U.S.
foreign tax credits or deductions with respect to such taxes, subject to certain
provisions and limitations contained in the Code. Specifically, if more than 50%
of the value of a Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service pursuant to which shareholders of the Fund
will be required to (i) include in ordinary gross income (in addition to taxable
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<PAGE>
dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as qualified foreign
taxes paid by them. The Funds probably will not satisfy this 50% requirement.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends received from the Fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that a Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. A Fund that
cannot or does not make this election may deduct such taxes in determining the
amount it has available for distribution to shareholders, and shareholders will
not, in this event, include these foreign taxes in their income, nor will they
be entitled to any tax deductions or credits with respect to such taxes.
High Yield Bond Fund is permitted to acquire stock in foreign corporations. If
this Fund acquires stock of certain foreign corporations that receive at least
75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The Fund may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
The amount of a Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of such Fund to dispose of
portfolio securities or enter into options or futures transactions that will
generate capital gains. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption of shares of a Fund (including by exercise of the exchange
privilege) a shareholder may realize a taxable gain or loss depending upon the
amount of the proceeds and the investor's basis in his shares. Any gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term or short-term, depending upon the
shareholder's tax holding period for the shares and subject to the special rules
described below. A sales charge paid in purchasing Class A shares of a Fund
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent shares of the Fund or another John Hancock fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
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<PAGE>
privilege. Such disregarded load will result in an increase in the shareholder's
tax basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange may be disallowed to the extent the shares disposed of
are replaced with other shares of the same Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to automatic dividend reinvestments. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, each Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Funds
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation by the Fund, each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as long-term capital gain income
in his return for his taxable year in which the last day of such Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by such Fund, and (c) be
entitled to increase the adjusted tax basis for his shares in such Fund by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, each Fund is generally permitted to carry
forward a net capital loss in any year to offset its own net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent net capital gains are offset by such losses, they would not result in
Federal income tax liability to the applicable Fund and, as noted above, would
not be distributed as such to shareholders. As of December 31, 1995, High Yield
Bond Fund had capital loss carryforwards of $20,325,151, of which $9,184,152
expires in 2002 and $11,140,999 expires in 2003, and Government Income Fund had
capital loss carryforwards of $166,995,449 of which $50,265,256 expires in 1996,
$6,921,927 expires in 1998, $73,293,791 expires in 2001, $15,347,195 expires in
2002 and $2,021,077 expires in 2003. All of the capital loss carryforwards
expiring in 1996, 1997, 2000 and 2001, respectively, were acquired on September
15, 1995, in the reorganization with John Hancock Government Securities Trust
and, consequently, their availability may be limited under the Code in a given
year.
A Fund is required to accrue income on any debt securities that have more than a
de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options, futures and forward contracts may
also require the Fund to recognize income or gain without a concurrent receipt
of cash. However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) a Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
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<PAGE>
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Funds will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although either Fund may in its sole discretion provide relevant
information to shareholders.
Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. A Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Investments in debt obligations that are at risk of or are in default present
special tax issues for the Funds. Tax rules are not entirely clear about issues
such as when the Funds may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund that holds such obligations in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
Limitations imposed by the Code on regulated investment companies like the Funds
may restrict a Fund's ability to enter into futures, options, foreign currency
positions and currency forward transactions.
Certain options, futures and forward foreign currency transactions undertaken by
a Fund may cause such Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of certain currency
forwards, options and futures, as ordinary income or loss) and timing of some
capital gains and losses realized by the Fund. Also, certain of a Fund's losses
on its transactions involving options, futures and forward foreign currency
contracts and/or offsetting or successor portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income or gains. Certain of such transactions may also cause a Fund to dispose
of investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of a Fund's distributions to
shareholders. Certain of the applicable tax rules may be modified if the Fund is
eligible and chooses to make one or more of certain tax elections that may be
available. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to seek to minimize any potential adverse tax consequences.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
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prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, a Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Funds.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
Provided that each Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
Yield. For the 30-day period ended April 30, 1996, the yields of (a) High Yield
Bond Fund's Class A and Class B shares were 9.10% and 8.82%, respectively, and
(b) Government Income Fund's Class A and Class B shares were 5.90% and 5.45%,
respectively.
Each Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [(a-b + 1 )6 - 1]
---
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
Total Return. Average annual total return is determined separately for each
class of shares.
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Set forth below are tables showing the performance on a total return basis
(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000
investment in the Class A and Class B shares of Government Income Fund and High
Yield Bond Fund.
<TABLE>
<CAPTION>
Government Income Fund
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 9/30/94* to One Year Ended Five Years Ended 2/23/88* to
- -------------- ----------- -------------- ---------------- -----------
<C> <C> <C> <C> <C>
4/30/96 4/30/96 4/30/96 4/30/96 4/30/96
3.13% 5.80% 2.22% 5.85% 6.74%
High Yield Bond Fund
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 9/30/94* to One Year Ended Five Years Ended 2/23/88* to
- -------------- ----------- -------------- ---------------- -----------
4/30/96 4/30/96 4/30/96 4/30/96 4/30/96
10.96% 5.98% 10.30% 11.68% 8.64
</TABLE>
* Commencement of operations.
Total Return. Each Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1-year and life-of-fund periods.
In the case of Class A shares or Class B shares, this calculation assumes the
maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of a Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
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The total return in the case of Class B shares of each Fund is calculated by
determining the net asset value of all shares held at the end of the period for
each share held from the beginning of the period (assuming reinvestment of all
dividends and distributions at net asset value during the period and the
deduction of any applicable contingent deferred sales charge as if the shares
were redeemed at the end of the period), subtracting the maximum offering price
per share (net asset value per share) at the beginning of such period and then
dividing the result by the maximum offering price per share (net asset value per
share) at the beginning of the same period. Total return for Class A shares of
each of Government Income Fund and High Yield Bond Fund is calculated in the
same manner except the maximum offering price reflects the deduction of the
maximum initial sales charge and the redemption value is at net asset value.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's maximum sales charge on Class A
shares or the CDSC on Class B shares into account. A Fund's "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the stated period by the maximum offering price or net asset
value at the end of the period. Excluding a Fund's sales charge on Class A
shares and the CDSC on Class B shares from a total return calculation produces a
higher total return figure.
From time to time, in reports and promotional literature, a Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. A Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta reflects the market-related risk of the Fund by showing how
responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of a Fund for any
period in the future. The performance of a Fund is a function of many factors
including its earnings, expenses and number of outstanding shares. Fluctuating
market conditions; purchases, sales and maturities of portfolio securities;
sales and redemptions of shares of beneficial interest; and changes in operating
expenses are all examples of items that can increase or decrease a Fund's
performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser and officers of the
Trust pursuant to recommendations made by its investment committee, which
consists of officers and directors of the Advisor and affiliates and officers
and Trustees who are interested persons of the Funds. Orders for purchases and
sales of securities are placed in a manner which, in the opinion of the Adviser,
will offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
makers reflect a "spread." Investments in debt securities are generally traded
on a net basis through dealers acting for their own account as principals and
not as brokers; no brokerage commissions are payable on such transactions.
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<PAGE>
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the NASD and other policies that the Trustees may
determine, the Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute a Fund's portfolio transactions.
Purchase of securities for the Funds are normally principal transactions made
directly from the issuer or from an underwriter or market maker for which no
brokerage commissions are usually paid. Purchases from underwriters will include
a commission or concession paid by the issuer to the underwriter, and purchases
and sales from dealers serving as market makers will usually include a mark up
or mark down. Purchases and sales of options and futures will be effected
through brokers who charge a commission for their services and are reflected in
the amounts shown below.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Funds. The
Funds will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of each Fund's brokerage business, the policies and practices of
the Adviser in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees.
Brokerage commissions of the Funds for their respective reporting periods, as
follows, amounted to:
Government Income Fund - (a) $15,814 for the fiscal year ended October 31,
1995; (b) $96,931 for the fiscal year ended October 31, 1994; and (c)
$254,859 for the fiscal year ended October 31, 1993.
High Yield Bond Fund - (a) $40,228 for the fiscal year ended October 31,
1995; (b) $2,320 for the fiscal year ended October 31, 1994; and (c)
$13,320 for the fiscal year ended October 31, 1993.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, each Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended October 31, 1995,
neither Fund directed any commissions to compensate brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
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The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Corporation and its subsidiaries,
three of which, Tucker Anthony Incorporated ("Tucker Anthony") John Hancock
Distributors, Inc. ("John Hancock Distributors") and Sutro & Company, Inc.
("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to procedures
determined by the Trustees and consistent with the above policy of obtaining
best net results, the Fund may execute portfolio transactions with or through
Tucker Anthony, Sutro or John Hancock Distributors. During the year ended
October 31, 1995, neither Fund executed any portfolio transactions with then
affiliated brokers.
Any of the Affiliated Brokers may act as broker for a Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to a Fund as determined by
a majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Funds, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Funds will not effect principal transactions with
Affiliated Brokers. The Funds may, however, purchase securities from other
members of underwriting syndicates of which Tucker Anthony and Sutro are
members, but only in accordance with the policy set forth above and procedures
adopted and reviewed periodically by the Trustees.
Brokerage or other transactions costs of a Fund are generally commensurate with
the rate of portfolio activity. The portfolio turnover rates for each of the
Funds for (a) the fiscal year ended October 31, 1995 and (b) the fiscal year
ended October 31, 1994 were:
Government Income Fund - (a) 102% and (b) 92%.
High Yield Bond Fund - (a) 98% and (b) 153%*.
* Higher turnover rates were due to volatile market conditions.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser and
the Funds have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Funds and their shareholders come
first.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA 02205-
9116, a wholly owned indirect subsidiary of the Life Company, is the transfer
and dividend paying agent for the Funds. Each Fund pays Investor Services
monthly a transfer agent fee equal to $20 per account for the Class A shares and
$22.50 per account for the Class B shares on an annual basis, plus out-of-
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pocket expenses. These expenses are aggregated and charged to the Fund and
allocated to each class on the basis of the relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a custodian agreement
between the Trust and Investors Bank & Trust Company, 89 South Street, Boston,
Massachusetts 02111. Under the custodian agreement, the custodian performs
custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The independent auditors audit and render
an opinion on the Funds' annual financial statements and review the Funds'
annual income tax returns. The financial statements of the Funds for periods
prior to October 31, 1995 in the Prospectus and this Statement of Additional
Information and have been audited by Ernst & Young LLP for the periods indicated
in their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
Moody's Investors Service, Inc. ("Moody's)
Aaa, Aa, A and Baa - Tax-exempt bonds rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to bonds that are of "high quality by all
standards," but long-term risks appear somewhat larger than Aaa rated bonds. The
Aaa and Aa rated bonds are generally known as "high grade bonds." The foregoing
ratings for tax-exempt bonds are rated conditionally. Bonds for which the
security depends upon the completion of some act or upon the fulfillment of some
condition are rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such conditional
ratings denote the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as upper
medium grade obligations. Principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds rated Baa are considered a medium grade obligations; i.e.,
they are neither highly protected or poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact, have speculative characteristics as well.
Standard & Poor's Ratings Group ("S&P")
AAA, AA, A and BBB - Bonds rated AAA bear the highest rating assigned to debt
obligations, which indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade," are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the bonds being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. Although a provisional rating addresses credit quality subsequent to
completion of the project, it makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. Bonds rated BBB are regarded as
having an adequate capacity to repay principal and pay interest. Whereas they
normally exhibit protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay principal
and pay interest for bonds in this category than for bonds in the A category.
Fitch Investors Service ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
57
<PAGE>
ratings. Bonds rated BBB are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
TAX-EXEMPT NOTE RATINGS
Moody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal and interest.
Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Moody's - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
Other Considerations - The ratings of S&P, Moody's, and Fitch represent their
respective opinions of the quality of the municipal securities they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal securities with the same
maturity, coupon and ratings may have different yields and municipal securities
of the same maturity and coupon with different ratings may have the same yield.
58
<PAGE>
JOHN HANCOCK BOND FUND
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement from the Intermediate
Maturity Government Fund 1996 Annual Report to Shareholders for the year ended
March 31, 1996 (filed electronically on May 22, 1996; file nos. 811-03006 and
2-66906; accession number 0001010521-96-000080): Government Income Fund 1995
Annual Report to Shareholders for the year ended October 31, 1995 (filed
electronically on January 3, 1996; file nos. 811-5254 and 33-16048; accession
number 0000950135-96-000034) and 1996 semi-annual report to shareholder for the
period ended April 30, 1996 (filed electronically on June 28, 1996; file nos.
811-5254 and 33-16048; accession number 0001005477-96-000175). High Yield Bond
1995 Annual Report to Shareholders for the year ended October 31, 1995 (filed
electronically on January 3, 1996; file nos. 811-5254 and 33-16048; accession
number 0000950135-96-000031) and 1996 semi-annual report to shareholder for the
period ended April 30, 1996 (filed electronically on June 28, 1996; file nos.
811-5254 and 16048; accession number 0001005477-96-000175).
John Hancock Intermediate Maturity Government Fund
Statement of Assets and Liabilities as of March 31, 1996.
Statement of Operations of the year ended March 31, 1996.
Statement of Changes in Net Asset for each of the two years in the period
ended March 31, 1996.
Notes to Financial Statements.
Financial Highlights for each of the years in the period ended March 31,
1996 and the period ended March 31, 1992.
Schedule of Investments as of March 31, 1996.
Report of Independent Auditors.
John Hancock Government Income Fund
Statement of Assets and Liabilities as of October 31, 1995.
Statement of Operations of the year ended October 31, 1995.
Statement of Changes in Net Asset for each of the two years in the period
ended October 31, 1995.
Notes to Financial Statements.
Financial Highlights for each of the years in the period ended October
31, 1995 Schedule of Investments as of October 31, 1995.
Report of Independent Auditors.
Statement of Assets and Liabilities as of April 30, 1996.
Statement of Operations of the year ended April 30, 1996.
Statement of Changes in Net Asset for each of the two years in the period
ended April 30, 1996.
Notes to Financial Statements.
Financial Highlights for the period ended April 30, 1996.
Schedule of Investments as of April 30, 1996.
C-1
<PAGE>
John Hancock High Yield Bond Fund
Statement of Assets and Liabilities as of October 31, 1995.
Statement of Operations of the year ended October 31, 1995.
Statement of Changes in Net Asset for each of the two years in the period
ended October 31, 1995.
Notes to Financial Statements.
Financial Highlights for each of the years in the period ended October
31, 1995. Schedule of Investments as of October 31, 1995.
Report of Independent Auditors.
Statement of Assets and Liabilities as of April 30, 1996.
Statement of Operations of the year ended April 30, 1996.
Statement of Changes in Net Asset for each of the two years in the period
ended April 30, 1996.
Notes to Financial Statements.
Financial Highlights for each the period ended April 30, 1996.
Schedule of Investments as of April 30, 1996.
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities
As of August 5, 1996, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Intermediate Maturity Government Fund
Class A Shares - 1,038
Class B Shares - 817
Government Income Fund
Class A Shares - 29,286
Class B Shares - 11,842
High Yield Bond Fund
Class A Shares - 2,412
Class B Shares - 11,521
C-2
<PAGE>
Item 27. Indemnification
(a) Indemnification provisions relating to the Registrant's Trustees,
officers, employees and agents is set forth in Article VII of the Registrant's
By Laws included as Exhibit 2 herein.
(b) Under Section 12 of the Distribution Agreement, John Hancock Funds,
Inc. ("John Hancock Funds" ) has agreed to indemnify the Registrant and its
Trustees, officers and controlling persons against claims arising out of certain
acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company
("the Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the of the Insurance Company who serves as a Trustee or
officer of the Registrant at the direction or request of the Insurance Company
against litigation expenses and liabilities incurred while acting as such,
except that such indemnification does not cover any expense or liability
incurred or imposed in connection with any matter as to which such person shall
be finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Insurance Company. In addition,
no such person will be indemnified by the Insurance Company in respect of any
liability or expense incurred in connection with any matter settled without
final adjudication unless such settlement shall have been approved as in the
best interests of the Insurance Company either by vote of the Board of Directors
at a meeting composed of directors who have no interest in the outcome of such
vote, or by vote of the policyholders. The Insurance Company may pay expenses
incurred in defending an action or claim in advance of its final disposition,
but only upon receipt of an undertaking by the person indemnified to repay such
payment if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc.("the Adviser") provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
C-3
<PAGE>
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Cash Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series, Inc., John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited Term
Government Fund, John Hancock Sovereign Investors Fund, Inc., John Hancock
Special Equities Fund, John Hancock Sovereign Bond Fund, John Hancock Tax-Exempt
Series, John Hancock Strategic Series, John Hancock Technology Series, Inc.,
John Hancock World Fund, John Hancock Investment Trust, John Hancock
Institutional Series Trust, Freedom Investment Trust, Freedom Investment Trust
II and Freedom Investment Trust III.
(b) The following table lists, for each director and officer of John
Hancock Funds, the information indicated.
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, President and Trustee, Chairman and Chief
101 Huntington Avenue Chief Executive Officer Executive Officer
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Robert G. Freedman Director Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
James W. McLaughlin Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President
101 Huntington Avenue and Secretary
Boston, Massachusetts
Christopher M. Meyer Second Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John Goldsmith Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-6
<PAGE>
Richard O. Hansen Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington avenue
Boston, Massachusetts
Anthony P. Petrucci Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith Harstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
C-7
<PAGE>
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
The Registrant maintains the records required to be maintained by it under
Rules 31a-1 (a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 101 Huntington Avenue, Boston
Massachusetts 02199-7603. Certain records, including records relating to
Registrant's shareholders and the physical possession of its securities,
may be maintained pursuant to Rule 31a-3 at the main offices of
Registrant's Transfer Agent and Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus with respect to a series of the Registrant is delivered with a
copy of the latest annual report to shareholders with respect to that
series upon request and without charge.
(d) Registrant undertakes to comply with Section 16(c) of the Investment
Company Act of 1940, as amended which relates to the assistance to be
rendered to shareholders by the Trustees of the Registrant in calling a
meeting of shareholders for the purpose of voting upon the question of the
removal of a trustee.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Boston and The Commonwealth of Massachusetts on
the 27th day of August, 1996.
JOHN HANCOCK BOND FUND
By: *
-------------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive
- ----------------------- Officer (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/ James B. Little Senior Vice President and Chief August 27, 1996
- ----------------------- Financial Officer (Principal
James B. Little Financial and Accounting Officer)
* Trustee
- -----------------------
James F. Carlin
* Trustee
- -----------------------
William H. Cunningham
* Trustee
- -----------------------
Charles F. Fretz
* Trustee
- -----------------------
Anne C. Hodsdon
C-9
<PAGE>
Signature Title Date
--------- ----- ----
* Trustee
- ----------------------
Charles L. Ladner
* Trustee
- ----------------------
Leo E. Linbeck, Jr.
* Trustee
- ----------------------
Patricia P. McCarter
* Trustee
- ----------------------
Steven R. Pruchansky
* Trustee
- ----------------------
Richard S. Scipione
* Trustee
- ----------------------
Norman H. Smith
* Trustee
- ----------------------
John P. Toolan
*By: /s/ Susan S. Newton August 27, 1996
--------------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
June 25, 1996, filed herewith
</TABLE>
C-10
<PAGE>
POWER OF ATTORNEY
The undersigned Trustee/Director of each of the above listed Trusts, each a
Massachusetts business trust, and Corporations, each a Maryland Corporation,
does hereby severally constitute and appoint EDWARD J. BOUDREAU, JR., SUSAN S.
NEWTON, AND JAMES B. LITTLE, and each acting singly, to be my true, sufficient
and lawful attorneys, with full power to each of them, and each acting singly,
to sign for me, in my name and in the capacity indicated below, any Registration
Statement on Form N-1A and any Registration Statement on Form N-14 to be filed
by the Trust under the Investment Company Act of 1940, as amended (the "1940
Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and
any and all amendments to said Registration Statements, with respect to the
offering of shares and any and all other documents and papers relating thereto,
and generally to do all such things in my name and on my behalf in the capacity
indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and
all requirements of the Securities and Exchange Commission thereunder, hereby
ratifying and confirming my signature as it may be signed by said attorneys or
each of them to any such Registration Statements and any and all amendments
thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of
the 25th day of June, 1996.
/s/Edward J. Boudreau, Jr. /s/Leo E. Linbeck, Jr.
- ----------------------------- --------------------------
Edward J. Boudreau, Jr. Leo E. Linbeck, Jr.
/s/James F. Carlin /s/Patricia P. McCarter
- ----------------------------- --------------------------
James F. Carlin Patricia P. McCarter
/s/William H. Cunningham /s/Steven R. Pruchansky
- ----------------------------- --------------------------
William H. Cunningham Steven R. Pruchansky
/s/Charles F. Fretz /s/Richard S. Scipione
- ----------------------------- --------------------------
Charles F. Fretz Richard S. Scipione
/s/Harold R. Hiser, Jr. /s/Norman H. Smith
- ----------------------------- --------------------------
Harold R. Hiser, Jr. Norman H. Smith
/s/Anne C. Hodsdon /s/John P. Toolan
- ----------------------------- --------------------------
Anne C. Hodsdon John P. Toolan
/s/Charles L. Ladner
- -----------------------------
Charles L. Ladner
C-11
<PAGE>
JOHN HANCOCK BOND FUND
(File No. 2-66906)
INDEX TO EXHIBITS
99.B1 Amended and Restated Declaration of Trust dated 7/1/96.+
99.B2 Amended Bylaws.*
99.B3 Not Applicable.
99.B4 Specimen Share Certificates for Class A Shares and Class B Shares.*
99.B5 Investment Advisory Agreement between John Hancock Advisers, Inc.
and the Registrant on behalf of John Hancock Intermediate Maturity
Government Fund.*
99.B6 Distribution Agreement between John Hancock Broker Distribution
Services, Inc. and the Registrant.*
99.B6.1 Form of Soliciting Dealer Agreement between John Hancock Funds,
Inc. and the John Hancock funds.*
99.B6.2 Form of Financial Institution Sales and Service Agreement between
John Hancock Funds, Inc. and the John Hancock funds.*
99.B7 Not Applicable.
99.B8 Master Custodian Agreement between the John Hancock funds and Investors
Bank & Trust Company.*
99.B9 Transfer Agency Agreement between John Hancock Investor Services
Corporation and the John Hancock funds.*
99.B10 Not Applicable.
99.B11 Auditors Consents.+
99.B12 Not Applicable.
99.B13 Not Applicable.
99.B14 Not Applicable.
99.B15 Rule 12b-1 Plans for Class A Shares for John Hancock Intermediate
Maturity Government Fund.*
99.B15.1 Rule 12b-1 Plans for Class B Shares for John Hancock Intermediate
Maturity Government Fund.*
C-12
<PAGE>
99.B16 Schedule of computation of each performance quotation provided in the
Registration Statement in response to Item 22.*
27.1A Intermediate Muturity Government - Annual+
27.1B Intermediate Maturity Government - Annual+
27.2A Government Income - Annual+
27.2B Government Income - Annual+
27.3A High Yield Bond - Annual+
27.3B High Yield Bond - Annual+
27.4A Government Income - Semi+
27.4B Government Income - Semi+
27.5A High Yield Bond - Semi+
27.5B High Yield Bond - Semi+
* Previously filed electronically with Registration Statement and/or
post-effective amendment no. 31 file nos. 811-03006 and 2-66906 on July 17,
1995, accession number 0000950135-95- 001528.
+ Filed herewith
C-13
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
JOHN HANCOCK BOND TRUST
(formerly John Hancock Bond Fund)
(formerly Transamerica Bond Fund)
101 Huntington Avenue
Boston, Massachusetts 02199
Dated July 1, 1996
AMENDED AND RESTATED DECLARATION OF TRUST made this 1st day of July, 1996
by the undersigned (together with all other persons from time to time duly
elected, qualified and serving as Trustees in accordance with the provisions of
Article II hereof, the "Trustees");
WHEREAS, pursuant to a declaration of trust executed and delivered on
November 29, 1984 (the "Original Declaration"), the Trustees established a trust
for the investment and reinvestment of funds contributed thereto;
WHEREAS, the Trustees divided the beneficial interest in the trust assets
into transferable shares of beneficial interest, as provided therein;
WHEREAS, the Trustees declared that all money and property contributed to
the trust established thereunder be held and managed in trust for the benefit of
the holders, from time to time, of the shares of beneficial interest issued
thereunder and subject to the provisions thereof;
WHEREAS, the Trustees desire to amend and restate the Original Declaration;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, the undersigned, being all of the Trustees of the
trust, hereby amend and restate the Original Declaration as follows:
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is "John Hancock
Bond Trust" (the "Trust").
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the contract
described in Section 3.3 hereof.
(b) "By-laws" means the By-laws referred to in Section 2.8 hereof, as
amended from time to time.
<PAGE>
(c) "Class" means any division of shares within a Series in accordance with
the provisions of Article V.
(d) The terms "Commission" and "Interested Person" have the meanings given
them in the 1940 Act. Except as such term may be otherwise defined by the
Trustees in conjunction with the establishment of any Series, the term "vote of
a majority of the Outstanding Shares entitled to vote" shall have the same
meaning as is assigned to the term "vote of a majority of the outstanding voting
securities" in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who has custody of
any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time to
time. Reference in this Declaration of Trust to "Declaration," "hereof,"
"herein," and "hereunder" shall be deemed to refer to this Declaration rather
than exclusively to the article or section in which such words appear.
(g) "Distributor" means the party, other than the Trust, to the contract
described in Section 3.1 hereof.
(h) "Fund" or "Funds" individually or collectively, means the separate
Series of the Trust, together with the assets and liabilities assigned thereto.
(i) "Fundamental Restrictions" means the investment restrictions set forth
in the Prospectus and Statement of Additional Information for any Series and
designated as fundamental restrictions therein with respect to such Series.
(j) "His" shall include the feminine and neuter, as well as the masculine,
genders.
(k) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.
(l) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(m) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
(n) "Prospectus" means the Prospectuses and Statements of Additional
Information included in the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such Prospectuses and Statements of
Additional Information may be amended or supplemented and filed with the
Commission from time to time.
(o) "Series" individually or collectively means the separately managed
component(s) of the Trust (or, if the Trust shall have only one such component,
then that one) as may be established and designated from time to time by the
Trustees pursuant to Section 5.11 hereof.
2
<PAGE>
(p) "Shareholder" means a record owner of Outstanding Shares.
(q) "Shares" means the equal proportionate units of interest into which the
beneficial interest in the Trust shall be divided from time to time, including
the Shares of any and all Series or of any Class within any Series (as the
context may require) which may be established by the Trustees, and includes
fractions of Shares as well as whole Shares. "Outstanding" Shares means those
Shares shown from time to time on the books of the Trust or its Transfer Agent
as then issued and outstanding, but shall not include Shares which have been
redeemed or repurchased by the Trust and which are at the time held in the
treasury of the Trust.
(r) "Transfer Agent" means any Person other than the Trust who maintains
the Shareholder records of the Trust, such as the list of Shareholders, the
number of Shares credited to each account, and the like.
(s) "Trust" means John Hancock Bond Trust.
(t) "Trustees" means the persons who have signed this Declaration, so long
as they shall continue in office in accordance with the terms hereof, and all
other persons who now serve or may from time to time be duly elected, qualified
and serving as Trustees in accordance with the provisions of Article II hereof,
and reference herein to a Trustee or the Trustees shall refer to such person or
persons in this capacity or their capacities as trustees hereunder.
(u) "Trust Property" means any and all property, real or personal, tangible
or intangible, which is owned or held by or for the account of the Trust or the
Trustees, including any and all assets of or allocated to any Series or Class,
as the context may require.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without The Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
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Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment company, and
exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To invest in, hold for investment, or reinvest in, cash; securities,
including common, preferred and preference stocks; warrants; subscription
rights; profit-sharing interests or participations and all other contracts for
or evidence of equity interests; bonds, debentures, bills, time notes and all
other evidences of indebtedness; negotiable or non-negotiable instruments;
government securities, including securities of any state, municipality or other
political subdivision thereof, or any governmental or quasi-governmental agency
or instrumentality; and money market instruments including bank certificates of
deposit, finance paper, commercial paper, bankers' acceptances and all kinds of
repurchase agreements, of any corporation, company, trust, association, firm or
other business organization however established, and of any country, state,
municipality or other political subdivision, or any governmental or
quasi-governmental agency or instrumentality; any other security, instrument or
contract the acquisition or execution of which is not prohibited by any
Fundamental Restriction; and the Trustees shall be deemed to have the foregoing
powers with respect to any additional securities in which the Trust may invest
should the Fundamental Restrictions be amended.
(c) To acquire (by purchase, subscription or otherwise), to hold, to trade
in and deal in, to acquire any rights or options to purchase or sell, to sell or
otherwise dispose of, to lend and to pledge any such securities, to enter into
repurchase agreements, reverse repurchase agreements, firm commitment
agreements, forward foreign currency exchange contracts, interest rate, mortgage
or currency swaps, and interest rate caps, floors and collars, to purchase and
sell options on securities, indices, currency, swaps or other financial assets,
futures contracts and options on futures contracts of all descriptions and to
engage in all types of hedging, risk management or income enhancement
transactions.
(d) To exercise all rights, powers and privileges of ownership or interest
in all securities and repurchase agreements included in the Trust Property,
including the right to vote thereon and otherwise act with respect thereto and
to do all acts for the preservation, protection, improvement and enhancement in
value of all such securities and repurchase agreements.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real or
personal, including cash or foreign currency, and any interest therein.
(f) To borrow money and in this connection issue notes or other evidence of
indebtedness; to secure borrowings by mortgaging, pledging or otherwise
subjecting as security the Trust Property; and to endorse, guarantee, or
undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
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(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
(h) To enter into a plan of distribution and any related agreements whereby
the Trust may finance directly or indirectly any activity which is primarily
intended to result in the distribution and/or servicing of Shares.
(i) To adopt on behalf of the Trust or any Series thereof an alternative
purchase plan providing for the issuance of multiple Classes of Shares (as
authorized herein at Section 5.11).
(j) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or arising out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
Notwithstanding any other provision herein, the Trustees shall have full
power in their discretion as contemplated in Section 8.5, without any
requirement of approval by Shareholders, to invest part or all of the Trust
Property (or part or all of the assets of any Series), or to dispose of part or
all of the Trust Property (or part or all of the assets of any Series) and
invest the proceeds of such disposition, in securities issued by one or more
other investment companies registered under the 1940 Act. Any such other
investment company may (but need not) be a trust (formed under the laws of any
state) which is classified as a partnership or corporation for federal income
tax purposes.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any Series of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
deemed appropriately protected. The right, title and interest of the Trustees in
the Trust Property and the Property of each Series of the Trust shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee he
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shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees shall have the
power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the
provisions set forth in Articles VI and VII and Section 5.11 hereof, to apply to
any such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or property of the Trust or of the particular Series with
respect to which such Shares are issued, whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by the laws of The
Commonwealth of Massachusetts governing business corporations.
Section 2.5. Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or any
Series of the Trust or the names of the Trustees or otherwise as the Trustees
may deem expedient, to the same extent as such delegation is permitted by the
1940 Act.
Section 2.6. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 2.7. Expenses. The Trustees shall have the power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The Trustees
shall fix the compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided herein
or in the By-laws, any action to be taken by the Trustees may be taken by a
majority of the Trustees present at a meeting of Trustees, including any meeting
held by means of a conference telephone circuit or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, or by written consents of a majority of Trustees then in office. The
Trustees may adopt By-laws not inconsistent with this Declaration to provide for
the conduct of the business of the Trust and may amend or repeal such By-laws to
the extent such power is not reserved to the Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
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Section 2.9. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust or any Series thereof; (b) enter
into joint ventures, partnerships and any other combinations or associations;
(c) remove Trustees, fill vacancies in, add to or subtract from their number,
elect and remove such officers and appoint and terminate such agents or
employees as they consider appropriate, and appoint from their own number, and
terminate, any one or more committees which may exercise some or all of the
power and authority of the Trustees as the Trustees may determine; (d) purchase,
and pay for out of Trust Property or the property of the appropriate Series of
the Trust, insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, administrators, distributors, selected
dealers or independent contractors of the Trust against all claims arising by
reason of holding any such position or by reason of any action taken or omitted
by any such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (e) establish pension, profit-sharing, share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust; (f) to the extent permitted by law, indemnify any
person with whom the Trust or any Series thereof has dealings, including the
Investment Adviser, Administrator, Distributor, Transfer Agent and selected
dealers, to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
fiscal year and taxable year of the Trust or any Series thereof and the method
by which its or their accounts shall be kept; and (i) adopt a seal for the
Trust, but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except for transactions not permitted
by the 1940 Act or rules and regulations adopted, or orders issued, by the
Commission thereunder, the Trustees may, on behalf of the Trust, buy any
securities from or sell any securities to, or lend any assets of the Trust or
any Series thereof to any Trustee or officer of the Trust or any firm of which
any such Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or Transfer Agent or with any
Interested Person of such Person; and the Trust or a Series thereof may employ
any such Person, or firm or company in which such Person is an Interested
Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing
agent or custodian upon customary terms.
Section 2.11. Litigation. The Trustees shall have the power to engage in
and to prosecute, defend, compromise, abandon, or adjust by arbitration, or
otherwise, any actions, suits, proceedings, disputes, claims, and demands
relating to the Trust, and out of the assets of the Trust or any Series thereof
to pay or to satisfy any debts, claims or expenses incurred in connection
therewith, including those of litigation, and such power shall include without
limitation the power of the Trustees or any appropriate committee thereof, in
the exercise of their or its good faith business judgment, to dismiss any
action, suit, proceeding, dispute, claim, or demand, derivative or otherwise,
brought by any person, including a Shareholder in its own name or the name of
the Trust, whether or not the Trust or any of the Trustees may be named
individually therein or the subject matter arises by reason of business for or
on behalf of the Trust.
Section 2.12. Number of Trustees. The initial Trustees shall be the persons
initially signing the Original Declaration. The number of Trustees (other than
the initial Trustees) shall be such number as shall be fixed from time to time
by vote of a majority of the Trustees, provided, however, that the number of
Trustees shall in no event be less than one (1).
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Section 2.13. Election and Term. Except for the Trustees named herein or
appointed to fill vacancies pursuant to Section 2.15 hereof, the Trustees may
succeed themselves and shall be elected by the Shareholders owning of record a
plurality of the Shares voting at a meeting of Shareholders on a date fixed by
the Trustees. Except in the event of resignations or removals pursuant to
Section 2.14 hereof, each Trustee shall hold office until such time as less than
a majority of the Trustees holding office has been elected by Shareholders. In
such event the Trustees then in office shall call a Shareholders' meeting for
the election of Trustees. Except for the foregoing circumstances, the Trustees
shall continue to hold office and may appoint successor Trustees.
Section 2.14. Resignation and Removal. Any Trustee may resign his trust
(without the need for any prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate
number of Trustees after such removal shall not be less than one) with cause, by
the action of two-thirds of the remaining Trustees or by action of two-thirds of
the outstanding Shares of the Trust (for purposes of determining the
circumstances and procedures under which any such removal by the Shareholders
may take place, the provisions of Section 16(c) of the 1940 Act (or any
successor provisions) shall be applicable to the same extent as if the Trust
were subject to the provisions of that Section). Upon the resignation or removal
of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of the resigning or removed Trustee. Upon the incapacity or death of
any Trustee, his legal representative shall execute and deliver on his behalf
such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.15. Vacancies. The term of office of a Trustee shall terminate
and a vacancy shall occur in the event of his death, retirement, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform the
duties of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill
such vacancy by the appointment of such other person as they in their discretion
shall see fit, made by vote of a majority of the Trustees then in office. Any
such appointment shall not become effective, however, until the person named in
the vote approving the appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
An appointment of a Trustee may be made in anticipation of a vacancy to occur at
a later date by reason of retirement, resignation or increase in the number of
Trustees, provided that such appointment shall not become effective prior to
such retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.15, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. The vote by a
majority of the Trustees in office, fixing the number of Trustees shall be
conclusive evidence of the existence of such vacancy.
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Section 2.16. Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration except as herein otherwise expressly provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their discretion
from time to time enter into an exclusive or non-exclusive distribution contract
or contracts providing for the sale of the Shares to net the Trust or the
applicable Series of the Trust not less than the amount provided for in Section
7.1 of Article VII hereof, whereby the Trustees may either agree to sell the
Shares to the other party to the contract or appoint such other party as their
sales agent for the Shares, and in either case on such terms and conditions, if
any, as may be prescribed in the By-laws, and such further terms and conditions
as the Trustees may in their discretion determine not inconsistent with the
provisions of this Article III or of the By-laws; and such contract may also
provide for the repurchase of the Shares by such other party as agent of the
Trustees.
Section 3.2. Advisory or Management Contract. The Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts or, if the Trustees establish multiple Series, separate
investment advisory or management contracts with respect to one or more Series
whereby the other party or parties to any such contracts shall undertake to
furnish the Trust or such Series management, investment advisory,
administration, accounting, legal, statistical and research facilities and
services, promotional or marketing activities, and such other facilities and
services, if any, as the Trustees shall from time to time consider desirable and
all upon such terms and conditions as the Trustees may in their discretion
determine. Notwithstanding any provisions of the Declaration, the Trustees may
authorize the Investment Advisers, or any of them, under any such contracts
(subject to such general or specific instructions as the Trustees may from time
to time adopt) to effect purchases, sales, loans or exchanges of portfolio
securities and other investments of the Trust on behalf of the Trustees or may
authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of such Investment Advisers, or
any of them (and all without further action by the Trustees). Any such
purchases, sales, loans and exchanges shall be deemed to have been authorized by
all of the Trustees. The Trustees may, in their sole discretion, call a meeting
of Shareholders in order to submit to a vote of Shareholders at such meeting the
approval or continuance of any such investment advisory or management contract.
If the Shareholders of any one or more of the Series of the Trust should fail to
approve any such investment advisory or management contract, the Investment
Adviser may nonetheless serve as Investment Adviser with respect to any Series
whose Shareholders approve such contract.
Section 3.3. Administration Agreement. The Trustees may in their discretion
from time to time enter into an administration agreement or, if the Trustees
establish multiple Series or Classes, separate administration agreements with
respect to each Series or Class, whereby the other party to such agreement shall
undertake to manage the business affairs of the Trust or of a
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Series or Class thereof and furnish the Trust or a Series or a Class thereof
with office facilities, and shall be responsible for the ordinary clerical,
bookkeeping and recordkeeping services at such office facilities, and other
facilities and services, if any, and all upon such terms and conditions as the
Trustees may in their discretion determine.
Section 3.4. Service Agreement. The Trustees may in their discretion from
time to time enter into Service Agreements with respect to one or more Series or
Classes thereof whereby the other parties to such Service Agreements will
provide administration and/or support services pursuant to administration plans
and service plans, and all upon such terms and conditions as the Trustees in
their discretion may determine.
Section 3.5. Transfer Agent. The Trustees may in their discretion from time
to time enter into a transfer agency and shareholder service contract whereby
the other party to such contract shall undertake to furnish transfer agency and
shareholder services to the Trust. The contract shall have such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the Declaration. Such services may be provided by one or more Persons.
Section 3.6. Custodian. The Trustees may appoint or otherwise engage one or
more banks or trust companies, each having an aggregate capital, surplus and
undivided profits (as shown in its last published report) of at least two
million dollars ($2,000,000) to serve as Custodian with authority as its agent,
but subject to such restrictions, limitations and other requirements, if any, as
may be contained in the By-laws of the Trust. The Trustees may also authorize
the Custodian to employ one or more sub-custodians, including such foreign banks
and securities depositories as meet the requirements of applicable provisions of
the 1940 Act, and upon such terms and conditions as may be agreed upon between
the Custodian and such sub-custodian, to hold securities and other assets of the
Trust and to perform the acts and services of the Custodian, subject to
applicable provisions of law and resolutions adopted by the Trustees.
Section 3.7. Affiliations of Trustees or Officers, Etc. The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust or any
Series thereof is a shareholder, director, officer, partner, trustee,
employee, manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or for any
parent or affiliate of any organization, with which a contract of the
character described in Sections 3.1, 3.2, 3.3 or 3.4 above or for services
as Custodian, Transfer Agent or disbursing agent or for providing
accounting, legal and printing services or for related services may have
been or may hereafter be made, or that any such organization, or any parent
or affiliate thereof, is a Shareholder of or has an interest in the Trust,
or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in Sections
3.1, 3.2, 3.3 or 3.4 above or for services as Custodian, Transfer Agent or
disbursing agent or for related services may have been or may hereafter be
made also has any one or more of such contracts with one or more other
partnerships, corporations, trusts, associations or other organizations, or
has other business or interests,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing
the same or create any liability or accountability to the Trust or its
Shareholders.
Section 3.8. Compliance with 1940 Act. Any contract entered into pursuant
to Sections 3.1 or 3.2 shall be consistent with and subject to the requirements
of Section 15 of the 1940 Act (including any amendment thereof or other
applicable Act of Congress hereafter enacted), as modified by any applicable
order or orders of the Commission, with respect to its continuance in effect,
its termination and the method of authorization and approval of such contract or
renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust or any Series thereof. No Trustee, officer, employee or agent of the Trust
or any Series thereof shall be subject to any personal liability whatsoever to
any Person, other than to the Trust or its Shareholders, in connection with
Trust Property or the affairs of the Trust, except to the extent arising from
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties with respect to such Person; and all such Persons shall look solely to
the Trust Property, or to the Property of one or more specific Series of the
Trust if the claim arises from the conduct of such Trustee, officer, employee or
agent with respect to only such Series, for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust or any Series
thereof, is made a party to any suit or proceeding to enforce any such liability
of the Trust or any Series thereof, he shall not, on account thereof, be held to
any personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general successor) out of
the Trust Property for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made only out of
assets of the one or more Series whose Shares were held by said Shareholder at
the time the act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this
Section 4.1 shall not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust or any Series thereof to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer, employee
or agent of the Trust or any Series thereof shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including without
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limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee, officer, employee or
agent of the Trust (including any individual who serves at its request as
director, officer, partner, trustee or the like of another organization in
which it has any interest as a shareholder, creditor or otherwise) shall be
indemnified by the Trust, or by one or more Series thereof if the claim
arises from his or her conduct with respect to only such Series, to the
fullest extent permitted by law against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust, a Series thereof or the
Shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interest of the Trust or a Series thereof;
(iii) in the event of a settlement or other disposition not involving
a final adjudication as provided in paragraph (b)(ii) resulting in a
payment by a Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office:
(A) by the court or other body approving the settlement or other
disposition;
(B) based upon a review of readily available facts (as opposed to
a full trial-type inquiry) by (x) vote of a majority of the
Non-interested Trustees acting on the matter (provided that a majority
of the Non-interested Trustees then in office act on the matter) or
(y) written opinion of independent legal counsel; or
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(C) by a vote of a majority of the Shares outstanding and
entitled to vote (excluding Shares owned of record or beneficially by
such individual).
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification to
which personnel of the Trust or any Series thereof other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 4.3 may be advanced by the Trust or a Series thereof prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust or Series
thereof shall be insured against losses arising out of any such advances;
or
(ii) a majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Non-interested Trustees act on the matter)
or an independent legal counsel in a written opinion shall determine, based
upon a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who (i) is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) is not involved in the claim, action, suit or proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be obligated to
give any bond or other security for the performance of any of his duties
hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc. No
purchaser, lender, transfer agent or other Person dealing with the Trustees or
any officer, employee or agent of the Trust or a Series thereof shall be bound
to make any inquiry concerning the validity of any transaction purporting to be
made by the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or a
Series thereof or undertaking, and every other act or thing whatsoever executed
in connection with the Trust shall be conclusively presumed to have been
executed or done by the executors thereof only in their capacity as Trustees
under this Declaration or in their capacity as officers, employees or agents of
the Trust or a Series thereof. Every written obligation, contract, instrument,
certificate, Share, other security of the Trust or a Series thereof or
undertaking made or issued by the Trustees may recite that the same is executed
or made by them not individually, but as Trustees under the Declaration, and
that the obligations
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of the Trust or a Series thereof under any such instrument are not binding upon
any of the Trustees or Shareholders individually, but bind only the Trust
Property or the Trust Property of the applicable Series, and may contain any
further recital which they may deem appropriate, but the omission of such
recital shall not operate to bind the Trustees individually. The Trustees shall
at all times maintain insurance for the protection of the Trust Property or the
Trust Property of the applicable Series, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or employee of
the Trust or a Series thereof shall, in the performance of his duties, be fully
and completely justified and protected with regard to any act or any failure to
act resulting from reliance in good faith upon the books of account or other
records of the Trust or a Series thereof, upon an opinion of counsel, or upon
reports made to the Trust or a Series thereof by any of its officers or
employees or by the Investment Adviser, the Administrator, the Distributor,
Transfer Agent, selected dealers, accountants, appraisers or other experts or
consultants selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of beneficial interest
without par value. The number of such Shares of beneficial interest authorized
hereunder is unlimited. The Trustees shall have the exclusive authority without
the requirement of Shareholder approval to establish and designate one or more
Series of shares and one or more Classes thereof as the Trustees deem necessary
or desirable. Each Share of any Series shall represent an equal proportionate
Share in the assets of that Series with each other Share in that Series. Subject
to the provisions of Section 5.11 hereof, the Trustees may also authorize the
creation of additional Series of Shares (the proceeds of which may be invested
in separate, independently managed portfolios) and additional Classes of Shares
within any Series. All Shares issued hereunder including, without limitation,
Shares issued in connection with a dividend in Shares or a split in Shares,
shall be fully paid and nonassessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust Property of
every description and the right to conduct any business hereinbefore described
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than the beneficial interest conferred by their Shares,
and they shall have no right to call for any partition or division of any
property, profits, rights or interests of the Trust nor can they be called upon
to share or assume any losses of the Trust or suffer an assessment of any kind
by virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in this Declaration. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion or
exchange rights, except as the Trustees may determine with respect to any Series
or Class of Shares.
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Section 5.3. Trust Only. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration of Trust shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion may, from
time to time without a vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times and on such terms as the Trustees may deem
best, except that only Shares previously contracted to be sold may be issued
during any period when the right of redemption is suspended pursuant to Section
6.9 hereof, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and Shares held in the treasury. The
Trustees may from time to time divide or combine the Shares of the Trust or, if
the Shares be divided into Series or Classes, of any Series or any Class thereof
of the Trust, into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust or in the Trust Property
allocated or belonging to such Series or Class. Contributions to the Trust or
Series thereof may be accepted for, and Shares shall be redeemed as, whole
Shares and/or 1/1000ths of a Share or integral multiples thereof.
Section 5.5. Register of Shares. A register shall be kept at the principal
office of the Trust or an office of the Transfer Agent which shall contain the
names and addresses of the Shareholders and the number of Shares held by them
respectively and a record of all transfers thereof. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as provided herein or
in the By-laws, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as to their use.
Section 5.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery the transfer shall be recorded on the
register of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to
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the Trustees or the Transfer Agent, but until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or registrar
nor any officer or agent of the Trust shall be affected by any notice of such
death, bankruptcy or incompetence, or other operation of law.
Section 5.7. Notices. Any and all notices to which any Shareholder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 5.8. Treasury Shares. Shares held in the treasury shall, until
resold pursuant to Section 5.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Section 2.13; (ii) with respect
to any investment advisory contract entered into pursuant to Section 3.2; (iii)
with respect to termination of the Trust or a Series or Class thereof as
provided in Section 8.2; (iv) with respect to any amendment of this Declaration
to the limited extent and as provided in Section 8.3; (v) with respect to a
merger, consolidation or sale of assets as provided in Section 8.4; (vi) with
respect to incorporation of the Trust to the extent and as provided in Section
8.5; (vii) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust or a Series thereof or the Shareholders of either; (viii) with
respect to any plan adopted pursuant to Rule 12b-1 (or any successor rule) under
the 1940 Act, and related matters; and (ix) with respect to such additional
matters relating to the Trust as may be required by this Declaration, the
By-laws or any registration of the Trust as an investment company under the 1940
Act with the Commission (or any successor agency) or as the Trustees may
consider necessary or desirable. As determined by the Trustees without the vote
or consent of shareholders, on any matter submitted to a vote of Shareholders
either (i) each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote or (ii) each dollar of net asset value (number of
Shares owned times net asset value per share of such Series or Class, as
applicable) shall be entitled to one vote on any matter on which such Shares are
entitled to vote and each fractional dollar amount shall be entitled to a
proportionate fractional vote. The Trustees may, in conjunction with the
establishment of any further Series or any Classes of Shares, establish
conditions under which the several Series or Classes of Shares shall have
separate voting rights or no voting rights. There shall be no cumulative voting
in the election of Trustees. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration or the By-laws to be taken by Shareholders. The By-laws may include
further provisions for Shareholders' votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. No annual or regular meetings of
Shareholders are required. Special meetings of the Shareholders, including
meetings involving only the holders of Shares of one or more but less than all
Series or Classes thereof, may be called at any time by the Chairman of the
Board, President, or any Vice-President of the Trust, and shall be called by the
President or the Secretary at the request, in writing or by resolution, of a
majority of the Trustees, or at the written request of the holder or holders of
ten percent (10%) or more of the
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total number of Outstanding Shares of the Trust entitled to vote at such
meeting. Meetings of the Shareholders of any Series shall be called by the
President or the Secretary at the written request of the holder or holders of
ten percent (10%) or more of the total number of Outstanding Shares of such
Series of the Trust entitled to vote at such meeting. Any such request shall
state the purpose of the proposed meeting.
Section 5.11. Series or Class Designation. (a) Without limiting the
authority of the Trustees set forth in Section 5.1 to establish and designate
any further Series or Classes, the Trustees hereby establish the following
Series, each of which consists of two Classes of Shares: John Hancock
Intermediate Maturity Government Fund, John Hancock Government Income Fund and
John Hancock High Yield Bond Fund (the "Existing Series").
(b) The Shares of the Existing Series and Class thereof herein established
and designated and any Shares of any further Series and Classes thereof that may
from time to time be established and designated by the Trustees shall be
established and designated, and the variations in the relative rights and
preferences as between the different Series shall be fixed and determined, by
the Trustees (unless the Trustees otherwise determine with respect to further
Series or Classes at the time of establishing and designating the same);
provided, that all Shares shall be identical except that there may be variations
so fixed and determined between different Series or Classes thereof as to
investment objective, policies and restrictions, purchase price, payment
obligations, distribution expenses, right of redemption, special and relative
rights as to dividends and on liquidation, conversion rights, exchange rights,
and conditions under which the several Series or Classes shall have separate
voting rights, all of which are subject to the limitations set forth below. All
references to Shares in this Declaration shall be deemed to be Shares of any or
all Series or Classes as the context may require.
(c) As to any Existing Series and Classes herein established and designated
and any further division of Shares of the Trust into additional Series or
Classes, the following provisions shall be applicable:
(i) The number of authorized Shares and the number of Shares of each
Series or Class thereof that may be issued shall be unlimited. The Trustees may
classify or reclassify any unissued Shares or any Shares previously issued and
reacquired of any Series or Class into one or more Series or one or more Classes
that may be established and designated from time to time. The Trustees may hold
as treasury shares (of the same or some other Series or Class), reissue for such
consideration and on such terms as they may determine, or cancel any Shares of
any Series or Class reacquired by the Trust at their discretion from time to
time.
(ii) All consideration received by the Trust for the issue or sale of
Shares of a particular Series or Class, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors of such Series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series, the Trustees shall allocate them among any
one or more of the Series established and designated
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from time to time in such manner and on such basis as they, in their sole
discretion, deem fair and equitable. Each such allocation by the Trustees shall
be conclusive and binding upon the Shareholders of all Series for all purposes.
No holder of Shares of any Series shall have any claim on or right to any assets
allocated or belonging to any other Series.
(iii) The assets belonging to each particular Series shall be charged
with the liabilities of the Trust in respect of that Series or the appropriate
Class or Classes thereof and all expenses, costs, charges and reserves
attributable to that Series or Class or Classes thereof, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall be allocated
and charged by the Trustees to and among any one or more of the Series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all Series and Classes for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items are capital; and each
such determination and allocation shall be conclusive and binding upon the
Shareholders. The assets of a particular Series of the Trust shall under no
circumstances be charged with liabilities attributable to any other Series or
Class thereof of the Trust. All persons extending credit to, or contracting with
or having any claim against a particular Series or Class of the Trust shall look
only to the assets of that particular Series for payment of such credit,
contract or claim.
(iv) The power of the Trustees to pay dividends and make distributions
shall be governed by Section 7.2 of this Declaration. With respect to any Series
or Class, dividends and distributions on Shares of a particular Series or Class
may be paid with such frequency as the Trustees may determine, which may be
daily or otherwise, pursuant to a standing resolution or resolutions adopted
only once or with such frequency as the Trustees may determine, to the holders
of Shares of that Series or Class, from such of the income and capital gains,
accrued or realized, from the assets belonging to that Series, as the Trustees
may determine, after providing for actual and accrued liabilities belonging to
that Series or Class. All dividends and distributions on Shares of a particular
Series or Class shall be distributed pro rata to the Shareholders of that Series
or Class in proportion to the number of Shares of that Series or Class held by
such Shareholders at the time of record established for the payment of such
dividends or distribution.
(v) Each Share of a Series of the Trust shall represent a beneficial
interest in the net assets of such Series. Each holder of Shares of a Series or
Class thereof shall be entitled to receive his pro rata share of distributions
of income and capital gains made with respect to such Series or Class net of
expenses. Upon redemption of his Shares or indemnification for liabilities
incurred by reason of his being or having been a Shareholder of a Series or
Class, such Shareholder shall be paid solely out of the funds and property of
such Series of the Trust. Upon liquidation or termination of a Series or Class
thereof of the Trust, Shareholders of such Series or Class thereof shall be
entitled to receive a pro rata share of the net assets of such Series. A
Shareholder of a particular Series of the Trust shall not be entitled to
participate in a derivative or class action on behalf of any other Series or the
Shareholders of any other Series of the Trust.
(vi) On each matter submitted to a vote of Shareholders, all Shares of
all Series and Classes shall vote as a single class; provided, however, that (1)
as to any matter with respect to which a separate vote of any Series or Class is
required by the 1940 Act or is required by attributes applicable to any Series
or Class or is required by any Rule 12b-1 plan, such
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requirements as to a separate vote by that Series or Class shall apply, (2) to
the extent that a matter referred to in clause (1) above, affects more than one
Class or Series and the interests of each such Class or Series in the matter are
identical, then, subject to clause (3) below, the Shares of all such affected
Classes or Series shall vote as a single Class; (3) as to any matter which does
not affect the interests of a particular Series or Class, only the holders of
Shares of the one or more affected Series or Classes shall be entitled to vote;
and (4) the provisions of the following sentence shall apply. On any matter that
pertains to any particular Class of a particular Series or to any Class expenses
with respect to any Series which matter may be submitted to a vote of
Shareholders, only Shares of the affected Class or that Series, as the case may
be, shall be entitled to vote except that: (i) to the extent said matter affects
Shares of another Class or Series, such other Shares shall also be entitled to
vote, and in such cases Shares of the affected Class, as the case may be, of
such Series shall be voted in the aggregate together with such other Shares; and
(ii) to the extent that said matter does not affect Shares of a particular Class
of such Series, said Shares shall not be entitled to vote (except where
otherwise required by law or permitted by the Trustees acting in their sole
discretion) even though the matter is submitted to a vote of the Shareholders of
any other Class or Series.
(vii) Except as otherwise provided in this Article V, the Trustees
shall have the power to determine the designations, preferences, privileges,
payment obligations, limitations and rights, including voting and dividend
rights, of each Class and Series of Shares. Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the authority to provide
that the holders of Shares of any Series or Class shall have the right to
convert or exchange said Shares into Shares of one or more Series or Classes of
Shares in accordance with such requirements, conditions and procedures as may be
established by the Trustees.
(viii) The establishment and designation of any Series or Classes of
Shares shall be effective upon the execution by a majority of the then Trustees
of an instrument setting forth such establishment and designation and the
relative rights and preferences of such Series or Classes, or as otherwise
provided in such instrument. At any time that there are no Shares outstanding of
any particular Series or Class previously established and designated, the
Trustees may by an instrument executed by a majority of their number abolish
that Series or Class and the establishment and designation thereof. Each
instrument referred to in this section shall have the status of an amendment to
this Declaration.
Section 5.12. Assent to Declaration of Trust. Every Shareholder, by virtue
of having become a Shareholder, shall be held to have expressly assented and
agreed to the terms hereof and to have become a party hereto.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. (a) All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust. The
Trust may require any Shareholder to pay a sales charge to the Trust, the
underwriter, or any other person designated by the Trustees upon redemption or
repurchase of Shares in such amount and upon such conditions as shall be
determined from time to time by the Trustees.
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(b) The Trust shall redeem the Shares of the Trust or any Series or Class
thereof at the price determined as hereinafter set forth, upon the appropriately
verified written application of the record holder thereof (or upon such other
form of request as the Trustees may determine) at such office or agency as may
be designated from time to time for that purpose by the Trustees. The Trustees
may from time to time specify additional conditions, not inconsistent with the
1940 Act, regarding the redemption of Shares in the Trust's then effective
Prospectus.
Section 6.2. Price. Shares shall be redeemed at a price based on their net
asset value determined as set forth in Section 7.1 hereof as of such time as the
Trustees shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be based on the net
asset value of such Shares next determined as set forth in Section 7.1 hereof
after receipt of such application. The amount of any contingent deferred sales
charge or redemption fee payable upon redemption of Shares may be deducted from
the proceeds of such redemption.
Section 6.3. Payment. Payment of the redemption price of Shares of the
Trust or any Series or Class thereof shall be made in cash or in property to the
Shareholder at such time and in the manner, not inconsistent with the 1940 Act
or other applicable laws, as may be specified from time to time in the Trust's
then effective Prospectus(es), subject to the provisions of Section 6.4 hereof.
Notwithstanding the foregoing, the Trustees may withhold from such redemption
proceeds any amount arising (i) from a liability of the redeeming Shareholder to
the Trust or (ii) in connection with any Federal or state tax withholding
requirements.
Section 6.4. Effect of Suspension of Determination of Net Asset Value. If,
pursuant to Section 6.9 hereof, the Trustees shall declare a suspension of the
determination of net asset value with respect to Shares of the Trust or of any
Series or Class thereof, the rights of Shareholders (including those who shall
have applied for redemption pursuant to Section 6.1 hereof but who shall not yet
have received payment) to have Shares redeemed and paid for by the Trust or a
Series or Class thereof shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his redemption right so
suspended may, during the period of such suspension, by appropriate written
notice of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any Share certificates
on deposit. The redemption price of Shares for which redemption applications
have not been revoked shall be based on the net asset value of such Shares next
determined as set forth in Section 7.1 after the termination of such suspension,
and payment shall be made within seven (7) days after the date upon which the
application was made plus the period after such application during which the
determination of net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
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Section 6.6. Redemption of Shareholder's Interest. The Trustees, in their
sole discretion, may cause the Trust to redeem all of the Shares of one or more
Series or Class thereof held by any Shareholder if the value of such Shares held
by such Shareholder is less than the minimum amount established from time to
time by the Trustees.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. (a) If the Trustees shall, at any
time and in good faith, be of the opinion that direct or indirect ownership of
Shares or other securities of the Trust has or may become concentrated in any
Person to an extent which would disqualify the Trust or any Series of the Trust
as a regulated investment company under the Internal Revenue Code of 1986, then
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or any Series of the Trust sufficient to
maintain or bring the direct or indirect ownership of Shares or other securities
of the Trust or any Series of the Trust into conformity with the requirements
for such qualification and (ii) to refuse to transfer or issue Shares or other
securities of the Trust or any Series of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust or any Series of the
Trust in question would result in such disqualification. The redemption shall be
effected at the redemption price and in the manner provided in Section 6.1.
(b) The holders of Shares or other securities of the Trust or any Series of
the Trust shall upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other securities of
the Trust or any Series of the Trust as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code of 1986, as amended, or to
comply with the requirements of any other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula. The Trust may also reduce the number of outstanding Shares
of the Trust or of any Series of the Trust pursuant to the provisions of Section
7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (ii)
during which trading on the New York Stock Exchange is restricted, (iii) during
which an emergency exists as a result of which disposal by the Trust or a Series
thereof of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Trust or a Series thereof fairly to determine the
value of its net assets, or (iv) during any other period when the Commission may
for the protection of Shareholders of the Trust by order permit suspension of
the right of redemption or postponement of the date of payment or redemption;
provided that applicable rules and regulations of the Commission shall govern as
to whether the conditions prescribed in clauses (ii), (iii), or (iv) exist. Such
suspension shall take effect at such time as the Trust shall specify but not
later than the close of business on the business day next following the
declaration of suspension, and thereafter there shall be no right of redemption
or payment on redemption until the Trust shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which said stock exchange shall have reopened or the period specified in (ii) or
(iii) shall have expired (as to which
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in the absence of an official ruling by the Commission, the determination of the
Trust shall be conclusive). In the case of a suspension of the right of
redemption, a Shareholder may either withdraw his request for redemption or
receive payment based on the net asset value existing after the termination of
the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The net asset value of each outstanding Share
of the Trust or of each Series or Class thereof shall be determined on such days
and at such time or times as the Trustees may determine. The value of the assets
of the Trust or any Series thereof may be determined (i) by a pricing service
which utilizes electronic pricing techniques based on general institutional
trading, (ii) by appraisal of the securities owned by the Trust or any Series of
the Trust, (iii) in certain cases, at amortized cost, or (iv) by such other
method as shall be deemed to reflect the fair value thereof, determined in good
faith by or under the direction of the Trustees. From the total value of said
assets, there shall be deducted all indebtedness, interest, taxes, payable or
accrued, including estimated taxes on unrealized book profits, expenses and
management charges accrued to the appraisal date, net income determined and
declared as a distribution and all other items in the nature of liabilities
which shall be deemed appropriate, as incurred by or allocated to the Trust or
any Series or Class of the Trust. The resulting amount which shall represent the
total net assets of the Trust or Series or Class thereof shall be divided by the
number of Shares of the Trust or Series or Class thereof outstanding at the time
and the quotient so obtained shall be deemed to be the net asset value of the
Shares of the Trust or Series or Class thereof. The net asset value of the
Shares shall be determined at least once on each business day, as of the close
of regular trading on the New York Stock Exchange or as of such other time or
times as the Trustees shall determine. The power and duty to make the daily
calculations may be delegated by the Trustees to the Investment Adviser, the
Administrator, the Custodian, the Transfer Agent or such other Person as the
Trustees by resolution may determine. The Trustees may suspend the daily
determination of net asset value to the extent permitted by the 1940 Act. It
shall not be a violation of any provision of this Declaration if Shares are
sold, redeemed or repurchased by the Trust at a price other than one based on
net asset value if the net asset value is affected by one or more errors
inadvertently made in the pricing of portfolio securities or in accruing income,
expenses or liabilities.
Section 7.2. Distributions to Shareholders. (a) The Trustees shall from
time to time distribute ratably among the Shareholders of the Trust or of a
Series or Class thereof such proportion of the net profits, surplus (including
paid-in surplus), capital, or assets of the Trust or such Series held by the
Trustees as they may deem proper. Such distributions may be made in cash or
property (including without limitation any type of obligations of the Trust or
Series or Class or any assets thereof), and the Trustees may distribute ratably
among the Shareholders of the Trust or Series or Class thereof additional Shares
of the Trust or Series or Class thereof issuable hereunder in such manner, at
such times, and on such terms as the Trustees may deem proper. Such
distributions may be among the Shareholders of the Trust or Series or Class
thereof at the time of declaring a distribution or among the Shareholders of the
Trust or Series or Class thereof at such other date or time or dates or times as
the Trustees shall determine. The Trustees may in their discretion determine
that, solely for the purposes of such distributions, Outstanding
22
<PAGE>
Shares shall exclude Shares for which orders have been placed subsequent to a
specified time on the date the distribution is declared or on the next preceding
day if the distribution is declared as of a day on which Boston banks are not
open for business, all as described in the then effective Prospectus under the
Securities Act of 1933. The Trustees may always retain from the net profits such
amount as they may deem necessary to pay the debts or expenses of the Trust or a
Series or Class thereof or to meet obligations of the Trust or a Series or Class
thereof, or as they may deem desirable to use in the conduct of its affairs or
to retain for future requirements or extensions of the business. The Trustees
may adopt and offer to Shareholders such dividend reinvestment plans, cash
dividend payout plans or related plans as the Trustees shall deem appropriate.
The Trustees may in their discretion determine that an account administration
fee or other similar charge may be deducted directly from the income and other
distributions paid on Shares to a Shareholder's account in each Series or Class.
(b) Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or a Series or Class thereof to avoid or reduce liability for
taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net income
of the Series and Classes thereof of the Trust shall be determined in such
manner as the Trustees shall provide by resolution. Expenses of the Trust or of
a Series or Class thereof, including the advisory or management fee, shall be
accrued each day. Each Class shall bear only expenses relating to its Shares and
an allocable share of Series expenses in accordance with such policies as may be
established by the Trustees from time to time and as are not inconsistent with
the provisions of this Declaration or of any applicable document filed by the
Trust with the Commission or of the Internal Revenue Code of 1986, as amended.
Such net income may be determined by or under the direction of the Trustees as
of the close of regular trading on the New York Stock Exchange on each day on
which such market is open or as of such other time or times as the Trustees
shall determine, and, except as provided herein, all the net income of any
Series or Class, as so determined, may be declared as a dividend on the
Outstanding Shares of such Series or Class. If, for any reason, the net income
of any Series or Class determined at any time is a negative amount, or for any
other reason, the Trustees shall have the power with respect to such Series or
Class (i) to offset each Shareholder's pro rata share of such negative amount
from the accrued dividend account of such Shareholder, or (ii) to reduce the
number of Outstanding Shares of such Series or Class by reducing the number of
Shares in the account of such Shareholder by that number of full and fractional
Shares which represents the amount of such excess negative net income, or (iii)
to cause to be recorded on the books of the Trust an asset account in the amount
of such negative net income, which account may be reduced by the amount,
provided that the same shall thereupon become the property of the Trust with
respect to such Series or Class and shall not be paid to any Shareholder, of
dividends declared thereafter upon the Outstanding Shares of such Series or
Class on the day such negative net income is experienced, until such asset
account is reduced to zero. The Trustees shall have full discretion to determine
whether any cash or property received shall be treated as income or as principal
and whether any item of expense shall be charged to the income or the principal
account, and their determination made in good faith shall be conclusive upon the
Shareholders. In the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much if any of the value thereof shall be treated as income, the balance, if
any, to be treated as principal.
23
<PAGE>
Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article VII, but subject to Section 5.11
hereof, the Trustees may prescribe, in their absolute discretion, such other
bases and times for determining the per Share net asset value of the Shares of
the Trust or a Series or Class thereof or net income of the Trust or a Series or
Class thereof, or the declaration and payment of dividends and distributions as
they may deem necessary or desirable. Without limiting the generality of the
foregoing, the Trustees may establish several Series or Classes of Shares in
accordance with Section 5.11, and declare dividends thereon in accordance with
Section 5.11(d)(iv).
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A SERIES OR CLASS;
AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust shall continue without limitation of time
but subject to the provisions of this Article VIII.
Section 8.2. Termination of the Trust or a Series or a Class. The Trust or
any Series or Class thereof may be terminated by (i) the affirmative vote of the
holders of not less than two-thirds of the Outstanding Shares entitled to vote
and present in person or by proxy at any meeting of Shareholders of the Trust or
the appropriate Series or Class thereof, (ii) by an instrument or instruments in
writing without a meeting, consented to by the holders of two-thirds of the
Outstanding Shares of the Trust or a Series or Class thereof; provided, however,
that, if such termination as described in clauses (i) and (ii) is recommended by
the Trustees, the vote or written consent of the holders of a majority of the
Outstanding Shares of the Trust or a Series or Class thereof entitled to vote
shall be sufficient authorization, or (iii) notice to Shareholders by means of
an instrument in writing signed by a majority of the Trustees, stating that a
majority of the Trustees has determined that the continuation of the Trust or a
Series or a Class thereof is not in the best interest of such Series or a Class,
the Trust or their respective shareholders as a result of factors or events
adversely affecting the ability of such Series or a Class or the Trust to
conduct its business and operations in an economically viable manner. Such
factors and events may include (but are not limited to) the inability of a
Series or Class or the Trust to maintain its assets at an appropriate size,
changes in laws or regulations governing the Series or Class or the Trust or
affecting assets of the type in which such Series or Class or the Trust invests
or economic developments or trends having a significant adverse impact on the
business or operations of such Series or Class or the Trust. Upon the
termination of the Trust or the Series or Class,
(i) The Trust, Series or Class shall carry on no business except for
the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust,
Series or Class and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust, Series or Class
shall have been wound up, including the power to fulfill or discharge the
contracts of the Trust, Series or Class, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property or Trust Property allocated or belonging to such
Series or Class to one or more persons at public or private sale for
consideration which may consist in whole or in
24
<PAGE>
part of cash, securities or other property of any kind, discharge or pay
its liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or Trust Property allocated or belonging to such Series or Class
that requires Shareholder approval in accordance with Section 8.4 hereof
shall receive the approval so required.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property or the remaining property of the
terminated Series or Class, in cash or in kind or partly each, among the
Shareholders of the Trust or the Series or Class according to their
respective rights.
(b) After termination of the Trust, Series or Class and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust and file with the Office of the Secretary
of The Commonwealth of Massachusetts an instrument in writing setting forth the
fact of such termination, and the Trustees shall thereupon be discharged from
all further liabilities and duties with respect to the Trust or the terminated
Series or Class, and the rights and interests of all Shareholders of the Trust
or the terminated Series or Class shall thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be amended by a
vote of the holders of a majority of the Shares outstanding and entitled to vote
or by any instrument in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of a majority of the Shares outstanding
and entitled to vote.
(b) This Declaration may be amended by a vote of a majority of Trustees,
without approval or consent of the Shareholders, except that no amendment can be
made by the Trustees to impair any voting or other rights of shareholders
prescribed by Federal or state law. Without limiting the foregoing, the Trustees
may amend this Declaration without the approval or consent of Shareholders (i)
to change the name of the Trust or any Series, (ii) to add to their duties or
obligations or surrender any rights or powers granted to them herein; (iii) to
cure any ambiguity, to correct or supplement any provision herein which may be
inconsistent with any other provision herein or to make any other provisions
with respect to matters or questions arising under this Declaration which will
not be inconsistent with the provisions of this Declaration; and (iv) to
eliminate or modify any provision of this Declaration which (a) incorporates,
memorializes or sets forth an existing requirement imposed by or under any
Federal or state statute or any rule, regulation or interpretation thereof or
thereunder or (b) any rule, regulation, interpretation or guideline of any
Federal or state agency, now or hereafter in effect, including without
limitation, requirements set forth in the 1940 Act and the rules and regulations
thereunder (and interpretations thereof), to the extent any change in applicable
law liberalizes, eliminates or modifies any such requirements, but the Trustees
shall not be liable for failure to do so.
(c) The Trustees may also amend this Declaration without the approval or
consent of Shareholders if they deem it necessary to conform this Declaration to
the requirements of applicable Federal or state laws or regulations or the
requirements of the regulated investment
25
<PAGE>
company provisions of the Internal Revenue Code of 1986, as amended, or if
requested or required to do so by any Federal agency or by a state Blue Sky
commissioner or similar official, but the Trustees shall not be liable for
failing so to do.
(d) Nothing contained in this Declaration shall permit the amendment of
this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(e) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Trustees or by the
Shareholders as aforesaid or a copy of the Declaration, as amended, and executed
by a majority of the Trustees, shall be conclusive evidence of such amendment
when lodged among the records of the Trust.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or any
Series may merge or consolidate into any other corporation, association, trust
or other organization or may sell, lease or exchange all or substantially all of
the Trust Property or Trust Property allocated or belonging to such Series,
including its good will, upon such terms and conditions and for such
consideration when and as authorized at any meeting of Shareholders called for
the purpose by the affirmative vote of the holders of two-thirds of the Shares
of the Trust or such Series outstanding and entitled to vote and present in
person or by proxy at a meeting of Shareholders, or by an instrument or
instruments in writing without a meeting, consented to by the holders of
two-thirds of the Shares of the Trust or such Series; provided, however, that,
if such merger, consolidation, sale, lease or exchange is recommended by the
Trustees, the vote or written consent of the holders of a majority of the
Outstanding Shares of the Trust or such Series entitled to vote shall be
sufficient authorization; and any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to Massachusetts law.
Section 8.5. Incorporation. The Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws of any
jurisdiction or any other trust, partnership, association or other organization
to take over all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series or to carry on any business in which the
Trust shall directly or indirectly have any interest, and to sell, convey and
transfer all or any portion of the Trust Property or the Trust Property
allocated or belonging to such Series to any such corporation, trust,
association or organization in exchange for the shares or securities thereof or
otherwise, and to lend money to, subscribe for the shares or securities of, and
enter into any contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust or such Series holds or is about to acquire
shares or any other interest. The Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring all or a portion of the Trust Property to such organization or
entities.
26
<PAGE>
ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders of
each Series a written financial report of the transactions of the Trust and
Series thereof, including financial statements which shall at least annually be
certified by independent public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Execution and Filing. This Declaration and any amendment
hereto shall be filed in the office of the Secretary of The Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its execution. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and filed with the Secretary of The Commonwealth of
Massachusetts. A restated Declaration shall, upon execution, be conclusive
evidence of all amendments contained therein and may thereafter be referred to
in lieu of the original Declaration and the various amendments thereto.
Section 10.2. Governing Law. This Declaration is executed by the Trustees
and delivered in The Commonwealth of Massachusetts and with reference to the
laws thereof, and the rights of all parties and the validity and construction of
every provision hereof shall be subject to and construed according to the laws
of said Commonwealth.
Section 10.3. Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying (a) the number or identity of Trustees or Shareholders,
(b) the due authorization of the execution of any instrument or writing, (c) the
form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact
that the number of Trustees or Shareholders present at any meeting or executing
any written instrument satisfies the requirements of this Declaration, (e) the
form of any By-laws adopted by or the identity of any officers elected by the
Trustees, or (f) the existence of any fact or facts which in any manner relate
to the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their successors.
27
<PAGE>
Section 10.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986 or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this instrument as of the
1st of July, 1996.
/s/ Edward J. Boudreau, Jr.
Edward J. Boudreau, Jr.
as Trustee and not individually,
34 Swan Road
Winchester, Massachusetts 01890
/s/ James F. Carlin
James F. Carlin
as Trustee and not individually,
619 Washington Street
Wellesley, Massachusetts 02181
/s/ William H. Cunningham
William H. Cunningham
as Trustee and not individually,
1909 Hill Oaks Court
Austin, Texas 78703
/s/ Charels F. Fretz
Charles F. Fretz
as Trustee and not individually,
Clothier Springs Road
Malvern, Pennsylvania 19355
28
<PAGE>
/s/ Harold R. Hiser, Jr.
Harold R. Hiser, Jr.
as Trustee and not individually,
123 Highland Avenue
Short Hill, New Jersey 07078
/s/ Anne C. Hodsdon
Anne C. Hodsdon
as Trustee and not individually,
135 Woodland Road
Hampton, New Hampshire 03842
/s/ Charles L. Ladner
Charles L. Ladner
as Trustee and not individually,
182 Beaumont Road
Devon, Pennsylvania 19333
/s/ Leo E. Linbeck, Jr.
Leo E. Linbeck, Jr.
as Trustee and not individually,
3404 Chevy Chase
Houston, Texas 77027
/s/ Patricia P. McCarter
Patricia P. McCarter
as Trustee and not individually,
1230 Brentford Road
Malvern, Pennsylvania 19355
/s/ Steven R. Pruchansky
Steven R. Pruchansky
as Trustee and not individually,
6920 Daniels Road
Naples, Florida 33999
29
<PAGE>
/s/ Richard S. Scipione
Richard S. Scipione
as Trustee and not individually,
4 Sentinel Road
Hingham, Massachusetts 02043
/s/ Norman H. Smith
Norman H. Smith
as Trustee and not individually,
243 Mount Oriole Lane
Linden, Virginia 22642
/s/ John P. Toolan
John P. Toolan
as Trustee and not individually,
13 Chadwell Place
Morristown, New Jersey 07960
30
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
SUFFOLK COUNTY, MASSACHUSETTS
July 1, 1996
Then personally appeared the above-named persons, 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., Steven R. Pruchansky,
Richard S. Scipione, Norman H. Smith, and John P. Toolan, who acknowledged the
foregoing instrument to be his free act and deed.
Before me,
/s/ Anne Marie White
--------------------
Anne Marie White
Notary Public
My commission expires: 10/20/00
31
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for Intermediate Maturity Government Fund in the John Hancock Income
Funds Prospectus and "Independent Auditors" in the John Hancock Intermediate
Maturity Government Fund Class A and Class B Shares Statement of Additional
Information in Post-Effective Amendment No. 35 to the Registration Statement
(Form N-1A, No. 2-66906) dated August 30, 1996.
We also consent to the incorporation by reference therein of our report dated
May 10, 1996, with respect to the financial statements and financial highlights
of the John Hancock Intermediate Maturity Government Fund (one of the portfolios
constituting John Hancock Bond Trust) in the Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
August 21, 1996
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for High Yield Bond Fund in the John Hancock Income Funds Prospectus
and "Independent Auditors" in the John Hancock High Yield Bond Fund Class A and
Class B Shares Statement of Additional Information in Post-Effective Amendment
No. 35 to the Registration Statement (Form N-1A, No. 2-66906) dated August 30,
1996.
We also consent to the incorporation by reference therein and of our report
dated December 15, 1995, with respect to the financial statements and financial
highlights of the John Hancock High Yield Bond Fund (one of the portfolios
constituting John Hancock Bond Trust) in this Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
August 21, 1996
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for Government Income Fund in the John Hancock Income Funds
Prospectus and "Independent Auditors" in the John Hancock Government Income Fund
Class A and Class B Shares Statement of Additional Information in Post-Effective
Amendment No. 35 to the Registration Statement (Form N-1A, No. 2-66906) dated
August 30, 1996.
We also consent to the incorporation by reference therein of our report dated
December 15, 1995, with respect to the financial statements and financial
highlights of the John Hancock Government Income Fund (one of the portfolios
constituting John Hancock Bond Trust) in this Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
August 21, 1996
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<TABLE> <S> <C>
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<NAME> JOHN HANCOCK INTERMEDIATE MATURITY GOVERNMENT FUND - B
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<PERIOD-START> APR-01-1995
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<INVESTMENTS-AT-COST> 38,581,102
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<NUMBER-OF-SHARES-SOLD> 2,009,478
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
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<RECEIVABLES> 30,961,428
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<REALIZED-GAINS-CURRENT> (6,768,941)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 663,879,300
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<RECEIVABLES> 30,961,428
<ASSETS-OTHER> 169,226
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<TOTAL-ASSETS> 714,333,106
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<SHARES-COMMON-PRIOR> 27,547,677
<ACCUMULATED-NII-CURRENT> 5,426
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<ACCUMULATED-NET-GAINS> (19,491,372)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 697,523,358
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<INTEREST-INCOME> 26,331,033
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<REALIZED-GAINS-CURRENT> (6,768,941)
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<NUMBER-OF-SHARES-SOLD> 2,414,651
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<SHARES-REINVESTED> 973,020
<NET-CHANGE-IN-ASSETS> 456,238,928
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 5,105,392
<AVERAGE-NET-ASSETS> 232,407,476
<PER-SHARE-NAV-BEGIN> 8.75
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<PER-SHARE-NAV-END> 9.32
<EXPENSE-RATIO> 1.89
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 192,807,071
<INVESTMENTS-AT-VALUE> 197,544,929
<RECEIVABLES> 12,742,103
<ASSETS-OTHER> 144,502
<OTHER-ITEMS-ASSETS> 4,610,862
<TOTAL-ASSETS> 210,304,538
<PAYABLE-FOR-SECURITIES> 2,640,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 625,685
<TOTAL-LIABILITIES> 3,266,485
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 223,773,206
<SHARES-COMMON-STOCK> 3,674,039
<SHARES-COMMON-PRIOR> 1,594,818
<ACCUMULATED-NII-CURRENT> 21,206
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,253,679)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 207,038,053
<DIVIDEND-INCOME> 1,006,279
<INTEREST-INCOME> 19,807,076
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<EXPENSES-NET> 3,351,237
<NET-INVESTMENT-INCOME> 17,462,118
<REALIZED-GAINS-CURRENT> (12,008,875)
<APPREC-INCREASE-CURRENT> 9,302,593
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<NUMBER-OF-SHARES-SOLD> 6,078,825
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<SHARES-REINVESTED> 135,872
<NET-CHANGE-IN-ASSETS> 34,603,437
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (9,244,804)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 183,819,589
<PER-SHARE-NAV-BEGIN> 7.33
<PER-SHARE-NII> 0.72
<PER-SHARE-GAIN-APPREC> (0.12)
<PER-SHARE-DIVIDEND> 0.73
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<PER-SHARE-NAV-END> 7.20
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 192,807,071
<INVESTMENTS-AT-VALUE> 197,544,929
<RECEIVABLES> 12,742,103
<ASSETS-OTHER> 144,502
<OTHER-ITEMS-ASSETS> 4,610,862
<TOTAL-ASSETS> 210,304,538
<PAYABLE-FOR-SECURITIES> 2,640,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 625,685
<TOTAL-LIABILITIES> 3,266,485
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<PAID-IN-CAPITAL-COMMON> 223,773,206
<SHARES-COMMON-STOCK> 25,087,383
<SHARES-COMMON-PRIOR> 21,913,963
<ACCUMULATED-NII-CURRENT> 21,206
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,253,679)
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<DIVIDEND-INCOME> 1,006,279
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<EXPENSES-NET> 3,351,237
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<REALIZED-GAINS-CURRENT> (12,008,875)
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<NUMBER-OF-SHARES-SOLD> 10,103,871
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<PER-SHARE-NAV-BEGIN> 7.33
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<PER-SHARE-GAIN-APPREC> (0.13)
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<EXPENSE-RATIO> 1.89
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 619,342,329
<INVESTMENTS-AT-VALUE> 611,723,650
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<ASSETS-OTHER> (255,555)
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<TOTAL-ASSETS> 627,905,830
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 619,342,329
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<ASSETS-OTHER> (255,555)
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<TOTAL-ASSETS> 627,905,830
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<SHARES-COMMON-PRIOR> 13,080,320
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<OVERDISTRIBUTION-NII> 47,650
<ACCUMULATED-NET-GAINS> (16,618,150)
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<NUMBER-OF-SHARES-SOLD> 1,261,126
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<NET-CHANGE-IN-ASSETS> (79,015,499)
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<PER-SHARE-NAV-END> 8.98
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 209,507,376
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<PAID-IN-CAPITAL-COMMON> 237,712,640
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<ACCUMULATED-NET-GAINS> (19,216,029)
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<ACCUM-APPREC-OR-DEPREC> 9,897,158
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<EXPENSES-NET> 1,877,349
<NET-INVESTMENT-INCOME> 10,026,948
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<NUMBER-OF-SHARES-SOLD> 3,675,757
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<PER-SHARE-NAV-END> 7.45
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 209,507,376
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<RECEIVABLES> 14,177,679
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<OTHER-ITEMS-ASSETS> 9,982,722
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<PAYABLE-FOR-SECURITIES> 476,417
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<OTHER-ITEMS-LIABILITIES> 5,099,837
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<PAID-IN-CAPITAL-COMMON> 237,712,640
<SHARES-COMMON-STOCK> 25,752,731
<SHARES-COMMON-PRIOR> 25,087,383
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (19,216,029)
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<ACCUM-APPREC-OR-DEPREC> 9,897,158
<NET-ASSETS> 228,416,002
<DIVIDEND-INCOME> 136,434
<INTEREST-INCOME> 11,767,863
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<EXPENSES-NET> 1,877,349
<NET-INVESTMENT-INCOME> 10,026,948
<REALIZED-GAINS-CURRENT> 2,037,650
<APPREC-INCREASE-CURRENT> 5,399,838
<NET-CHANGE-FROM-OPS> 17,464,436
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<DISTRIBUTIONS-OF-INCOME> 8,548,504
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<NUMBER-OF-SHARES-SOLD> 5,298,521
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<SHARES-REINVESTED> 514,447
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<PER-SHARE-NAV-END> 7.45
<EXPENSE-RATIO> 1.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
