John Hancock Funds
Government
Income
Fund
ANNUAL REPORT
May 31,1997
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Richard S. Scipione
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the
year. Stocks began 1997 on the high wires, bolstered by a near-perfect
"Goldilocks" economy -- not too hot, not too cold. In almost a
straight shot, the Dow Jones Industrial Average soared through the
7000 level for the first time in early March. Just days later, stocks
lost their footing and staged a month-long free-fall in a nervous
reaction to rising interest rates and data that showed the economy was
picking up steam. Stocks gave back all of their year's gain and
suffered their worst decline since 1990 during this period. No sooner
had real fears begun to beset investors than they were gone, erased in
a euphoric rally caused by strong earnings and no signs of inflation.
By the end of May, the Dow had risen by 14.6% and the broader Standard
& Poor's 500 Stock Index by 15.4% -- levels not many thought the
market would reach all year, let alone in five months. Bondholders
have not enjoyed the same bounty, as the bond market has mostly stayed
worried about the strength of the economy, the direction of interest
rates, and the Federal Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and
left them pondering their valuation models, since the market is now
more expensive than it has been in decades. It's impossible to know
what will happen next in the markets. But whether it's another strong
move forward or a retreat, we recommend keeping a long-term
perspective, rather than over-focusing on the market's daily twists
and turns. While the economic backdrop seems to remain near perfect,
the one thing we believe investors should be prepared for is more
market volatility. It also makes sense to do something we've always
advocated: set realistic expectations, since, as we've also seen this
year, markets can move down as fast as they go up.
Use this time of heightened volatility as an opportunity to review
your portfolio's asset allocations with your investment professional.
After such a strong advance in equities over the last two and a half
years, it could be time to rebalance your portfolio, if you haven't
already, to maintain your desired targets of diversification. As part
of that process, make sure that your investment strategies still
reflect your individual time horizons, objectives and risk tolerance.
Despite turbulence, one thing remains constant. A well-constructed
plan and a cool head can be the best tools for reaching your financial
goals.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and
Chief Executive Officer, flush right, next to second paragraph.
BY BARRY EVANS, CFA, PORTFOLIO MANAGER
John Hancock
Government Income Fund
Bond investors shift between panic and glee,
depending on economic outlook
Recently, John Hancock Government Income Fund's fiscal year end
changed from October to May. What follows is a discussion of the
Fund's performance for the 12-month period ended May 31, 1997.
This past year, the bond market came full circle -- but it wasn't a
smooth ride. Last summer's strong economy caused bond investors to
worry about rising inflation and higher interest rates. Yields
climbed, with the benchmark 30-year Treasury peaking in July at 7.19%.
During the fall, weaker economic numbers erased investors' concerns,
with 30-year Treasury yields falling to 6.35% in late November. Bond
prices rallied until December, when it became clear the economy was no
longer slowing. Yields rose in advance of the Federal Reserve's
decision to boost short-term interest rates in March. Investors
expected another increase to follow, so yields kept moving up. They
finally reversed course late in April, amid signs of weaker economic
growth. The 30-year Treasury ended May with a yield of 6.92% -- about
where it had begun a year earlier.
"This past
year, the
bond market
came full
circle..."
With little overall change in interest rates, the best performers were
mortgage-backed securities, U.S. government agencies, and foreign
government bonds that offer a yield advantage over U.S. Treasuries.
Their added income enhances total return (income plus price changes),
especially when bond prices are flat or falling. The Lehman Brothers
Mortgage Index, for example, gained 9.32% for the year ended May 31,
1997. This compared to just 7.46% for the Lehman Brothers Treasury
Index.
A 2 1/4" x 3 3/4" photo of the portfolio management team. Caption reads:
"Barry H. Evans (seated) and Fund management team members Roger Hamilton
(center) and Seth Robbins (right)."
Pie chart with heading "Portfolio Diversification" at top of left hand
column. The pie is divided into four sections. From top going
clockwise: Foreign Banks 4%; Foreign Governments 13%; U.S. Treasuries
34%; and U.S. Government Agencies 49%. A footnote below reads: "As a
percentage of net assets on May 31, 1997."
Fortunately, John Hancock Government Income Fund favored higher-
yielding bonds over Treasuries. For the 12 months ended May 31, 1997,
the Fund's Class A and Class B shares had total returns of 7.86% and
6.94%, respectively, at net asset value. By comparison, the average
general U.S. government fund returned 7.03%, according to Lipper
Analytical Services, Inc.1 Please see pages six and seven for longer-
term performance information.
"...we had
65% to
70% of
the Fund's
assets in
bonds with
a yield
advantage
over
Treasuries."
The yield advantage
For most of the year, we had 65% to 70% of the Fund's assets in bonds
with a yield advantage over Treasuries. About half of this was in
traditional mortgage bonds, which did well. Our largest stake was in
GNMA current coupon mortgages -- those with rates close to prevailing
interest rates -- because they're easy to buy and sell. In April, we
took some profits. Prices on mortgage bonds were high, and yield
premiums over Treasuries were near historic lows. Plus, we were
worried about extension risk. If interest rates are stable or rising,
homeowners are less likely to pay off their mortgages early. This has
the effect of lengthening the maturity of a mortgage bond, which
increases its risk. With hindsight, we would have been better off
keeping our high mortgage stake.
We also had 12% to 18% of the Fund's assets in dollar-denominated,
foreign government bonds, which also did well. Our Canadian bonds
benefited as the government got its fiscal house in order and improved
its credit rating. We also owned government bonds from Argentina and
Brazil that offered higher yields than U.S. government bonds, plus the
potential for long-term price gains. Both callable U.S. government
agency bonds and collateralized mortgage obli-gations (CMOs) also
helped performance. Callable agencies are bonds issued by government
agencies that can be redeemed before maturity. Over the year, we
raised our stake in agencies to 10%, up from 4%. We kept about 9% of
the Fund's assets in CMOs -- securities that separate the cash flows
of mortgage pools into various classes with different maturities.
Low-risk profile
During most of the year, we kept only 30% to 35% of the Fund's assets
in Treasuries. Our focus was on 30-year Treasuries and cash. We
avoided short- and intermediate-term Treasuries, which tend to get
hurt more than longer maturity bonds when the Fed raises rates. Even
after the Fed's March move, we steered clear of two- and three-year
maturities because their prices didn't reflect the possibility of
another rate increase. We did, however, add some five- and ten-year
Treasuries.
We also took a low-risk approach to duration -- a measure of how
sensitive the Fund is to changes in interest rates. The longer a
bond's duration, the more its price will fall as interest rates rise -
- - or rise as interest rates fall. For the most part, we kept duration
around the peer group average of five years. We shortened slightly
last summer and again during the first quarter of 1997, when the
economy looked strong and we thought interest rates might be headed
up. The only time we lengthened was last fall, when rates were
falling.
Bar chart with heading "Fund Performance" at top of left hand column. Under
the heading is the footnote: "For the 12 months ended May 31, 1997." The chart
is scaled in increments of 2% from top to bottom, with 10% on the top and 0%
at the bottom. Within the chart, there are three solid bars. The first
represents the 7.86% total return for John Hancock Government Income Fund:
Class A. The second represents the 6.94% total return for John Hancock
Government Income Fund: Class B. The third represents the 7.03% total return
for the Average general U.S. government fund. Footnote below reads: "Total
returns for John Hancock Government Income Fund are at net asset value with
all distributions reinvested. The average general U.S. government fund is
tracked by Lipper Analytical Services.(1) See the following two pages for
historical performance information."
Waiting game
The end of May left bond investors wondering what the Fed's next move
would be. In April and May, the economy seemed to ease off its torrid
first quarter pace. But slower consumer spending may have been the
result of temporary factors -- a cool spring, floods in the Midwest
and auto strikes. We'll be watching housing starts, durable goods
purchases, and growth in personal income, auto sales and retail sales
to determine whether the economy is in fact picking up steam. We
expect the Fed to raise rates at least once,which could cause prices
to drop. We'd see this as an opportunity to buy long-term Treasuries
in preparation for falling interest rates. In the meantime, we plan to
hold tight with our above-average stake in higher-yielding securities.
Long term, we believe the bond market's prospects are bright. If the
economy eventually slows, rates will fall and bond prices will rise.
Meanwhile, the supply of U.S. government bonds is shrinking as the
Federal government gets spending under control. Demand is high,
especially from foreign investors. Plus, we see no major commodity
price or inflation shocks on the horizon. All of these factors add up
to a promising future for bond investors.
"...the supply
of U.S.
government
bonds is
shrinking..."
- ---------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through
the end of the Fund's period discussed in this report. Of course,
the manager's views are subject to change as market and other
conditions warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested
dividends and do not take into account sales charges. Actual
load-adjusted performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Government Income
Fund. Total return is a performance measure that equals the sum of all
dividends and capital gains, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset per share.
Performance figures include the maximum applicable sales charge of
4.50% for Class A shares. (Prior to May 15, 1995, the maximum
applicable sales charge for Class A shares was 4.75%.) The effect of
the maximum contingent deferred sales charge for Class B shares
(maximum 5% and declining to 0% over six years) is included in Class B
performance. Remember that all figures represent past performance and
are no guarantee of how the Fund will perform in the future. Also,
keep in mind that the total return and share price of the Fund's
investments will fluctuate. As a result, your Fund's shares may be
worth more or less than their original cost, depending on when you
sell them.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---------- --------- ----------
John Hancock
Government
Income Fund:
Class A(1) (0.38%) N/A 14.74%
John Hancock
Government
Income Fund:
Class B(2) (1.56%) 28.98% 78.91%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---------- --------- ----------
John Hancock
Government
Income Fund:
Class A(1) (0.38%) N/A 5.65%
John Hancock
Government
Income Fund:
Class B(2) (1.56%) 5.22% 6.60%
YIELDS
As of May 31, 1997
SEC 30-DAY
YIELD
----------------
John Hancock
Government
Income Fund:
Class A 5.98%
John Hancock
Government
Income Fund:
Class B 5.51%
Notes to Performance
(1) Class A shares commenced on September 30, 1994.
(2) Class B shares commenced on February 23, 1988.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Government Income Fund would be worth on May 31, 1997,
assuming you had invested on the day each class of shares started and
reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Treasury Composite Index --
an unmanaged index of fixed-income securities that are similar, but
not identical, to the bonds in the Fund's portfolio.
Government Income Fund
Class A shares
Line chart with the heading Government Income Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the
hypothetical $10,000 investment made in the Government Income Fund on
September 30, 1994, before sales charge, and is equal to $12,303 as of May 31,
1997. The second line represents the value of the Lehman Brothers Treasury
Composite Index and is equal to $12,197 as of May 31, 1997. The third line
represents the Government Income Fund, after sales charge, and is equal to
$11,749 as of May 31, 1997.
Government Income Fund
Class B shares
Line chart with the heading Government Income Fund: Class B*, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines. The first line represents the value of the Lehman
Brothers Treasury Composite Index and is equal to $20,946 as of May 31, 1997.
The second line represents the value of the hypothetical $10,000 investment
made in the Government Income Fund, before sales charge, on February 23, 1988,
and is equal to $18,313 as of May 31, 1997.
*No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
May 31, 1997
- -------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
U.S. Government and agencies securities (cost - $416,240,097) $410,849,933
Foreign government bonds (cost - $85,336,335) 84,797,029
Multi-family mortgage backed bonds (cost - $9,419,506) 9,290,271
Joint repurchase agreement (cost - $3,061,000) 3,061,000
Corporate savings account 171
------------
507,998,404
Receivable for shares sold 11,461
Interest receivable 6,127,468
Other assets 170,247
------------
Total Assets 514,307,580
- -------------------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased 177,131
Payable for margin variation - Note A 227,243
Dividend payable 142,387
Payable to John Hancock Advisers, Inc. and affiliates - Note B 155,195
Accounts payable and accrued expenses 456,967
------------
Total Liabilities 1,158,923
- -------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 540,681,531
Accumulated net realized loss on investments ( 21,199,760)
Net unrealized depreciation of investments ( 6,276,783)
Distributions in excess of net investment income ( 56,331)
------------
Net Assets $513,148,657
=====================================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial interest
outstanding - unlimited number of shares authorized with no
par value, respectively)
Class A - $359,758,235/40,303,205 $ 8.93
=====================================================================================
Class B - $153,390,422/17,184,111 $ 8.93
=====================================================================================
Maximum Offering Price Per Share*
Class A - ($8.93 x 104.71%) $ 9.35
=====================================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows the
value of what the Fund owns, is due and owes on May 31, 1997. You'll also find
the net asset value and the maximum offering price per share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
- --------------------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996
OCTOBER 31, 1996 TO MAY 31, 1997(1)
---------------- ---------------------
<S> <C> <C>
Investment Income:
Interest $52,084,692 $25,913,771
----------- -----------
Expenses:
Investment management fee - Note B 3,952,669 1,999,643
Distribution and service fee - Note B
Class A 1,066,882 548,807
Class B 1,972,552 954,757
Transfer agent fee - Note B 1,098,875 505,378
Custodian fee 161,369 81,558
Printing 103,680 3,430
Financial services fee - Note B 96,304 59,313
Miscellaneous 88,326 6,723
Trustees' fees 86,595 46,761
Registration and filing fees 78,049 45,850
Auditing fee 62,382 30,025
Advisory board fee 51,407 --
Legal fees 39,250 1,005
----------- -----------
Total Expenses 8,858,340 4,283,250
- ---------------------------------------------------------------------------------------
Net Investment Income 43,226,352 21,630,521
- ---------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
on Investments and Financial Future Contracts:
Net realized gain (loss) on investments sold ( 3,115,736) 1,424,055
Net realized gain on financial futures contracts 54,519 212,039
Change in net unrealized appreciation/
depreciation of investments ( 15,006,957) ( 10,319,322)
Change in net unrealized appreciation/
depreciation of financial futures contracts 24,624 ( 298,280)
----------- -----------
Net Realized and Unrealized Loss on
Investments and Financial Futures Contracts ( 18,043,550) ( 8,981,508)
- ---------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $25,182,802 $12,649,013
=======================================================================================
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
The Statement of Operations summarizes the Fund's investment income earned and expenses
incurred in operating the Fund. It also shows net gains (losses) for the period stated.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD FROM
---------------------------- NOVEMBER 1, 1996
1995 1996 TO MAY 31, 1997(1)
----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 21,225,641 $ 43,226,352 $ 21,630,521
Net realized gain (loss) on investments sold
and financial futures contracts ( 6,768,941) ( 3,061,217) 1,636,094
Change in net unrealized appreciation/depreciation of investments
and financial futures contracts 49,303,120 ( 14,982,333) ( 10,617,602)
----------- ------------ ------------
Net Increase in Net Assets Resulting from Operations 63,759,820 25,182,802 12,649,013
----------- ------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($0.7182, $0.6475 and $0.3686 per share, respectively) ( 4,353,217) ( 30,301,964) ( 15,469,416)
Class B -- ($0.6528, $0.5817 and $0.3301 per share, respectively) ( 16,866,998) ( 12,924,388) ( 6,102,517)
Distributions in excess of net investment income
Class A -- (none, $0.0006 and none per share, respectively) -- ( 24,790) --
Class B -- (none, $0.0003 and none per share, respectively) -- ( 6,308) --
----------- ------------ ------------
Total Distributions to Shareholders ( 21,220,215) ( 43,257,450) ( 21,571,933)
----------- ------------ ------------
From Fund Share Transactions -- Net*: 413,699,323 ( 105,001,453) ( 52,375,680)
----------- ------------ ------------
Net Assets:
Beginning of period 241,284,430 697,523,358 574,447,257
------------ ------------ ------------
End of period (including undistributed net investment income
of $5,426, distributions in excess of net investment income
of $9,046 and $56,331, respectively) $697,523,358 $574,447,257 $513,148,657
============ ============ ============
*Analysis of Fund Share Transactions:
YEAR ENDED OCTOBER 31, PERIOD FROM
---------------------------------------------------------- NOVEMBER 1, 1996
1995 1996 TO MAY 31, 1997(1)
-------------------------- -------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- --------- -----------
CLASS A
Shares sold 316,821 $ 2,814,999 2,410,470 $21,862,541 917,678 $ 8,339,272
Shares issued in reorganization
- -- Note E 51,435,148 464,795,225 -- -- -- --
Shares issued to shareholders in
reinvestment of distributions 217,963 2,023,104 1,608,652 14,641,736 843,678 7,579,076
---------- ------------ ---------- ----------- --------- -----------
51,969,932 469,633,328 4,019,122 36,504,277 1,761,356 15,918,348
Less shares repurchased ( 1,498,883) ( 13,909,339) (10,824,321) ( 98,756,948) (5,149,479) ( 46,344,996)
---------- ------------ ---------- ----------- --------- -----------
Net increase (decrease) 50,471,049 $455,723,989 ( 6,805,199) ($62,252,671) (3,388,123) ($30,426,648)
========== ============ ========== =========== ========= ===========
CLASS B
Shares sold 2,414,651 $ 21,569,979 1,969,851 $18,166,729 1,548,490 $13,820,117
Shares issued in
reorganization -- Note E 243,005 2,166,726 -- -- -- --
Shares issued to shareholders in
reinvestment of distributions 973,020 8,764,619 734,239 6,692,313 361,894 3,251,553
---------- ------------ ---------- ----------- --------- -----------
3,630,676 32,501,324 2,704,090 24,859,042 1,910,384 17,071,670
Less shares repurchased ( 6,837,005) ( 74,525,990) ( 7,418,441) ( 67,607,824) (4,353,270) ( 39,020,702)
---------- ------------ ---------- ----------- --------- -----------
Net decrease ( 3,206,329) ($ 42,024,666) ( 4,714,351) ($42,748,782) (2,442,886) ($21,949,032)
========== ============ ========== =========== ========= ===========
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous
period. The difference reflects earnings less expenses, any investment gains and losses, distributions paid to shareholders and
any increase or decrease in money shareholders invested in the Fund. The footnote illustrates the number of Fund shares sold,
reinvested and repurchased during the last three periods, along with the corresponding dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key
ratios and supplemental data are listed as follows:
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
SEPTEMBER 30, 1994
(COMMENCEMENT OF YEAR ENDED OCTOBER 31, PERIOD FROM
OPERATIONS) TO ------------------------ NOVEMBER 1, 1996
OCTOBER 31, 1994 1995(1) 1996 TO MAY 31, 1997(7)
---------------- --------- -------- ---------------
<S> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 8.85 $ 8.75 $ 9.32 $ 9.07
--------- --------- -------- --------
Net Investment Income 0.06 0.72 0.65(5) 0.37(5)
Net Realized and Unrealized Gain (Loss) on
Investments, Options and Financial Futures Contracts ( 0.10) 0.57 ( 0.25) ( 0.14)
--------- --------- -------- --------
Total from Investment Operations ( 0.04) 1.29 0.40 0.23
--------- --------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.06) ( 0.72) ( 0.65) ( 0.37)
--------- --------- -------- --------
Net Asset Value, End of Period $ 8.75 $ 9.32 $ 9.07 $ 8.93
========= ========= ======== ========
Total Investment Return at Net Asset Value (2,3) ( 0.45%)(4) 15.32% 4.49% 2.57%(4)
Total Adjusted Investment Return at Net Asset Value (3) ( 0.46%)(4) 15.28% -- --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $ 223 $470,569 $396,323 $359,758
Ratio of Expenses to Average Net Assets (2) 0.12%(4) 1.19% 1.17% 1.13%(6)
Ratio of Net Investment Income to Average Net Assets (2) 0.71%(4) 7.38% 7.10% 7.06%(6)
Portfolio Turnover Rate 92% 102%(8) 106% 129%
The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net
investment income, gains (losses), dividends and total investment return of the Fund. It shows how the Fund's net asset
value for a share has changed since the end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD FROM
-------------------------------------------------------------- NOVEMBER 1, 1996 TO
1992 1993 1994 1995(1) 1996 MAY 31, 1997(7)
-------- -------- --------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 9.79 $ 9.83 $ 10.05 $ 8.75 $ 9.32 $ 9.08
-------- -------- --------- -------- -------- --------
Net Investment Income 0.80 0.70 0.65 0.65 0.58(5) 0.33(5)
Net Realized and Unrealized Gain (Loss)
on Investments, Options and Financial
Futures Contracts 0.03 0.24 ( 1.28) 0.57 ( 0.24) ( 0.15)
-------- -------- --------- -------- -------- --------
Total from Investment Operations 0.83 0.94 ( 0.63) 1.22 0.34 0.18
-------- -------- --------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.79) ( 0.72) ( 0.65) ( 0.65) ( 0.58) ( 0.33)
Distributions from Net Realized Gains
on Investments
Sold and Financial Futures Contracts -- -- ( 0.02) -- -- --
-------- -------- --------- -------- -------- --------
Total Distributions ( 0.79) ( 0.72) ( 0.67) ( 0.65) ( 0.58) ( 0.33)
-------- -------- --------- -------- -------- --------
Net Asset Value, End of Period $ 9.83 $ 10.05 $ 8.75 $ 9.32 $ 9.08 $ 8.93
======== ======== ========= ======== ======== ========
Total Investment Return
at Net Asset Value (2,3) 8.81% 9.86% ( 6.42%) 14.49% 3.84% 2.02%(4)
Total Adjusted Investment Return
at Net Asset Value (3) 8.66% 9.85% ( 6.43%) 14.47% -- --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $225,540 $293,413 $241,061 $226,954 $178,124 $153,390
Ratio of Expenses to Average Net Assets (2) 2.00% 2.00% 1.93% 1.89% 1.90% 1.86%(6)
Ratio of Net Investment Income
to Average Net Assets (2) 8.03% 7.06% 6.98% 7.26% 6.37% 6.32%(6)
Portfolio Turnover Rate 112% 138% 92% 102%(8) 106% 129%
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
(2) Excluding interest expense, which equalled 0.04% for Class A for the year ended October 31, 1995 and 0.15%,
0.01%, 0.01% and 0.02% for Class B for the years ended October 31, 1992, 1993, 1994 and 1995, respectively.
(3) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) On average month-end shares outstanding.
(6) Annualized.
(7) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
(8) Portfolio turnover excludes merger activity.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Government Income Fund on May 31, 1997. It's
divided into four main categories: U.S. government and agencies securities, foreign government bonds, multi-family
mortgage-backed bonds and short-term investments. Short-term investments, which represent the Fund's "cash" position,
are listed last.
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- -------- -------- ---------- ------
<S> <C> <C> <C> <C>
U.S.GOVERNMENT AND AGENCIES SECURITIES
Government -- U.S. (33.52%)
United States Treasury,
Bond 15.750% 11-15-01 $ 34,340 $ 46,482,624
Bond 11.875 11-15-03 17,550 22,357,121
Bond * 12.750 11-15-10 14,000 19,328,680
Bond 12.000 08-15-13 27,200 37,994,864
Bond 8.125 08-15-19 37,000 41,607,610
Note 8.000 05-15-01 4,000 4,211,240
------------
171,982,139
------------
Government -- U.S. Agencies (46.55%)
Federal Home Loan Bank,
Bond ARM 6.250# 06-11-99 1,000 1,017,500
Note 12.500 09-10-97 7,000 7,130,130
Federal Home Loan Mortgage Corp.,
CMO Remic 1094-K 7.000 06-15-21 2,300 2,268,375
CMO Remic 1608-L 6.500 09-15-23 7,000 6,402,760
CMO Remic 1634-PN 4.500 12-15-23 10,575 7,660,213
CMO Remic 1667-PE 6.000 03-15-08 11,750 11,386,455
Federal Judiciary Office Building,
Zero Coupon Bond Zero 02-15-01 250 196,603
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf 9.150 04-10-98 10,000 10,232,800
30 Yr Pass Thru Ctf 8.500 09-01-24 to 13,173 13,661,977
10-01-24
CMO Remic 1990-51-H 7.500 05-25-20 200 200,936
CMO Remic 1990-58-J 7.000 05-25-20 3,700 3,608,647
CMO Remic 1990-94-D 6.500 08-25-20 1,660 1,603,975
CMO Remic 1991-56-M 6.750 06-25-21 4,000 3,883,720
Medium Term Note 11.875 05-19-00 6,800 7,771,108
Financing Corp.,
Bond 9.400 02-08-18 4,000 4,931,240
Bond 9.650 11-02-18 1,600 2,014,992
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 6.500 03-20-23 11,543 11,838,727
30 Yr Pass Thru Ctf 7.500 05-15-23 to 92,871 92,881,043
12-15-25
30 Yr Pass Thru Ctf 8.000 09-15-23 to 25,059 25,605,997
08-15-24
30 Yr Pass Thru Ctf 11.000 01-15-14 to 8,307 9,282,041
12-15-15
Small Business Administration,
Pass Thru Ctf Ser 97-E 7.300 05-01-17 4,000 4,012,500
Tennessee Valley Authority,
Note Ser D 8.250 04-15-42 10,500 11,276,055
------------
238,867,794
------------
TOTAL U.S.GOVERNMENT AND AGENCIES SECURITIES
(Cost $416,240,097) ( 80.07%) 410,849,933
------- ------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar-Denominated Foreign
Government Bonds (16.52%)
Argentina, Republic of,
Bond Ser FRB 6.750# 03-31-05 5,335 4,978,222
Global Bond 11.375 01-30-17 3,000 3,282,000
Brazil, Republic of,
Bond Ser A FRB 6.500# 01-01-01 8,831 8,699,190
Colombia, Republic of,
Global Bond 8.375 02-15-27 4,000 3,790,000
Hydro-Quebec Corp.,
Deb Ser HK 9.375 04-15-30 5,440 6,398,093
Deb Ser GV 10.700 10-15-07 5,000 5,085,250
Deb 9.400 02-01-21 5,000 5,833,500
International Bank for
Reconstruction &
Development, Bond 7.625 01-19-23 5,700 5,943,447
Landeskreditbank Baden
- -- Wuerttemberg,
Sub Note 7.625 02-01-23 13,650 13,989,203
Ontario, Province of,
30 Yr Deb 11.500 03-10-13 12,400 13,385,924
United Mexican States,
Bond 11.375 09-15-16 6,000 6,570,000
Venezuela, Republic of,
Deb Ser DL FRB 6.500# 12-18-07 5,000 4,554,700
Bond Ser W-B 6.750 03-31-20 3,000 2,287,500
------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $85,336,335) ( 16.52%) 84,797,029
------ ------------
MULTI-FAMILY MORTGAGE-BACKED
BONDS (1.81%)
DLJ Mortgage Acceptance Corp.,
CMO 1993-M10-A2 7.200 07-15-03 4,511 4,533,442
CMO 1993-MF7-A1 7.400 06-18-03 4,692 4,756,829
------------
TOTAL MULTI-FAMILY
MORTGAGE-BACKED BONDS
(Cost $9,419,506) ( 1.81%) 9,290,271
------ ------------
TOTAL LONG-TERM BONDS
(Cost $510,995,938) ( 98.40%) 504,937,233
------ ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.60%)
Investment in a joint repurchase
agreement transaction with Swiss
Bank Corp. Dated 5-30-97,
Due 6-02-97 (Secured by U.S.
Treasury Notes, 6.375%,
Due 5-15-99 and U.S. Treasury
Bonds, 6.25% thru 11.25%,
Due 11-15-08 thru 8-15-23)
Note A 5.560 3,061 3,061,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% 171
------------
TOTAL SHORT-TERM INVESTMENTS ( 0.60%) 3,061,171
------ ------------
TOTAL INVESTMENTS ( 99.00%) $507,998,404
====== ============
* U.S. Treasury Bonds with a value of $978,860 owned by the Fund were designated as margin deposits for
future contracts at May 31, 1997.
# Represents rates effective on May 31, 1997.
The percentage shown for each investment category is the total value of that category as a percentage
of the net assets of the Fund.
See notes to financial statements.
</TABLE>
Notes to Financial Statements
NOTE A --
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of
1940. The Trust consists of three series: John Hancock Government
Income Fund (the "Fund"), John Hancock High Yield Bond Fund and John
Hancock Intermediate Maturity Government Fund. The other two series of
the Trust are reported in separate financial statements. On June 25,
1996 the Trustees voted to approve a change in the fiscal period from
October 31 to May 31. This change is effective May 31, 1997.The
investment objective of the Fund is to earn a high level of current
income consistent with preservation of capital by investing primarily
in securities that are issued or guaranteed as to principal and
interest by the U.S. government, its agencies or instrumentalities
("U.S. government securities").
The Trustees have authorized the issuance of multiple classes of
shares of the Fund, designated as Class A and Class B shares. The
shares of each class represent an interest in the same portfolio of
investments of the Fund and have equal rights to voting, redemptions,
dividends and liquidation, except that certain expenses, subject to
the approval of the Trustees, may be applied differently to each class
of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of
a class which bears distribution and service expenses under terms of a
distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which
approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by
the Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc., a wholly owned subsidiary of The Berkeley
Financial Group, may participate in a joint repurchase agreement
transaction. Aggregate cash balances are invested in one or more
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account
on the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis for
both financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investments, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $20,815,945 of a capital
loss carryforward available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gains distribution will
be made. The carryforwards expire as follows: May 31, 2002 -
$15,347,195, May 31, 2003 - $1,419,401, May 31, 2004 - $1,964,217, and
May 31, 2005 - $2,085,132. Expired capital loss carryforwards are
reclassified to capital paid-in in the year of expiration.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment
securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid
by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and will be in the
same amount, except for the effect of expenses that may be applied
differently to each class.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues and expenses of the Fund. Actual results
could differ from these estimates.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or the date of purchase over
the life of the security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are determined at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution and service fees, if any, are
calculated daily at the class level based on the appropriated net
assets of each class and the specific expense rate(s) applicable to
each class.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual fund. Expenses which are not readily
identifiable to a specific fund are allocated in such a manner as
deemed equitable, taking into consideration, among other things, the
nature and type of expense and the relative sizes of the fund.
BANK BORROWINGS The Fund is permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. The Fund had no borrowing activity for the period ended
May 31, 1997.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial
futures contracts to hedge against the effects of fluctuations in
interest rates and other market conditions. Buying futures tends to
increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying
instrument or hedge other Fund instruments. At the time the Fund
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," equal to a certain percentage
of the value of the financial futures contract being traded. Each day,
the futures contract is valued at the official settlement price of the
board of trade or U.S. commodities exchange on which it trades.
Subsequent payments, known as "variation margin," to and from the
broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments,
arising from this "mark to market," are recorded by the Fund as
unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss.
Risks of entering into futures contracts include the possibility that
there may be an illiquid market and/or that a change in the value of
the contracts may not correlate with changes in the value of the
underlying securities. In addition, the Fund could be prevented from
opening or realizing the benefits of closing out futures positions
because of position limits or limits on daily price fluctuation
imposed by an exchange.
For federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses can be affected as a result of futures
contracts.
At May 31, 1997, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- ------------------ -------- --------------
JUN 97 70 TREASURY BOND SHORT ($ 53,438)
JUN 97 100 TREASURY NOTE SHORT ( 112,187)
SEP 97 225 TREASURY NOTE SHORT ( 56,250)
--------
($221,875)
========
OPTIONS Listed options will be valued at the last quoted sales price
on the exchange on which they are primarily traded. Purchased put or
call over-the-counter options will be valued at the average of the
"bid" prices obtained from two independent brokers. Written put or
call over-the-counter options will be valued at the average of the
"asked" prices obtained from two independent brokers. Upon the writing
of a call or put option, an amount equal to the premium received by
the Fund will be included in the Statement of Assets and Liabilities
as an asset and corresponding liability. The amount of the liability
will be subsequently marked to market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the bond
market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument and buying puts and writing
calls will tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the
face (or "notional") amount of each contract at value will reflect the
maximum exposure of the Fund in these contracts, but the actual
exposure will be limited to the change in value of the contract over
the period the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset a
contract with a counterparty on a timely basis ("liquidity risk").
Exchange-traded options have minimal credit risk as the exchanges act
as counterparties to each transaction, and only present liquidity risk
in highly unusual market conditions. To minimize credit and liquidity
risks in over-the-counter option contracts, the Fund will continuously
monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's
period-end Statement of Assets and Liabilities.
There were no written option transactions for the period ended May 31,
1997.
NOTE B --
MANAGEMENT FEE, ADMINISTRATIVE SERVICES
AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, to 0.650% of the first $200,000,000 of the Fund's
average daily net asset value, 0.625% of the next $300,000,000 and
0.600% of the Fund's average daily net asset value in excess of
$500,000,000.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the period
ended May 31, 1997, net sales charges received with regard to sales of
Class A shares amounted to $105,964. Out of this amount, $12,478 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $79,732 was paid as sales commissions
to unrelated broker-dealers and $13,754 was paid as sales commissions
to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and
Sutro & Co., Inc. ("Sutro"), all of which are broker-dealers. The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company
("JHMLICo"), is the indirect sole shareholder of Distributors and was
the indirect shareholder until November 29, 1996 of John Hancock
Freedom Securities Corporation and its subsidiaries, which include
Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at
the time of redemption or the original purchase cost of the shares
being redeemed. Proceeds from the CDSC are paid to JH Funds and are
used in whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale
of Class B shares. For the period ended May 31, 1997, contingent
deferred sales charges paid to JH Funds amounted to $278,323.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution
Plan with respect to Class A and Class B pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Accordingly, the Fund will make
payments to JH Funds for distribution and service expenses, at an
annual rate not to exceed 0.25% of Class A average daily net assets
and 1.00% of Class B average daily net assets to reimburse JH Funds
for its distribution and service costs. Up to a maximum of 0.25% of
such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the
Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
JHMLICo. The Fund pays transfer agent fees based on the number of
shareholder accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax
and financial management services for the Funds. The compensation for
the period was at an annual rate of 0.01875% of the average net assets
of each Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are directors and/or officers of the Adviser and/or its
affiliates as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The
Fund makes investments into other John Hancock funds, as applicable,
to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the
Fund's books as an other asset. The deferred compensation liability
and the related other asset are always equal and are marked to market
on a periodic basis to reflect any income earned by the investment as
well as any unrealized gains or losses. At May 31, 1997, the Fund's
investments to cover the deferred compensation liability had
unrealized appreciation of $3,797.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
obligations, during the period ended May 31, 1997, aggregated
$678,604,995 and $698,712,825, respectively.
The cost of investments (excluding the corporate savings account)
owned at May 31, 1997 for federal income tax purposes was
$514,440,753. Gross unrealized appreciation and depreciation of
investments aggregated $7,461,177 and $13,903,697, respectively,
resulting in net unrealized depreciation of $6,442,520.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the period ended May 31, 1997, the Fund has reclassified
$105,873 from distributions in excess of net investment income to
capital paid-in. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as
of May 31, 1997. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to certain
differences in the computation of distributable income and capital
gains under federal tax rules versus generally accepted accounting
principles.
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
John Hancock Government Income Fund
We have audited the accompanying statement of assets and liabilities
of the John Hancock Government Income Fund (the "Fund"), one of the
portfolios constituting John Hancock Bond Trust, including the
schedule of investments, as of May 31, 1997, and the related statement
of operations for the period from November 1, 1996 to May 31, 1997 and
for the year ended October 31, 1996, the statement of changes in net
assets and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of May 31, 1997, by correspondence
with the custodian and brokers, and other auditing procedures when
replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock Government Income Fund
portfolio of John Hancock Bond Trust at May 31, 1997, the results of
its operations for the period from November 1, 1996 to May 31, 1997
and the year ended October 31, 1996, and the changes in its net assets
and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Boston, Massachusetts
July 11, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is
furnished with respect to the dividends of the Fund paid during its
taxable year ended May 31, 1997.
All of the dividends paid for the fiscal year are taxable as ordinary
income. None of the dividends qualify for the dividends received
deduction available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-
DIV in January 1998. This will reflect the total of all distributions
which are taxable for calendar year 1997.
Notes
John Hancock Funds - Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
Notes
John Hancock Funds - Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
Notes
John Hancock Funds - Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
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of the page. A box sectioned in quadrants with a triangle in upper
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lower right. A tag line below reads: "A Global Investment Management Firm."
101 Huntington Avenue, Boston, MA 02199-7603
1-800-225-5291 1-800-554-6713 (TDD)
Internet: www.jhancock.com/funds
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PAID
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Permit No. 75
This report is for the information of shareholders of the John Hancock
Government Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details
charges, investment objectives and operating policies.
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5600A 5/97
7/97
John Hancock Funds
High Yield
Bond
Fund
ANNUAL REPORT
May 31, 1997
TRUSTEES
Edward J. Boudreau, Jr.
James F. Carlin*
William H. Cunningham*
Charles F. Fretz*
Harold R. Hiser, Jr.*
Anne C. Hodsdon
Charles L. Ladner*
Leo E. Linbeck, Jr.*
Patricia P. McCarter*
Steven R. Pruchansky*
Richard S. Scipione
Lt. Gen. Norman H. Smith, USMC (Ret.)*
John P. Toolan*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the
year. Stocks began 1997 on the high wires, bolstered by a near-perfect
"Goldilocks" economy -- not too hot, not too cold. In almost a straight
shot, the Dow Jones Industrial Average soared through the 7000 level for
the first time in early March. Just days later, stocks lost their
footing and staged a month-long free-fall in a nervous reaction to
rising interest rates and data that showed the economy was picking up
steam. Stocks gave back all of their year's gain and suffered their
worst decline since 1990 during this period. No sooner had real fears
begun to beset investors than they were gone, erased in a euphoric rally
caused by strong earnings and no signs of inflation. By the end of May,
the Dow had risen by 14.6% and the broader Standard & Poor's 500 Stock
Index by 15.4% -- levels not many thought the market would reach all
year, let alone in five months. Bondholders have not enjoyed the same
bounty, as the bond market has mostly stayed worried about the strength
of the economy, the direction of interest rates, and the Federal
Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left
them pondering their valuation models, since the market is now more
expensive than it has been in decades. It's impossible to know what will
happen next in the markets. But whether it's another strong move forward
or a retreat, we recommend keeping a long-term perspective, rather than
over-focusing on the market's daily twists and turns. While the economic
backdrop seems to remain near perfect, the one thing we believe
investors should be prepared for is more market volatility. It also
makes sense to do something we've always advocated: set realistic
expectations, since, as we've also seen this year, markets can move down
as fast as they go up.
Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After
such a strong advance in equities over the last two and a half years, it
could be time to rebalance your portfolio, if you haven't already, to
maintain your desired targets of diversification. As part of that
process, make sure that your investment strategies still reflect your
individual time horizons, objectives and risk tolerance. Despite
turbulence, one thing remains constant. A well-constructed plan and a
cool head can be the best tools for reaching your financial goals.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
BY ARTHUR CALAVRITINOS, CFA, PORTFOLIO MANAGER
John Hancock
High Yield Bond Fund
Volatility rules the bond market over inflation concerns
Recently, the Fund's fiscal year end changed from October to May. What
follows is a discussion of the Fund's performance for the 12 months
ended May 31, 1997.
Bonds had to work hard over the last 12 months to move ahead. Since the
period began last June, bond investors have been in a stew over whether
the economy was heating up and if inflation would rear its head.
Interest rates followed the economic news up and down as investor
sentiment swung back and forth between euphoria and woe. Strong
employment figures in March sparked a big move up in rates, as the
market began to anticipate that the Federal Reserve would raise short-
term rates to temper the economy and pre-empt inflation -- which it did.
By the end of May, inflation fears calmed and bonds stabilized.
"The favorable
economic
environment
has helped
high-yield
companies..."
High-yield bonds felt the effects of the market volatility, but they
continued to outperform U.S. Treasury bonds by a wide margin. For the 12
months ending May 31, 1997, Treasury bonds with 10-year maturities
gained 7.66%, while the broad high-yield market returned 13.26%, as
measured by the Merrill Lynch high-yield bond index. High-yield bonds
with a credit rating of single B, which are one of the Fund's focuses,
advanced 14.14%. A combination of factors continues to bolster the high-
yield bond market. Demand for these higher-yielding securities remains
very strong, as investors continue to seek more yield in a relatively
low interest-rate environment. Although higher-yield bonds carry a
greater level of risk, since their credit ratings are below investment
grade, investors have become more confident in the sector as it has
performed well over the past several years. The favorable economic
environment has also helped high-yield companies keep defaults to a
minimum.
A 2" x 3 1/2" photo of the portfolio management team at bottom right.
Caption reads: " Arthur Calavritinos (right) and Fund management team
members: (l-r) Fred Cavanaugh, Linda Carter and Jamie Kellogg."
Top Five Securities
1. Gaylord Container 4.3%
2. Gulf States Steel 3.4%
3. Northwest Airlines 3.3%
4. NS Group 2.8%
5. Nextel 2.7%
Footnote reads:
As a percentage of net assets on May 31, 1997
"...many of
our cyclical
holdings
helped boost
performance."
In this environment, John Hancock High Yield Bond Fund turned in a
strong performance both on an absolute and relative basis. For the 12
months ended May 31, 1997, the Fund's Class A and Class B shares posted
total returns of 17.08% and 16.21%, respectively, at net asset value.
That compared favorably with the 13.13% return of the average high
current yield fund, according to Lipper Analytical Services, Inc.1
Longer-term performance information can be found on pages six and seven.
Cyclical, retail companies boost performance
As always, we continued to apply our in-depth company analysis to find
credits whose business prospects we believe make them worth the extra
risk. Where possible, we like to buy companies opportunistically, at
times when their bonds are relatively underpriced. That way, the Fund
can not only receive the bonds' high current income, but also have the
potential to realize price appreciation. In addition to knowing each
company we invest in, an important element in our decision-making
process involves an overall knowledge of the industries in which our
companies operate. Sometimes, that leads us to companies that do not
issue high-yield bonds, at which point we may selectively choose to take
advantage of the Fund's ability to own stock.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investments"; the header for the right column is "
Recent performance ... and what's behind the numbers." The first
listing is Big 5 Holdings followed by an up arrow and the phrase
"Rebounding California economy." The second listing is Bowater followed
by an up arrow and the phrase "Shrinking newsprint capacity helps
dominant company." The third listing is Echostar followed by a flat
arrow and the phrase "Failed takeover bid."
Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
Over the last 12 months, many of our cyclical holdings -- including our
paper and steel companies -- helped boost performance. In the paper
area, our top holding, Gaylord Container, contributed significantly to
performance, as its stock rose by more than 20% from the time we bought
it at the end of last year. Near the end of the period, we added Stone
Container, the largest liner board manufacturer in the United States, at
what we believe is an opportune moment. The industry has recently been
hurt by an increase in capacity that has overshadowed demand. But we're
comfortable with Stone's pre-eminent industry position and believe the
bonds have the potential to appreciate once the added supply makes its
way into the system. In the meantime, the bonds have an attractive
12 1/4% coupon and the company has strong, unduplicable assets. Having
what we define as "strategic assets" is a key component in our company
selection criteria. Another good performer was paper company Bowater,
which makes newsprint, a low-end part of the paper industry now ignored
by many paper companies. Stagnant capacity and strong assets have helped
Bowater become the top U.S. newsprint company, and its stock has risen
34% since January.
Among our retail holdings, Hills Stores, a Midwestern chain, has seen
its bond prices rise since we bought them at an inexpensive price after
the company turned in several disappointing quarters. Another strong
retail performer was Big 5 Holdings, a California-based sporting goods
store whose bonds we also bought for an attractive price after the
company suffered from temporary weather-related setbacks. But we were
confident not only in company management, but also in the rebounding
California economy, and the bond prices have risen nicely. On the flip
side, another of our California plays, Barry's Jewelers, continues to
disappoint. It, too, had the benefit of the same good California
environment, but despite several leadership changes it has been unable
to work out its control and management problems. The company recently
filed for bankruptcy. We're holding on to the bonds, however, because we
believe there's still value in the company.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the 12 months ended May 31,
1997." The chart is scaled in increments of 5% from top to bottom, with
20% at the top and 0% at the bottom. Within the chart, there are three
solid bars. The first represents the 17.08% total return for John
Hancock High Yield Bond Fund: Class A. The second represents the 16.21%
total return for John Hancock High Yield Bond Fund: Class B. The third
represents the 13.13% total return for the average high current yield
fund. Footnote below reads: "Total returns for John Hancock High Yield
Bond Fund are at net asset value with all distributions reinvested. The
average high current yield fund is tracked by Lipper Analytical
Services.(1) See the following two pages for historical performance
information."
Telecommunications mixed
We had mixed results with our telecommunications holdings. Nextel
Communications' sales rose after it worked out the bugs of its new
cellular telephone technology and demand picked up. On the other hand,
Echostar, makers of satellite cable TV dishes, suffered when a takeover
deal fell apart. But we still believe not only in this company's
strategic assets, but also in the potential for another merger to
succeed.
To come
We're remaining cautious about the outlook for high-yield bonds in the
near term. After the strong price advances these bonds have experienced
over the last several years, it's harder to find well priced, worthy
credits and attractive yields. With all the price gains, the yield
advantage that high-yield bonds enjoy over Treasuries has shrunk to
historically low levels. That raises the specter that investors could
begin to upgrade the credit quality of their portfolios. It also means
that high-yield bondholders are being paid less to take, in most
instances, the same amount of risk. A perfect example is food company
DiGiorgio, which recently called in its 12% bonds, some of which the
Fund held and tendered for a significantly higher price than what we had
paid for them. While the Fund benefited from the price gain, it no
longer holds those high coupon bonds. In their place, the company was
able to issue new ones paying a 10% coupon, even though the company and
the business risk remained essentially the same.
"...we still
believe
high-yield
bonds remain
attractive
over the
long term."
But we still believe high-yield bonds remain attractive over the longer
term, especially as long as demand remains strong, which we believe it
will in this low interest rate environment.
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
See the Fund's prospectus for a detailed discussion of the risks of
investing in high-yield bonds.
1 Figures from Lipper Analytical Services, Inc. include reinvested
dividends and do not take into account sales charges. Actual load-
adjusted performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock High Yield Bond Fund.
Total return is a performance measure that equals the sum of all
dividends and capital gains, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 4.50%
for Class A shares. (Prior to May 15, 1995, the maximum applicable sales
charge for Class A shares was 4.75%.) The effect of the maximum
contingent deferred sales charge for Class B shares (maximum 5% and
declining to 0% over six years) is included in Class B performance.
Remember that all figures represent past performance and are no
guarantee of how the Fund will perform in the future. Also, keep in mind
that the total return and share price of the Fund's investments will
fluctuate. As a result, your Fund's shares may be worth more or less
than their original cost, depending on when you sell them.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---------- ---------- ----------
John Hancock High Yield Bond Fund:
Class A(1) 8.63% N/A 33.05%
John Hancock High Yield Bond Fund:
Class B(2) 7.90% 60.97% 126.41%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
---------- ---------- ----------
John Hancock High Yield Bond Fund:
Class A(1) 8.63% N/A 7.91%
John Hancock High Yield Bond Fund:
Class B(2) 7.90% 9.99% 9.05%
YIELDS
As of May 31, 1997
SEC 30-DAY
YIELD
----------
John Hancock High Yield Bond Fund:
Class A 9.42%
John Hancock High Yield Bond Fund:
Class B 9.12%
Notes to Performance
(1) Class A shares commenced on June 30, 1993.
(2) Class B shares commenced on October 26, 1987.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock High Yield Bond Fund would be worth on May 31, 1997, assuming
you had invested on the day each class of shares started and reinvested
all distributions. For comparison, we've shown the same $10,000
investment in the Lehman Brothers High Yield Bond Index -- an unmanaged
index of fixed-income securities that are similar, but not identical, to
the bonds in the Fund's portfolio.
High Yield Bond Fund
Class A shares
Line chart with the heading High Yield Bond Fund: Class A, representing
the growth of a hypothetical $10,000 investment over the life of the
fund. Within the chart are three lines. The first line represents the
value of the hypothetical $10,000 investment made in the High Yield Bond
Fund on June 30, 1993, before sales charge, and is equal to $14,588 as
of May 31, 1997. The second line represents the value of the Lehman
Brothers High Yield Bond Index and is equal to $14,152 as of May 31,
1997. The third line represents the High Yield Bond Fund, after sales
charge, and is equal to $13,931 as of May 31, 1997.
High Yield Bond Fund
Class B shares
Line chart with the heading High Yield Bond Fund: Class B*, representing
the growth of a hypothetical $10,000 investment over the life of the
fund. Within the chart are two lines. The first line represents the
value of the Lehman Brothers High Yield Bond Index and is equal to
$25,387 as of May 31, 1997. The second line represents the value of the
hypothetical $10,000 investment made in the High Yield Bond Fund on
October 26, 1987, before sales charge, and is equal to $23,685 of May
31, 1997.
* No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
May 31, 1997
- --------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $365,946,735) $373,375,696
Common and preferred stocks and warrants (cost - $71,864,080) 80,562,335
Joint repurchase agreement (cost - $9,998,000) 9,998,000
Corporate savings account 3,206
------------
463,939,237
Receivable for investments sold 8,042,013
Receivable for shares sold 2,583,447
Dividends receivable 16,592
Foreign tax receivable 460
Interest receivable 9,793,420
Other assets 51,913
------------
Total Assets 484,427,082
- --------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 6,801,124
Payable for shares repurchased 87,598
Payable for forward foreign currency exchange contracts sold - Note A 397
Payable for closed forward foreign currency exchange contracts - Note A 105,582
Payable to John Hancock Advisers, Inc. and affiliates - Note B 302,051
Dividend payable 37,291
Accounts payable and accrued expenses 144,150
------------
Total Liabilities 7,478,193
- --------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 465,263,791
Accumulated net realized loss on investments and foreign currency
transactions ( 4,858,582)
Net unrealized appreciation of investments and foreign currency
transactions 16,127,794
Undistributed net investment income 415,886
------------
Net Assets $476,948,889
======================================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial interest
outstanding - 125,000,000 shares authorized with $0.01 per share par
value, respectively)
Class A - $97,925,134/12,436,729 $ 7.87
======================================================================================
Class B - $379,023,755/48,136,933 $ 7.87
======================================================================================
Maximum Offering Price Per Share*
Class A - ($7.87 x 104.71%) $ 8.24
======================================================================================
The Statement of Assets and Liabilities is the Fund's balance sheet and shows the value
of what the Fund owns, is due and owes on May 31, 1997. You'll also find the net asset
value and the maximum offering price per share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
- --------------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996
OCTOBER 31, 1996 TO MAY 31, 1997(1)
---------------- ------------------
<S> <C> <C>
Investment Income:
Interest $26,344,513 $23,913,256
Dividends (net of foreign withholding taxes
of $688 and $3,416) 516,328 1,209,527
--------------- --------------
26,860,841 25,122,783
--------------- --------------
Expenses:
Investment management fee - Note B 1,326,701 1,204,001
Distribution and service fee - Note B
Class A 94,091 111,924
Class B 1,940,909 1,796,947
Transfer agent fee - Note B 318,480 287,062
Custodian fee 99,931 56,420
Registration and filing fees 85,256 110,681
Auditing fee 48,290 26,000
Financial services fee - Note B 37,927 42,106
Printing 36,514 13,645
Trustees' fees 26,487 29,747
Advisory board fee 15,911 --
Legal fees 10,110 4,026
Miscellaneous 4,379 2,609
--------------- --------------
Total Expenses 4,044,986 3,685,168
- --------------------------------------------------------------------------------------
Net Investment Income 22,815,855 21,437,615
- --------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold 8,079,688 7,901,905
Net realized gain (loss) on foreign currency
transactions ( 50,098) 234,118
Change in net unrealized appreciation/depreciation
of investments 3,036,975 8,480,354
Change in net unrealized appreciation/depreciation
of foreign currency transactions 48,361 64,784
--------------- --------------
Net Realized and Unrealized Gain on Investments
and Foreign Currency Transactions 11,114,926 16,681,161
- --------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations $33,930,781 $38,118,776
======================================================================================
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
The Statement of Operations summarizes the Fund's investment income earned and expenses
incurred in operating the Fund. It also shows net gains (losses) for the period stated.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD FROM
--------------------------- NOVEMBER 1, 1996
1995 1996 TO MAY 31, 1997(1)
----------- ---------- -------------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 17,462,118 $ 22,815,855 $ 21,437,615
Net realized gain (loss) on investments
sold and foreign currency transactions ( 12,008,875) 8,029,590 8,136,023
Change in net unrealized appreciation/
depreciation of investments and foreign
currency transactions 9,302,593 3,085,336 8,545,138
--------------- -------------- ---------------
Net Increase in Net Assets Resulting from
Operations 14,755,836 33,930,781 38,118,776
--------------- -------------- ---------------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($0.7310, $0.7560 and
$0.4529 per share, respectively) ( 1,845,748) ( 3,878,979) ( 4,535,707)
Class B -- ($0.6738, $0.7024 and
$0.4192 per share, respectively) ( 15,681,410) ( 18,935,736) ( 16,798,872)
--------------- -------------- ---------------
Total Distributions to Shareholders ( 17,527,158) ( 22,814,715) ( 21,334,579)
--------------- -------------- ---------------
From Fund Share Transactions -- Net*: 37,374,759 77,581,499 164,429,074
--------------- -------------- ---------------
Net Assets:
Beginning of period 172,434,616 207,038,053 295,735,618
--------------- -------------- ---------------
End of period (including undistributed
net investment income of $21,206,
distributions in excess of net investment
income of $51,675 and undistributed net
investment income of $415,886,
respectively) $207,038,053 $295,735,618 $476,948,889
=============== =============== ===============
* Analysis of Fund Share Transactions:
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD FROM
------------------------------------------------- NOVEMBER 1, 1996
1995 1996 TO MAY 31, 1997(1)
---------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold 6,078,825 $43,382,586 8,767,330 $ 65,045,830 9,294,156 $ 71,427,228
Shares issued to
shareholders in
reinvestment of
distributions 135,872 966,256 274,586 2,040,722 296,915 2,292,966
------------- ------------- ------------- ------------- ------------- -------------
6,214,697 44,348,842 9,041,916 67,086,552 9,591,071 73,720,194
Less shares
repurchased ( 4,135,476) ( 29,488,564) ( 5,722,882) ( 42,359,728) ( 4,147,415) ( 31,953,487)
------------- ------------- ------------- ------------- ------------- -------------
Net increase 2,079,221 $14,860,278 3,319,034 $ 24,726,824 5,443,656 $ 41,766,707
============= ============= ============= ============= ============= =============
CLASS B
Shares sold 10,103,871 $71,810,000 16,014,384 $119,134,111 22,945,002 $176,520,972
Shares issued to
shareholders in
reinvestment of
distributions 1,007,375 7,154,628 1,109,704 8,233,250 848,334 6,554,413
------------- ------------- ------------- ------------- ------------- -------------
11,111,246 78,964,628 17,124,088 127,367,361 23,793,336 183,075,385
Less shares
repurchased ( 7,937,826) ( 56,450,147) (10,029,960) ( 74,512,686) ( 7,837,914) ( 60,413,018)
------------- ------------- ------------- ------------- ------------- -------------
Net increase 3,173,420 $22,514,481 7,094,128 $ 52,854,675 15,955,422 $122,662,367
============= ============= ============= ============= ============= =============
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has
changed since the end of the previous period. The difference reflects earnings less
expenses, any investment and foreign currency gains and losses, distributions paid to
shareholders and any increase or decrease in money shareholders invested in the Fund.
The footnote illustrates the number of Fund shares sold, reinvested and repurchased
during the last three periods, along with the corresponding dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key
ratios and supplemental data are listed as follows:
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM JUNE 30, 1993 YEAR ENDED OCTOBER 31, PERIOD FROM
(COMMENCEMENT OF OPERATIONS) ---------------------------------- NOVEMBER 1, 1996
TO OCTOBER 31, 1993 1994 1995(1) 1996 TO MAY 31, 1997(6)
---------------------------- --------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 8.10 $ 8.23 $ 7.33 $ 7.20 $ 7.55
-------- -------- -------- -------- --------
Net Investment Income 0.33 0.80(2) 0.72 0.76(2) 0.45
Net Realized and Unrealized Gain (Loss)
on Investments and
Foreign Currency Transactions 0.09 ( 0.83) ( 0.12) 0.35 0.32
-------- -------- -------- -------- --------
Total from Investment Operations 0.42 ( 0.03) 0.60 1.11 0.77
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.29) ( 0.82) ( 0.73) ( 0.76) ( 0.45)
Distributions from Net Realized Gain on
Investments Sold -- ( 0.05) -- -- --
-------- -------- -------- -------- --------
Total Distributions ( 0.29) ( 0.87) ( 0.73) ( 0.76) ( 0.45)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 8.23 $ 7.33 $ 7.20 $ 7.55 $ 7.87
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) 4.96%(4) ( 0.59%) 8.83% 16.06% 10.54%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $ 2,344 $11,696 $26,452 $52,792 $97,925
Ratio of Expenses to Average Net Assets 0.91%(5) 1.16% 1.16% 1.10% 1.05%(5)
Ratio of Net Investment Income to Average Net
Assets 12.89%(5) 10.14% 10.23% 10.31% 10.19%(5)
Portfolio Turnover Rate 204% 153% 98% 113% 78%
Average Brokerage Commission Rate (7) -- -- -- -- $0.0583
The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net
investment income, gains (losses), dividends and total investment return of the Fund. It shows how the Fund's net asset
value for a share has changed since the end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31 PERIOD FROM
----------------------------------------------------- NOVEMBER 1, 1996
1992 1993 1994 1995(1) 1996 TO MAY 31, 1997(6)
------- ------- ------- --------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of
Period $ 7.44 $ 7.43 $ 8.23 $ 7.33 $ 7.20 $ 7.55
-------- -------- -------- -------- -------- --------
Net Investment Income 0.87 0.80 0.74(2) 0.67 0.70(2) 0.42
Net Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency Transactions ( 0.04) 0.75 ( 0.83) ( 0.13) 0.35 0.32
-------- -------- -------- -------- -------- --------
Total from Investment Operations 0.83 1.55 ( 0.09) 0.54 1.05 0.74
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment
Income ( 0.84) ( 0.75) ( 0.76) ( 0.67) ( 0.70) ( 0.42)
Distributions from Net Realized
Gain on Investments Sold -- -- ( 0.05) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ( 0.84) ( 0.75) ( 0.81) ( 0.67) ( 0.70) ( 0.42)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 7.43 $ 8.23 $ 7.33 $ 7.20 $ 7.55 $ 7.87
======== ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value (3) 11.56% 21.76% ( 1.33%) 7.97% 15.24% 10.06%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) $98,560 $154,214 $160,739 $180,586 $242,944 $379,024
Ratio of Expenses to Average Net
Assets 2.25% 2.08% 1.91% 1.89% 1.82% 1.80%(5)
Ratio of Net Investment Income to
Average Net Assets 11.09% 10.07% 9.39% 9.42% 9.49% 9.45%(5)
Portfolio Turnover Rate 206% 204% 153% 98% 113% 78%
Average Brokerage Commission Rate (7) -- -- -- -- -- $0.0583
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) Annualized.
(6) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
(7) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1997
- --------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by High Yield Bond Fund on May 31, 1997. It's
divided into three main categories: bonds, common and preferred stocks and warrants, and short-term investments. The
bonds are further broken down by industry groups. Under each industry group is a list of the bonds owned by the Fund.
Short-term investments, which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BONDS
Automobile/Trucks (2.41%)
Am General Corp., Sr Note Ser B 05-01-02 12.875% B $ 4,500 $ 4,185,000
J.B. Poindexter & Co., Inc., Sr Note 05-15-04 12.500 B- 5,750 5,778,750
Key Plastics, Inc., Sr Note 11-15-99 14.000 B+ 1,365 1,521,975
-------------
11,485,725
-------------
Banks - Foreign (0.10%)
Sumitomo Bank International Finance N.V.,
Gtd Sub Note (Japan) 05-31-01 # (R) 0.750 A2 50,000 487,459
-------------
Building (0.65%)
Fortress Group, Inc., Sr Note 05-15-03 13.750 B3 3,000 3,075,000
-------------
Chemicals (0.42%)
OPP Petroquimica S.A., Bond (Brazil) 10-29-04 (R) (Y) 11.000 B 2,000 2,025,000
-------------
Computers (0.41%)
Computervision Corp., Sr Sub Note 08-15-99 11.375 B- 2,000 1,960,000
-------------
Containers (7.39%)
Gaylord Container Corp., Sr Sub Disc Deb 05-15-05 12.750 B- 15,500 16,972,500
MVE, Inc., Sr Sec Note 02-15-02 12.500 B+ 2,000 2,030,000
Owens-Illinois, Inc., Sr Sub Note 04-01-99 10.250 BB- 1,700 1,704,250
Riverwood International Corp., Gtd Sr Sub Note
04-01-08 10.875 B- 5,000 4,550,000
Stone Container Corp., Unit (Sr Sub Deb &
Supplemental Interest Cert) 04-01-02 12.250 B- 9,750 9,993,750
-------------
35,250,500
-------------
Diversified Operations (1.25%)
Jordan Industries, Inc., Sr Sub Deb 04-01-09,
Step Coupon (11.75%, 04-01-02) (A) (R) Zero B 11,259 5,967,113
-------------
Electronics (0.39%)
Electronic Retailing Systems International, Inc.,
Unit (Sr Disc Note & Warrant) 02-01-04 (R) 13.250 B 1,000 685,000
Intertek Finance Plc, Sr Sub Note (United Kingdom)
11-01-06 (Y) 10.250 B2 1,150 1,190,250
-------------
1,875,250
-------------
Food (2.20%)
Specialty Foods Acquisition Corp., Sr Sub Note
Ser B 08-15-03 11.250 B- 9,000 8,257,500
TLC Beatrice International Holdings Inc., Sr
Note 10-01-05 11.500 BB- 2,000 2,225,000
-------------
10,482,500
-------------
Food Distribution (0.45%)
Americold Corp., Sr Sub Note 05-01-08 12.875 B- 2,000 2,120,000
-------------
Glass Products (1.09%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R) (Y) 11.375 B+ 5,000 5,193,500
-------------
Government - Foreign (0.46%)
United Mexican States, Bond (Mexico) 09-15-16 (Y) 11.375 BB 2,000 2,190,000
-------------
Government - U.S. (0.81%)
United States Treasury, Bond 02-15-27 6.625 AAA 4,000 3,853,760
-------------
Insurance (0.21%)
Italy, Republic of, Privatization Exchangeable Note
(Italy) 06-28-01 (Y) 5.000 AA3 1,000 987,500
-------------
Leisure (11.04%)
Argosy Gaming Co., Sub Note 06-01-01 12.000 B- 250 182,500
Casino America, Inc., Sr Sec Note 08-01-03 12.500 B 11,200 11,396,000
Casino Magic Corp. - Louisiana, 1st Mtg 08-15-03 (R) 13.000 B- 5,500 4,620,000
Coast Hotels & Casinos, Inc., 1st Mtg Ser B 12-15-02 13.000 B 3,000 3,330,000
GB Property Funding Corp., 1st Mtg 01-15-04 10.875 B 10,000 8,850,000
Lady Luck Gaming Corp., 1st Mtg 03-01-01 11.875 B- 2,750 2,753,437
Showboat, Inc., Sr Sub Note 08-01-09 13.000 B 2,000 2,320,000
Trump Atlantic City Associates, 1st Mtg Note 05-01-06 11.250 BB- 7,000 6,860,000
Trump Castle Funding, Inc., 1st Mtg Note 11-15-03 11.750 CAA 3,000 2,565,000
Trump Hotels & Casino Resorts Funding, Inc./Holdings,
L.P., Sr Sec Note 06-15-05 15.500 B+ 8,520 9,755,400
-------------
52,632,337
-------------
Manufacturing (3.23%)
Geberit International, S.A., Sr Sub Note (Luxembourg)
04-15-07 (R) (Y) # 10.125 B+ 100 62,043
International Semi-Tech Microelectronics Inc.,
Sr Disc Note 08-15-03, Step Coupon (11.50%, 08-15-00)
(Canada) (A) (Y) Zero B+ 17,282 10,542,020
Remington Arms Company, Inc., Sr Sub Note 12-01-03 (R) 10.000 B 4,000 3,200,000
Tokheim Corp., Sr Sub Note Ser B 08-01-06 11.500 B3 1,500 1,612,500
-------------
15,416,563
-------------
Media (3.12%)
American Telecasting, Inc.,
Sr Disc Note Ser B 08-15-05, Step Coupon (14.50%,
08-15-00) (A) Zero CCC+ 2,000 620,000
Australis Media Ltd., Unit (Sr Sub Disc Note 05-15-03
& Warrant), Step Coupon (15.75%, 05-15-00) (Australia)
(A) (Y) Zero B 3,000 1,860,000
Marcus Cable Co., L.P., Sr Disc Note 12-15-05, Step
Coupon (14.25%, 6-15-00) (A) Zero B 12,000 9,120,000
Radio One Inc., Sr Sub Note 05-15-04, Step Coupon
(12.00%, 05-15-00) (A) (R) 7.000 B 2,000 1,765,000
Scandinavian Broadcasting System S.A., Sub Deb
(Luxembourg) 08-01-05 (Y) 7.250 B 1,555 1,539,450
-------------
14,904,450
-------------
Oil & Gas (1.62%)
Kelley Oil & Gas Partners Ltd.,
Sub Note 12-15-99 7.875 B- 4,550 4,186,000
Deb 04-01-00 8.500 B- 1,500 1,440,000
Maxus Energy Corp., Deb 11-15-15 11.500 BB- 2,000 2,100,000
-------------
7,726,000
-------------
Paper & Paper Products (4.66%)
APP Finance II Mauritius Ltd., Bond (Indonesia)
12-29-49 (R) (Y) 12.000 B+ 5,500 5,486,250
APP International Finance Co. B.V., Gtd Sec Note
(Indonesia) 10-01-05 (R) (Y) 11.750 BB 750 808,125
Florida Coast Paper LLC, 1st Mtg Ser B 06-01-03 12.750 B 4,000 4,040,000
Grupo Industrial Durango, S.A., Note (Mexico)
08-01-03 (Y) # 12.625 BB- 615 688,800
Indah Kiat International Finance Co., Gtd Sec Bond
Ser C (Indonesia) 06-15-06 (Y) 12.500 BB 2,500 2,812,500
Repap New Brunswick, Sr Note (Canada) 04-15-05, (Y) 10.625 CC 8,000 7,480,000
Uniforet Inc., Gtd Sr Sec Note (Canada) 10-15-06 (Y) 11.125 B 1,000 910,000
-------------
22,225,675
-------------
Pollution Control (1.83%)
ICF Kaiser International, Inc.,
Sr Note Ser B 12-31-03 13.000 B 1,000 1,050,000
Sr Sub Note 12-31-03 13.000 B- 750 750,000
Unit (Sr Sub Note & Warrant) 12-31-03 13.000 B- 7,000 6,930,000
-------------
8,730,000
-------------
Printing (0.43%)
Sullivan Graphics, Inc., Sr Sub Note 08-01-05 12.750 CAA 2,000 2,030,000
-------------
Protection (1.06%)
Mosler, Inc., Sr Note Ser A 04-15-03 11.000 CCC- 5,500 5,060,000
-------------
Retail (5.31%)
Barry's Jewelers, Inc., Sr Note 12-22-00 11.000 CAA 6,000 3,600,000
Big 5 Holdings, Sr Sub Note Ser B 09-15-02 13.625 B- 7,940 8,416,400
Duane Reade Corp., Sr Note 09-15-02 12.000 B- 636 667,800
Hills Stores Co., Sr Note Ser B 07-01-03 12.500 B2 14,250 12,344,063
Lechters, Inc., Sub Note 09-27-01 5.000 B 500 320,000
-------------
25,348,263
-------------
Steel (14.36%)
Algoma Steel, Inc., 1st Mtg 07-15-05 12.375 B 1,500 1,695,000
Altos Hornos de Mexico S.A., Bond (Mexico) 04-30-04
(R) (Y) 11.875 B1 3,000 3,191,250
Gulf States Steel, Inc. of Alabama, 1st Mtg 04-15-03 13.500 B 16,750 16,289,375
Haynes International, Inc., Sr Note 09-01-04 11.625 B- 10,000 10,750,000
IVACO, Inc., Sr Note (Canada) 09-15-05 (Y) 11.500 B+ 9,321 10,031,726
NS Group, Inc.,
Sr Note 07-15-03 13.500 B- 3,000 3,277,500
Unit (Sr Sec Note & Warrant) 07-15-03 13.500 B- 9,000 10,305,000
Republic Engineered Steels, Inc., 1st Mtg 12-15-01 9.875 CCC+ 8,000 7,520,000
Sheffield Steel Corp., Sr Note 11-01-01 12.000 B3 5,150 4,841,000
Weirton Steel Corp., Sr Note 03-01-98 11.500 B 580 591,600
-------------
68,492,451
-------------
Supermarkets (0.28%)
Supermercados Norte, Bond (Argentina) 02-09-04 (R)
(Y) 10.875 B1 1,300 1,342,250
-------------
Telecommunications (11.06%)
Comunicacion Celular S.A.,
Bond 11-15-03, Step Coupon (13.125%, 11-15-00)
(Colombia) (A) (Y) Zero B+ 3,250 2,323,750
EchoStar Satellite Broadcasting Corp.,
Sr Disc Note 03-15-04, Step Coupon (13.125%, 3-15-00)
(A) Zero B- 12,445 8,462,600
Fonorola, Inc., Gtd Sr Sec Note (Canada) 08-15-02 (Y) 12.500 B+ 1,500 1,650,000
Globalstar L.P. Capital, Unit (Sr Note 02-15-04 &
Warrant) (R) 11.375 B 10,125 10,125,000
IMPSAT Corp., Gtd Sr Sec Note 07-15-03 12.125 BB- 465 497,550
Innova S de R.L., Sr Note (Mexico) 04-01-07 (R) (Y) 12.875 B- 2,000 2,090,000
Ionica Plc, Sr Note (United Kingdom) 08-15-06 (Y) 13.500 B 1,000 1,045,000
McCaw International Ltd.,
Unit (Sr Disc Note 04-15-07 & Warrant), Step Coupon
(13.000%, 04-15-02) (A) (R) Zero B 5,750 2,817,500
Nextel Communications, Inc.,
Sr Disc Note 09-01-03, Step Coupon (11.50%, 09-01-98)
(A) Zero CCC- 2,000 1,720,000
Sr Disc Note 08-15-04, Step Coupon (9.75%, 02-15-99)
(A) Zero CCC- 14,900 11,324,000
Paging Network, Inc., Sr Sub Note 10-15-08 10.000 B 9,050 8,552,250
Primeco, Inc., Sr Sub Note 03-01-05 12.750 B 667 750,375
Shared Technologies Fairchild, Inc.,
Sr Sub Disc Note 03-01-06, Step Coupon (12.25%,
03-01-99) (A) Zero CAA 1,600 1,392,000
-------------
52,750,025
-------------
Textile (1.47%)
Apparel Ventures, Inc., Sr Note Ser B 12-31-00 12.250 B- 2,350 2,026,875
Willcox & Gibbs, Inc., Sr Note 12-15-03 (R) 12.250 B+ 5,000 5,000,000
-------------
7,026,875
-------------
Tobacco (0.11%)
Liggett Group, Inc., Sr Note Ser B 02-01-99 11.500 B 1,000 545,000
-------------
Utilities (0.46%)
CE Casecnan Water & Energy Co., Inc., Sr Note Ser A
(Philippines) 11-15-05 (Y) 11.450 BB 2,000 2,192,500
-------------
TOTAL BONDS
(Cost $365,946,735) ( 78.28%) 373,375,696
---------- -------------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS MARKET
ISSUER, DESCRIPTION OR WARRANTS VALUE
- ------------------- ------------- -------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
American Telecasting, Inc., Warrant ** 2,000 $ 200
Ampex Corp. (Class A), Common Stock ** 100,000 643,750
AVI Holdings, Inc., Warrant (R) ** 1,500 7,500
Barry's Jewelers, Inc., Common Stock ** 40,000 16,248
Bowater, Inc., Common Stock 100, 820 4,977,988
Browne Bottling Co., Warrant ** 237 2
Burlington Motor Holdings Inc., Warrant ** 95 --
Burlington Motor Holdings Inc., Preferred Stock 90 37,500
Cablevision Systems Corp., Ser M Preferred Stock 21,127 2,001,783
Champion International Corp., Common Stock 50,000 2,468,750
CHC Helicopter Corp., Warrant (Canada) (Y) ** 16,000 16,000
Comunicacion Celular S.A., Warrant (Colombia) (Y) ** 32,500 243,750
Continental Air Finance Trust, Preferred Stock (R) 45,500 3,617,250
Crown Packaging Holdings Ltd., Common Stock (Canada) (Y) ** 2,750 22,000
Decorative Home Accents, Inc., Common Stock ** 1,000 10
Farm Fresh Holdings Corp., (Class B), Common Stock ** 1,000 8,000
Gaylord Container Corp. (Class A), Common Stock ** 400,000 3,275,000
Granite Broadcasting Corp., Preferred Stock (R) 20,640 1,965,960
Great Atlantic & Pacific Tea Co., Inc., Common Stock 169,800 4,690,725
Haynes Holdings, Inc., Common Stock ** 67,938 806,764
ICF Kaiser International, Inc., Warrant ** 7,000 3,500
Ithaca Industries, Inc., Common Stock ** 235,000 1,880,000
Lady Luck Gaming Corp., Common Stock ** 66,335 2,122,720
Mercury Finance Co., Common Stock ** 200,000 525,000
Nextlink Communications Inc., Preferred Stock (R) 31,061 1,553,050
Nextlink Communications Inc., Warrant (R) ** 30,000 --
Northwest Airlines Corp. (Class A), Common Stock ** 375,000 15,515,625
Petroleum Heat & Power Co., Inc., Preferred Stock (R) 100,000 2,400,000
Qantas Airways Ltd., Common Stock American Depositary Shares (ADS) (Australia)
# (R) (Y) 32,200 681,439
Qualcomm Financial Trust, Preferred Stock (R) 60,000 2,910,000
Renaissance Cosmetics, Warrant ** 4,000 200,000
SFX Broadcasting, Inc., Ser E Preferred Stock 90,000 9,630,000
Sheffield Steel Corp., Warrant ** 500 1,500
Sterling Chemicals Holdings, Warrant ** 1,000 35,000
US Airways Group, Inc., Ser B Preferred Stock 91,200 7,911,600
USX-Delhi Group, Common Stock 320,000 4,360,000
Wang Laboratories Inc., Ser B Preferred Stock 100,000 4,975,000
Weirton Steel Corp., Common Stock ** 100,000 300,000
Western Pacific Airlines, Inc., Common Stock ** 10,000 57,500
Westshore Terminals Inc., Common Stock (Canada) # (Y) 160,000 701,221
-----------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $71,864,080) ( 16.89%) 80,562,335
----------- -----------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- -------- --------- ------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.10%)
Investment in a joint repurchase agreement transaction with
Swiss Bank Corp. - Dated 05-30-97, Due 06-02-97
(secured by U.S. Treasury Notes, 6.375%, Due 05-15-99,
U.S. Treasury Bonds, 6.250% - 11.250%, Due 11-15-08
thru 08-15-23) - Note A 5.560% $ 9,998 $ 9,998,000
-------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company, Daily Interest Savings Account, Current
Rate 4.95% 3,206
-------------
TOTAL SHORT-TERM INVESTMENTS ( 2.10%) 10,001,206
------------- -------------
TOTAL INVESTMENTS ( 97.27%) $463,939,237
============= =============
NOTES TO THE SCHEDULE OF INVESTMENTS
(A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date.
(Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer;
however, security is U.S. dollar denominated.
# Par value of foreign bonds and shares outstanding of common stocks is expressed in local currency, as shown
parenthetically in security description.
(R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be
resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities
amounted to $68,000,689 as of May 31, 1997.
* Credit ratings are unaudited and rated by Moody's Investor Services or John Hancock Advisers, Inc. where Standard and
Poor's ratings are not available.
** Non-income producing security.
The percentage shown for each investment category is the total value of that category as a percentage of the net
assets of the Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Portfolio Concentration
May 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
The High Yield Bond Fund invests primarily in securities issued in the United States of America. The performance of this
Fund is closely tied to the economic and financial conditions of the countries within which it invests. The concentration
of investments by industry category for individual securities held by the Fund is shown in the Schedule of Investments.
In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages
of the Fund's investments at May 31, 1997 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- -----------------------
<S> <C>
Argentina 0.28%
Australia 0.53
Brazil 0.42
Canada 6.57
Colombia 0.54
Indonesia 1.91
Italy 0.21
Japan 0.10
Luxembourg 0.34
Mexico 2.80
Philippines 0.46
United Kingdom 0.47
United States 82.64
--------
TOTAL INVESTMENTS 97.27%
========
Additionally, the concentration of investments can be aggregated by the quality rating for each debt security.
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- ----------------------- -----------------------
<S> <C>
AAA 0.81%
AA 0.21
A 0.10
BB 4.63
B 63.45
CAA 2.01
CCC 5.50
CC 1.57
--------
TOTAL BONDS 78.28%
========
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE A --
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940.
The Trust consists of three series: John Hancock High Yield Bond Fund
(the "Fund"), John Hancock Intermediate Maturity Government Fund and
John Hancock Government Income Fund (collectively, the "Funds"). The
other two series of the Trust are reported in separate financial
statements. On June 25, 1996 the Trustees voted to approve a change in
the fiscal period from October 31 to May 31. This change is effective
May 31, 1997.The investment objective of the Fund is to maximize current
income without assuming undue risk by investing in a diversified
portfolio consisting primarily of lower-rated, high-yielding debt
securities.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A and Class B shares. The shares of
each class represent an interest in the same portfolio of investments of
the Fund and have equal rights to voting, redemptions, dividends and
liquidation, except that certain expenses, subject to the approval of
the Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution and service expenses under terms of a
distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or at fair value as determined in good faith in
accordance with procedures approved by the Board of Trustees. Short-term
debt investments maturing within 60 days are valued at amortized cost
which approximates market value. All portfolio transactions initially
expressed in terms of foreign currencies have been translated into U.S.
dollars as described in "Foreign Currency Translation" below.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The
Berkeley Financial Group, may participate in a joint repurchase
agreement. Aggregate cash balances are invested in one or more
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $4,858,582 of a capital
loss carryforward available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gain distributions will be
made. The carryforward expires May 31, 2003. The Fund's tax year end is
May 31.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment
securities is recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Fund is made aware
of the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding
taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid by
the Fund with respect to each class of shares will be calculated in the
same manner, at the same time and will be in the same amount, except for
the effect of expenses that may be applied differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution and service fees, if any, are
calculated daily at the class level based on the appropriate net assets
of each class and the specific expense rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual fund. Expenses which are not readily
identifiable to a specific fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative size of the fund.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or date of purchase over the
life of the security, as required by the Internal Revenue Code.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues and expenses of the Fund. Actual results
could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. The Fund had no borrowing activity for the period ended May
31, 1997.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.,
London time, on the date of any determination of the net asset value of
the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates
prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain
or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference
between the amounts of dividends, interest and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains
or losses arise from changes in the value of assets and liabilities
other than investments in securities at fiscal year end, resulting from
changes in the exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into
forward foreign currency exchange contracts as a hedge against the
effect of fluctuations in currency exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date at a set price. The aggregate
principal amounts of the contracts are marked to market daily at the
applicable foreign currency exchange rates. Any resulting unrealized
gains and losses are included in the determination of the Fund's daily
net assets. The Fund records realized gains and losses at the time the
forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering these contracts from potential
inability of counterparties to meet the terms of the contract and from
unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets and
Liabilities. The Fund may also purchase and sell forward contracts to
facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intends to take delivery of the foreign
currency. Such contracts normally involve no market risk other than that
not offset by the currency amount of the underlying transaction.
Open foreign currency forward buy contracts at May 31, 1997, were as
follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT MONTH DEPRECIATION
- -------- ------------------- ---------- ------------
GERMAN
DEUTSCHE MARK 103,000 JUL 97 ($ 397)
======
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.625% of
the first $75,000,000 of the Fund's average daily net asset value,
(b) 0.5625% of the next $75,000,000 and (c) 0.50% of the Fund's average
daily net asset value in excess of $150,000,000.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended
May 31, 1997, net sales charges received with regard to sales of Class A
shares amounted to $946,242. Out of this amount, $115,431 was retained
and used for printing prospectuses, advertising, sales literature and
other purposes, $662,692 was paid as sales commissions to unrelated
broker-dealers and $168,119 was paid as sales commissions to sales
personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker
Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc.
("Sutro"), all of which are broker-dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company ("JHMLICo"), is the
indirect sole shareholder of Distributors and was the indirect
shareholder until November 29, 1996 of John Hancock Freedom Securities
Corporation and its subsidiaries, which include Tucker Anthony and
Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended May 31, 1997, contingent deferred
sales charges paid to JH Funds amounted to $362,711.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution
Plan with respect to Class A and Class B pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Accordingly, the Fund will make
payments to JH Funds for distribution and service expenses, at an annual
rate not to exceed 0.25% of Class A average daily net assets and 1.00%
of Class B average daily net assets to reimburse JH Funds for its
distribution and service costs. Up to a maximum of 0.25% of such
payments may be service fees as defined by the amended Rules of Fair
Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's
12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
JHMLICo. The Fund pays transfer agent fees based on the number of
shareholder accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the
period was at an annual rate of 0.01875% of the average net assets of
each Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon, and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The
Fund makes investments into other John Hancock funds, as applicable, to
cover its liability for the deferred compensation. Investments to cover
the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the
related other asset are always equal and are marked to market on a
periodic basis to reflect any income earned by the investment as well as
any unrealized gains or losses. At May 31, 1997, the Fund's investments
to cover the deferred compensation liability had unrealized appreciation
of $1,074.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations
of the U.S. government and its agencies and short-term securities,
during the period ended May 31, 1997, aggregated $412,894,160 and
$264,672,907, respectively. Purchases and proceeds from sales of
obligations of the U.S. government and its agencies during the period
ended May 31, 1997, aggregated $27,184,883 and $23,249,789,
respectively.
The cost of investments owned at May 31, 1997 (including the
joint repurchase agreement) for federal income tax purposes was
$447,808,815. Gross unrealized appreciation and depreciation of
investments aggregated $25,950,585 and $9,823,369, respectively,
resulting in net unrealized appreciation of $16,127,216.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the period ended May 31, 1997, the Fund has reclassified amounts
to reflect an increase in undistributed net investment income of
$364,525, an increase in accumulated net realized loss on investments of
$283,963 and a decrease in capital paid-in of $80,562. This represents
the cumulative amount necessary to report these balances on a tax basis,
excluding certain temporary differences, as of May 31, 1997. Additional
adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the
Fund, are primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles.
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of John Hancock Bond Trust
John Hancock High Yield Bond Fund
We have audited the accompanying statement of assets and liabilities of
the John Hancock High Yield Bond Fund (the "Fund"), one of the
portfolios constituting John Hancock Bond Trust, including the schedule
of investments, as of May 31, 1997, and the related statement of
operations for the period from November 1, 1996 to May 31, 1997 and for
the year ended October 31, 1996, the statement of changes in net assets
and the financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of May 31, 1997, by correspondence
with the custodian and brokers, and other auditing procedures when
replies from brokers were not received. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock High Yield Bond Fund portfolio of
John Hancock Bond Trust at May 31, 1997, the results of its operations
for the period from November 1, 1996 to May 31, 1997 and the year ended
October 31, 1996, and the changes in its net assets and the financial
highlights for each of the indicated periods, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Boston, Massachusetts
July 11, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished
with respect to the dividends of the Fund during its fiscal year ended
May 31, 1997. All of the dividends paid for the fiscal year are taxable
as ordinary income. None of the 1996 dividends qualify for the dividends
received deduction available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-
DIV in January of 1998. This will reflect the total of all distributions
which are taxable for calendar year 1997.
NOTES
John Hancock High Yield Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock High Yield Bond Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
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5700A 5/97
7/97
