FILE NO. 2-66906
FILE NO. 811-3006
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 38 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 42 (X)
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JOHN HANCOCK BOND TRUST
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (617) 375-1700
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SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
(X) on July 15, 1997 pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
( ) on (date) pursuant to paragraph (a) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
The Registrant filed the notice required by Rule 24f-2 for the most recent
fiscal year of John Hancock Intermediate Maturity Government Fund on or about
May 27, 1997. The Registrant filed the notice required by Rule 24f-2 for the
most recent fiscal year of John Hancock Government Income Fund and John Hancock
High Yield Bond Fund on or about December 27, 1996.
<PAGE>
<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
1 Front Cover Page *
2 Overview; Investor Expenses; *
3 Financial Highlights *
4 Overview; Goal and Strategy; Portfolio *
Securities; Risk Factors; Business
Structure; More About Risk
5 Overview; Business Structure; *
Manager/Subadviser; Investor Expenses
6 Choosing a Share Class; Buying Shares; *
Selling Shares; Transaction Policies;
Dividends and Account Policies;
Additional Investor Services
7 Choosing a Share Class; How Sales Charges *
are Calculated; Sales Charge Deductions
and Waivers; Opening an Account; Buying
Shares; Transaction Policies; Additional
Investor Services
8 Selling Shares; Transaction Policies; *
Dividends and Account Policies
9 Not Applicable *
10 * Front Cover Page
11 * Table of Contents
12 * Organization of the Fund
13 * Investment Objectives and Policies;
Certain Investment Practices;
Investment Restrictions
14 * Those Responsible for Management
15 * Those Responsible for Management
16 * Investment Advisory; Subadvisory
and Other Services; Distribution
Contract; Transfer Agent Services;
Custody of Portfolio; Independent
Auditors
17 * Brokerage Allocation
18 * Description of Fund's Shares
19 * Net Asset Value; Additional
Services and Programs
20 * Tax Status
21 * Distribution Contract
22 * Calculation of Performance
23 * Financial Statements
</TABLE>
<PAGE>
SUPPLEMENT TO THE JOHN HANCOCK INCOME FUNDS PROSPECTUS
The financial highlights below for each of the nine years in the period ended
October 31, 1996 have been audited by the fund's independent auditors Ernst and
Young LLP, and have been updated from that shown on page 5 to include unaudited
figures for the six months ended April 30, 1997.
<TABLE>
<CAPTION>
GOVERNMENT INCOME FUND
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Class A - year ended October 31, 1994(1) 1995(2) 1996 1997(8)
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.85 $8.75 $9.32 $9.07
Net investment income (loss) 0.06 0.72 0.65(3) 0.31(3)
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.25) (0.17)
Total from investment operations (0.04) 1.29 0.40 0.14
Less distributions:
Dividends from net investment income (0.06) (0.72) (0.65) (0.31)
Net asset value, end of period $8.75 $9.32 $9.07 $8.90
Total investment return at net asset value(4,5) (%) (0.45)(6) 15.32 4.49 1.60(6)
Total adjusted investment return at net asset value(4) (%) (0.46)(6) 15.28 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 223 470,569 396,323 363,700
Ratio of expenses to average net assets(5) (%) 0.12(6) 1.19 1.17 1.14(9)
Ratio of net investment income (loss) to average net assets(5) (%) 0.71(6) 7.38 7.10 7.02(9)
Portfolio turnover rate (%) 92 102 106 112
Debt outstanding at end of period (000s omitted)(7) ($) -- -- -- --
Average daily amount of debt outstanding during the period (000s omitted)(7) ($) 349 N/A N/A N/A
Average monthly number of shares outstanding during the period (000s omitted) 28,696 N/A N/A N/A
Average daily amount of debt outstanding per share during the period(7) ($) 0.01 N/A N/A N/A
<CAPTION>
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Class B - year ended October 31, 1988(1) 1989 1990 1991 1992
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<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.58 $10.01 $9.98 $9.37 $9.79
Net investment income (loss) 0.69(3) 0.98 0.88 0.89 0.80
Net realized and unrealized gain (loss) on investments (0.45) (0.01) (0.54) 0.40 0.03
Total from investment operations 0.24 0.97 0.34 1.29 0.83
Less distributions
Dividends from net investment income (0.64) (1.00) (0.95) (0.87) (0.79)
Distributions from net realized gain on investments sold (0.17) -- -- -- --
Total distributions (0.81) (1.00) (0.95) (0.87) (0.79)
Net asset value, end of period $10.01 $9.98 $9.37 $9.79 $9.83
Total investment return at net asset value(4,5) (%) 2.40(6) 10.22 3.71 14.38 8.81
Total adjusted investment return at net asset value(4) (%) 1.02(6) 9.40 3.67 -- 8.66
Ratios and supplemental data
Net assets end of period (000s omitted) ($) 6,966 26,568 64,707 129,014 225,540
Ratio of expenses to average net assets (%) 1.38(6) 2.00 2.00 2.00 2.00(5)
Ratio of adjusted expenses to average net assets(10) (%) 2.76(6) 2.82 2.04 -- --
Ratio of net investment income (loss) to average net assets(5) (%) 6.34(6) 9.64 9.22 9.09 8.03
Ratio of adjusted net investment income (loss) to average net assets (%) 4.96(6) 8.82 9.18 -- --
Portfolio turnover rate (%) 174 151 83 162 112
Fee reduction per share ($) 0.15 0.08 0.004 -- --
Debt outstanding at end of period (000s omitted)(7) ($) -- -- -- -- 0
Average daily amount of debt outstanding during the
period (000s omitted)(7) ($) -- -- -- -- 6,484
Average monthly number of shares outstanding during
the period (000s omitted) -- -- -- -- 18,572
Average daily amount of debt outstanding per share
during the period(7) ($) -- -- -- -- 0.35
<CAPTION>
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Class B - year ended October 31, 1993 1994 1995(2) 1996 1997(8)
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<S> <C> <C> <C> <C> <C>
Per share operating performance $9.83 $10.05 $8.75 $9.32 $9.08
Net asset value, beginning of period 0.70 0.65 0.65 0.58(3) 0.28(3)
Net investment income (loss) 0.24 (1.28) 0.57 (0.24) (0.18)
Net realized and unrealized gain (loss) on investments 0.94 (0.63) 1.22 0.34 0.10
Total from investment operations
Less distributions (0.72) (0.65) (0.65) (0.58) (0.28)
Dividends from net investment income -- (0.02) -- -- --
Distributions from net realized gain on investments sold (0.72) (0.67) (0.65) (0.58) (0.28)
Total distributions $10.05 $8.75 $9.32 $9.08 $8.90
Net asset value, end of period 9.86 (6.42) 14.49 3.84 1.12(6)
Total investment return at net asset value(4,5) (%) 9.85 (6.43) 14.47 -- --
Total adjusted investment return at net asset value(4) (%)
Ratios and supplemental data 293,413 241,061 226,954 178,124 154,753
Net assets end of period (000s omitted) ($) 2.00(5) 1.93(5) 1.89(5) 1.90 1.87(9)
Ratio of expenses to average net assets (%) -- -- -- -- --
Ratio of adjusted expenses to average net assets(10) (%) 7.06 6.98 7.26 6.37 6.28(9)
Ratio of net investment income (loss) to average net assets(5) (%) -- -- -- -- --
Ratio of adjusted net investment income (loss) to average net assets (%) 138 92 102 106 112
Portfolio turnover rate (%) -- -- -- -- --
Fee reduction per share ($) 0 0 -- -- --
Debt outstanding at end of period (000s omitted)(7) ($)
Average daily amount of debt outstanding during the 503 349 N/A N/A N/A
period (000s omitted)(7) ($)
Average monthly number of shares outstanding during 26,378 28,696 N/A N/A N/A
the period (000s omitted)
Average daily amount of debt outstanding per share 0.02 0.01 N/A N/A N/A
during the period(7) ($)
(1) Class A and Class B shares commenced operations on September 30, 1994 and February 23, 1988,
respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(5) Excludes interest expense, which equals 0.04% for Class A for the year ended October 31, 1995
and 0.15%, 0.01%, 0.01% and 0.02% for Class B for the years ended October 31, 1992, 1993, 1994
and 1995, respectively.
(6) Not annualized.
(7) Debt outstanding consists of reverse repurchase agreements entered into during the year.
(8) Six months ended April 30, 1997. (Unaudited.)
(9) Annualized.
(10) Unreimbursed, without fee reduction.
</TABLE>
July 15, 1997
INCPS2 7/97
<PAGE>
The financial highlights below for each of the 10 years in the period ended
October 31, 1996 have been audited by the fund's independent auditors Ernst and
Young LLP, and have been updated from that shown on page 7 to include unaudited
figures for the six months ended April 30, 1997.
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
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Class A - year ended October 31, 1993(1) 1994 1995(2) 1996 1997(9)
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<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.10 $8.23 $7.33 $7.20 $7.55
Net investment income (loss) 0.33 0.80(3) 0.72 0.76(3) 0.39(3)
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12) 0.35 0.13
Total from investment operations 0.42 (0.03) 0.60 1.11 0.52
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73) (0.76) (0.39)
Distributions from net realized gain on investments sold -- (0.05) -- -- --
Total distributions (0.29) (0.87) (0.73) (0.76) (0.39)
Net asset value, end of period $8.23 $7.33 $7.20 $7.55 $7.68
Total investment return at net asset value(4) (%) 4.96(5) (0.59) 8.83 16.06 6.99(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 52,792 89,211
Ratio of expenses to average net assets (%) 0.91(6) 1.16 1.16 1.10 1.04(6)
Ratio of net investment income (loss) to average net assets (%) 12.89(6) 10.14 10.23 10.31 10.19(6)
Portfolio turnover rate (%) 204 153 98 113 61
<CAPTION>
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Class B - year ended October 31, 1987(1) 1988 1989 1990 1991 1992 1993
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<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.95 $9.94 $9.70 $8.14 $6.45 $7.44 $7.43
Net investment income (loss) 0.01 1.07(3) 1.16 1.09 0.98 0.87 0.80
Net realized and unrealized gain (loss) on investments (0.02) (0.14) (1.55) (1.68) 1.06 (0.04) 0.75
Total from investment operations (0.01) 0.93 (0.39) (0.59) 2.04 0.83 1.55
Less distributions:
Dividends from net investment income -- (1.17) (1.14) (1.09) (0.98) (0.84) (0.75)
Distributions from net realized gain on investments sold -- -- -- -- -- -- --
Distributions from capital paid-in -- -- (0.03) (0.01) (0.07) -- --
Total distributions -- -- (1.17) (1.17) (1.10) (1.05) (0.84) (0.75)
Net asset value, end of period $9.94 $9.70 $8.14 $6.45 $7.44 $7.43 $8.23
Total investment return at net asset value(4) (%) (0.10)(5) 9.77 (4.51) (8.04) 34.21 11.56 21.76
Total adjusted investment return at net asset value(4,7) (%) (0.41)(5) 9.01 (4.82) (8.07) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 110 20,852 33,964 37,097 72,023 98,560 154,214
Ratio of expenses to average net assets (%) 0.03(6) 2.00 2.20 2.22 2.24 2.25 2.08 1.91
Ratio of adjusted expenses to average net assets(8) (%) 0.34(6) 2.76 2.51 2.25 -- -- --
Ratio of net investment income (loss) to average net assets (%) 0.09(6) 10.97 12.23 14.59 13.73 11.09 10.07
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (0.22)(6) 10.21 11.92 14.56 -- -- -- --
Portfolio turnover rate (%) 0 60 100 96 93 206 204
Fee reduction per share ($) 0.03 0.07 0.03 0.002 -- -- --
<CAPTION>
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Class B - year ended October 31, 1994 1995(2) 1996 1997(9)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance $8.23 $7.33 $7.20 $7.55
Net asset value, beginning of period 0.74(3) 0.67 0.70(3) 0.36(3)
Net investment income (loss) (0.83) (0.13) 0.35 0.13
Net realized and unrealized gain (loss) on investments (0.09) 0.54 1.05 0.49
Total from investment operations
Less distributions: (0.76) (0.67) (0.70) (0.36)
Dividends from net investment income (0.05) -- -- --
Distributions from net realized gain on investments sold -- -- -- --
Distributions from capital paid-in (0.81) (0.67) (0.70) (0.36)
Total distributions $7.33 $7.20 $7.55 $7.68
Net asset value, end of period (1.33) 7.97 15.24 6.59(5)
Total investment return at net asset value(4) (%) -- -- -- --
Total adjusted investment return at net asset value(4,7) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 160,739 180,586 242,944 352,035
Ratio of expenses to average net assets (%) 0.03(6) 1.91 1.89 1.82 1.78(6)
Ratio of adjusted expenses to average net assets(8) (%) -- -- -- --
Ratio of net investment income (loss) to average net assets (%) 9.39 9.42 9.49 9.41(6)
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (0.22)(6) -- -- --
Portfolio turnover rate (%) 153 98 113 61
Fee reduction per share ($) -- -- -- --
(1) Class A and Class B shares commenced operations on June 30, 1993 and October 26, 1987,
respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(5) Not annualized.
(6) Annualized.
(7) An estimated total return calculation that does not take into consideration fee reductions
by the adviser during the periods shown.
(8) Unreimbursed, without fee reduction.
(9) Six months ended April 30, 1997. (Unaudited.)
</TABLE>
July 15, 1997
INCPS2 7/97
<PAGE>
Supplement to the John Hancock Income Funds Prospectus
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HIGH YIELD BOND FUND
On page 6, the Portfolio Securities section is revised to read: Up to 30% of
assets may be invested in bonds rated CC/Ca.
LIMITED TERM GOVERNMENT FUND
On pages 30 and 31 under the heading "Higher-risk securities and practices":
The following practices are not permitted:
Covered mortgage dollar roll transactions; in-kind, delayed and zero coupon debt
securities; financial futures and options; structured securities; and swaps,
caps, floors, collars.
INTERMEDIATE MATURITY GOVERNMENT FUND
For Intermediate Maturity Government Fund the prospectus date is July 15, 1997.
On page 27, the Class B unreimbursed distribution expenses for Intermediate
Maturity Government Fund were $398,870 and 5.39% of net assets.
On pages 8 and 9, the Investor Expenses and Financial Highlights section for
Intermediate Maturity Government Fund have been updated as follows:
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
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Shareholder transaction expenses Class A Class B
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
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Annual fund operating expenses (as a % of average net assets)
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Management fee (after expense limitation)(3) 0.03% 0.03%
12b-1 fee 0.25% 1.00%
Other expenses (after limitation)(3) 0.47% 0.47%
Total fund operating expenses (after limitation)(3) 0.75% 1.50%
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
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Share class Year 1 Year 3 Year 5 Year 10
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Class A shares $37 $53 $70 $120
Class B shares
Assuming redemption
at end of period $45 $67 $82 $131
Assuming no redemption $15 $47 $82 $131
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and other class-specific expenses). Without this limitation,
management fees would be 0.40% for each class, other expenses would be
0.47% for each class and total fund operating expenses would be 1.12% for
Class A and 1.87% for Class B.
<PAGE>
INTERMEDIATE MATURITY GOVERNMENT FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
Volatility, as indicated by Class A year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1992(1) 1993 1994 1995(2) 1996 1997
1.96(5) 6.08 2.51 3.98 5.60 4.56
<TABLE>
<CAPTION>
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Class A - year ended March 31, 1992(1) 1993 1994 1995(2) 1996 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.03 $10.05 $9.89 $9.79 $9.69
Net investment income (loss) 0.17 0.58 0.41 0.49 0.62 0.67
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.08) (0.25)
Total from investment operations 0.20 0.60 0.25 0.38 0.54 0.42
Less distributions:
Dividends from net investment income (0.17) (0.58) (0.41) (0.48) (0.64) (0.66)
Distributions from net realized gain on investments sold -- -- -- -- -- (0.08)
Total distributions (0.17) (0.58) (0.41) (0.48) (0.64) (0.74)
Net asset value, end of period $10.03 $10.05 $9.89 $9.79 $9.69 $9.37
Total investment return at net asset value(3) (%) 1.96(5) 6.08 2.51 3.98 5.60 4.56
Total adjusted investment return at net asset value(3,4) (%) 1.68(5) 5.53 2.27 3.43 4.83 4.19
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 13,775 33,273 24,310 12,950 29,024 22,043
Ratio of expenses to average net assets(6) (%) 0.50(7) 0.50 0.75 0.80 0.75 0.75
Ratio of adjusted expenses to average net assets(6,8) (%) 1.62(7) 1.05 0.99 1.35 1.45 1.12
Ratio of net investment income (loss) to average net assets (%) 6.47(7) 5.47 4.09 4.91 6.49 6.99
Ratio of adjusted net investment income (loss) to average assets(8) (%) 5.35(7) 4.92 3.85 4.36 5.79 6.62
Fee reduction per share(9) ($) 0.11 0.06 0.02 0.05 0.07 0.04
Portfolio turnover rate (%) 1 186 244 341 423(10) 427
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Class B - year ended March 31, 1992(1) 1993 1994 1995(2) 1996 1997
- --------------------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $10.00 $10.03 $10.05 $9.89 $9.79 $9.69
Net investment income (loss) 0.15 0.51 0.34 0.43 0.57 0.60
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.10) (0.24)
Total from investment operations 0.18 0.53 0.18 0.32 0.47 0.36
Less distributions:
Dividends from net investment income (0.15) (0.51) (0.34) (0.42) (0.57) (0.60)
Distribution from net realized gain on investments sold -- -- -- -- -- (0.08)
Total distributions (0.15) (0.51) (0.34) (0.42) (0.57) (0.68)
Net asset value, end of period $10.03 $10.05 $9.89 $9.79 $9.69 $9.37
Total investment return at net asset value(3) (%) 1.80(5) 5.40 1.85 3.33 4.92 3.84
Total adjusted investment return at net asset value(3,4) 1.52(5) 4.85 1.61 2.78 4.15 3.47
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,630 13,753 11,626 9,506 8,532 6,779
Ratio of expenses to average net assets(6) (%) 1.15(7) 1.15 1.40 1.45 1.40 1.43
Ratio of adjusted expenses to average net assets(6,8) (%) 2.27(7) 1.70 1.64 2.00 2.10 1.80
Ratio of net investment income (loss) to average net assets (%) 5.85(7) 4.82 3.44 4.26 5.80 6.30
Ratio of adjusted net investment income (loss) to average assets(8) (%) 4.73(7) 4.27 3.20 3.71 5.10 5.93
Fee reduction per share(9) ($) 0.11 0.06 0.02 0.05 0.07 0.04
Portfolio turnover rate (%) 1 186 244 341 423(10) 427
(1) Class A and Class B shares commenced operations on December 31, 1991.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment adviser of the fund.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) An estimated total return calculation that does not take into consideration fee reductions by
the adviser during the periods shown.
(5) Not annualized.
(6) Beginning on December 31, 1991 (commencement of operations) through March 31, 1995, the
expenses used in the ratios represented the expenses of the fund plus expenses incurred indirectly from
the Adjustable U.S. Government fund (the "Portfolio"), the mutual fund in which the fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended March 31, 1996 include the
expenses of the Portfolio through September 22, 1995.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
(9) Based on the average of the shares outstanding at the end of each month.
(10) Portfolio turnover rate excludes merger activity.
</TABLE>
7/15/97
INCPS2nd 7/97
<PAGE>
JOHN HANCOCK
Income Funds
[Logo]
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Prospectus Government Income Fund
May 1, 1997*
High Yield Bond Fund
This prospectus gives vital
information about these funds. Intermediate Maturity
For your own benefit and Government Fund
protection, please read it before
you invest, and keep it on hand Limited-Term Government Fund
for future reference.
Sovereign Bond Fund
Please note that these funds:
o are not bank deposits Sovereign U.S. Government Income Fund
o are not federally insured
o are not endorsed by any bank Strategic Income Fund
or government agency
o are not guaranteed to achieve
their goal(s)
Some of these funds may invest up
to 100% in junk bonds; read risk
information carefully.
Like all mutual fund shares,
these securities have not been
approved or disapproved by the
Securities and Exchange
Commission or any state
securities commission, nor has
the Securities and Exchange
Commission or any state
securities commission passed upon
the accuracy or adequacy of this
prospectus. Any representation to
the contrary is a criminal
offense.
*March 1, 1997 for all funds
except Limited-Term Government
Fund and Sovereign Bond Fund.
[Logo]JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
A fund-by-fund look at goals, Government Income Fund 4
strategies, risks, expenses High Yield Bond Fund 6
and financial history. Intermediate Maturity Government Fund 8
Limited-Term Government Fund 10
Sovereign Bond Fund 12
Sovereign U.S. Government Income Fund 14
Strategic Income Fund 16
Policies and instructions for Your account
opening, maintaining and Choosing a share class 18
closing an account in any How sales charges are calculated 18
income fund. Sales charge reductions and waivers 19
Opening an account 20
Buying shares 21
Selling shares 22
Transaction policies 24
Dividends and account policies 24
Additional investor services 25
Details that apply to the Fund details
income funds as a group. Business structure 26
Sales compensation 27
More about risk 29
For more information back cover
<PAGE>
Overview
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GOAL OF THE INCOME FUNDS
John Hancock income funds seek current income without sacrificing total return.
Some of the funds also invest for stability of principal. Each fund has its own
strategy and its own risk/reward profile. Because you could lose money by
investing in these funds, be sure to read all risk disclosure carefully before
investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking a regular stream of income
o are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
o want to diversify their portfolios
o are seeking a mutual fund for the income portion of an asset allocation
portfolio
o are retired or nearing retirement
Income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $20 billion in assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clipart] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clipart] Portfolio securities The primary types of securities in which the fund
invests. Secondary investments are described in "More about risk" at the end of
the prospectus.
[Clipart] Risk factors The major risk factors associated with the fund.
[Clipart] Portfolio management The individual or group designated by the
investment adviser to handle the fund's day-to-day management.
[Clipart] Expenses The overall costs borne by an investor in the fund, including
sales charges and annual expenses.
[Clipart] Financial highlights A table showing the fund's financial performance
for up to ten years, by share class. A bar chart showing total return allows you
to compare the fund's historical risk level to those of other funds.
<PAGE>
Government Income Fund
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: JHGIX CLASS B: TSGIX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks to earn a high level of current income consistent with
preservation of capital. To pursue this goal, the fund invests primarily in U.S.
Government and agency securities of any maturity, as described below. Stability
of share price is a secondary goal.
PORTFOLIO SECURITIES
[Clipart] Under normal circumstances, the fund invests at least 80% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include
Treasuries, mortgage-backed securities such as Ginnie Maes, Freddie Macs and
Fannie Maes, and repurchase agreements and forward commitments involving these
securities.
For liquidity and flexibility, the fund may place up to 20% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including asset-backed securities,
U.S. dollar-denominated foreign government securities and derivative and
leveraged investments, and may engage in other investment practices. Investments
in asset-backed and foreign government securities must be in the two highest and
four highest rating categories, respectively, or if unrated, be of comparable
quality. Up to 10% of assets may be invested in foreign government bonds rated
BB/Ba or B (junk bonds).
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including U.S. Government and
mortgage-backed securities). To the extent that the fund invests in
mortgage-backed securities, it may also be subject to extension and prepayment
risks. These risks are defined in "More about risk" starting on page 29. Other
factors may affect the market price and yield of the fund's securities,
including investor demand and domestic and worldwide economic conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clipart] Barry H. Evans, CFA, leader of the fund's portfolio management team
since January 1995, is a senior vice president of the adviser. He has been in
the investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.63% 0.63%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.30% 0.30%
Total fund operating expenses 1.18% 1.93%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $81 $107 $182
Class B shares
Assuming redemption
at end of period $70 $91 $124 $206
Assuming no redemption $20 $61 $104 $206
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
4 GOVERNMENT INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
Volatility, as indicated by Class B year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1988(1) 1989 1990 1991 1992 1993 1994(1) 1995(2) 1996
2.40(6) 10.22 3.71 14.38 8.81 9.86 (6.42) 14.49 3.84
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended October 31, 1994(1) 1995(2) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 8.85 $ 8.75 $ 9.32
Net investment income (loss) 0.06 0.72 0.65(3)
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.25)
Total from investment operations (0.04) 1.29 0.40
Less distributions:
Dividends from net investment income (0.06) (0.72) (0.65)
Net asset value, end of period $ 8.75 $ 9.32 $ 9.07
Total investment return at net asset value(4,5) (%) (0.45)(6) 15.32 4.49
Total adjusted investment return at net asset value(4) (%) (0.46)(6) 15.28 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 223 470,569 396,323
Ratio of expenses to average net assets(5) (%) 0.12(6) 1.19 1.17
Ratio of net investment income (loss) to average net assets(5) (%) 0.71(6) 7.38 7.10
Portfolio turnover rate (%) 92 102 106
Debt outstanding at end of period (000s omitted)(7) ($) -- -- --
Average daily amount of debt outstanding during the period (000s omitted)(7) ($) 349 N/A N/A
Average monthly number of shares outstanding during the period (000s omitted) 28,696 N/A N/A
Average daily amount of debt outstanding per share during the period(7) ($) 0.01 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1988(1) 1989 1990 1991 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.58 $ 10.01 $ 9.98 $ 9.37 $ 9.79 $ 9.83 $ 10.05
Net investment income (loss) 0.69(3) 0.98 0.88 0.89 0.80 0.70 0.65
Net realized and unrealized gain (loss) on
investments (0.45) (0.01) (0.54) 0.40 0.03 0.24 (1.28)
Total from investment operations 0.24 0.97 0.34 1.29 0.83 0.94 (0.63)
Less distributions
Dividends from net investment income (0.64) (1.00) (0.95) (0.87) (0.79) (0.72) (0.65)
Distributions from net realized gain on
investments sold (0.17) -- -- -- -- -- (0.02)
Total distributions (0.81) (1.00) (0.95) (0.87) (0.79) (0.72) (0.67)
Net asset value, end of period $10.01 $ 9.98 $ 9.37 $ 9.79 $ 9.83 $ 10.05 $ 8.75
Total investment return at net asset value(4,5) (%) 2.40(6) 10.22 3.71 14.38 8.81 9.86 (6.42)
Total adjusted investment return at net asset
value(4) (%) 1.02(6) 9.40 3.67 -- 8.66 9.85 (6.43)
Ratios and supplemental data
Net assets end of period (000s omitted) ($) 6,966 26,568 64,707 129,014 225,540 293,413 241,061
Ratio of expenses to average net assets (%) 1.38(6) 2.00 2.00 2.00 2.00(5) 2.00(5) 1.93(5)
Ratio of adjusted expenses to average net assets (%) 2.76(6) 2.82 2.04 -- -- -- --
Ratio of net investment income (loss) to average net
assets(5) (%) 6.34(6) 9.64 9.22 9.09 8.03 7.06 6.98
Ratio of adjusted net investment income (loss) to
average net assets (%) 4.96(6) 8.82 9.18 -- -- -- --
Portfolio turnover rate (%) 174 151 83 162 112 138 92
Fee reduction per share ($) 0.15 0.08 0.004 -- -- -- --
Debt outstanding at end of period (000s omitted)(7) ($) -- -- -- -- 0 0 0
Average daily amount of debt outstanding during the
period (000s omitted)(7) ($) -- -- -- -- 6,484 503 349
Average monthly number of shares outstanding during
the period (000s omitted) -- -- -- -- 18,572 26,378 28,696
Average daily amount of debt outstanding per share
during the period(7) ($) -- -- -- -- 0.35 0.02 0.01
</TABLE>
- --------------------------------------------------------------------------------
Class B - year ended October 31, 1995(2) 1996
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 8.75 $ 9.32
Net investment income (loss) 0.65 0.58(3)
Net realized and unrealized gain (loss) on
investments 0.57 (0.24)
Total from investment operations 1.22 0.34
Less distributions
Dividends from net investment income (0.65) (0.58)
Distributions from net realized gain on
investments sold -- --
Total distributions (0.65) (0.58)
Net asset value, end of period $ 9.32 $ 9.08
Total investment return at net asset value(4,5) (%) 14.49 3.84
Total adjusted investment return at net asset
value(4) (%) 14.47 --
Ratios and supplemental data
Net assets end of period (000s omitted) ($) 226,954 178,124
Ratio of expenses to average net assets (%) 1.89(5) 1.90
Ratio of adjusted expenses to average net assets (%) -- --
Ratio of net investment income (loss) to average net
assets(5) (%) 7.26 6.37
Ratio of adjusted net investment income (loss) to
average net assets (%) -- --
Portfolio turnover rate (%) 102 106
Fee reduction per share ($) -- --
Debt outstanding at end of period (000s omitted)(7) ($) -- --
Average daily amount of debt outstanding during the
period (000s omitted)(7) ($) N/A N/A
Average monthly number of shares outstanding during
the period (000s omitted) N/A N/A
Average daily amount of debt outstanding per share
during the period(7) ($) N/A N/A
(1) Class A and Class B shares commenced operations on September 30, 1994 and
February 23, 1988, respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Excludes interest expense, which equals 0.04% for Class A for the year
ended October 31, 1995 and 0.15%, 0.01%, 0.01% and 0.02% for Class B for
the years ended October 31, 1992, 1993, 1994 and 1995, respectively.
(6) Not annualized.
(7) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
GOVERNMENT INCOME FUND 5
<PAGE>
High Yield Bond Fund
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: JHHBX CLASS B: TSHYX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks to maximize current income without assuming undue risk.
To pursue this goal, the fund invests primarily in junk bonds, i.e. lower-rated,
higher-yielding debt securities.
Because the performance of junk bonds has historically been influenced by
economic conditions, the fund may rotate securities selection by business sector
according to the economic outlook. The fund also seeks capital appreciation, but
only when consistent with its primary goal.
PORTFOLIO SECURITIES
[Clipart] Under normal circumstances, the fund invests at least 65% of assets in
bonds rated lower than BBB/Baa and their unrated equivalents. Up to 10% of
assets may be invested in bonds rated CC/Ca. Up to 40% of assets may be invested
in the securities of issuers in the electric utility and telephone industries.
For all other industries, the limitation is 25% of assets.
Types of bonds include, but are not limited to, domestic and foreign corporate
bonds, debentures, notes, convertible securities, preferred stocks, municipal
obligations and government obligations.
The fund may also invest up to 20% of net assets in U.S. or foreign equities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including restricted securities, and
may engage in other investment practices.
RISK FACTORS
[Clipart] Investors should expect greater fluctuations in share price, yield and
total return compared to less aggressive bond funds. These fluctuations, whether
positive or negative, may be sharp and unanticipated.
Issuers of junk bonds are typically in weak financial health and their ability
to pay interest and principal is uncertain. Compared to issuers of
investment-grade bonds, they are more likely to encounter financial difficulties
and to be materially affected by these difficulties when they do encounter them.
Junk bond markets may react strongly to adverse news about an issuer or the
economy, or to the perception or expectation of adverse news. Before you invest,
please read "More about risk" starting on page 29.
PORTFOLIO MANAGEMENT
[Clipart] Arthur N. Calavritinos, CFA, leader of the fund's portfolio management
team since July 1995, is a second vice president of the adviser. He joined John
Hancock Funds in 1988 and has been in the investment business since 1987.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.56% 0.56%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.29% 0.29%
Total fund operating expenses 1.10% 1.85%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $78 $103 $173
Class B shares
Assuming redemption
at end of period $69 $88 $120 $197
Assuming no redemption $19 $58 $100 $197
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
Volatility, as indicated by Class B year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1987(1) 1988 1989 1990 1991 1992 1993(1) 1994 1995(2) 1996
(0.10)(5) 9.77 (4.51) (8.04) 34.21 11.56 21.76 (1.33) 7.97 15.24
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended October 31, 1993(1) 1994 1995(2) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 8.10 $ 8.23 $ 7.33 $ 7.20
Net investment income (loss) 0.33 0.80(3) 0.72 0.76(3)
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12) 0.35
Total from investment operations 0.42 (0.03) 0.60 1.11
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73) (0.76)
Distributions from net realized gain on investments sold -- (0.05) -- --
Total distributions (0.29) (0.87) (0.73) (0.76)
Net asset value, end of period $ 8.23 $ 7.33 $ 7.20 $ 7.55
Total investment return at net asset value(4) (%) 4.96(5) (0.59) 8.83 16.06
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 52,792
Ratio of expenses to average net assets (%) 0.91(6) 1.16 1.16 1.10
Ratio of net investment income (loss) to average net assets (%) 12.89(6) 10.14 10.23 10.31
Portfolio turnover rate (%) 204 153 98 113
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1987(1) 1988 1989 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 9.95 $ 9.94 $ 9.70 $ 8.14 $ 6.45 $ 7.44
Net investment income (loss) 0.01 1.07(3) 1.16 1.09 0.98 0.87
Net realized and unrealized gain (loss)
on investments (0.02) (0.14) (1.55) (1.68) 1.06 (0.04)
Total from investment operations (0.01) 0.93 (0.39) (0.59) 2.04 0.83
Less distributions:
Dividends from net investment income -- (1.17) (1.14) (1.09) (0.98) (0.84)
Distributions from net realized gain on
investments sold -- -- -- -- -- --
Distributions from capital paid-in -- -- (0.03) (0.01) (0.07) --
Total distributions -- (1.17) (1.17) (1.10) (1.05) (0.84)
Net asset value, end of period $ 9.94 $ 9.70 $ 8.14 $ 6.45 $ 7.44 $ 7.43
Total investment return at net asset
value(4) (%) (0.10)(5) 9.77 (4.51) (8.04) 34.21 11.56
Total adjusted investment return at net
asset value(4,7) (%) (0.41)(5) 9.01 (4.82) (8.07) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 110 20,852 33,964 37,097 72,023 98,560
Ratio of expenses to average net assets (%) 0.03(6) 2.00 2.20 2.22 2.24 2.25
Ratio of adjusted expenses to average net assets(8) (%) 0.34(6) 2.76 2.51 2.25 -- --
Ratio of net investment income (loss) to average net assets (%) 0.09(6) 10.97 12.23 14.59 13.73 11.09
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (0.22)(6) 10.21 11.92 14.56 -- --
Portfolio turnover rate (%) 0 60 100 96 93 206
Fee reduction per share ($) 0.03 0.07 0.03 0.002 -- --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1993 1994 1995(2) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 7.43 $ 8.23 $ 7.33 $ 7.20
Net investment income (loss) 0.80 0.74(3) 0.67 0.70(3)
Net realized and unrealized gain (loss)
on investments 0.75 (0.83) (0.13) 0.35
Total from investment operations 1.55 (0.09) 0.54 1.05
Less distributions:
Dividends from net investment income (0.75) (0.76) (0.67) (0.70)
Distributions from net realized gain on
investments sold -- (0.05) -- --
Distributions from capital paid-in -- -- -- --
Total distributions (0.75) (0.81) (0.67) (0.70)
Net asset value, end of period $ 8.23 $ 7.33 $ 7.20 $ 7.55
Total investment return at net asset
value(4) (%) 21.76 (1.33) 7.97 15.24
Total adjusted investment return at net
asset value(4,7) (%) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586 242,944
Ratio of expenses to average net assets (%) 2.08 1.91 1.89 1.82
Ratio of adjusted expenses to average net assets(8) (%) -- -- -- --
Ratio of net investment income (loss) to average net assets (%) 10.07 9.39 9.42 9.49
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) -- -- -- --
Portfolio turnover rate (%) 204 153 98 113
Fee reduction per share ($) -- -- -- --
</TABLE>
(1) Class A and Class B shares commenced operations on June 30, 1993 and
October 26, 1987, respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) Annualized.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Unreimbursed, without fee reduction.
HIGH YIELD BOND FUND 7
<PAGE>
Intermediate Maturity Government Fund
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: TAUSX CLASS B: TSUSX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks to earn a high level of current income consistent with
preservation of capital and maintenance of liquidity. To pursue this goal, the
fund invests primarily in U.S. Government securities of any maturity, as
described below. The fund's weighted average maturity will typically be between
three and ten years.
PORTFOLIO SECURITIES
[Clipart] Under normal circumstances, the fund invests at least 65% of assets
in securities that are issued, or guaranteed as to principal and interest, by
the U.S. Government, its agencies or instrumentalities. These may include
Treasuries and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
The fund may invest up to 35% in asset-backed securities or corporate debt
securities rated AAA/Aaa and their unrated equivalents. For liquidity and
flexibility, the fund may place up to 35% of assets in investment-grade
short-term securities. In abnormal market conditions, it may invest more assets
in these securities as a defensive tactic. The fund also may invest in certain
higher-risk investments, including derivative and leveraged investments, and may
engage in other investment practices.
RISK FACTORS
[Clipart] As with most income funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including U.S. Government and
mortgage-backed securities). To the extent that the fund invests in
mortgage-backed securities, it may also be subject to extension and prepayment
risks. These risks are defined in "More about risk" starting on page 29. Other
factors may affect the market price and yield of the fund's securities,
including investor demand and domestic and worldwide economic conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clipart] Roger C. Hamilton, leader of the fund's portfolio management team
since January 1992 (with the fund's previous adviser), is a vice president of
the adviser. He joined John Hancock Funds in December 1994 and has been in the
investment business since 1980.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee 0.25% 1.00%
Other expenses (after limitation)(3) 0.50% 0.50%
Total fund operating expenses
(after limitation)(3) 0.75% 1.50%
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $37 $53 $70 $120
Class B shares
Assuming redemption
at end of period $45 $67 $82 $131
Assuming no redemption $15 $47 $82 $131
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and other class-specific expenses). Without this limitation,
management fees would be 0.40% for each class, other expenses would be
0.72% for each class and total fund operating expenses would be 1.37% for
Class A and 2.02% for Class B.
8 INTERMEDIATE MATURITY GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
Volatility, as indicated by Class A year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1992(4) 1993 1994 1995(2) 1996 1996(6)
1.96(4) 6.08 2.51 5.60 3.98 2.03(4)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended March 31, 1992(1) 1993 1994 1995(2) 1996 1996(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.00 $ 10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69
Net investment income (loss) 0.17 0.58 0.41 0.49 0.62 0.40(4)
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.08) (0.21)
Total from investment operations 0.20 0.60 0.25 0.38 0.54 0.19
Less distributions:
Dividends from net investment income (0.17) (0.58) (0.41) (0.48) (0.64) (0.34)
Net asset value, end of period $ 10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69 $ 9.54
Total investment return at net asset value(5,7)(%) 1.96(6) 6.08 2.51 3.98 5.60 2.03(6)
Total adjusted investment return at net asset value(4,7)(%) 1.68(6) 5.53 2.27 3.43 4.83 1.87(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 13,775 33,273 24,310 12,950 29,024 25,856
Ratio of expenses to average net assets(5)(%) 0.50(9) 0.50 0.75 0.80 0.75 0.75(9)
Ratio of adjusted expenses to average net assets(8,10)(%) 1.62(9) 1.05 0.99 1.35 1.45 1.07(9)
Ratio of net investment income (loss) to average assets(10)(%)
assets (%) 6.47(9) 5.47 4.09 4.91 6.49 7.05(9)
Ratio of adjusted net investment income (loss) to average
assets(8) (%) 5.35(9) 4.92 3.85 4.36 5.79 6.73(9)
Portfolio turnover rate (%) 1 186 244 341 423 115
Fee reduction per share ($) 0.11 0.06 0.02 0.05 0.07 0.02(4)
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - year ended March 31, 1992(1) 1993 1994 1995(2) 1996 1996(9)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $ 10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69
Net investment income (loss) 0.15 0.51 0.34 0.43 0.57 0.31(9)
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.10) (0.15)
Total from investment operations 0.18 0.53 0.18 0.32 0.47 0.16
Less distributions:
Dividends from net investment income (0.15) (0.51) (0.34) (0.42) (0.57) (0.31)
Net asset value, end of period $10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69 $ 9.54
Total investment return at net asset value(3) (%) 1.80(6) 5.40 1.85 3.33 4.92 1.69(9)
Total adjusted investment return at net asset value(5,7) 1.52(6) 4.85 1.61 2.78 4.15 1.53(9)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,630 13,753 11,626 9,506 8,532 7,118
Ratio of expenses to average net assets(6) (%) 1.15(9) 1.15 1.40 1.45 1.40 1.40(9)
Ratio of adjusted expenses to average net assets (%) 2.27(9) 1.70 1.64 2.00 2.10 1.72(9)
Ratio of net investment income (loss) to average net assets
assets (10)(%) 5.85(9) 4.82 3.44 4.26 5.80 6.39(9)
Ratio of adjusted net investment income (loss) to average
assets(10) (%) 4.73(9) 4.27 3.20 3.71 5.10 6.07(9)
Portfolio turnover rate (%) 1 186 244 341 423 115
Fee reduction per share ($) 0.11 0.06 0.02 0.05 0.07 0.02
</TABLE>
(1) Class A and Class B shares commenced operations on December 31, 1991.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Six months ended September 30, 1996. (Unaudited.)
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
fund plus expenses incurred indirectly from the Adjustable U.S. Government
fund (the "Portfolio"), the mutual fund in which the fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended March
31, 1996 include the expenses of the Portfolio through September 22, 1995.
(9) Annualized.
(10) Unreimbursed, without fee reduction.
INTERMEDIATE MATURITY GOVERNMENT FUND 9
<PAGE>
Limited-Term Government Fund
REGISTRANT NAME: JOHN HANCOCK LIMITED-TERM GOVERNMENT FUND
TICKER SYMBOL CLASS A: JHNLX CLASS B: JHLBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks to provide current income and security of principal. To
pursue this goal, the fund invests primarily in U.S. Government and agency
securities, as described below. The fund's securities may be of any maturity,
although a substantial portion typically will have maturities of ten years or
less.
PORTFOLIO SECURITIES
[Clipart] Under normal circumstances, the fund invests at least 80% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 20% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, and may engage in other investment
practices.
RISK FACTORS
[Clipart] in seeking to maintain a relatively stable share price, the fund may
sacrifice opportunities for higher yields. At the same time, its share price
will fluctuate to some extent with changes in interest rates. Typically, a rise
in interest rates causes a decline in the market value of debt securities
(including U.S. Government and mortgage-backed securities). To the extent that
the fund invests in mortgage-backed securities, it may also be subject to
extension and prepayment risks. These risks are defined in "More about risk"
starting on page 29. Other factors may affect the market price and yield of the
fund's securities, including investor demand and domestic and worldwide economic
conditions. The U.S. Government does not guarantee the market value or the
current yield of government securities, nor does the government's guarantee in
any way extend to the fund itself. Please read "More about risk" carefully
before investing.
PORTFOLIO MANAGEMENT
[Clipart] Barry H. Evans, CFA, leader of the fund's portfolio management team
since January 1995, is a senior vice president of the adviser. He has been in
the investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.60% 0.60%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.47% 0.47%
Total fund operating expenses 1.37% 2.07%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $44 $72 $103 $190
Class B shares
Assuming redemption
at end of period $51 $85 $111 $198
Assuming no redemption $21 $65 $111 $198
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 LIMITED-TERM GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
Volatility, as indicated by Class A year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(0.49) 5.67 11.59 7.75 12.54 4.19 7.13 (1.31) 11.23 3.45
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1987 1988 1989 1990 1991 1992 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 9.71 $ 8.83 $ 8.56 $ 8.73 $ 8.61 $ 8.97 $ 8.77
Net investment income (loss) 0.78 0.77 0.79 0.74 0.67 0.54 0.48
Net realized and unrealized gain (loss)
on investments (0.83) (0.28) 0.18 (0.11) 0.36 (0.18) 0.14
Total from investment operations (0.05) 0.49 0.97 0.63 1.03 0.36 0.62
Less distributions:
Dividends from net investment income (0.83) (0.76) (0.80) (0.75) (0.67) (0.54) (0.48)
Distributions from net realized gain
on investments sold -- -- -- -- -- (0.02) (0.11)
Total distributions (0.83) (0.76) (0.80) (0.75) (0.67) (0.56) (0.59)
Net asset value, end of period $ 8.83 $ 8.56 $ 8.73 $ 8.61 $ 8.97 $ 8.77 $ 8.80
Total investment return at net asset
value(2) (%) (0.49) 5.67 11.59 7.75 12.54 4.19 7.13
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 202,924 192,315 179,065 176,329 211,322 259,170 262,903
Ratio of expenses to average net assets (%) 0.97 1.02 1.01 1.53 1.44 1.55 1.51
Ratio of net investment income (loss) to
average net assets (%) 8.52 8.71 8.98 8.56 7.72 6.13 5.34
Portfolio turnover rate (%) 7 12 26 75 134 185 175
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Class A - year ended December 31, 1994 1995 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 8.80 $ 8.31 $8.73
Net investment income (loss) 0.38(1) 0.50(1) 0.50(1)
Net realized and unrealized gain (loss)
on investments (0.49) 0.42 (0.21)
Total from investment operations (0.11) 0.92 0.29
Less distributions:
Dividends from net investment income (0.38) (0.50) (0.50)
Distributions from net realized gain
on investments sold -- -- --
Total distributions (0.38) (0.50) (0.50)
Net asset value, end of period $ 8.31 $ 8.73 $8.52
Total investment return at net asset
value(2) (%) (1.31) 11.23 3.45
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 218,846 198,681 175,995
Ratio of expenses to average net assets (%) 1.41 1.36 1.37
Ratio of net investment income (loss) to
average net assets (%) 4.39 5.76 5.81
Portfolio turnover rate (%) 155 105 166
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Class B - year ended December 31, 1994(3) 1995 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 8.77 $ 8.31 $8.73
Net investment income (loss) 0.30(1) 0.45(1) 0.44(1)
Net realized and unrealized gain (loss) on investment (0.46) 0.42 (0.21)
Total from investment operations (0.16) 0.87 0.23
Less distributions:
Dividends from net investment income (0.30) (0.45) (0.44)
Net asset value, end of period $ 8.31 $ 8.73 $8.52
Total investment return at net asset value(2) (%) (1.84)(4) 10.60 2.72
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 7,111 10,765 10,472
Ratio of expenses to average net assets (%) 2.12(5) 1.93 2.08
Ratio of net investment income (loss) to average
net assets (%) 3.70(5) 5.21 5.10
Portfolio turnover rate (%) 155 105 166
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Class B shares commenced operations on January 3, 1994.
(4) Not annualized.
(5) Annualized.
LIMITED-TERM GOVERNMENT FUND 11
<PAGE>
Sovereign Bond Fund
REGISTRANT NAME: SOVEREIGN BOND FUND
TICKER SYMBOL CLASS A: JHNBX CLASS B: JHBBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks to generate a high level of current income consistent
with prudent investment risk. To pursue this goal, the fund invests in a
diversified portfolio of marketable debt securities. These securities are
primarily investment grade, although up to 25% of them may be junk bonds rated
as low as CC/Ca and their unrated equivalents. The fund does not concentrate its
investments in any particular industry.
PORTFOLIO SECURITIES
[Clipart] Under normal circumstances, the fund invests at least 65% of assets in
corporate and government bonds and debentures. Typically, at least
three-quarters of these debt securities (excluding commercial paper) will be:
o securities of any type of issuer that are rated among the four highest
Moody's or S&P rating categories and their unrated equivalents
o U.S. Government and agency securities
The fund may invest up to 25% of assets in U.S. dollar-denominated foreign
securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including asset-backed securities and
derivatives and leveraged investments, and may engage in other investment
practices.
RISK FACTORS
[Clipart] Investors should expect fluctuations in share price, yield and total
return, particularly with changes in interest rates. Typically, a rise in
interest rates causes a decline in the market value of debt securities. To the
extent that it invests in certain securities, the fund may be affected by
additional risks:
o junk bonds: above-average credit, market and other risks
o foreign securities: currency, information, natural event and political risks
o mortgage-backed securities: extension and prepayment risks
These risks are defined in "More about risk" starting on page 29. The longer the
fund's average weighted maturity, the more it is likely to be affected by a
change in interest rates. Please read "More about risk" carefully before
investing.
PORTFOLIO MANAGEMENT
[Clipart] James K. Ho, CFA, leader of the fund's portfolio management team since
March 1988, is an executive vice president of the adviser. He joined John
Hancock Funds in 1985 and has been in the investment business since 1977.
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past fiscal year, adjusted to
reflect any changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.33% 0.33%
Total fund operating expenses 1.13% 1.83%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $79 $104 $176
Class B shares
Assuming redemption
at end of period $69 $88 $119 $196
Assuming no redemption $19 $58 $ 99 $196
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 SOVEREIGN BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
Volatility, as indicated by Class A year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
1.58 9.82 12.13 6.71 16.59 8.08 11.80 (2.75) 19.40 4.11
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1987 1988 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 15.89 $ 14.53 $ 14.51 $ 14.77 $ 14.33
Net investment income (loss) 1.40 1.44 1.43 1.32 1.29
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.17) (0.06) 0.27 (0.40) 0.98
Total from investment operations 0.23 1.38 1.70 0.92 2.27
Less distributions:
Dividends from net investment income (1.53) (1.40) (1.44) (1.35) (1.29)
Distributions from net realized gain on
investments sold and financial futures contracts (0.06) -- -- -- --
Distributions from capital paid-in -- -- -- (0.01) --
Total distributions (1.59) (1.40) (1.44) (1.36) (1.29)
Net asset value, end of period $ 14.53 $ 14.51 $ 14.77 $ 14.33 $ 15.31
Total investment return at net asset value(1) (%) 1.58 9.82 12.13 6.71 16.59
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,095,208 1,103,691 1,110,394 1,103,391 1,249,980
Ratio of expenses to average net assets (%) 0.82 0.82 0.80 1.31 1.27
Ratio of net investment income (loss) to
average net assets (%) 9.32 9.77 9.68 9.18 8.81
Portfolio turnover rate (%) 159 66 64 92 90
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 15.31 $ 15.29 $ 15.53 $ 13.90 $ 15.40
Net investment income (loss) 1.20 1.14 1.12 1.12 1.09
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.01) 0.62 (1.55) 1.50 (0.50)
Total from investment operations 1.19 1.76 (0.43) 2.62 0.59
Less distributions:
Dividends from net investment income (1.21) (1.14) (1.12) (1.12) (1.09)
Distributions from net realized gain on
investments sold and financial futures contracts -- (0.38) (0.08) -- --
Distributions from capital paid-in -- -- -- -- --
Total distributions (1.21) (1.52) (1.20) (1.12) (1.09)
Net asset value, end of period $ 15.29 $ 15.53 $ 13.90 $ 15.40 14.90
Total investment return at net asset value(1) (%) 8.08 11.80 (2.75) 19.40 4.11
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,386,260 1,505,754 1,326,058 1,535,204 1,416,116
Ratio of expenses to average net assets (%) 1.44 1.41 1.26 1.13 1.14
Ratio of net investment income (loss) to
average net assets (%) 7.89 7.18 7.74 7.58 7.32
Portfolio turnover rate (%) 87 107 85 103(3) 123
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended December 31, 1993(2) 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.90 $ 15.52 $ 13.90 $15.40
Net investment income (loss) 0.11 1.04 1.02 0.98
Net realized and unrealized gain (loss) on investments and
financial futures contracts -- (1.54) 1.50 (0.50)
Total from investment operations 0.11 (0.50) 2.52 0.48
Less distributions:
Dividends from net investment income (0.11) (1.04) (1.02) (0.98)
Distributions from net realized gain on investments sold
and financial futures contracts (0.38) (0.08) -- --
Total distributions (0.49) (1.12) (1.02) (0.98)
Net asset value, end of period $15.52 $ 13.90 $ 15.40 $14.90
Total investment return at net asset value(1) (%) 0.90(4) (3.13) 18.66 3.38
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112
Ratio of expenses to average net assets (%) 1.63(5) 1.78 1.75 1.84
Ratio of net investment income (loss) to average net assets (%) 0.57(5) 7.30 6.87 6.62
Portfolio turnover rate (%) 107 85 103(3) 123
</TABLE>
(1) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(2) Portfolio turnover excludes merger activity
(3) Class B shares commenced operations on November 23, 1993.
(4) Not annualized.
(5) Annualized.
SOVEREIGN BOND FUND 13
<PAGE>
Sovereign U.S. Government Income Fund
REGISTRANT NAME: JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHSGX CLASS B: FGOPX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks to provide as high a level of income as is consistent
with long-term total return. To pursue this goal, the fund invests in U.S.
Government and agency securities, as described below.
PORTFOLIO SECURITIES
[Clipart] Under normal circumstances, the fund invests at least 65% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including derivative and leveraged
investments, and may engage in other investment practices.
RISK FACTORS
[Clipart] As with most income investments, the value of your investment will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's
securities, including investor demand and economic conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clipart] Barry H. Evans, CFA, leader of the fund's portfolio management team
since January 1995, is a senior vice president of the adviser. He has been in
the investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.35% 0.35%
Total fund operating expenses 1.15% 1.85%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $80 $105 $178
Class B shares
Assuming redemption
at end of period $69 $88 $120 $198
Assuming no redemption $19 $58 $100 $198
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
14 SOVEREIGN U.S. GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
Volatility, as indicated by Class B year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1987(6) 1987(7) 1988 1989 1990 1991 1992 1993 1994 1995 1996
2.61 3.70 11.53 11.52 6.24 14.46 7.58 12.66 (7.05) 15.27 3.33
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended October 31, 1992(1) 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.51 $ 10.29 $ 10.89 $ 9.24 $ 10.01
Net investment income (loss) 0.64 0.68(2) 0.65 0.65 0.64(2)
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.22) 0.61 (1.34) 0.77 (0.26)
Total from investment operations 0.42 1.29 (0.69) 1.42 0.38
Less distributions:
Dividends from net investment income (0.64) (0.68) (0.65) (0.65) (0.64)
Distributions from net realized gain on investments sold -- (0.01) (0.31) -- --
Total distributions (0.64) (0.69) (0.96) (0.65) (0.64)
Net asset value, end of period $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.75
Total investment return at net asset value(3) (%) 5.33(4) 12.89 (6.66) 15.90 4.02
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 350,907 375,416 315,372 370,966 330,162
Ratio of expenses to average net assets (%) 1.06(5) 1.30 1.23 1.17 1.15
Ratio of net investment income (loss) to average net assets (%) 7.11(5) 6.47 6.62 6.76 6.58
Portfolio turnover rate (%) 140 273 127 94 143
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1987(6) 1987(7) 1988 1989 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.00 $ 10.28 $ 9.45 $ 9.73 $ 10.01 $ 9.83 $ 10.29
Net investment income (loss) 0.56 0.48 0.78 0.81 0.85 0.85 0.76
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.36 (0.75) 0.28 0.25 (0.25) 0.51 --
Total from investment operations 0.92 (0.27) 1.06 1.06 0.60 1.36 0.76
Less distributions:
Dividends from net investment income (0.57) (0.48) (0.77) (0.77) (0.78) (0.90) (0.77)
Distributions from net realized gain on
investments sold (0.07) (0.08) (0.01) (0.01) -- -- --
Total distributions (0.64) (0.56) (0.78) (0.78) (0.78) (0.90) (0.77)
Net asset value, end of period $ 10.28 $ 9.45 $ 9.73 $ 10.01 $ 9.83 $ 10.29 $ 10.28
Total investment return at net asset value(3) (%) 2.61(5) 3.70(3) 11.53 11.52 6.24 14.46 7.58
Total adjusted investment return at
net asset value(3,8) (%) -- 3.65(4) 11.47 11.29 6.23 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 164,001 170,030 161,163 144,756 133,778 164,347 197,032
Ratio of expenses to average net assets (%) 1.26(5) 1.24(5) 1.29 1.35 1.54 1.51 1.55
Ratio of adjusted expenses to
average net assets(9) (%) -- 1.32(5) 1.35 1.58 1.55 -- --
Ratio of net investment income (loss) to
average net assets (%) 7.56(5) 7.94(5) 8.09 8.34 8.54 8.53 7.35
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) -- 7.86(5) 8.03 8.11 8.53 -- --
Portfolio turnover rate (%) 108(5) 83(5) 79 45 63 62 140
Fee reduction per share ($) -- 0.01 0.01 0.02 0.01 -- --
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended October 31, 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.28 $ 10.88 $ 9.23 $ 10.00
Net investment income (loss) 0.66(2) 0.61 0.60 0.58(2)
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.61 (1.34) 0.77 (0.26)
Total from investment operations 1.27 (0.73) 1.37 0.32
Less distributions:
Dividends from net investment income (0.66) (0.61) (0.60) (0.58)
Distributions from net realized gain on
investments sold (0.01) (0.31) -- --
Total distributions (0.67) (0.92) (0.60) (0.58)
Net asset value, end of period $ 10.88 $ 9.23 $ 10.00 $ 9.74
Total investment return at net asset value(3) (%) 12.66 (7.05) 15.27 3.33
Total adjusted investment return at
net asset value(3,8) (%) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 244,133 196,899 130,824 112,228
Ratio of expenses to average net assets (%) 1.51 1.64 1.72 1.82
Ratio of adjusted expenses to
average net assets(9) (%) -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) 6.23 6.19 6.24 5.91
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) -- -- -- --
Portfolio turnover rate (%) 273 127 94 143
Fee reduction per share ($) -- -- -- --
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) For the period June 5, 1986 (commencement of operations) to March 31, 1987.
(7) For the period April 1, 1987 to October 31, 1987.
(8) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(9) Unreimbursed, without fee reduction.
SOVEREIGN U.S. GOVERNMENT FUND 15
<PAGE>
Strategic Income Fund
REGISTRANT NAME: JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHFIX CLASS B: STIBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clipart] The fund seeks a high level of current income. To pursue this goal,
the fund invests primarily in three sectors:
o foreign government and corporate debt securities
o U.S. Government and agency securities
o junk bonds rated as low as CC/Ca and their unrated equivalents.
Under normal circumstances, the fund's assets will be invested in all three
sectors. However, the weighting of assets among sectors will be adjusted to
reflect current or anticipated market behavior, and the fund may invest up to
100% of assets in any sector.
PORTFOLIO SECURITIES
[Clipart] The fund may invest in debt securities of all maturities and types,
including bonds, debentures, notes, preferred stock, mortgage-backed and
asset-backed securities and others. The fund may also invest up to 10% of net
assets in U.S. or foreign equities.
For liquidity and flexibility, the fund may invest in investment-grade
short-term securities. In abnormal market conditions, it may invest more assets
in these securities as a defensive tactic. The fund also may invest in certain
higher-risk investments, including derivative and leveraged investments, and may
engage in other investment practices.
RISK FACTORS
[Clipart] Investors should expect fluctuations in share price, yield and total
return that are above-average for bond funds. Typically, a rise in interest
rates causes a decline in the market value of debt securities. The longer the
fund's average weighted maturity, the more it is likely to be affected by a
change in interest rates. To the extent that the fund invests in mortgage-backed
securities, it may also be subject to extension and prepayment risks. These
risks are defined in "More about risk" starting on page 29. Foreign securities
carry additional risks, including currency, information, natural event and
political risks. Issuers of junk bonds are typically in weak financial health,
and their ability to pay interest and principal is uncertain, especially in an
adverse economy. Junk bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception or expectation of adverse news.
Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clipart] Frederick L. Cavanaugh, Jr., leader of the fund's portfolio management
team since 1986, is a senior vice president of the adviser. He joined John
Hancock Funds in 1986 and has been in the investment business since 1973.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clipart] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.45% 0.45%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.28% 0.28%
Total fund operating expenses 1.03% 1.73%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $55 $76 $99 $165
Class B shares
Assuming redemption
at end of period $68 $84 $114 $186
Assuming no redemption $18 $54 $94 $186
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
16 STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clipart] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
Volatility, as indicated by Class A year-by-year total investment return (%)
(scale varies from fund to fund)
[The table below was represented as a bar graph in the printed material.]
1987(1) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1996(8)
4.81(6) 6.89 9.72 (7.36) 12.31 19.92 6.81 4.54 9.33 11.37 8.90(6)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - year ended May 31, 1987(1) 1988 1989 1990 1991 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 10.00 $ 9.71 $ 9.24 $ 8.98 $ 7.33 $ 7.20
Net investment income (loss) 0.79 1.13 1.12 1.04 0.93 0.80
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.29) (0.47) (0.26) (1.65) (0.13) 0.52
Total from investment operations 0.50 0.66 0.86 (0.61) 0.80 1.32
Less distributions:
Dividends from net investment income (0.79) (1.13) (1.12) (1.04) (0.93) (0.74)(4)
Distributions in excess of net investment income -- -- -- -- -- --
Distributions from capital paid-in -- -- -- -- -- --
Total distributions (0.79) (1.13) (1.12) (1.04) (0.93) (0.74)
Net asset value, end of period $ 9.71 $ 9.24 $ 8.98 $ 7.33 $ 7.20 $ 7.78
Total investment return at net asset value(3) (%) 4.81(6) 6.89 9.72 (7.36) 12.31 19.92
Total adjusted investment return at
net asset value(5,7) (%) 3.64(6) 6.49 9.58 (7.45) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 30,260 67,140 95,430 80,890 79,272 153,568
Ratio of expenses to average net assets (%) 1.00(4) 1.09 1.33 1.53 1.75 1.69
Ratio of adjusted expenses to average net assets (%) 2.17(4) 1.49 1.47 1.62 -- --
Ratio of net investment income (loss) to
average net assets (%) 10.87(8) 12.07 12.28 12.60 13.46 10.64
Ratio of adjusted net investment income (loss) to
average net assets (%) 9.70(8) 11.67 12.14 12.51 -- --
Portfolio turnover rate (%) 207 67 125 81 60 80
Fee reduction per share ($) 0.09 0.04 0.01 0.01 -- --
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - year ended May 31, 1993 1994 1995 1996 1996(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 7.78 $ 7.55 $ 7.17 $ 7.15 $ 7.27
Net investment income (loss) 0.71 0.68 0.64 0.66(3) 0.32(3)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.22) (0.33) (0.02) 0.12 0.31
Total from investment operations 0.49 0.35 0.62 0.78 0.63
Less distributions:
Dividends from net investment income (0.72) (0.58)(4) (0.55) (0.66) (0.32)
Distributions in excess of net investment income -- (0.05) -- -- --
Distributions from capital paid-in -- (0.10) (0.09) -- --
Total distributions (0.72) (0.73) (0.64) (0.66) (0.32)
Net asset value, end of period $ 7.55 $ 7.17 $ 7.15 $ 7.27 $ 7.58
Total investment return at net asset value(3) (%) 6.81 4.54 9.33 11.37 8.90(5)
Total adjusted investment return at
net asset value(5,7) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 262,137 335,261 327,876 369,127 400,738
Ratio of expenses to average net assets (%) 1.58 1.32 1.09 1.03 1.01(8)
Ratio of adjusted expenses to average net assets (%) -- -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) 9.63 8.71 9.24 9.13 8.73(8)
Ratio of adjusted net investment income (loss) to
average net assets (%) -- -- -- -- --
Portfolio turnover rate (%) 97 91 55 78 77
Fee reduction per share ($) -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - year ended May 31, 1994(1) 1995 1996 1996(8)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $ 7.58 $ 7.17 $ 7.15 $ 7.27
Net investment income (loss) 0.40 0.60(3) 0.61(3) 0.29(3)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12 0.31
Total from investment operations (0.01) 0.58 0.73 0.60
Less distributions:
Dividends from net investment income (0.32) (0.52) (0.61) (0.29)
Distributions in excess of net investment income (0.03) -- -- --
Distributions from capital paid-in (0.05) (0.08) -- --
Total distributions (0.40) (0.60) (0.61) (0.29)
Net asset value, end of period $ 7.17 $ 7.15 $ 7.27 $ 7.58
Total investment return at net asset value(5) (%) (0.22)(6) 8.58 10.61 8.50(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751 275,432
Ratio of expenses to average net assets (%) 1.91(7) 1.76 1.73 1.71(7)
Ratio of net investment income (loss) to average net assets (%) 8.12(7) 8.55 8.42 8.02(7)
Portfolio turnover rate (%) 91 55 78 77
</TABLE>
(1) Class A and Class B shares commenced operations on August 18, 1986 and
October 4, 1993, respectively.
(2) Six months ended November 30, 1996. (Unaudited.)
(3) Based on the average of the shares outstanding at the end of each month.
(4) The dividend policy of the fund was changed, effective August 1, 1991, from
one that utilized daily dividend declarations to one that declares
dividends monthly. Additionally, the dividend policy of the fund was
changed, effective October 1, 1993, from one that declared dividends
monthly to daily dividend declarations.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Annualized.
STRATEGIC INCOME FUND 17
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock income funds offer two classes of shares, Class A and Class B.
Each class has its own cost structure, allowing you to choose the one that best
meets your requirements. Your financial representative can help you decide.
- --------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------
o Front-end sales charges, as o No front-end sales charge; all
described below. There are your money goes to work for you
several ways to reduce these right away.
charges, also described below.
o Higher annual expenses than
o Lower annual expenses than Class Class A shares.
B shares.
o A deferred sales charge, as
described below.
o Automatic conversion to Class A
shares after either five years
(Group 1) or eight years (Group 2)
(see below), thus reducing future
annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Use the table below to find out which group the fund is in, then consult the
sales charge information for that group.
- --------------------------------------------------------------------------------
Group 1 Group 2
- --------------------------------------------------------------------------------
o Intermediate Maturity o Government Income
Government
o High Yield Bond
o Limited-Term Government
o Sovereign Bond
o Sovereign U.S. Government Income
o Strategic Income
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges - Group 1
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - Group 2
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments (Groups 1 and 2)
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
18 YOUR ACCOUNT
<PAGE>
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) on shares you sell within a certain time after you bought them, as
described in the table below. There is no CDSC on shares acquired through
reinvestment of dividends. The CDSC is based on the original purchase cost or
the current market value of the shares being sold, whichever is less. The longer
the time between the purchase and the sale of shares, the lower the rate of the
CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on Group 1 CDSC on Group 2
purchase shares being sold shares being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services to add these options (see
the back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination priviliges. Each investor has an individual
account, but for sales charge purposes the group's investments are lumped
together, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial aggregate
investments must be at least $250), and individual investors may terminate their
accounts at any time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases: o
to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
YOUR ACCOUNT 19
<PAGE>
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o government entities that are prohibited from paying mutual fund sales charges
o financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets to a John Hancock fund from an employee
benefit plan that has John Hancock funds
o members of an approved affinity group financial services program
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 members (one-year
CDSC applies)
o in the case of Limited-Term Government Fund, anyone investing the proceeds
from any non-John Hancock mutual fund, as long as that fund had sales charges
and the investor paid them; investors must supply a copy of the redemption
check or confirmation statement, and must remain invested in Limited-Term
Government Fund for at least 15 days
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any puchase, exchange or sale of
shares.
20 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clipart] o Make out a check for the o Make out a check for the
investment amount, payable investment amount payable
to "John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to investment slip from an
your financial account statement. If no
representative, or mail slip is available, include
to Signature Services a note specifying the fund
(address below). name, your share class,
your account number and the
name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
to Signature Services
(address below).
By exchange
[Clipart] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an exchange.
exchange.
By wire
[Clipart] o Deliver your completed o Instruct your bank to wire
application to your the amount of your
financial representative, investment to:
or mail it to Signature First Signature Bank & Trust
Services. Account # 900000260
Routing # 211475000
o Obtain your account number Specify the fund name, your
by calling your financial share class, your account
representative or Signature number and the name(s) in
Services. which the account is
registered. Your bank may
o Instruct your bank to wire charge a fee to wire funds.
the amount of your
investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name,
your choice of share class,
the new account number and
the name(s) in which the
account is registered. Your
bank may charge a fee to
wire funds.
By phone
[Clipart] See "By wire" and o Verify that your bank or
"By exchange." credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the
"Invest-By-Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your
account.
o Tell the Signature Services
representative the fund
name, your share class,
your account number, the
name(s) in which the
account is registered and
the amount of your
investment.
- ------------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way STE 1000
Boston, MA 02217-1000
Phone To open or add to an account using
1-800-225-5291 the Monthly Automatic Accumulation
Program, see "Additional investor
Or contact your financial representative services."
for instructions and assistance.
- ------------------------------------------
YOUR ACCOUNT 21
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clipart] o Accounts of any type. o Write a letter of
instruction or complete a
o Sales of any amount. stock power indicating the
fund name, your share
class, your account number,
the name(s) in which the
account is registered and
the dollar value or number
of shares you wish to sell.
o Include all signatures and
any additional documents
that may be required (see
next page).
o Mail the materials to
Signature Services.
o A check will be mailed to
the name(s) and address in
which the account is
registered, or otherwise
according to your letter of
instruction.
By phone
[Clipart] o Most accounts. o For automated service 24
hours a day using your
o Sales of up to $100,000. touch-tone phone, call the
EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John
Hancock Funds, call
Signature Services between
8 A.M. and 4 P.M. Eastern
Time on most business days.
By wire or electronic funds transfer (EFT)
[Clipart] o Requests by letter to sell o Fill out the "Telephone
any amount (accounts of any Redemption" section of your
type). new account application.
o Requests by phone to sell o To verify that the
up to $100,000 (accounts telephone redemption
with telephone redemption privilege is in place on an
privileges). account, or to request the
forms to add it to an
existing account, call
Signature Services.
o Amounts of $1,000 or more
will be wired on the next
business day. A $4 fee will
be deducted from your
account.
o Amounts of less than $1,000
may be sent by EFT or by
check. Funds from EFT
transactions are generally
available by the second
business day. Your bank may
charge a fee for this
service.
By exchange
[Clipart] o Accounts of any type. o Obtain a current prospectus
for the fund into which you
o Sales of any amount. are exchanging by calling
your financial
representative or Signature
Services.
o Call your financial
representative or Signature
Services to request an
exchange.
By check
[Clipart] o Government Income, o Request checkwriting on your
Limited-Term Government, account application.
Sovereign U.S. Government
and Strategic Income Funds o Verify that the shares to be
only. sold were purchased more than
10 days earlier or were
o Any account with purchased by wire.
checkwriting privileges.
o Write a check for any
o Sales of over $100. amount over $100.
------------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way STE 1000
Boston, MA 02217-1000
Phone
1-800-225-5291
To sell shares through a systematic
withdrawal plan, see "Additional Or contact your financial representative
investor services." for instructions and assistance.
------------------------------------------
22 YOUR ACCOUNT
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution o a credit union
o a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
[Clipart]
- --------------------------------------------------------------------------------
Seller Requirements for written requests
- --------------------------------------------------------------------------------
Owners of individual, joint, sole o Letter of instruction.
proprietorship, UGMA/UTMA
(custodial accounts for minors) or o On the letter, the signatures
general partner accounts. and titles of all persons
authorized to sign for the
account, exactly as the account
is registered.
o Signature guarantee if
applicable (see above).
Owners of corporate or association o Letter of instruction.
accounts.
o Corporate resolution, certified
within the past two years.
o On the letter and the
resolution, the signature of the
person(s) authorized to sign for
the account.
o Signature guarantee if
applicable (see above).
Owners or trustees of trust o Letter of instruction.
accounts.
o On the letter, the signature(s)
of the trustee(s).
o If the names of all trustees are
not registered on the account,
please also provide a copy of
the trust document certified
within the past six months.
o Signature guarantee if
applicable (see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if
applicable (see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing
executor.
o Signature guarantee if
applicable (see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
YOUR ACCOUNT 23
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Signature Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are taken, Signature Services is not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B shares
will continue to age from the original date and will retain the same CDSC rate
as they had before the exchange, except that the rate will change to the new
fund's rate if that rate is higher. A CDSC rate that has increased will drop
again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
Eligibility by state You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively,
24 YOUR ACCOUNT
<PAGE>
you can choose to have a check for your dividends mailed to you. However, if the
check is not deliverable, your dividends will be reinvested.
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. Some dividends paid in January may be
taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Signature Services,
Inc." Deliver your check and application to your financial representative or
Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and there
is no limit to the number of payees you may have, as long as they are all on
the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial representative
or Signature Services.
Retirement plans John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, 401(k) plans, 403(b) plans (including TSAs) and
other pension and profit-sharing plans. Using these plans, you can invest in any
John Hancock fund (except tax-free income funds) with a low minimum investment
of $250 or, for some group plans, no minimum investment at all. To find out
more, call Signature Services at 1-800-225-5291.
YOUR ACCOUNT 25
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock income fund is an open-end
management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests. At a mutual fund's inception, the initial
shareholder (typically the adviser) appoints the fund's board. Thereafter, the
board and the shareholders determine the board's membership. The boards of the
John Hancock income funds may include individuals who are affiliated with the
investment adviser. However, the majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
<TABLE>
<S><C><C>
------------------
Shareholders
-------------------
----------------------------------
Financial services firms and
their representatives
Distribution Advise current and prospective
and shareholder shareholders on their fund
services invesments, often in the context
of an overall financial plan.
------------------------------------
--------------------------------- -------------------------------------
Principal distributor Transfer agent
John Hancock Funds, Inc. John Hancock Signature Services, Inc.
101 Huntington Avenue 1 John Hancock Way, Suite 1000
Boston, MA 02199-7603 Boston, MA 02217-1000
Markets the funds and distributes Handles shareholder services, includ-
shares through selling brokers, ing record-keeping and statements,
financial planners and other distribution of dividends and pro-
financial representatives. cessing of buy and sell requests.
--------------------------------- -------------------------------------
- --------------------------- -----------------------------------
Investment adviser Custodian
John Hancock Advisers, Inc. Investors Bank & Trust Co.
101 Huntington Avenue 89 South Street
Boston, MA 02199-7603 Boston, MA 02111 Asset
Management
Manages the funds' Holds the funds' assets, settles
business and invest- all portfolio trades and collects
ment activites. most of the valuation data required
- --------------------------- for calculating each fund's NAV.
-----------------------------------
--------------------------------
Trustees
Supervise the funds' activities.
--------------------------------
</TABLE>
26 FUND DETAILS
<PAGE>
Accounting compensation The funds compensate the adviser for performing tax and
financial management services. Annual compensation is not expected to exceed
0.02% of each fund's average net assets.
Portfolio trades In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
Investment goals Except for Government Income Fund, High Yield Bond Fund and
Intermediate Maturity Government Fund, each fund's investment goal is
fundamental and may only be changed with shareholder approval.
Diversification All of the income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation that authorizes annual fees of this type). The 12b-1 fee
rates vary by fund and by share class, according to Rule 12b-1 plans adopted by
the funds. The sales charges and 12b-1 fees paid by investors are detailed in
the fund-by-fund information. The portions of these expenses that are reallowed
to financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
Government Income $ 9,835,482 4.85%
High Yield Bond $ 7,642,995 3.83%
Intermediate Maturity Gov. $ 253,107 2.30%
Limited-Term Government $ 191,883 1.93%
Sovereign Bond $ 3,897,654 3.40%
Sovereign U.S. Gov. Income $ 5,553,890 4.58%
Strategic Income $ 5,169,665 3.18%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Initial compensation Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
Annual compensation Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
FUND DETAILS 27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Group 1 funds
Up to $99,999 3.00% 2.26% 0.25% 2.50%
$100,000 - $499,999 2.50% 2.01% 0.25% 2.25%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Group 2 funds
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of $1 million
or more (Groups 1 and 2)
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
Waiver investments(2) -- 0.00% 0.25% 0.25%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
Group 1 funds
All amounts 2.25% 0.25% 2.50%
Group 2 funds
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
28 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and investment practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that a John Hancock income fund
will earn income or show a positive total return over any period of time --
days, months or years.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another security
or index) is used as a hedge against an opposite position that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative affect on fund management or
performance.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
FUND DETAILS 29
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices
- --------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semi-annual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
@ Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
Intermediate Sovereign
Government High Yield Maturity Limited-Term Sovereign U.S. Gov't Strategic
Income Bond Gov't Government Bond Income Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment practices
Borrowing; reverse repurchase agreements
The borrowing of money from banks
or through reverse repurchase agreements.
Leverage, credit risks. 33.3 33.3 33.3 33.3 33.3 33.3 33
Covered mortgage dollar roll transactions
The sale of mortgage-backed securities
with the commitment to buy back similar
securities at a future date. Credit, interest
rate,leverage, market, opportunity risks. * * * * * * *
Repurchase agreements The purchase of a
security that must later be sold back to
the issuer at the same price plus interest.
Credit risk. * * * * * * *
Securities lending The lending of securities
to financial institutions, which provide
cash or government securities as collateral.
Credit risk. 30 30 33.3 33.3 33.3 30 33.3
Short-term trading Selling a security soon
after purchase. A portfolio engaging in
short-term trading will have higher turnover
and transaction expenses. Market risk. * * * * * * *
When-issued securities and forward commitments
The purchase or sale of securities for delivery
at a future date; market value may change before
delivery. Market, opportunity, leverage risks. * * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
Conventional securities
Brady bonds Dollar-denominated securities issued
to refinance foreign government bank loans and
other debt. Credit, interest rate, market,
political risks. 10 @ (1) -- -- 25 -- @ (1)
Foreign debt securities Debt securities issued
by foreign governments or companies. Credit,
currency, interest rate, market, political risks. 20 * (1) -- -- 25 -- * (1)
In-kind, delayed and zero coupon debt securities
Securities offering non-cash or delayed-cash
payment. Their prices are typically more volatile
than those of conventional debt securities.
Credit, interest rate, market risks. * * * * * * *
Restricted and illiquid securities Securities
not traded on the open market. May include
illiquid Rule 144A securities. Liquidity,
valuation, market risks. 10 10 15 15 15 15 15
- ------------------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Asset-backed securities Securities backed by
unsecured debt, such as credit card debt;
these securities are often guaranteed or
over-collateralized to enhance their credit
quality. Credit, interest rate risks. 20 * 35 20 * 35 *
Mortgage-backed securities Securities backed
by pools of mortgages, including passthrough
certificates, PACs, TACs and other senior
classes of collateralized mortgage obligations
(CMOs). Credit, extension, prepayment, interest
rate risks. * * * * * * *
Participation interests Securities representing
an interest in another security or in bank loans.
Credit, interest rate, liquidity, valuation
risks. -- 10(2) -- -- 15(2) -- 15(2)
Rights and warrants Securities offering the
right, or involving the promise, to buy or
sell certain securities at a future date.
Market risk. 5 5 5 5 5 -- 5
</TABLE>
(1) No more than 25% of the fund`s assets will be invested in government
securities of any one foreign country.
(2) Part of the 10% or 15% limitation on illiquid securities.
30 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Intermediate Sovereign
Government High Yield Maturity Limited-Term Sovereign U.S. Gov't Strategic
Income Bond Gov't Government Bond Income Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leveraged derivative securities
Currency contracts Contracts involving the
right or obligation to buy or sell a
given amount of foreign currency at a
specified price and future date.
o Hedged. Currency, hedged leverage,
correlation, liquidity, opportunity risks. -- * -- -- -- -- *
o Speculative. Currency, speculative
leverage, liquidity risks. -- -- -- -- -- -- @
Financial futures and options; securities
and index options Contracts involving the
right or obligation to deliver or receive
assets or money depending on the performance
of one or more assets or an economic index.
o Futures and related options. Interest
rate, currency, market, hedged or
speculative leverage, correlation,
liquidity, opportunity risks. * * * * * * *
o Options on securities and indices. Interest
rate, currency, market, hedged or speculative
leverage, correlation, liquidity, credit,
opportunity risks. * * * * @ * @
Structured securities Indexed and/or leveraged
mortgage-backed and other debt securities,
including principal-only and interest-only
securities, leveraged floating rate securities,
and others. These securities tend to be highly
sensitive to interest rate movements and their
performance may not correlate to such movements
in a conventional fashion. Credit, interest
rate, extension, prepayment, market, speculative
leverage, liquidity, valuation risks. * 10 10 10 10 10 *
Swaps, caps, floors, collars OTC contracts
involving the right or obligation to receive
or make payments based on two different income
streams. Correlation, credit, currency, interest
rate, hedged or speculative leverage, liquidity,
valuation risks. @ @ @ @ @ @ @
</TABLE>
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
[The following table was depicted as a bar graph in the printed material.]
<TABLE>
<CAPTION>
Quality rating
(S&P/Moody's)(2) High Yield Bond Fund Sovereign Bond Fund Strategic Income Fund
<S> <C> <C> <C>
Investment-Grade Bonds
AAA/Aaa 0.9% 41.8% 22.6%
AA/Aa 0.4% 9.4% 10.7%
A/A 0.2% 14.2% 0.6%
BBB/Baa 3.8% 13.0% 2.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Junk Bonds
BB/Ba 10.5% 11.7% 10.8%
B/B 64.4% 7.5% 42%
CCC/Caa 6.1% 0.0% 0.9%
CC/Ca 0.4% 0.0% 0.0%
C/C 0.0% 0.0% 0.0%
D 0.4% 0.0% 0.2%
% of portfolio in bonds 87.1% 97.6% 90.0%
</TABLE>
(1) Average weighted quality distribution for the most recent fiscal year.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
FUND DETAILS 31
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/ semi-annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semi-annual report or the SAI,
please write or call:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA02217-1000
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
Internet: www.jhancock.com/funds
[Logo]JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock(R) (C) 1996 John Hancock Funds, Inc.
Financial Services INCPN 5/97
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JOHN HANCOCK BOND TRUST
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock Government Income Fund
John Hancock High Yield Bond Fund
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
July 15, 1997
This Statement of Additional Information provides information about John Hancock
Government Income Fund and John Hancock High Yield Bond Fund (individually a
"Fund" and collectively, the "Funds"), each a diversified series of John Hancock
Bond Trust (the "Trust"), in addition to the information that is contained in
the Funds' Prospectus dated March 1, 1997 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Funds.............................................. 2
Investment Objectives and Policies..................................... 2
Investment Restrictions................................................ 21
Those Responsible for Management....................................... 23
Investment Advisory and Other Services................................. 33
Distribution Contracts................................................. 35
Net Asset Value........................................................ 38
Initial Sales Charge on Class A Shares................................. 38
Deferred Sales Charge on Class B Shares................................ 41
Special Redemptions.................................................... 44
Additional Services and Programs....................................... 44
Description of the Funds' Shares....................................... 46
Tax Status............................................................. 47
Calculation of Performance............................................. 51
Brokerage Allocation................................................... 53
Transfer Agent Services................................................ 55
Custody of Portfolio................................................... 55
Independent Auditors................................................... 55
Appendix............................................................... A-1
Financial Statements .................................................. F-1
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ORGANIZATION OF THE FUNDS
Each Fund is a series of the Trust, an open-end management investment company
organized as a Massachusetts business trust on December 12, 1984. Prior to
December 22, 1994, John Hancock Government Income Fund was called Transamerica
Government Income Fund and John Hancock High Yield Bond Fund was called
Transamerica High Yield Bond Fund. Prior to August 30, 1996, the Funds were
series of John Hancock Series, Inc., a Maryland corporation.
John Hancock Advisers, Inc. (the "Adviser"), an indirect wholly- owned
subsidiary of John Hancock Mutual Life Insurance Company (the "Life Company"),a
Massachusetts life insurance company chartered in 1862 with national
headquarters at John Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. There can be no assurance
that either Fund will achieve its respective investment objective.
John Hancock Government Income Fund's investment objective is to earn a high
level of current income consistent with preservation of capital by investing
primarily in securities that are issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities. The Fund may
seek to enhance its current return and may seek to hedge against changes in
interest rates by engaging in transactions involving options (subject to certain
limits), futures and options on futures. The Fund expects that under normal
market conditions it will invest at least 80% of its total assets in U.S.
Government securities (and related repurchase agreements and forward
commitments). The Fund may take full advantage of the entire range of maturities
of U.S. Government securities and may adjust the dollar-weighted average
maturity of its portfolio from time to time based in large part on the Adviser's
expectation of future changes in interest rates.
As to the balance of the Fund's assets, where consistent with the investment
objective, the Fund may:
1. invest in U.S. dollar denominated securities issued or guaranteed by
foreign governments which are considered stable by the Adviser, or any of the
political subdivisions, instrumentalities, authorities or agencies of these
governments. These securities generally will be rated within the four highest
rating categories by a nationally recognized rating organization (e.g. Standard
& Poor's Rating Group ("S&P") or Moody's Investors Service, Inc. ("Moody's")) or
if not so rated, determined to be of equivalent quality in the opinion of the
Adviser; provided that the Fund may invest up to 10% of its total assets in
securities which may be rated B or better by a nationally recognized rating
organization.
2. invest in other "asset backed securities" which are not included as
"government asset backed": securities and are rated in one of the two highest
rating categories by a nationally recognized credit rating organization or if
not so rated, determined to be of equivalent investment quality in the opinion
the Adviser;
3. engage in hedging transactions, including options, interest rate futures
contracts and options thereon, subject to certain limitations described below;
4. enter into repurchase agreements and reverse repurchase agreements and
invest in when issued securities and restricted securities, subject to certain
limitations described below;
5. invest in (for liquidity purposes) high quality, short-term debt
securities with remaining maturities of one year or less ("money market
instruments") such as certificates of deposit, bankers' acceptances, corporate
debt securities, commercial paper and related repurchase agreements.
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Asset backed securities, like Ginnie Mae certificates, are securities which
represent a participation in or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool of assets similar to
one another. Types of other asset backed securities include automobile
receivable securities, credit card receivable securities and mortgage backed
securities such as collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs").
John Hancock High Yield Bond Fund's primary investment objective is to maximize
current income without assuming undue risk by investing in a diversified
portfolio consisting primarily of lower-rated, high yielding, fixed income
securities, such as: domestic and foreign corporate bonds; debentures and notes;
convertible securities; preferred stocks; and domestic and foreign government
obligations. As a secondary objective, the Fund seeks capital appreciation, but
only when it is consistent with the primary objective of maximizing current
income. The Fund's investment objectives may not be changed without 30 days'
prior written notice to shareholders.
Under normal market conditions, at least 65% of the Fund's total assets may be
invested in bonds or debentures rated "Baa" or lower by Moody's, or "BBB" or
lower by S&P; however, no more than 10% of the Fund's total assets may be
invested in securities that are rated as low as "CC" by S&P or "Ca" by Moody's.
Unrated securities will also be considered for investment by the Fund when the
Adviser believes that the issuer's financial condition, or the protection
afforded by the terms of the securities themselves, limits the risk to the Fund
to a degree comparable to that of rated securities consistent with the Fund's
objectives and policies.
The Fund's investments in debt securities may include zero coupon bonds and
payment-in-kind bonds. Zero coupon bonds are issued at a significant discount
from their principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The market prices
of zero coupon and payment-in-kind bonds are affected to a greater extent by
interest rate changes, and thereby tend to be more volatile than securities
which pay interest periodically and in cash. The Fund accrues income on these
securities for tax and accounting purposes, and this income is required to be
distributed to shareholders. Because no cash is received at the time income
accrues on these securities, the Fund may be forced to liquidate other
investments to make distributions. At times when the Fund invests in zero-coupon
and payment-in-kind bonds, it will not be pursuing its primary objective of
maximizing current income.
Although the Fund intends to maintain investment emphasis on debt securities of
domestic issuers, the Fund may invest without limitation in debt securities of
foreign issuers, including those issued by supranational entities such as the
World Bank. The Fund may also purchase debt securities issued in an any country
developed or undeveloped. Investments in securities of issuers in
non-industrialized countries generally involve more risk and may be considered
speculative. The Fund may also enter into forward foreign currency exchange
contracts for the purchase or sale of foreign currency for hedging purposes. The
risks of foreign investments should be carefully considered by investors.
Included among domestic debt securities eligible for purchase by the Fund are
adjustable and variable or floating rate securities, mortgage related securities
(including stripped securities, collateralized mortgage obligations and
multi-class pass-through securities), asset-backed securities and callable
bonds. Callable bonds have a provision permitting the issuer, at its option to
"call" or redeem the bonds. If an issuer were to redeem bonds held by the Fund
during a time of declining interest rates, the Fund might not be able to
reinvest the proceeds in bonds providing the same coupon return as the bonds
redeemed.
To the extent that the Fund does not invest in the securities described above,
the Fund may:
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1. invest (for liquidity purposes ) in high quality, short-term debt
securities with remaining maturities of one year or less ("money market
instruments") including government obligations, certificates of deposit,
bankers' acceptances, short-term corporate debt securities, commercial paper and
related repurchase agreements;
2. invest up to 10% of its total assets in municipal obligations, including
municipal bonds issued at a discount, in circumstances where the Adviser
determines that investing in such obligations would facilitate the Fund's
ability to accomplish its investment objectives;
3. lend its portfolio securities, enter into repurchase agreements and
reverse repurchase agreements, purchase restricted and illiquid securities and
purchase securities on a when issued or forward commitment basis;
4. write (sell) covered call and put options and purchase call and put
options on debt securities and securities indices in an effort to increase
current income and for hedging purposes; and
5. purchase and sell interest rate futures contracts on debt securities and
securities index futures contracts, and write and purchase options on these
futures contracts for hedging purposes.
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, part or all of the
assets of the Fund may be invested in cash or cash equivalents consisting of:
1. obligations of banks (including certificates of deposit, bankers'
acceptances and repurchase agreements ) with assets of $100,000,0000 or more;
2. commercial paper rated within the two highest rating categories of a
nationally recognized rating organization;
3. investment grade short-term notes;
4. obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities; and
5. related repurchase agreements.
As a matter of fundamental policy, the Fund will not invest more than 25% of its
total assets (taken at market value) in the securities of issuers engaged in any
one industry, except that the Fund may invest up to 40% of the value of its
total assets in the securities of issuers engaged in the electric utility and
telephone industries. The Adviser follows a policy of not causing the Fund to
invest more than 25% of its total assets in the securities of issuers engaged in
the electric utility industry or the telephone industry unless yields available
for four consecutive weeks in the four highest rating categories on new issue
bonds in this industry (issue size of $50 million or more) have averaged greater
than the yields of new issue long-tern industrial bonds similarly rated (issue
size of $50 million or more) and, in the opinion the Adviser, the relative
return available from the electric utility or telephone industry and the
relative risk, marketability, quality and availability of securities of this
industry justifies such an investment. Obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities are not subject to the
foregoing 25% limitation. In addition, for purposes of this limitation,
determinations of what constitutes an industry are made in accordance with
specific industry codes set forth in the Standard Industrial Classification
Manual and without considering groups of industries (e.g., all utilities, to be
an industry.
Government Securities. Each Fund may invest in U.S. Government securities, which
are obligations issued or guaranteed by the U.S. Government and its agencies,
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authorities or instrumentalities. Certain U.S. Government securities, including
U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities, issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes").
Custodial Receipts. The Funds may acquire custodial receipts for U.S. government
securities. Custodial receipts evidence ownership of future interest payments,
principal payments or both, and include Treasury Receipts, Treasury Investors
Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities
("CATS").
Custodial receipts are not considered U.S. government securities.
Bank and Corporate Obligations. Each of the Funds may invest in commercial
paper. Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Funds consists of direct U.S.
dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which a Fund may invest include certificates of deposit, bankers' acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Municipal Obligations. High Yield Bond Fund may invest in a variety of municipal
obligations which consist of municipal bonds, municipal notes and municipal
commercial paper.
Municipal Bonds. Municipal bonds are issued to obtain funds for various public
purposes including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
exempt from federal income tax. The payment of principal and interest by issuers
of certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. Such guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
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Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
Federal tax legislation enacted in the 1980s placed substantial new restrictions
on the issuance of the bonds described above and in some cases eliminated the
ability of state or local governments to issue municipal obligations for some of
the above purposes. Such restrictions do not affect the Federal income tax
treatment of municipal obligations in which the Fund may invest which were
issued prior to the effective dates of the provisions imposing such
restrictions. The effect of these restrictions may be to reduce the volume of
newly issued municipal obligations.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. There is also the possibility that as a result of litigation or
other conditions the power or ability of any one or more issuers to pay when due
the principal of and interest on their municipal obligations may be affected.
The yields of municipal bonds depend upon, among other things, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service,
Inc. ("Moody's") and Fitch Investors Service ("Fitch") represent their
respective opinions on the quality of the municipal bonds they undertake to
rate. It should be emphasized, however, that ratings are general and not
absolute standards of quality. Consequently, municipal bonds with the same
maturity, coupon and rating may have different yields and municipal bonds of the
same maturity and coupon with different ratings may have the same yield. See the
Appendix for a description of ratings. Many issuers of securities choose not to
have their obligations rated. Although unrated securities eligible for purchase
by the Fund must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
Mortgage-Backed Securities. The Funds may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits REMIC, CMOs and stripped mortgage-backed securities
("SMBS"), and other types of "Mortgage-Backed Securities" that may be available
in the future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to Ginnie Mae, Fannie Mae and Freddie Macs.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
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principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass-through securities. Debt service on CMOs is
provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), and invests in certain mortgages
primarily secured by interests in real property and other permitted investments.
Investors may purchase "regular" or "residual" interests in REMICs, although the
Funds do not intend, absent a change in current tax law, to invest in residual
interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
Structured or Hybrid Notes. Government Income Fund and High Yield Bond Fund may
invest in "structured" or "hybrid" notes. The distinguishing feature of a
structured or hybrid note is that the amount of interest and/or principal
payable on the note is based on the performance of a benchmark asset or market
other than fixed income securities or interest rates. Examples of these
benchmarks include stock prices, currency exchange rates and physical commodity
prices. Investing in a structured note allows a Fund to gain exposure to the
benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, a Fund may forego all or part of the interest and principal that would
be payable on a comparable conventional note; a Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 10% limitation on investments
in illiquid securities.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
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Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated with Mortgage-backed Securities. Different types of derivative
debt securities are subject to different combinations of prepayment, extension
and/or interest rate risk. Conventional mortgage pass- through securities and
sequential pay CMOs are subject to all of these risks, but are typically not
leveraged. Thus, the magnitude of exposure may be less than for more leveraged
Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage-Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only debt securities ("POs"),
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage-Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
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Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Convertible Securities. High Yield Bond Fund may invest in convertible
securities. Convertible securities may be converted at either a stated price or
stated rate into underlying shares of common stock of the same issuer.
Convertible securities have general characteristics similar to both fixed income
and equity securities. The market value of convertible securities declines as
interest rates increase, and increases as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stocks and therefore will also react to variations in the general market for
equity securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis, and consequently may not experience
market value declines to the same extent as the underlying common stock. When
the market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer. However, the issuers of
convertible securities may default on their obligations.
Mortgage "Dollar Roll" Transactions. The Funds may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which a
Fund sells Mortgage-Backed Securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Funds will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of a Fund's borrowing and other senior securities. For financial reporting and
tax purposes, each Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. Neither Fund currently intends to enter into
mortgage rolls that are accounted for as financing.
Pay-In-Kind, Delayed and Zero Coupon Bonds. Each Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices of pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. A Fund's investments in pay-in-kind, delayed and
zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status." At times when a Fund invests in pay-in-kind,
delayed and zero coupon bonds, it will not be pursuing its primary objective of
maximizing current income.
Indexed Securities. High Yield Bond Fund may invest in indexed securities,
including floating rate securities that are subject to a maximum interest rate
("capped floaters") and leveraged inverse floating rate securities ("inverse
floaters") (up to 10% of the Fund's total assets). The interest rate or, in some
cases, the principal payable at the maturity of an indexed security may change
positively or inversely in relation to one or more interest rates, financial
indices or other financial indicators ("reference prices"). An indexed security
may be leveraged to the extent that the magnitude of any change in the interest
rate or principal payable on an indexed security is a multiple of the change in
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the reference price. Thus, indexed securities may decline in value due to
adverse market changes in interest rates or other reference prices.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to different
types of investments, each Fund may enter into interest rate swaps and other
types of swap agreements such as caps, collars and floors. Only High Yield Bond
Fund may enter into currency swaps, caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payment to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. For example, if a Fund agreed to exchange payments in
dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. Each Fund will maintain in a segregated account
with its custodian, cash or liquid securities equal to the net amount, if any,
of the excess of the Fund's obligations over its entitlements with respect to
swap, cap, collar or floor transactions.
Asset-Backed Securities. Government Income Fund and High Yield Bond Fund may
invest a portion of their assets in asset-backed securities. For Government
Income Fund, these securities must be rated in one of the two highest rating
categories by a nationally recognized statistical rating organization (e.g., S&P
or Moody's) or if not so rated, of equivalent investment quality in the opinion
of the Adviser.
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
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residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Lower Rated High Yield Debt Obligations. Government Income Fund and High Yield
Bond Fund may invest in high yielding, fixed income securities rated below
investment grade (e.g., rated below Baa by Moody's or below BBB by S&P),
sometimes referred to as junk bonds. No more than 10% of Government Income
Fund's total assets may be invested in these securities, and Government Income
Fund may not invest in securities rated lower than B by a nationally recognized
rating organization. Ratings are based largely on the historical financial
condition of the issuer. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition, which may be better or worse than the rating would indicate.
See the Appendix to this Statement of Additional Information which describes the
characteristics of corporate bonds in the various rating categories. High Yield
Bond Fund may invest in comparable quality unrated securities which, in the
opinion of the Adviser, offer comparable yields and risks to those securities
which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The high yield fixed income market is relatively new and
its growth occurred during a period of economic expansion. The market has not
yet been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities generally
respond to short term corporate and market developments to a greater extent than
do the price and liquidity of higher rated securities because such developments
are perceived to have a more direct relationship to the ability of an issuer of
such lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately a Fund's assets. The reduced availability of
reliable, objective data may increase a Fund's reliance on management's judgment
in valuing high yield bonds. In addition, a Fund's investments in high yield
securities may be susceptible to adverse publicity and investor perceptions,
whether or not justified by fundamental factors. A Fund's investments, and
consequently its net asset value, will be subject to the market fluctuations and
risks inherent in all securities.
Ratings as Investment Criteria In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These rating will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information concerning the rating of Moody's and S&P and their
significance. Subsequent to its purchase by the Funds, an issue of securities
may cease to be rated, or its rating may be reduced below the minimum required
for purchase by the Funds. Neither of these events will require the sale of the
securities by the Funds.
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Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
Brady Bonds. The Funds may invest in Brady Bonds and other sovereign debt
securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities issued by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness (generally, commercial bank debt). In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as multilateral institutions such as the World
Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitate
the exchange of commercial bank debt for newly issued (known as Brady Bonds).
The World Bank and the IMF provide funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
IMF debtor nations are required to implement domestic monetary and fiscal
reforms. These reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs promote
the debtor country's ability to service its external obligations and promote its
economic growth and development. The Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors. The Adviser believes that economic reforms undertaken by countries in
connection with the issuance of Brady Bonds make the debt of countries which
have issued or have announced plans to issue Brady Bonds an attractive
opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Phillipines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January 1, 1997, the Funds are not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have along payment
history. Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt, bonds issued at a discount of face value of such debt, bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Certain Brady Bonds have been
collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Investments in Foreign Securities. Government Income Fund may invest in U.S.
dollar denominated securities of foreign governments. These securities will
generally be rated within the four highest rating categories by a nationally
recognized rating organization S&P or Moody's or if not so rated, determined to
be of equivalent quality in the opinion of the Adviser; provided that Government
Income Fund may invest up to 10% of its total assets in securities which may be
rated B or better by a nationally recognized rating organization.
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High Yield Bond Fund may invest in securities of foreign issuers, including debt
and equity securities of corporate and governmental issuers in countries with
emerging economies or securities markets. High Yield Bond Fund may also invest
in American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs")
or other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs, in
bearer form, are designed for use in European securities markets.
Foreign Currency Transactions. High Yield Bond Fund may engage in foreign
currency transactions. The foreign currency exchange transactions of the Fund
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may enter
into forward foreign currency exchange contracts involving currencies of the
different countries in which it may invest as a hedge against possible
variations in the foreign exchange rate between these currencies. Forward
contracts are agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. Transaction hedging is
the purchase or sale of forward foreign currency contracts with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities quoted or denominated in the same
or related foreign currencies. Portfolio hedging is the use of forward foreign
currency contracts to offset portfolio security positions denominated or quoted
in the same or related foreign currencies. The Fund's dealings in forward
foreign currency exchange contracts will be limited to hedging either specified
transactions or portfolio positions. The Fund will not attempt to hedge all of
its foreign portfolio positions.
If High Yield Bond Fund enters into a forward contract requiring it to purchase
foreign currency, its custodian bank will segregate cash or liquid securities,
of any type or maturity, in a separate account of the Fund in an amount
necessary to complete the forward contract. These assets will be valued at
market daily and if the value of the securities in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment in
purchased forward contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of these securities decline. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency exchange transactions
varies with factors such as the currency involved, the length of the contract
period and the prevailing market conditions. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
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realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly, so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation, limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends in some cases, capital gains, and interest payable on certain of
the Fund's foreign portfolio securities may be subject to foreign withholding or
other foreign taxes, thus reducing the net amount of income or gains available
for distribution to the Fund's shareholders.
Repurchase Agreements. Each Fund may invest in repurchase agreements. In a
repurchase agreement the Fund buys a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the
issuer at a fixed time and price plus accrued interest. Each Fund will enter
into repurchase agreements only with member banks of the Federal Reserve System
and with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Funds
enter into repurchase agreements.
Each Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, a decline in
value of the underlying securities or lack of access to income during this
period, and the expense of enforcing its rights.
Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase
agreements which involve the sale of government securities held in its portfolio
to a bank with an agreement that the Fund will buy back the securities at a
fixed future date at a fixed price plus an agreed amount of "interest" which may
be reflected in the repurchase price. Reverse repurchase agreements are
considered to be borrowings by the Fund. Reverse repurchase agreements involve
the risk that the market value of securities purchased by a Fund with proceeds
of the transaction may decline below the repurchase price of the securities sold
by the Fund which it is obligated to repurchase. A Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. To minimize various risks associated with reverse repurchase
agreements, the Fund will establish and maintain with the Fund's custodian a
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separate account consisting of liquid securities, of any type or maturity, in an
amount at least equal to the repurchase prices of the securities (plus any
accrued interest thereon) under such agreements. A Fund will not enter into
reverse repurchase agreements and other borrowings exceeding in the aggregate
more than 33 1/3% of the market value of its total assets. Government Income
Fund will not make additional investments while borrowings (including reverse
repurchase agreements) are in excess of 5% of the Fund's total assets. A Fund
will enter into reverse repurchase agreements only with federally insured banks
or savings and loan associations which are approved in advance as being
creditworthy by the Trustees. Under procedures established by the Trustees, the
Adviser will monitor the creditworthiness of the banks involved.
Restricted Securities. The Funds may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. Each Funds will not invest more than 10% of its total
assets in illiquid investments, based upon a continuing review of the trading
markets for specific Section 4(2) paper or Rule 144A securities, that they are
liquid, they will not be subject to the 10% limit on illiquid investments. The
Trustees may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring the liquidity of restricted securities. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor each Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Options on Securities, Securities Indices and Currency. Each Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or, in the
case of High Yield Bond Fund, on any currency in which Fund investments may be
denominated. These options may be listed on national domestic securities
exchanges or foreign securities exchanges or traded in the over-the-counter
market. Each Fund may write covered put and call options and purchase put and
call options to enhance total return, as a substitute for the purchase or sale
of securities or (in the case of High Yield Bond Fund) currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the Fund's custodian with a value at least equal to the
Fund's obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the Fund's net
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exposure on its written option position. A written call option on securities is
typically covered by maintaining the securities that are subject to the option
in a segregated account. A Fund may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of the
underlying index.
A Fund may terminate its obligations under an exchange traded call or put option
by purchasing an option identical to the one it has written. Obligations under
over-the-counter options may be terminated only by entering into an offsetting
transaction with the counterparty to such option. Such purchases are referred to
as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in anticipation
of an increase, or put options in anticipation of a decrease ("protective
puts"), in the market value of securities or (in the case of High Yield Bond
Fund) currencies of the type in which it may invest. A Fund may also sell call
and put options to close out its purchased options.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of a Fund's portfolio securities or (in
the case of High Yield Bond Fund) the currencies in which they are denominated.
Put options may also be purchased by a Fund for the purpose of affirmatively
benefiting from a decline in the price of securities or currencies which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities or currency decreased below the exercise
price sufficiently to cover the premium and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of put options may be offset by countervailing
changes in the value of a Fund's portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which a Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If a Fund is unable
to effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
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closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or (in the
case of High Yield Bond Fund) currency exchange rates, each Fund may purchase
and sell various kinds of futures contracts, and purchase and write call and put
options on these futures contracts. The Fund may also enter into closing
purchase and sale transactions with respect to any of these contracts and
options. The futures contracts may be based on various securities (such as U.S.
Government securities), securities indices, foreign currencies (in the case of
High Yield Bond Fund) and any other financial instruments and indices. All
futures contracts entered into by the Funds are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that a Fund proposes to acquire or (in the
case of High Yield Bond Fund) the exchange rate of currencies in which portfolio
securities are quoted or denominated. When interest rates are rising or
securities prices are falling, a Fund can seek to offset a decline in the value
of its current portfolio securities through the sale of futures contracts. When
interest rates are falling or securities prices are rising, a Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
High Yield Bond Fund may seek to offset anticipated changes in the value of a
currency in which its portfolio securities, or securities that it intends to
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purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or (in the case of High Yield Bond
Fund) foreign currency rates that would adversely affect the dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. Similarly,
High Yield Bond Fund may sell futures contracts on any currencies in which its
portfolio securities are quoted or denominated or in one currency to hedge
against fluctuations in the value of securities denominated in a different
currency if there is an established historical pattern of correlation between
the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in a Fund's portfolio may
be more or less volatile than prices of such futures contracts, the Adviser will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any differential by having the Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or (in the case of High Yield Bond Fund) currency exchange
rates then available in the applicable market to be less favorable than prices
that are currently available. A Fund may also purchase futures contracts as a
substitute for transactions in securities or (in the case of High Yield Bond
Fund) foreign currency, to alter the investment characteristics of or currency
exposure associated with portfolio securities or to gain or increase its
exposure to a particular securities market or currency.
Options on Futures Contracts. Each Fund may purchase and write options on
futures for the same purposes as its transactions in futures contracts. The
purchase of put and call options on futures contracts will give a Fund the right
(but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, a Fund obtains the
benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that a Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by a Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
18
<PAGE>
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. Each Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that a Fund is using futures and
related options for hedging purposes, futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that the Fund owns or futures contracts will be purchased
to protect the Fund against an increase in the price of securities (or, in the
case of High Yield Bond Fund, the currency in which they are quoted or
denominated) it intends to purchase. Each Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or securities or instruments which it expects to purchase. As evidence
of its hedging intent, each Fund expects that on 75% or more of the occasions on
which it takes a long futures or option position (involving the purchase of
futures contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets of High Yield
Bond Fund denominated in the related currency) in the cash market at the time
when the futures or option position is closed out. However, in particular cases,
when it is economically advantageous for a Fund to do so, a long futures
position may be terminated or an option may expire without the corresponding
purchase of securities or other assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. Each Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Funds' portfolios are various futures
on U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
19
<PAGE>
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent a Fund from closing out
positions and limiting its losses.
Restricted Securities. The Funds may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. Each Funds will not invest more than 10% of its total
assets in illiquid investments, based upon a continuing review of the trading
markets for specific Section 4(2) paper or Rule 144A securities, that they are
liquid, they will not be subject to the 10% limit on illiquid investments. The
Trustees may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring the liquidity of restricted securities. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor each Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Lending of Securities. The Funds may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. A
Fund may reinvest any cash collateral in short-term securities and money markets
funds. When a Fund lends portfolio securities, there is a risk that the borrower
may fail to return the securities involved in the transaction. As a result, the
Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund
may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of each Fund not to lend portfolio securities having a total
value exceeding 30% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Fundamental
Investment Restriction. Generally, warrants and stock purchase rights do not
carry with them the right to receive dividends or exercise voting rights with
respect to the underlying securities, and they do not represent any rights in
the assets of the issuer. As a result, an investment in warrants and rights may
be considered to entail greater investment risk than certain other types of
investments. In addition, the value of warrant and rights does not necessarily
change with the value of the underlying securities, and they cease to have value
if they are not exercised on or prior to their expiration date. Investment in
warrants and rights increases the potential profit or loss to be realized from
the investment of a given amount of the Fund's assets as compared with investing
the same amount in the underlying stock.
Forward Commitment and When-Issued Securities. Each Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Funds losing the
opportunity to obtain a price and yield considered to be advantageous. The
20
<PAGE>
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a when-
issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. Each Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income. Short
term trading may have the effect of increasing portfolio turnover rate. A high
rate of portfolio turnover (100% or greater) involves correspondingly greater
brokerage transaction expenses and may make it more difficult for a Fund to
qualify as a regulated investment company for federal income tax purposes. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights" in the prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. Each Fund has adopted certain fundamental
investment restrictions upon its investments as set forth below which cannot be
changed as to either Fund without the approval of the holders of a majority of
that Fund's outstanding shares. A majority for this purpose means: (a) more than
50% of the outstanding shares of a Fund, or (b) 67% or more of the shares
represented at a meeting where more than 50% of the outstanding shares of a Fund
are represented, whichever is less. If a percentage restriction or rating
restriction on investment or utilization of assets is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of a Fund's portfolio securities or a later
change in the rating of a portfolio security will not be considered a violation
of policy.
Each Fund may not:
(1) Borrow money in an amount in excess of 33-1/3% of its total assets, and then
only as a temporary measure for extraordinary or emergency purposes (except that
it may enter into a reverse repurchase agreement within the limits described in
the Prospectus or this Statement of Additional Information), or pledge, mortgage
or hypothecate an amount of its assets (taken at market value) in excess of 15%
of its total assets, in each case taken at the lower of cost or market value.
For the purpose of this restriction, collateral arrangements with respect to
options, futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margins are not considered a
pledge of assets.
(2) Underwrite securities issued by other persons except insofar as such Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Purchase or retain real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein and securities secured by real estate),
or mineral leases, commodities or commodity contracts (except contracts for the
future delivery of fixed income securities, stock index and currency futures and
options on such futures) in the ordinary course of its business. Each Fund
21
<PAGE>
reserves the freedom of action to hold and to sell real estate or mineral
leases, commodities or commodity contracts acquired as a result of the ownership
of securities.
(4) Invest in direct participation interests in oil, gas or other mineral
exploration or development programs.
(5) Make loans to other persons except by the purchase of obligations in which
such Fund is authorized to invest and by entering into repurchase agreements;
provided that a Fund may lend its portfolio securities not in excess of 30% of
its total assets (taken at market value). Not more than 10% of a Fund's total
assets (taken at market value) will be subject to repurchase agreements maturing
in more than seven days. For these purposes the purchase of all or a portion of
an issue of debt securities shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value) to
be invested in the securities of such issuer, other than securities issued or
guaranteed by the United States or any state or political subdivision thereof,
or any political subdivision of any such state, or any agency or instrumentality
of the United States, any state or political subdivision thereof, or any
political subdivision of any such state. In applying these limitations, a
guarantee of a security will not be considered a security of the guarantor,
provided that the value of all securities issued or guaranteed by that
guarantor, and owned by the Fund, does not exceed 10% of the Fund's total
assets. In determining the issuer of a security, each state and each political
subdivision agency, and instrumentality of each state and each multi-state
agency of which such state is a member is a separate issuer. Where securities
are backed only by assets and revenues of a particular instrumentality, facility
or subdivision, such entity is considered the issuer.
(7) Invest in companies for the purpose of exercising control or management.
(8) Purchase or retain in its portfolio any securities issued by an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of such Fund, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by such Fund one
or more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
(9) Purchase any securities or evidences of interest therein on margin, except
that each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and each Fund may make deposits
on margin in connection with futures contracts and related options.
(10) Sell any security which such Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon equivalent conditions.
(11) Knowingly invest in securities which are subject to legal or contractual
restrictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or market makers do not exist or will not
entertain bids or offers), except for repurchase agreements, if, as a result
thereof more than 10% of such Fund's total assets (taken at market value) would
be so invested.
(12) Issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act") if such issuance is specifically prohibited
22
<PAGE>
by the 1940 Act or the rules and regulations promulgated thereunder. For the
purpose of this restriction, collateral arrangements with respect to options,
futures contracts and options on futures contracts and collateral arrangements
with respect to initial and variation margins are not deemed to be the issuance
of a senior security.
Non-Fundamental Investment Restrictions. The following investment restrictions
are designated as nonfundamental and may be changed by the Trustees without
shareholder approval.
Government Income Fund may not invest more than 25% of its total assets (taken
at market value) in the securities of issuers engaged in any one industry. High
Yield Bond Fund may not invest more than 25% of its total assets (taken at
market value) in the securities of issuers engaged in any one industry, except
that High Yield Bond Fund may invest up to 40% of the value of its total assets
in the securities of issuers engaged in the electric utility and telephone
industries. Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities are not subject to either Fund's limitations on
industry concentration. Also, a Fund may not purchase securities of any issuer
(other than securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities) if such purchase, at the time thereof, would
cause a Fund to hold more than 10% of any class of securities of such issuer.
For this purpose, all indebtedness of an issuer shall be deemed a single class
and all preferred stock of an issuer shall be deemed a single class.
Government Income Fund will not invest more than 5% of its total assets in
companies which, including their respective predecessors, have a record of less
than three years' continuous operation.
In order to comply with certain state regulatory policies, neither Fund will, as
a matter of operating policy, pledge, mortgage or hypothecate its portfolio
securities if the percentage of securities so pledged, mortgaged or hypothecated
would exceed 15%.
In order to comply with certain state regulatory policies, the cost of
investments in options, financial futures, stock index futures and currency
futures, other than those acquired for hedging purposes, may not exceed 10% of a
Fund's total net assets.
Neither Fund may purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the Fund's
total assets would be invested in the securities of any one investment company.
These limitations do not apply to (a) the investment of cash collateral,
received by the Fund in connection with lending of the Fund's portfolio
securities, in the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the assets of
another investment company. Subject to the above percentage limitations, each
Fund may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase securities of
other investment companies within the John Hancock Group of Funds.
If a percentage restriction or rating restriction on investment or utilization
of assets is adhered to at the time an investment is made or assets are so
utilized, a later change in percentage resulting from changes in the value of a
Fund's portfolio securities or a later change in the rating of a portfolio
security will not be considered a violation of policy.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by the Trust's Trustees who elect officers
who are responsible for the day-to-day operations of each Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Trust are also officers and Directors of the Adviser or Officers and Directors
of the Funds' principal distributor, John Hancock Funds, Inc. ("John Hancock
Funds").
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Capital Corporation and New
England/Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994); Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds; Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993); Director, Signature
Services (until January 1996).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
27
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp. and NM Capital; Trustee,
The Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, John Hancock Property and
Casualty Insurance and its
affiliates (until November 1993);
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
29
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, SAMCorp.,
Insurance Agency, Inc. and NM
Capital; Counsel, John Hancock
Mutual Life Insurance Company (until
January 1997).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group, Vice
March 1950 President, John Hancock
Distributors, Inc. (until 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Directors and officers may also be officers
and/or Directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of June 30, 1997 the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the Trust and of
each of the Funds. On such date, the following shareholders were the only record
holders and beneficial owners of 5% or more of the shares of the respective
Funds:
30
<PAGE>
<TABLE>
<CAPTION>
Number of Shares held (expressed as Percentage
of each Fund's outstanding shares)
Number of Shares Percentage of Total
Name and Address of of Beneficial Outstanding Shares of
Shareholder Class of Shares Interest Owned the Class of the Fund
- ----------- --------------- -------------- ---------------------
<S> <C> <C> <C>
Merrill Lynch Pierce Government 2,215,173 12.95%
Fenner & Smith, Inc. Income Fund
4800 Deerlake Dr. East Class B
Jacksonville, FL
32246-6484
Continental Trust Co Government 1,105,445 6.46%
C/F County Employee's Annuity Income Fund
& Ben Fund of Cook County IL Class B
209 W Jackson St STE 700
Chicago, Il 60606
Novell Incorporated High Yield 790,133 5.69%
1555 North Technology Way Bond Fund
Orem UT Class A
Merrill Lynch Pierce High Yield 10,667,837 20.55%
Fenner & Smith, Inc. Bond Fund
4800 Deerlake Dr. East Class B
Jacksonville, FL
32246-6484
</TABLE>
At such date, no other person(s), owned of record or was known by the Trust to
beneficially own as much as 5% of the outstanding shares of the Trust or of
either of the Funds.
From December 22, 1994 until December 22, 1996, the Trustees established an
Advisory Board to facilitate a smooth transition between Transamerica Fund
Management Company ("TFMC"), the prior investment adviser, and the Adviser. The
members of the Advisory Board were distinct from the Trustees, did not serve the
Funds in any other capacity and were persons who had no power to determine what
securities were purchased or sold and behalf of the Funds.
Compensation of the Trustees and Advisory Board. The following tables provide
information regarding the compensation paid by the Funds and the other
investment companies in the John Hancock Fund Complex to the Independent
Directors and the Advisory Board members for their services for the Funds' most
recently completed fiscal year. Ms. Hodsdon and Messrs. Boudreau and Scipione,
each a non-Independent Trustee, and each of the officers of the Trust are
interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates and receive no compensation from the Funds for their services.
31
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate Total Compensation
Compensation from Compensation from from all Funds in
Government Income High Yield Bond John Hancock Fund
Fund (1) Fund (1) Complex to Trustees(2)
-------- -------- ----------------------
<S> <C> <C> <C>
James F. Carlin $ 7,487 $ 2,346 $ 74,250
William H. Cunningham* 9,806 3,064 74,250
Charles F. Fretz 7,422 2,327 74,500
Harold R. Hiser, Jr.* 7,105 2,196 70,250
Charles L. Ladner 7,422 2,327 74,500
Leo E. Linbeck, Jr. 9,806 3,064 74,250
Patricia P. McCarter* 7,422 2,327 74,250
Steven R. Pruchansky* 7,611 2,400 77,500
Norman H. Smith* 7,611 2,400 77,500
John P. Toolan* 7,398 2,319 74,250
-------- -------- ---------
Totals $ 79,090 $ 24,770 $ 745,500
</TABLE>
1 Compensation for the period ended October 31, 1996.
2 The total compensation paid by the John Hancock Funds Complex to the
Independent Trustees as of the calendar year ended December 31, 1996.
As of This date there were 67 funds in the John Hancock Funds Complex,
of which each of these Independent Trustees served on 32.
As of December 31, 1996, the value of the aggregate deferred
compensation from all funds in the John Hancock Funds Complex for Mr.
Cunningham was $131,741, for Mr. Hiser was $ 90,972, for Ms. McCarter
was 67,548, for Mr. Pruchansky was $28,731, for Mr. Smith was $32,314
and for Mr. Toolan was $163,385 under the John Hancock Group of Funds
Deferred Compensation Plan for Independent Trustees.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from Aggregate from all Funds in John
Government Income Compensation from Hancock Fund Complex
Advisory Board Fund High Yield Bond Fund to Board Members**
- -------------- ---- -------------------- ------------------
<S> <C> <C> <C>
R. Trent Campbell $ 10,938 $ 3,397 $ 47,000
Mrs. Lloyd Bentsen 10,686 3,308 47,000
Thomas R. Powers 10,692 3,313 47,000
Thomas B. McDade 10,756 3,333 47,000
-------- ------- ---------
Totals $ 43,072 $13,351 $ 188,000
</TABLE>
* For the fiscal year ended October 31, 1996.
** As of December 31, 1996.
32
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-
7603, was organized in 1968 and has more than $22 billion in assets under
management in its capacity as investment adviser to the Funds and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds, having a combined total of over 1,080,000 shareholders. The Adviser is
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard & Poor's
and A.M. Best's. Founded in 1862, the Life Company has been serving clients for
over 130 years.
Each Fund has entered into an investment management contract with the Adviser
(the "Advisory Agreement"). As manager and investment adviser, the Adviser will:
(a) furnish continuously an investment program for the Fund and determine,
subject to the overall supervision and review of the Trustees, which investments
should be purchased, held, sold or exchanged and (b) provide supervision over
all aspects of the Fund's operations except those which are delegated to a
custodian, transfer agent or other agent.
Each Fund bears all cost of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to each Fund's plan of distribution; fees and expenses of custodian
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including and allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not other wise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meeting; trade association memberships; insurance premiums; and any
extraordinary expenses.
As provided by the investment management contracts, each Fund pays the Adviser
an investment management fee, which is accrued daily and paid monthly in arrears
at the following rates of the Funds' average daily net assets:
John Hancock Government Income Fund
Fee
Average Daily Net Assets (Annual Rate)
- ------------------------ -------------
The first $200 million 0.65%
The next $300 million 0.625%
Over $500 million 0.60%
33
<PAGE>
John Hancock High Yield Bond Fund
Fee
Average Daily Net Assets (Annual Rate)
- ------------------------ -------------
The first $75 million 0.625%
The next $75 million 0.5625%
Over $150 million 0.50%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by a Fund may also be held by other funds or investment advisory
clients for which the Adviser or its affiliates provide investment advice.
Because of different investment objectives or other factors, a particular
security may be bought for one or more funds or clients when one or more are
selling the same security. If opportunities for purchase or sale of securities
by the Adviser for the Funds or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to the investment management contracts, the Adviser is not liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which their respective contracts relate, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from its reckless
disregard of the obligations and duties under the applicable investment
management contract.
Under the investment management contracts, the Funds may use the name "John
Hancock" or any name derived from or similar to it only for as long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If a Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
The continuation of the Advisory Agreement was approved on June 25, 1996 by all
of the Trustees. The investment management contract and the distribution
agreement discussed below continue in effect from year to year if approved
annually by vote of a majority of the Trustees who are not interested persons of
one of the parties to the contract, cast in person at a meeting called for the
purpose of voting on such approval, and by either the Trustees or the holders of
a majority of the Fund's outstanding voting securities. Both agreements
automatically terminate upon assignment and may be terminated without penalty on
60 days' written notice by either party or by vote of a majority of the
outstanding voting securities of the Fund.
For the period from November 1, 1994 to December 22, 1994 (a) and for the fiscal
year ended October 31, 1994 (b) advisory fees payable by the Funds to TFMC, each
Fund's former investment adviser, were as follows:
34
<PAGE>
(1) Government Income Fund - (a) $256,721 and (b) $1,728,997
(2) High Yield Bond Fund - (a) $162,374 and (b) $976,834
For the fiscal year ended October 31, 1996 (a) and for the period from December
22, 1994 to October 31, 1995, (b) advisory fees payable by the Funds to the
Adviser, were as follows:
(1) Government Income Fund - (a) $3,952,669 and (b) $1,612,806
(2) High Yield Bond Fund - (a) $1,326,701 and (b) $897,349
Administrative Services Agreement. Each Fund previously was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Funds. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment was provided as necessary to provide
administrative services to the Funds. The Services Agreement was amended in
connection with the appointment of the Adviser as adviser to the Fund to permit
services under the Agreement to be provided to the Funds by the Adviser and its
affiliates. The Services Agreement was terminated during the 1995 fiscal year.
The following amounts for each of the Funds for their respective periods reflect
the total of administrative services fees paid to TFMC ( and to the Adviser
during the period December 22, 1994 to January 16, 1995):
Government Income Fund - For the fiscal years ended October 31, 1995
and 1994 fees paid were $16,694 and $132,786 , respectively.
High Yield Bond Fund -For the fiscal years ended October 31, 1995 and
1994, fees paid were $13,697 and $100,822.
Accounting and Legal Services Agreement. The Trust, on behalf each Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides each Fund with certain tax, accounting
and legal services. For the fiscal year ended October 31, 1996, Government
Income Fund and High-Yield Bond Fund paid the Adviser $96,304 and $37,927 for
services under this agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACTS
Each Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers') which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are continually offered at net asset
value next determined, plus an applicable sales charge, if any. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation from a sales charge imposed, in the case of Class A
shares, at the time of sale or, in the case of Class B shares, on the deferred
35
<PAGE>
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
The Distribution Agreement was initially adopted by the affirmative vote of the
Trust's Trustees including the vote of a majority of Trustees who are not
parties to the agreement or interested persons of any such party, cast in person
at a meeting called for such purpose. The Distribution Agreement shall continue
in effect from year to year if approved by either the vote of the Fund's
shareholders or the Trustees including the vote of a majority of the Trustees
who are not parties to the agreement or interested persons of any such party,
cast in person at a meeting called for such purpose. The Distribution Agreement
may be terminated at any time as to one or both Funds, without penalty, by
either party upon sixty (60) days' written notice or by a vote of a majority of
the outstanding voting securities of the affected Fund and terminates
automatically in the case of an assignment by John Hancock Funds.
For the fiscal year ended October 31, 1996, the following amounts reflect (a)
the total underwriting commissions for sales of the Fund's Class A shares and
(b) the portion of such amount retained by the Fund's distributor, John Hancock
Funds and the former distributor, Transamerica Fund Distributors, Inc. In each
case, the remainder of such underwriting commissions was reallowed to dealers.
High Yield Bond Fund
(a) $239,238 and (b) $19,285
Government Income Fund
(a) $35,314 and (b) $6,442
Each Fund's Trustees adopted Distribution Plans with respect to Class B and
Class B shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company
Act of 1940.
Under the Plans , each Fund's Class A shares and Class B shares will pay
distribution and service fees at an aggregate annual rate of up to 25% and
1.00%, respectively, of that Fund's daily net assets attributable to shares of
that class. However, the service fee will not exceed 0.25% of the Fund's average
daily net assets attributable to each class of shares. In each case, up to 0.25%
is for service expenses and the remaining amount is for distribution expenses.
The distribution fees will be used to reimburse John Hancock Funds for their
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; and (iii) with respect to Class B shares only, interest expenses on
unreimbursed distribution expenses. The service fees will by used to compensate
Selling Brokers for providing personal and account maintenance services to
shareholders. In the event the John Hancock. Funds is not fully reimbursed for
expenses they incur under the Class A Plan, these expenses will not carried
beyond twelve months from the date they were incurred. Unreimbursed expenses
under the Class B Plan will be carried forward together with interest on the
balance of these unreimbursed expenses. A Fund does not treat unreimbursed
expenses under a Class B Plan as a liability of that Fund, because the Trustees
may terminate a Class B Plan at any time. For the fiscal year ended October 31,
1996 an aggregate of $9,835,482 of distribution expenses or 5.51% of the average
net assets of Government Income Fund's Class B shares was not reimbursed or
recovered by John Hancock Funds through the receipt of deferred sales charges or
Rules 12b-1 fees in prior periods. For the same period, an aggregate of $
7,642,995 of distribution expenses or 3.83% of the average net assets of High
Yield Bond Fund's Class B shares was not reimbursed or recovered by John Hancock
Funds through the receipt of deferred sales charges or Rule 12b-1 fees in prior
periods.
36
<PAGE>
The Plans were approved by a majority of the voting securities of each Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of each Fund and who have no direct
or indirect financial interest in the operation of the Plans ( the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide each Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. the Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
Each Plan provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. Each Plan provides that they may be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of that Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights to that Plan. Each of the Plan provides that no
material amendment to the Plans will be effective unless it is approved by a
vote of a majority of the Trustees and the Independent Trustees of the Fund. The
holders of Class A and Class B shares have exclusive voting rights with respect
to the Plan applicable to their respective class of shares. In adopting the
Plans, the Trustees concluded that, in their judgment, these is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of affected Fund.
Amounts paid to John Hancock Funds by any class of shares of each Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of that Fund; provided, however, that expenses attributable to each Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Funds may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Funds
During the fiscal year ended October 31, 1996, the Funds paid the Distributors
the following amounts of expenses with respect to the Class A shares and Class B
shares of each of the Funds:
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Compensation Expenses of Carrying or
Prospectuses to to Selling John Hancock Other Finance
Advertising New Shareholders Brokers Funds Charges
----------- ---------------- ------- ----- -------
<S> <C> <C> <C> <C> <C>
Government Income Fund
Class A Shares $ 77,146 $ 6,073 $783,540 $200,124 --
Class B Shares $112,230 $ 8,840 $711,590 $297,553 $842,339
High Yield Bond Fund
Class A Shares $ 15,545 $ 822 $ 23,340 $ 54,385 --
Class B Shares $177,583 $13,371 $531,696 $696,991 $521,269
</TABLE>
37
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of the
Funds, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by the
events occurring after closing of a foreign market, assets are valued by a
method that Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class net assets by the number of its shares outstanding. On
any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable securities may be significantly affected on days when a shareholder
has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Funds are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees of each Fund reserve the right to
change or waive each Fund's minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Adviser such rejection is in the respective Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Funds are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the investor is
entitled to accumulate current purchases with the greater of the current value
38
<PAGE>
(at offering price) of the Class A shares of the Funds, owned by the investor,
or if John Hancock Signature Services, Inc. ("Signature Services") is notified
by the investor's dealer or the investor at the time of the purchase, the cost
of the Class A shares owned.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment
laws from paying a sales charge or commission when it purchases shares
of any registered investment management company. *
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if
it is purchasing $1 million or more for non-discretionary customers or
accounts. *
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, mother, father, sister, brother,
mother-in-law, father-in-law) of any of the foregoing, or any fund,
pension, profit sharing or other benefit plan of the individuals
described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan. *
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees
at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
Service Agreement. See your Merrill Lynch financial consultant for
further information.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, for each Fund, if the
shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
39
<PAGE>
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
* For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. Each Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty- eight (48) month period. These qualified
retirement plans include IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
Section 457 plans. Such an investment (including accumulations and combinations)
must aggregate $100,000 or more invested during the specified period from the
date of the LOI or from a date within ninety (90) days prior thereto, upon
written request to Signature Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount intended
to be invested had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and the
sales charge payable had the LOI not been in effect is due from the investor.
However, for the purchases actually made with the specified period (either 13 or
48 months), the sales charge applicable will not be higher than that which would
have been applied (including accumulations and combinations) had the LOI been
for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
40
<PAGE>
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Signature Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by a Fund to sell, any additional shares and may be
terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of a sales charge so the Funds will receive the full amount of
the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including Class B shares derived from
reinvestment of dividends or capital gains distributions. No CDSC will be
imposed on shares derived from reinvestment of dividends or capital gains
distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the share you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price. However, you cannot redeem appreciation value only in order to avoid a
CDSC.
When requesting a redemption for a specific dollar amount, please indicate if
you require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $ 600
* Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) - 120
* Minus appreciation on remaining shares
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<PAGE>
(40 shares X $2) - 80
-----
* Amount subject to CDSC $ 400
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Funds to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" in the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Signature
Services. (Please note that this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
For Retirement Accounts (such as IRA, SIMPLE, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan,
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
42
<PAGE>
Please see matrix for reference.
<TABLE>
<CAPTION>
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-
Distribution (401 (k), Rollover retirement
MPP, PSP)
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions in periodic
or 12% of payments
account value
annually in
periodic
payments
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Between 59 1/2 Waived Waived Waived Waived for 12% of account
and 70 1/2 Life value annually
Expectancy or in periodic
12% of account payments
value annually
in periodic
payments
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of account
annuity annuity annuity value annually
payments (72+) payments (72+) payments (72+) in periodic
or 12% of or 12% of or 12% of payments
account value account value account value
annually in annually in annually in
periodic periodic periodic
payments payments payments
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Loans Waived Waived N/A N/A N/A
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Hardships Waived Waived Waived N/A N/A
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------- ------------------ ----------------- ---------------- ---------------- -----------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
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<PAGE>
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such security would be valued for the purpose of making such payment
at the same value as used in determining the Fund's net asset value. Each Fund
has however elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Funds must redeem their shares for cash except to the
extent to that the redemption payments to any shareholder during any 90-day
period would exceed the lesser of $250,000 or 1% of the applicable Fund's net
asset value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The funds permit exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income
Fund, John Hancock Intermediate Maturity Government Fund and John Hancock
Limited-Term Government Fund will retain the exchanged fund's CDSC schedule).
For purposes of computing the CDSC payable upon redemption of shares acquired in
an exchange, the holding period of the original shares is added to the holding
period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
Each Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
Each Fund may refuse any exchange order. Each Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. Each Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds from the redemption
of shares of the applicable Fund. Since the redemption price of the shares of a
Fund may be more or less than the shareholder's cost, depending upon the market
value of the securities owned by each Fund at the time of redemption, the
distribution of cash pursuant to this plan may result in realization of gain or
loss for purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B shares of the Funds could be disadvantageous to a shareholder because of
the initial sales charge payable on such purchases of Class A shares and the
CDSC imposed on redemptions of Class B shares and because redemptions are
taxable events. Therefore, a shareholder should not purchase Class A or Class B
44
<PAGE>
shares at the same time a Systematic Withdrawal Plan is in effect. The Funds
reserve the right to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement and Reinvestment Privilege. If Signature Services is notified
prior to reinvestment, a shareholder who has redeemed each Fund's shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
each Fund or another John Hancock fund, subject to the minimum investment limit
of that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A shares of
each Fund or in Class A shares of any John Hancock fund. If a CDSC was paid upon
a redemption, a shareholder may reinvest the proceeds from this redemption at
net asset value in additional shares of the class from which the redemption was
made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares.
To protect the interests of other investors in each Fund, each Fund may cancel
the reinvestment privilege of any parties that, in the opinion of the Funds, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Funds may refuse any reinvestment
request.
Each Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS".
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
45
<PAGE>
DESCRIPTION OF THE FUNDS' SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of each Fund without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further acting by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized shares of these two Funds and one
other series. Additional series may be added in the future. The Declaration of
Trust also authorizes the Trustees to classify and reclassify the shares of each
Fund, or any new series of the Trust, into one of more classes. As of the date
of this Statement of Additional Information, the Trustees have authorized the
issuance of two classes of shares of each Fund, designated as Class A and Class
B.
Class A and Class B shares of each Fund represent an equal proportionate
interest in the aggregate net asset values attributable to that class of each
Fund. Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to the Class A Plan and the Class B Plan,
respectively, of the applicable Fund. The different classes of the Funds may
bear different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Funds, if any, with respect to each class of shares will
be calculated in the same manner, at the same time and on the same day and will
be in the same amount, except that (i) the distribution and service fees
relating to Class A and Class B shares will be borne exclusively by that Class,
(ii) Class B shares will pay higher distribution and service fees than Class A
shares and (iii) each of Class A shares and Class B shares will bear any class
expenses properly allocable to such class of shares, subject to the conditions
the Internal Revenue Service imposes with respect to multiple-class structures.
Similarly, the net asset value per share may vary depending on the class of
shares purchased.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than in a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations and affairs of the
Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which the
Trust itself would be unable to meet its obligations, and the possibility of
this occurrence is remote.
46
<PAGE>
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. Use of
information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes. Each
Fund has qualified and elected to be treated as a "regulated investment company"
under Subchapter M of the Code, and intends to continue to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, each Fund will not be subject to Federal
income tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
Each Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. Each Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax.
Distributions from a Fund's current or accumulated earnings and profits ("E&P")
will be taxable under the Code for investors who are subject to tax. If these
distributions are paid from the Fund's "investment company taxable income," they
will be taxable as ordinary income; and if they are paid from the Fund's "net
capital gain," they will be taxable as long-term capital gain (net capital gain
is the excess (if any) of net long-term capital gain over net short-term capital
loss, and investment company taxable income is all taxable income and capital
gains, other than net capital gain, after reduction by deductible expenses).
Some distributions from investment company taxable income and/or net capital
gain may be paid in January but may be taxable to shareholders as if they had
been received on December 31 of the previous year. Neither Fund's dividends or
other distributions will generally qualify for the dividends-received deduction
available to corporations. The tax treatment described above will apply without
regard to whether distributions are received in cash or reinvested in additional
shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by High Yield Bond Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of distributions to shareholders. Any
such transactions that are not directly related to a Fund's investment in stock
or securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments or derivatives held for
less than three months, which gain is limited under the Code to less than 30% of
gross income for each taxable year, and could under future Treasury regulations
produce income not among the types of "qualifying income" from which the Fund
must derive at least 90% of its gross income for each taxable year. If the net
foreign exchange loss for a year treated as ordinary loss under Section 988 were
47
<PAGE>
to exceed a Fund's investment company taxable income computed without regard to
such loss but after considering the post-October loss regulations the resulting
overall ordinary loss for such year would not be deductible by the Fund or its
shareholders in future years.
Government Income Fund and High Yield Bond Fund may be subject to withholding
and other taxes imposed by foreign countries with respect to their investments
in foreign securities. Tax conventions between certain countries and the U.S.
may reduce or eliminate such taxes. Investors may be entitled to claim U.S.
foreign tax credits or deductions with respect to such taxes, subject to certain
provisions and limitations contained in the Code. Specifically, if more than 50%
of the value of a Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service pursuant to which shareholders of the Fund
will be required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as qualified foreign
taxes paid by them. The Funds probably will not satisfy this 50% requirement.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends received from the Fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that a Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. A Fund that
cannot or does not make this election may deduct such taxes in determining the
amount it has available for distribution to shareholders, and shareholders will
not, in this event, include these foreign taxes in their income, nor will they
be entitled to any tax deductions or credits with respect to such taxes.
High Yield Bond Fund is permitted to acquire stock in foreign corporations. If
this Fund acquires stock of certain foreign corporations that receive at least
75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The Fund may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
The amount of a Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of such Fund to dispose of
portfolio securities or enter into options or futures transactions that will
generate capital gains. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
48
<PAGE>
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption of shares of a Fund (including by exercise of the exchange
privilege) a shareholder may realize a taxable gain or loss depending upon the
amount of the proceeds and the investor's basis in his shares. Any gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term or short-term, depending upon the
shareholder's tax holding period for the shares and subject to the special rules
described below. A sales charge paid in purchasing Class A shares of a Fund
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent shares of the Fund or another John Hancock fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. Such disregarded load will result in an increase in the shareholder's
tax basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange may be disallowed to the extent the shares disposed of
are replaced with other shares of the same Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to automatic dividend reinvestments. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, each Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Funds
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation by the Fund, each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as long-term capital gain income
in his return for his taxable year in which the last day of such Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by such Fund, and (c) be
entitled to increase the adjusted tax basis for his shares in such Fund by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, each Fund is generally permitted to carry
forward a net capital loss in any year to offset its own net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent net capital gains are offset by such losses, they would not result in
Federal income tax liability to the applicable Fund and, as noted above, would
not be distributed as such to shareholders. As of December 31, 1996, High Yield
Bond Fund had capital loss carryforwards of $20,457,110, of which $9,184,152
expires in 2002 and $11,272,858 expires in 2003, and Government Income Fund had
capital loss carryforwards of $16,766,596 of which $15,347,195 expires in 2002
and $1,419,401 expires in 2003. All of the capital loss carryforwards expiring
in 1996, 1997, 2000 and 2001, respectively, were acquired on September 15, 1995,
in the reorganization with John Hancock Government Securities Trust and,
consequently, their availability may be limited under the Code in a given year.
A Fund is required to accrue income on any debt securities that have more than a
de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options, futures and forward contracts may
also require the Fund to recognize income or gain without a concurrent receipt
49
<PAGE>
of cash. However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) a Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Funds will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although either Fund may in its sole discretion provide relevant
information to shareholders.
Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. A Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Investments in debt obligations that are at risk of or are in default present
special tax issues for the Funds. Tax rules are not entirely clear about issues
such as when the Funds may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund that holds such obligations in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
Limitations imposed by the Code on regulated investment companies like the Funds
may restrict a Fund's ability to enter into futures, options, foreign currency
positions and currency forward transactions.
Certain options, futures and forward foreign currency transactions undertaken by
a Fund may cause such Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of certain currency
forwards, options and futures, as ordinary income or loss) and timing of some
capital gains and losses realized by the Fund. Also, certain of a Fund's losses
on its transactions involving options, futures and forward foreign currency
contracts and/or offsetting or successor portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income or gains. Certain of such transactions may also cause a Fund to dispose
of investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of a Fund's distributions to
shareholders. Certain of the applicable tax rules may be modified if the Fund is
50
<PAGE>
eligible and chooses to make one or more of certain tax elections that may be
available. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to seek to minimize any potential adverse tax consequences.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, a Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Funds.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
Provided that each Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
Yield. For the 30-day period ended April 30, 1997, the yields of (a) High Yield
Bond Fund's Class A and Class B shares were 9.92% and 9.63%, respectively, and
(b) Government Income Fund's Class A and Class B shares were 5.92% and 5.45 %,
respectively.
Each Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
6
Yeild = 2 ( [ (a - b) + 1 ] - 1 )
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
51
<PAGE>
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV where applicable).
Total Return. Average annual total return is determined separately for each
class of shares.
Set forth below are tables showing the performance on a total return basis
(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000
investment in the Class A and Class B shares of Government Income Fund and High
Yield Bond Fund.
<TABLE>
<CAPTION>
Government Income Fund
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 9/30/94* to One Year Ended Five Years Ended 2/23/88* to
4/30/97 4/30/97 4/30/97 4/30/97 4/30/97
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1.61% 6.05% 1.66% 5.53% 6.69%
High Yield Bond Fund
Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares
One Year Ended 6/30/93* to One Year Ended Five Years Ended 10/26/87* to
4/30/97 4/30/97 4/30/97 4/30/97 4/30/97
------- ------- ------- ------- -------
9.12% 8.14% 8.41% 10.19% 9.13%
</TABLE>
* Commencement of operations.
Total Return. Each Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
n _____
T = \ /ERV/P - 1
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1-year and life-of-fund periods.
Because each share has its own charge and fee structure, the classes have
different performance results. In the case of Class A shares or Class B shares,
this calculation assumes the maximum sales charge is included in the initial
investment or the CDSC is applied at the end of the period. This calculation
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period. The "distribution rate" is
determined by annualizing the result of dividing the declared dividends of a
Fund during the period stated by the maximum offering price or net asset value
at the end of the period.
52
<PAGE>
The total return in the case of Class B shares of each Fund is calculated by
determining the net asset value of all shares held at the end of the period for
each share held from the beginning of the period (assuming reinvestment of all
dividends and distributions at net asset value during the period and the
deduction of any applicable contingent deferred sales charge as if the shares
were redeemed at the end of the period), subtracting the maximum offering price
per share (net asset value per share) at the beginning of such period and then
dividing the result by the maximum offering price per share (net asset value per
share) at the beginning of the same period. Total return for Class A shares of
each of Government Income Fund and High Yield Bond Fund is calculated in the
same manner except the maximum offering price reflects the deduction of the
maximum initial sales charge and the redemption value is at net asset value.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's maximum sales charge on Class A
shares or the CDSC on Class B shares into account. A Fund's "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the stated period by the maximum offering price or net asset
value at the end of the period. Excluding a Fund's sales charge on Class A
shares and the CDSC on Class B shares from a total return calculation produces a
higher total return figure.
From time to time, in reports and promotional literature, a Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. A Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta reflects the market-related risk of the Fund by showing how
responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of a Fund for any
period in the future. The performance of a Fund is a function of many factors
including its earnings, expenses and number of outstanding shares. Fluctuating
market conditions; purchases, sales and maturities of portfolio securities;
sales and redemptions of shares of beneficial interest; and changes in operating
expenses are all examples of items that can increase or decrease a Fund's
performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser and officers of the
Trust pursuant to recommendations made by its investment committee, which
consists of officers and directors of the Advisor and affiliates and officers
and Trustees who are interested persons of the Funds. Orders for purchases and
sales of securities are placed in a manner which, in the opinion of the Adviser,
will offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
makers reflect a "spread." Investments in debt securities are generally traded
on a net basis through dealers acting for their own account as principals and
not as brokers; no brokerage commissions are payable on such transactions.
53
<PAGE>
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the NASD and other policies that the Trustees may
determine, the Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute a Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Funds. The
Funds will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of each Fund's brokerage business, the policies and practices of
the Adviser in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees.
Brokerage commissions of the Funds for their respective reporting periods, as
follows, amounted to:
Government Income Fund - (a) $135,622 for the fiscal year ended October
31, 1996; (b) $15,814 for the fiscal year ended October 31, 1995; (c)
$96,931 for the fiscal year ended October 31, 1994.
High Yield Bond Fund - (a) $ 39,163 for the fiscal year ended October
31, 1996 (b) $40,228 for the fiscal year ended October 31, 1995 and (c)
$2,320 for the fiscal year ended October 31,1994.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, each Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended October 31, 1996,
Government Income Fund paid $405 and High Yield Bond Fund paid $0 in commissions
to compensate brokers for research services such as industry, economic and
company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company is the indirect sole shareholder
of John Hancock Distributors, Inc., a broker-dealer ("Distributors" or
"Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
54
<PAGE>
execute portfolio transactions with or through Affiliated Brokers. For the
fiscal year ended October 31, 1996, the Fund paid no Brokerage commissions to
any Affiliated Broker.
Distributors may act as broker for a Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the 1940 Act. Commissions paid to an
Affiliated Broker must be at least as favorable as those which the Trustees
believe to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to a Fund as determined by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Funds, the Adviser or the Affiliated Brokers. Because the Adviser, which is
affiliated with the Affiliated Brokers, has, as an investment adviser to the
Fund, the obligation to provide investment management services, which includes
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Brokers as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Advisers may aggregate securities to
be sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services Inc., 1 Hancock Way , Suite 1000, Boston, MA
02217- 1000, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Funds. Each Fund pays Investor
Services monthly a transfer agent fee equal to $20 per account for the Class A
shares and $22.50 per account for the Class B shares on an annual basis, plus
out-of- pocket expenses. These expenses are aggregated and charged to the Fund
and allocated to each class on the basis of the relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a custodian agreement
between the Trust and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, the custodian
performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The independent auditors audit and render
an opinion on the Funds' annual financial statements and review the Funds'
annual income tax returns. The financial statements of the Funds included in the
Prospectus and this Statement of Additional Information and have been audited by
Ernst & Young LLP for the periods indicated in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
55
<PAGE>
The financial statements listed below are included in and incorporated by
reference into Part B of the Registration Statement of the John Hancock
Government Income Fund and John Hancock High Yield Bond Funds 1996 Annual Report
to Shareholders for the year ended October 31, 1996 (filed electronically on
December 27, 1996; file nos. 811-03006 and 2-66906; accession number
000928816-96-000373); and Semi-Annual Report to Shareholders (filed
electronically on June 25, 1997, accession number 000928816-97-000194).
John Hancock Government Income Fund
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operation for the year ended October 31, 1996.
Statement of Changes in Net Asset for each of the two years in the period
ended October 31, 1996.
Schedule of Investments as of October 31, 1996.
Report of Independent Auditors.
Statement of Assets and Liabilities as of April 30, 1997 (Unaudited).
Statement of Operations for six months ended April 30, 1997 (Unaudited).
Statement of Changes in Net Assets for six months ended April 30, 1997
(Unaudited).
Financial Highlights for the six months ended April 30, 1997 (Unaudited).
Schedule of Investments as of April 30, 1997 (Unaudited).
Notes to Financial Statements (Unaudited).
John Hancock High Yield Bond Fund
Statement of Operation for the year ended October 31, 1996.
Statement of Changes in Net Asset for each of the two years in the period
ended October 31, 1996.
Schedule of Investments as of October 31, 1996.
Report of Independent Auditors.
Statement of Assets and Liabilities as of April 30, 1997 (Unaudited).
Statement of Operations for six months ended April 30, 1997 (Unaudited).
Statement of Changes in Net Assets for six months ended April 30, 1997
(Unaudited).
Financial Highlights for the six months ended April 30, 1997 (Unaudited).
Schedule of Investments as of April 30, 1997 (Unaudited).
Notes to Financial Statements (Unaudited).
56
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS AND FUND'S ASSET COMPOSITION
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
A-1
<PAGE>
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
FITCH INVESTORS SERVICE ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
TAX-EXEMPT NOTE RATINGS
Moody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal and interest.
A-2
<PAGE>
Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Moody's - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
Other Considerations - The ratings of S&P, Moody's, and Fitch represent their
respective opinions of the quality of the municipal securities they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal securities with the same
maturity, coupon and ratings may have different yields and municipal securities
of the same maturity and coupon with different ratings may have the same yield.
A-3
<PAGE>
Quality Distribution. The average weighted quality distribution of the
securities in the portfolio for the year ended October 31, 1996.
<TABLE>
<CAPTION>
John Hancock Government Income Fund
- ---------------------------------------------------------------------------------------------------------------------
Rating Rating
Average % of Assigned by % of Assigned by % of
Security Ratings Value Portfolio Adviser Portfolio Service Portfolio
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AAA $561,802,759 90.4% 0 0.0% $561,802,759 90.4%
AA 14,719,207 2.4% 0 0.0% 14,719,207 2.4%
A 16,426,616 2.6% 0 0.0% 16,426,616 2.6%
BBB 0 0.0% 0 0.0% 0 0.0%
BB 3,710,229 0.6% 0 0.0% 3,710,229 0.6%
B 21,399,845 3.4% 16,582,548 2.7% 4,817,297 0.8%
CCC 0 0.0% 0 0.0% 0 0.0%
CC 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 0.0%
D 0
------------ ----------- ------------
Debt-Securities 618,058,655 99.4% 16,582,548 2.7% $601,476,107 96.9%
Equities Securities 0 0.0%
Short-Term Securities 3,520,539 0.6%
---------
Total Portfolio 621,579,194 100.0%
-----------
Other Assets -- Net 8,897,649
---------
Net Assets $630,476,843
============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
A-4
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK INTERMEDIATE MATURITY GOVERNMENT FUND
Class A and Class B Shares
Statement Of Additional Information
July 15, 1997
This Statement of Additional Information provides information about the John
Hancock Intermediate Maturity Government Fund (the "Fund"), in addition to the
information that is contained in the combined Income Funds' Prospectus dated May
1, 1997 (the "Prospectus"). The Fund is a diversified series of John Hancock
Bond Trust (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02117-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund 2
Investment Objective and Policies 2
Investment Restrictions 14
Those Responsible for Management 16
Investment Advisory and Other Services 26
Distribution Contracts 29
Net Asset Value 31
Initial Sales Charge on Class A Shares 32
Deferred Sales Charge on Class B Shares 34
Special Redemptions 37
Additional Services and Programs 38
Description of the Fund's Shares 40
Tax Status 41
Calculation of Performance 44
Brokerage Allocation 46
Transfer Agent Services 48
Custody of Portfolio 48
Independent Auditors 48
Appendix A A-1
Financial Statements F-1
1
<PAGE>
ORGANIZATION OF THE TRUST
The Fund is a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to September 22, 1995, the Fund was called John Hancock
Adjustable U.S. Government Trust. Prior to December 22, 1994, the Fund was
called Transamerica Adjustable U.S. Government Trust.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus.
The Fund seeks to earn a high level of current income, consistent with
preservation of capital and maintenance of liquidity. The Fund seeks to achieve
its investment objective by investing primarily in U.S. Government securities,
including mortgage-backed securities issued or guaranteed by U.S. Government
agencies. Since the U.S. Government has never defaulted on its obligations, its
securities are considered unmatched as a safe and reliable income source. The
Fund may also invest in obligations of the Tennessee Valley Authority and the
World Bank and medium-term debt obligations of governmental issuers. Under
normal market conditions, the Fund intends to maintain a weighted average
remaining maturity or average remaining life of three to ten years.
Under normal conditions, at least 65% of the Fund's total assets will be in U.S.
Government securities that consist of the following:
1. U.S. Treasury obligations, which differ only in their interest rates,
maturities and time of issuance, including U.S. Treasury bills (maturity of one
year or less), U.S. Treasury notes (maturity of one to ten years), and U.S.
Treasury bonds (generally maturities greater than ten years); and
2. Obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities which are supported by: (i) the full faith and credit of
the U.S. Government (e.g., securities issued by the Government National Mortgage
Association ("GNMA")), (ii) the right of the issuer to borrow an amount limited
to a specific line of credit from the U.S. Government (e.g., securities of the
Federal Home Loan Bank Board) or (iii) the credit of the instrumentality (e.g.,
bonds issued by the Federal Home Loan Mortgage Association ("FHLMC") or Federal
National Mortgage Association ("FNMA").
In general, investments in shorter and intermediate term (three to ten years)
debt securities are less sensitive to interest rate changes and provide more
stability than longer-term (ten years or more) investments. Shares of the Fund
are not deposits or obligations of, or guaranteed or endorsed by, any bank.
Also, Fund shares are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. All
2
<PAGE>
temporary defensive investments are required to be high quality. There is no
assurance that the Fund will achieve its investment objective.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represents
the opinions of these agencies as to the quality of the securities that they
rate. It should be emphasized, however, that such ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Fund as initial criteria for the selection of portfolio securities. Among
the factors that will be considered are the long-term ability of the issuer to
pay principal and interest and general economic trends. Appendix A contains
further information concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
Structured Securities. The Fund may invest 10% of its net assets in structured
securities including notes, bonds or debentures, the value of the principal of
and/or interest on which is to be determined by reference to changes in the
value of specific currencies, interest rates, commodities, indices or other
financial indicators (the "Reference") or the relative change in two or more
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that in
certain circumstances no principal is due at maturity and, therefore, may result
in the loss of the Fund's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at maturity.
In addition, the change in interest rate or the value of the security at
maturity may be a multiple of the change in the value of the Reference.
Consequently, structured securities entail a greater degree of market risk than
other types of debt obligations. Structured securities may also be more
volatile, less liquid and more difficult to accurately price than less complex
fixed income investments.
Mortgage Backed Securities. The Fund may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA certificates are guaranteed by the full
faith and credit of the U.S. Government for timely payment of principal and
interest on the certificates. FNMA certificates are guaranteed by FNMA, a
federally chartered and privately owned corporation, for full and timely payment
of principal and interest on the certificates. FHLMC certificates are guaranteed
by FHLMC, a corporate instrumentality of the U.S. Government, for timely payment
of interest and the ultimate collection of all principal of the related mortgage
loans.
3
<PAGE>
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also
may be collateralized by other mortgage assets such as whole loans or private
mortgage pass-through securities. Debt service on CMOs is provided from payments
of principal and interest on collateral of mortgaged assets and any reinvestment
income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended (the "Code") and invests in certain mortgages
primarily secured by interests in real property and other permitted investments.
Investors may purchase "regular" or "residual" interest in REMICS, although the
Fund does not intend, absent a change in current tax law, to invest in residual
interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the
Securities and Exchange Commission ("SEC") considers privately issued SMBS to be
illiquid.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed-income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, the Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When the Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
4
<PAGE>
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage pass-
through securities and sequential pay CMOs are subject to all of these risks,
but are typically not leveraged. Thus, the magnitude of exposure may be less
than for more leveraged Mortgage-Backed Securities.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage- Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only debt securities ("POs"),
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage- Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
5
<PAGE>
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to resell it back to the issuer at a fixed time and price, plus accrued
interest. The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with "primary dealers" in U.S. Government
securities. The Adviser will continuously monitor the creditworthiness of the
parties with whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income or lack of
access to income during this period as well as the expense of enforcing its
rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank or securities firm with an agreement that the Fund will buy
back the securities at a fixed future date at a fixed price plus an agreed
amount of interest which may be reflected in the repurchase price. Reverse
repurchase agreements are considered to be borrowings by the Fund. The Fund will
use proceeds obtained from the sale of securities pursuant to reverse repurchase
agreements to purchase other investments. The use of borrowed funds to make
investments is a practice known as "leverage," which is considered speculative.
Use of reverse repurchase agreements is an investment technique that is intended
to increase income. Thus, the Fund will enter into a reverse repurchase
agreement only when the Adviser determines that the interest income to be earned
from the investment of the proceeds is greater than the interest expense of the
transaction. However, there is a risk that interest expense will nevertheless
exceed the income earned. Reverse repurchase agreements involve the risk that
the market value of securities purchased by the Fund with proceeds of the
transaction may decline below the repurchase price of the securities sold by the
Fund that it is obligated to repurchase. The Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. To minimize various risks associated with reverse repurchase
agreements, the Fund will establish and maintain with the Fund's custodian a
separate account consisting of liquid securities (plus any accrued interest
thereon) under such agreements. In addition, the Fund will not enter into
reverse repurchase agreements or borrow money, except that as a temporary
measure for extraordinary or emergency purposes the Fund may borrow from banks
in aggregate amounts at any one time outstanding not exceeding 33 1/3% of the
total assets (including the amount borrowed) of the Fund valued at market and
the Fund may not purchase any securities at any time when borrowings exceed 5%
of the total assets of the Fund (taken at market). Forward commitment
transactions shall not constitute borrowings and interest paid on any borrowings
will reduce the Fund's net investment income. The Fund will enter into reverse
repurchase agreements only with selected registered broker/dealers or with
federally insured banks or savings and loan associations that are approved in
advance as being creditworthy by the Trustees. Under procedures established by
the Trustees, the Adviser will monitor the creditworthiness of the firms
involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
6
<PAGE>
144A under the 1933 Act. However, the Fund will not invest more than 15% of its
net assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments . The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on any securities in which it may invest or on any
securities index based on securities in which it may invest. These options may
be listed on national domestic securities exchanges or traded in the
over-the-counter market. The Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by a Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option that, by virtue of its exercise price or otherwise, reduces the
Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
7
<PAGE>
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities that it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options that the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
8
<PAGE>
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates or securities prices, the Fund
may purchase and sell various kinds of futures contracts, and purchase and write
call and put options on these futures contracts. The Fund may also enter into
closing purchase and sale transactions with respect to any of these contracts
and options. The futures contracts may be based on various securities (such as
U.S. Government securities), securities indices and any other financial
instruments and indices. All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade that are licensed, regulated or
approved by the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions that may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
interest rates are rising or securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
9
<PAGE>
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium that may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium that may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
10
<PAGE>
held by the Fund or securities or instruments that it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish with
the custodian a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
11
<PAGE>
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities on any type of maturity, equal in value to the
Fund's commitment. These assets will be valued daily at market, and additional
cash or securities will be segregated in a separate account to the extent that
the total value of the assets in the account declines below the amount of the
when-issued commitments. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's borrowings and other senior securities. For financial reporting
and tax purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities which are rated in the highest rating category by a
nationally recognized statistical rating organization (e.g., S&P or Moody's) or
if not so rated, of equivalent investment quality in the opinion of the Adviser.
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, the Fund's ability to maintain positions in
these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
12
<PAGE>
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to different
types of investments, the Fund and may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars and floors. In a
typical interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. The Fund will maintain in a segregated account
with its custodian, cash or liquid securities equal to the net amount, if any,
of the excess of the Fund's obligations over its entitlements with respect to
swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
13
<PAGE>
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "TAX STATUS."
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights to not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund does not invest for the purpose of seeking short-term
profits. The Fund's investment securities may be changed, however, without
regard to the holding period of these securities (subject to certain tax
restrictions), when the Adviser deems that this action will help achieve the
Fund's objective given a change in an issuer's operations or changes in general
market conditions. Short-term trading may have the effect of increasing
portfolio turnover rate. A high rate of portfolio turnover (100% or greater)
involves corresponding higher transaction expenses and may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes. The Fund's portfolio rate is set forth in the table under
the caption "Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectus and Statement of Additional
Information means approval by the lesser of (1) the holders of 67% or more of
the Fund's shares represented at a meeting if more than 50% of the Fund's
outstanding shares are present in person or by proxy at that meeting or (2) more
than 50% of the Fund's outstanding shares.
The Fund may not:
14
<PAGE>
1. borrow money, except that as a temporary measure for extraordinary or
emergency purposes the Fund may borrow from banks in aggregate amounts
at any one time outstanding not exceeding 33 1/3% of the total assets
(including the amount borrowed) of the Fund valued at market; and the
Fund may not purchase any securities at any time when borrowings exceed
5% of the total assets of the Fund (taken at market value). This
borrowing restriction does not prohibit the use of reverse repurchase
agreements (see "Reverse Repurchase Agreements"). For purposes of this
investment restriction, forward commitment transactions shall not
constitute borrowings. Interest paid on any borrowings will reduce the
Fund's net investment income;
2. make short sales of securities or purchase any security on margin,
except that the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of securities (this
restriction does not apply to securities purchased on a when-issued
basis);
3. underwrite securities issued by other persons, except insofar as the
Fund may technically be deemed an underwriter under the Securities Act
of 1933 in selling a security, and except that the Fund may invest all
or substantially all of its assets in another registered investment
company having substantially the same investment objectives as the
Fund;
4. make loans to other persons except (a) through the lending of
securities held by the Fund, (b) through the purchase of debt
securities in accordance with the investment policies of the Fund (the
entry into repurchase agreements is not considered a loan for purposes
of this restriction);
5. with respect to 75% of its total assets, purchase the securities of any
one issuer (except securities issued or guaranteed by the U.S.
Government and its agencies or instrumentalities, as to which there are
no percentage limits or restrictions) if immediately after and as a
result of such purchase (a) more than 5% of the value of its assets
would be invested in that issuer, or (b) the Fund would hold more than
10% of the outstanding voting securities of that issuer, except that
the Fund may invest all or substantially all of its assets in another
registered investment company having substantially the same investment
objectives as the Fund;
6. purchase or sell real estate (including limited partnership interests)
other than securities secured by real estate or interests therein
including mortgage-related securities or interests in oil, gas or
mineral leases in the ordinary course of business (the Fund reserves
the freedom of action to hold and to sell real estate acquired as a
result of the ownership of securities);
7. invest more than 25% of its total assets in the securities of issuers
whose principal business activities are in the same industry (excluding
obligations of the U.S. Government, its agencies and instrumentalities
and repurchase agreements) except that the Fund may invest all or
substantially all of its assets in another registered investment
company having substantially the same objectives as the Fund;
8. issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "Investment Company Act")) if such issuance is
specifically prohibited by the Investment Company Act or the rules and
regulations promulgated thereunder; or
15
<PAGE>
9. invest in securities of any company if, to the knowledge of the Trust,
any officer or director of the Trust or its Adviser owns more than 1/2
of 1% of the outstanding securities of such company, and all such
officers and directors own in the aggregate more than 5% of the
outstanding securities of such company.
Non-Fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
The Fund may not:
(a) invest in companies for the purpose of exercising control or
management, except that the Fund may invest all or substantially all of
its assets in another registered investment company having
substantially the same investment restrictions as the Fund;
(b) purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John
Hancock Group of Funds.
(c) invest in commodities, except that the Fund may purchase and sell:
options on securities and securities indices, futures contracts on
securities and securities indices and options on these futures, forward
commitments, when-issued securities, securities index put or call
warrants and repurchase agreements entered into in accordance with the
Fund's investment policies;
(d) invest more than 15% of its net assets in illiquid securities.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Trust
are also Officers and Directors of the Adviser or Officers and Directors of John
Hancock Funds, Inc.
("John Hancock Funds").
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 Executive Officer, The Berkeley
Financial Group ("The Berkeley
Group"); Chairman and Director, NM
Capital Management, Inc. ("NM
Capital"), John Hancock Advisers
International Limited ("Advisers
International") and Sovereign Asset
Management Corporation ("SAMCorp");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds");
Chairman, First Signature Bank and
Trust Company; Director, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Advisers International
(Ireland) Limited ("International
Ireland"), John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science;
Chairman, John Hancock
Distributors, Inc. (until April
1994); Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993); Director, Signature
Services (until January 1997).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp. and NM Capital; Trustee,
The Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, John Hancock Property and
Casualty Insurance and its
affiliates (until November 1993);
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of June 30, 1997, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders beneficially owned 5% of the outstanding
shares of the Fund listed below:
Name and Address of Percentage Ownership
Shareholder Shares Held of Outstanding Shares
- ----------- ----------- ---------------------
Class A
MLPF&S For the Sole 304,107 12.83%
Benefit of Its Customers
Attn: Fund Administration
4800 Deer Lake Dr East
Jacksonville, FL 33246-6484
Class A
River Production Co., Inc. 161,685 6.82%
PO Box 909
Columbia, MS 39429-0909
Class A
Northern Trust Co TTEE 120,342 5.08%
FBO Adventist Health System/West
Attn: Tiffany Snyder
PO Box 92956
A/C #22-85446/4-866770
Chicago, IL 60675-2956
MLPF&S For the Sole Class B 20.94%
Benefit of Its Customers 140,298
Attn: Fund Administration
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
From December 22, 1994 until December 22, 1996, the Trustees established an
Advisory Board to facilitate a smooth transition between Transamerica Fund
Management Company ("TFMC"), the prior investment adviser, and the Adviser. The
members of the Advisory Board were distinct from the Trustees, did not serve the
Fund in any other capacity and were persons who had no power to determine what
securities were purchased or sold and behalf of the Fund.
Compensation of the Trustees and Advisory Board. The following tables provide
information regarding the compensation paid by the Fund and the other investment
companies in the John Hancock Fund Complex to the Independent Trustees and the
Advisory Board members for their services. Messrs. Boudreau, Scipione, and Ms.
Hodsdon, each a non-Independent Trustees, and each of the officers of the Fund
who are interested persons of the Adviser, are compensated by the Adviser and/or
its affiliates and receive no compensation from the Fund for their services.
24
<PAGE>
<TABLE>
<CAPTION>
Total Compensation from all
Aggregate Compensation Funds in John Hancock Fund
Trustees from the Fund(1) Complex to Trustees*
- -------- ---------------- --------------------
<S> <C> <C>
James F. Carlin $286 $74,250
William H. Cunningham(**) $294 74,250
Charles F. Fretz $288 74,500
Harold R. Hiser, Jr. (**) $269 70,250
Charles L. Ladner $288 74,500
Leo E. Linbeck, Jr. $294 74,250
Patricia P. McCarter $288 74,250
Steven R. Pruchansky $300 77,500
Norman H. Smith $300 77,500
John P. Toolan (**) $286 74,250
------ --------
Total $2,893 $745,500
</TABLE>
(1) Compensation for the fiscal year ended March 31, 1997.
* The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees as of the calendar year ended December 31, 1996.
As of this date, there were sixty-seven funds in the John Hancock Fund
Complex, of which each of these Independent Trustees served on
thirty-two.
** As of December 31, 1996, the value of the aggregate deferred
compensation from all funds in the John Hancock Fund Complex for Mr.
Cunningham was $131,741 , for Mr. Hiser was $90,972 , for Ms. McCarter
was $67,548, for Mr. Pruchansky was $28,731, for Mr. Smith was $32,314
and for Mr. Toolan was $163,385 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
25
<PAGE>
Total Compensation from all
Funds in John Hancock Fund
Advisory Board Aggregate Compensation Complex to Advisory Board
Members from the Fund + Members***
- ------- --------------- ----------
R. Trent Campbell $103 $ 47,000
Mrs. Lloyd Bentsen $103 47,000
Thomas R. Powers $103 47,000
Thomas B. McDade $103 47,000
---- --------
Total $412 $188,000
+ Compensation for the fiscal year ended March 31, 1997.
*** For the calendar year December 31, 1996.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $22 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds, having
a combined total of over 1,080,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States and carries a high rating from Standard & Poor's and A.M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders. As
manager and investment adviser, the Adviser will (a) furnish continuously an
investment program, for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held or sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund; the compensation and
26
<PAGE>
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage, equal on an annual basis to
0.40%, of the average daily net assets of the Fund.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more funds or clients when one or more are selling the same security. If
opportunities for purchase or sale of securities by the Adviser or for the Fund
or for other funds or clients, for which the Adviser renders investment advice
arise for consideration at or about the same time transactions in such
securities will be made insofar as feasible, for the respective funds or clients
in a manner deemed equitable to all of them. To the extent that transactions on
behalf of more than one client of the Adviser or its respective affiliates may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which its contract relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard of the obligations and
duties under the contract.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the applicable Advisory
Agreement or any extension, renewal or amendment thereof remains in effect. If
the Fund's Advisory Agreement is no longer in effect, the Fund (to the extent
that it lawfully can) will cease to use such name or any other name indicating
that it is advised by or otherwise connected with the Adviser. In addition, the
Adviser or the Life Company may grant the non-exclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity, including
but not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
Under the Fund's master/feeder structure (which was terminated on September 22,
1995 pursuant to an Agreement and Plan of Liquidation and Termination dated June
13, 1995) existing for the fiscal years ended March 31, 1994, 1995 and 1996
(until September 22, 1995), the Fund invested all of its assets in Adjustable
U.S. Government Fund (the "Portfolio"). During these years, advisory fees
payable by the Portfolio to TFMC, the Portfolio's former investment adviser, and
borne indirectly by the Fund, amounted to $184,072, $86,085 and $0,
respectively. For the fiscal years ended March 31, 1996 and 1997, advisory fees
paid by the Portfolio to the Adviser and borne indirectly by the Fund, amounted
to $137,927 and $132,601, respectively. For the years ended March 31, 1995, 1996
27
<PAGE>
and 1997 TFMC (until December 22, 1994), the Adviser received fees of $0, $0 and
$10,548, respectively.
The initial term of the Advisory Agreement expires on September 25, 1997. The
Advisory Agreement and the Distribution Agreement discussed below, will continue
in effect from year to year, provided that its continuance is approved annually
both (i) by the holders of a majority of the outstanding voting securities of
the Trust or by the Trustees, and (ii) by majority of the Trustees who are not
parties to the Agreement or "interested persons" of any such parties. Both
agreements may be terminated on 60 days written notice by any party or by a vote
of a majority of the outstanding voting securities of the Fund and will
terminate automatically if assigned.
Administration Agreement. Pursuant to an administration agreement, dated
December 22, 1994, the Adviser provided the Fund with general office facilities
and supervised the overall administration of the Fund including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of the independent contractors and agents of the
Fund, the preparation and filing of all documents required for compliance by the
Fund with applicable laws and regulations and arranging for the maintenance of
books and records (other than accounting books and records) of the Fund. The
Adviser paid all compensation of the Trustees, officers and employees of the
Fund who were affiliated persons of the Adviser. The administration agreement
terminated in September 1995.
Under the administration agreement, the Adviser would have received from the
Fund, a fee at an annual rate of 0.10% of the Fund's average daily net assets,
subject to the expense limitation provisions described below. For the fiscal
years ended March 31, 1994 and 1995, respectively, administration fees paid by
the Fund to TFMC, the Fund's former administrator would have amounted to $46,091
and $21,511, respectively; and the Adviser would have received $7,171 for the
year ended March 31, 1995; however, all such fees were not imposed pursuant to
the fee and expense limitation arrangements then in effect.
Under the administration agreement, neither the Adviser nor its personnel was
liable for any error of judgment or mistake of law or for any act or omission in
the administration of the Fund except for willful misfeasance, bad faith or
gross negligence in the performance of its duties or from reckless disregard of
its obligations and duties under the administration agreement.
Administrative Services Agreement. During the fiscal years ended March 31, 1994
and 1995, the Fund was a party to an administrative services agreement with TFMC
(the "Services Agreement"), pursuant to which TFMC performed bookkeeping and
accounting services and functions, including preparing and maintaining various
accounting books, records and other documents and keeping such general ledgers
and portfolio accounts as are reasonably necessary for the operation of the
Fund. Other administrative services included communications in response to
shareholder inquiries and certain printing expenses of various financial
reports. In addition, such staff and office space, facilities and equipment was
provided as necessary to provide the required administrative services. The
Services Agreement was amended in connection with the appointment of the Adviser
as administrator to the Fund to permit services under the Agreement to be
provided by the Adviser and its affiliates. The Services Agreement was
terminated during the fiscal year ended March 31, 1995.
For the fiscal years ended March 31, 1994 and 1995, the Fund paid to TFMC
(pursuant to the Services Agreement), $18,021 and $9,604, respectively, of which
28
<PAGE>
$14,730 and $8,164, respectively, was paid to TFMC and $3,291 and $1,440,
respectively, was paid for certain data processing and pricing information
services.
For the fiscal years ended March 31, 1994 and 1995, the Portfolio paid TFMC
(pursuant to the Services Agreement), $38,012 and $24,461, respectively, of
which $26,722 and $17,704, respectively, was paid to TFMC and $11,290 and
$6,757, respectively, were paid for certain data processing and pricing
information services.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year March 31, 1997, the Fund paid the
Adviser $4,508 for services under this agreement from the effective date of July
1, 1996.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares on behalf of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund that are continually offered at net asset
value next determined, plus any applicable sales charge, if any. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation from a sales charge imposed, in the case of Class A
shares, at the time of sale or, in the case of Class B shares, on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended March 31, 1994, 1995 and 1996 were $59,793, $24,555 and
$4,976, respectively. Of such amounts, $7,455, $4,090 and $0, respectively, were
retained by the Fund's former distributor, Transamerica Fund Distributors, Inc.
or the current distributor in 1995 and 1996, as the case may be, and the
remainder was reallowed to dealers.
The Fund's Trustees, including the Independent Trustees, adopted new
Distribution Plans with respect to Class A and Class B shares (the "Plans"),
pursuant to Rule 12b-1 under the Investment Company Act. Such Plans were
approved by a majority of the outstanding shares of each respective class on
December 16, 1994 and became effective on December 22, 1994. Under the Plans the
Fund will pay distribution and service fees at an aggregate annual rate of up to
0.25% and 1.00%, respectively, of the Fund's average daily net assets
attributable to shares of that class. However, the service fee will not exceed
0.25% of the Fund's average daily net assets attributable to each class of
shares. The distribution fees will be used to reimburse the John Hancock Funds
for their distribution expenses, including but not limited to: (i) initial and
29
<PAGE>
ongoing sales compensation to Selling Brokers and others (including affiliates
of the John Hancock Funds) engaged in the sale of Fund shares; (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of Fund shares; and (iii) with respect to Class B shares only, interest expenses
on unreimbursed distribution expenses. The service fees will be used to
compensate Selling Brokers and others for providing personal and account
maintenance services to shareholders. In the event the John Hancock Funds is not
fully reimbursed for payments or expenses they incur under the Class A Plan,
these expenses will not be carried beyond twelve months from the date they were
incurred. Unreimbursed expenses under the Class B Plan will be carried forward
together with interest on the balance of these unreimbursed expenses. The Fund
does not treat unreimbursed expenses under the Class B Plan as a liability of
the Fund, because the Trustees may terminate the Class B Plan at any time. For
the fiscal year ended March 31, 1997, an aggregate of $398,870 of distribution
expenses or 5.39% of the average net assets of the Class B shares of the Fund,
was not reimbursed or recovered by the John Hancock Funds through the receipt of
deferred sales charges or 12b-1 fees in prior periods.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by a vote of a majority of the Independent Trustees, or (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class in
each case upon 60 days' written notice to John Hancock Funds and (c)
automatically in the event of assignment. The Plans further provide that they
may not be amended to increase the maximum amount of the fees for the services
described therein without the approval of a majority of the outstanding shares
of the class of the Fund which has voting rights with respect to the Plan. Each
Plan provides that no material amendment to the Plans will be effective unless
it is approved by a majority vote of the Trustees and the Independent Trustees
of the Fund. The holders of Class A and Class B shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
In adopting the Plans, the Trustees concluded that, in their judgment, there is
a reasonable likelihood that the Plans will benefit the holders of the
applicable class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
30
<PAGE>
During the fiscal year ended March 31, 1997, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services for the
Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Expenses of Carrying or
Prospectus to Compensation to John Hancock Other Finance
Advertising New Shareholders Selling Brokers Funds Charges
----------- ---------------- --------------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A shares $6,946 $ 318 $45,657 $11,366 $ --
Class B shares $2,522 $ 116 $11,112 $ 3,746 $51,279
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by the
events occurring after closing of a foreign market, assets are valued by a
method that Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
31
<PAGE>
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive a Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund, the
investor is entitled to accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund owned by the
investor, or if John Hancock Signature Services, Inc. ("Signature Services") is
notified by the investor's dealer or the investor at the time of the purchase,
the cost of the Class A shares owned.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment
laws from paying a sales charge or commission when it purchases shares
of any registered investment management company.*
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if
it is purchasing $1 million or more for non-discretionary customers or
accounts.*
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, mother, father, sister, brother,
mother-in-law, father-in-law) of any of the foregoing; or any fund,
pension, profit sharing or other benefit plan for the individuals
described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.*
32
<PAGE>
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees
at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
Service Agreement. See your Merrill Lynch financial consultant for
further information.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994 , and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current value of the Class A shares John Hancock
money market funds will only be eligible for the accumulation privilege if the
investor has previously paid a sales charge on the amount of those shares.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
33
<PAGE>
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. The Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
Section 457 plans. Such an investment (including accumulations and combinations)
must aggregate $50,000 or more invested during the specified period from the
date of the LOI or from a date within ninety (90) days prior thereto, upon
written request to Signature Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount intended
to be invested had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and the
sales charge payable had the LOI not been in effect is due from the investor.
However, for the purchases actually made within the specified period (either 13
or 48 months), the sales charge applicable will not be higher than that which
would have been applied (including accumulations and combinations) had the LOI
been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of a sales charge so that the Fund will receive the full amount
of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within four
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including Class B shares derived from
reinvestment of dividends or capital gains distributions. No CDSC will be
imposed on shares derived from reinvestment of dividends or capital gains
distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
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<PAGE>
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price. However, you cannot redeem appreciation value only in order to avoid a
CDSC.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares
(40 shares x $2) - 80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
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<PAGE>
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Signature
Services. (Please note that this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
For Retirement Accounts (such as IRA, SIMPLE, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan,
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA accounts that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
36
<PAGE>
<TABLE>
<CAPTION>
CDSC Waiver Matrix for Class B Funds
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-retirement
Distribution (401(k), MPP, Rollover
PSP)
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually in
distributions or periodic payments
12% of account
value annually
in periodic
payments
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually in
12% of account periodic payments
value annually
in periodic
payments
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of account
annuity payments annuity payments annuity payments value annually in
(72+) or 12% of (72+) or 12% of (72+) or 12% of periodic payments
account value account value account value
annually in annually in annually in
periodic payments periodic payments periodic payments
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Loans Waived Waived N/A N/A N/A
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Hardships Waived Waived Waived N/A N/A
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
Return of Waived Waived Waived Waived N/A
Excess
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
37
<PAGE>
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act. Under
that rule, the Fund must redeem its shares for cash except to the extent that
the redemption payments to any shareholder during any 90-day period would exceed
the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of
such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income
Fund, John Hancock Intermediate Maturity Government Fund and John Hancock
Limited-Term Government Fund will retain the exchanged fund's CDSC schedule).
For purposes of computing the CDSC payable upon redemption of shares acquired in
an exchange, the holding period of the original shares is added to the holding
period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares. Since the redemption price of the Fund shares may be
more or less than the shareholder's cost, depending upon the market value of the
securities owned by the Fund at the time of redemption, the distribution of cash
pursuant to this plan may result in realization of gain or loss for purposes of
Federal, state and local income taxes. The maintenance of a Systematic
Withdrawal Plan concurrently with purchases of additional Class A or Class B
shares of the Fund could be disadvantageous to a shareholder because of the
initial sales charge payable on such purchases of Class A shares and the CDSC
imposed on redemptions of Class B shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase Class A and Class B shares
38
<PAGE>
at the same time a Systematic Withdrawal Plan is in effect. The Fund reserves
the right to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
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<PAGE>
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trust has two Funds and only one series and the Trustees have
not authorized any additional series of the Fund, although they may do so in the
future. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Fund, or any new series of the Trust into one or
more classes. As of the date of this Statement of Additional Information, the
Trustees have authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class or series of the Fund.
Holders of Class A and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to Class A and Class B shares will be
borne exclusively by that class, (ii) Class B shares will pay higher
distribution and service fees than Class A shares and (iii) each Class A and
Class B shares will bear any class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to the multiple-class structures. Similarly, the net asset value per
share may vary depending on whether Class A or Class B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
40
<PAGE>
of the Trust. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts, obligations or affairs of the Fund. The
Declaration of Trust also provides for indemnification out of the Fund's assets
for all losses and expenses of any shareholder held personally liable by reason
of being or having been a shareholder. The Declaration of Trust also provides
that no series of the Trust shall be liable for the liabilities of any other
series. Furthermore, no fund included in this Fund's prospectus shall be liable
for the liabilities of any other John Hancock Fund. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. Use of
information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
The Fund has qualified and has elected to be treated as a "regulated investment
company" under Subchapter M of the Code and intends to continue to so qualify
for each taxable year. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its taxable income (including net realized
capital gains) which is distributed to shareholders in accordance with the
timing requirements of the Code.
The Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
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<PAGE>
The amount of net realized capital gains, if any, in any given year will vary
depending upon the Adviser's current investment strategy and whether the Adviser
believes it to be in the best interests of the Fund to dispose of portfolio
securities or enter into options or futures transactions that will generate
capital gains. At the time of an investor's purchase of Fund shares, a portion
of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions on
these shares from such appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the exchange
privilege) a shareholder may realize a taxable gain or loss depending upon the
amount of the proceeds and the investor's basis in his shares. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term or short-term, depending upon the
shareholder's tax holding period for the shares and subject to the special rules
described below. A sales charge paid in purchasing Class A shares of the Fund
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent shares of the Fund or another John Hancock Fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. This disregarded charge will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. Also, any loss
realized on a redemption or exchange may be disallowed to the extent the shares
disposed of are replaced with other shares of the Fund within a period of 61
days beginning 30 days before and ending 30 days after the shares are disposed
of, such as pursuant to automatic dividend reinvestments. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized upon the redemption of shares with a tax holding period of six
months or less will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain with respect to such
shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares in the Fund by
the difference between his pro rata share of such excess and his pro rata share
of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its own net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed as such to
42
<PAGE>
shareholders. The Fund has $13,214,712 of capital loss carryforwards as of the
tax year ended December 31, 1996, of which $5,412,804 expires in 1997, $653,763
expires in 1998, $2,207,560 expires in 1999, $23,234 expires in 2000, $4,062,681
expires in 2001, $427,159 expires in 2002 and $427,511 expires in 2004,
available to offset future net capital gains.
The Fund's dividends and capital gain distributions will not qualify for the
corporate dividends-received deduction.
The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts, may also
require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Fund will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The Fund may be required to account for its transactions in forward rolls in a
manner that, under certain circumstances, may limit the extent of its
participation in such transactions.
43
<PAGE>
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Certain of these transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred.
Certain of the applicable tax rules may be modified if the Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures contracts in order to seek to minimize any potential adverse
tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended March 31, 1997, the annualized yield for the Fund's
Class A shares and Class B shares were 6.13% and 5.56%, respectively. Average
44
<PAGE>
annual return for the Fund's Class A and Class B shares for the period from
December 31, 1991 (inception of the Fund) through March 31, 1997 was 4.10% and
4.02%, respectively. For the one year period ended March 31, 1997 annual returns
were 1.42% and 0.84%, respectively, for Class A and B shares of the Fund. For
the five year period ended March 31, 1997, the average annual returns were 3.90%
and 3.86%, respectively.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge, where applicable) on the last day of the period,
according to the following standard formula:
6
Yield = ( [ (a - b) + 1 ] - 1 )
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of shares of the Fund outstanding during the
period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
Total return is computed by finding the average annual compounded rate of return
over the 1-year, 5-year, and 10-year periods that would equate the initial
amount invested to the ending redeemable value according to the following
formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment made at
designated periods or fraction thereof.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC applied at the end of the period, respectively. This
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period. The "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the period stated by the maximum offering price or net asset
45
<PAGE>
value at the end of the period. Excluding the Fund's sales charge from the
distribution rate produces a higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Fund's sales charge on
Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's total
return and/or yield will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibbotson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, may also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers to
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
46
<PAGE>
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and other policies as the Trustees may determine, the Adviser may consider sales
of shares of the Fund as a factor in the selection of broker-dealers to execute
the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will not make any commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees. For the years ended March 31, 1997, 1996, and 1995, no
negotiated brokerage commissions were paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended March 31,
1997, the Fund did not pay commissions to compensate any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. During the
years ended March 31, 1997, 1996 and 1995, the Fund did not execute any
portfolio transactions with any Affiliated Broker.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
47
<PAGE>
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Brokers, has, as an investment adviser
to the Fund, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc. , 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays an annual fee of
$20.00 for each Class A shareholder and $22.50 for each Class B shareholder,
plus certain out-of- pocket expenses. These expenses are aggregated and charged
to the Fund and allocated to each class on the basis of their relative net asset
values.
CUSTODY OF THE FUND
Portfolio securities of the Fund are held pursuant to custodian agreements
between the Fund and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. Ernst & Young LLP audits and renders an
opinion of the Fund's annual financial statements and prepares the Fund's annual
Federal income tax return.
The financial statements listed below are included in and incorporated by
reference into Part B of the Registration Statement of John Hancock Intermediate
Maturity Government Fund (files no. 811-03006 and 2-66906) 1997 Annual Report to
Shareholders for the year ended March 31, 1997 (filed electronically on May 20,
1997, accession number 0000928816-97-000154):
48
<PAGE>
John Hancock Bond Trust
John Hancock Intermediate Maturity Government Fund
Statement of Assets and Liabilities as of March 31, 1997. Statement of
Operations of the year ended March 31, 1997. Statement of Changes in
Net Asset for the period ended March 31, 1997. Schedule of Investments
as of March 31, 1997.
Notes to Financial Statements.
Report of Independent Auditors.
49
<PAGE>
APPENDIX A
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Corporation
represent their opinions as to the quality of various debt instruments. Their
ratings are a generally accepted barometer of credit risk. They are, however,
subject to certain limitations from an investor's standpoint. Such limitations
include the following: the rating of an issue is heavily weighted by past
developments and does not necessarily reflect probable future conditions; there
is frequently a lag between the time a rating is assigned and the time it is
updated; and there are varying degrees of difference in credit risk of
securities in each rating category. Therefore, it should be understood, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have the
same yield.
Description of Bond Ratings Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated b generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-1
<PAGE>
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principle or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Standard & Poor's Ratings Group
AAA: Bonds rated AAA have the higher rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C: The rating C is reserved for income bonds on which no interest is being paid.
A-2
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK BOND TRUST
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements listed below are included in and incorporated
by reference into Part B of the Registration Statement of John Hancock
Intermediate Maturity Government Fund (file nos. 811-03006 and 2-66906) 1997
Annual Report to Shareholders for the year ended March 31, 1997 (filed
electronically on May 20, 1997, accession number 0000928816-97-000154); John
Hancock Government Income Fund and John Hancock High Yield Bond Funds 1996
Annual Report to Shareholders for the year ended October 31, 1996 (filed
electronically on December 27, 1996; file nos. 811-03006 and 2-66906; accession
number 000928816-96-000373); and Semi-Annual Report to Shareholders for the
period ended April 30, 1997 (filed electronically on June 25, 1997, accession
number 0000928816-97-000194).
John Hancock Intermediate Maturity Government Fund
Statement of Assets and Liabilities as of March 31, 1997.
Statement of Operations of the year ended March 31, 1997.
Statement of Changes in Net Asset for each of the two years in the period
ended March 31, 1997.
Financial Highlights for each of the six years in the period ended
March 31, 1997.
Schedule of Investments as of March 31, 1997.
Notes to Financial Statements.
Report of Independent Auditors.
John Hancock Government Income Fund
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statement of Changes in Net Assets for each of the two years in the period
ended October 31, 1996.
Notes to Financial Statements.
Financial Highlights for each of the 9 years in the period ended October
31, 1996.
Schedule of Investments as of October 31, 1996.
Report of Independent Auditors.
Statement of Assets and Liabilities as of April 30, 1997 (Unaudited).
Statement of Operations for the six months ended April 30, 1997
(Unaudited).
Statement of Changes in Net Assets for the six months ended April 30, 1997
(Uunaudited).
Financial Highlights for the six months ended April 30, 1997 (Unaudited).
Schedule of Investments as of April 30, 1997 (Unaudited).
Notes to Financial Statements (Unaudited).
C-1
<PAGE>
John Hancock High Yield Bond Fund
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statement of Changes in Net Assets for each of the two years in the period
ended October 31, 1996.
Notes to Financial Statements.
Financial Highlights for each of the 10 years in the period ended October
31, 1996.
Schedule of Investments as of October 31, 1996.
Report of Independent Auditors.
Statement of Assets and Liabilities as of April 30, 1997 (Unaudited).
Statement of Operations for the six months ended April 30, 1997
(Unaudited).
Statement of Changes in Net Assets for the six months ended April 30, 1997
(Uunaudited).
Financial Highlights for the six months ended April 30, 1997 (Unaudited).
Schedule of Investments as of April 30, 1997 (Unaudited).
Notes to Financial Statements (Unaudited).
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities
As of June 30, 1997, the number of record holders of shares of the
Registrant was as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Intermediate Maturity Government Fund
Class A Shares - 831
Class B Shares - 647
Government Income Fund
Class A Shares - 23,244
Class B Shares - 7,857
High Yield Bond Fund
Class A Shares - 4,830
Class B Shares - 14,853
C-2
<PAGE>
Item 27. Indemnification
(a) Indemnification provisions relating to the Registrant's Trustees,
officers, employees and agents is set forth in Article VII of the Registrant's
By Laws included as Exhibit 2 herein.
(b) Under Section 12 of the Distribution Agreement, John Hancock Funds,
Inc. ("John Hancock Funds" ) has agreed to indemnify the Registrant and its
Trustees, officers and controlling persons against claims arising out of certain
acts and statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company
("the Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the of the Insurance Company who serves as a Trustee or
officer of the Registrant at the direction or request of the Insurance Company
against litigation expenses and liabilities incurred while acting as such,
except that such indemnification does not cover any expense or liability
incurred or imposed in connection with any matter as to which such person shall
be finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Insurance Company. In addition,
no such person will be indemnified by the Insurance Company in respect of any
liability or expense incurred in connection with any matter settled without
final adjudication unless such settlement shall have been approved as in the
best interests of the Insurance Company either by vote of the Board of Directors
at a meeting composed of directors who have no interest in the outcome of such
vote, or by vote of the policyholders. The Insurance Company may pay expenses
incurred in defending an action or claim in advance of its final disposition,
but only upon receipt of an undertaking by the person indemnified to repay such
payment if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc.("the Adviser") provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
C-3
<PAGE>
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and
also serves as principal underwriter or distributor of shares for John Hancock
Cash Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited-Term
Government Fund, John Hancock Special Equities Fund, John Hancock Sovereign Bond
Fund, John Hancock Tax-Exempt Series, John Hancock Strategic Series, John
Hancock World Fund, John Hancock Investment Trust, John Hancock Institutional
Series Trust, John Hancock Investment Trust II, John Hancock Investment Trust
III and John Hancock Investment Trust IV.
(b) The following table lists, for each director and officer of John
Hancock Funds, the information indicated.
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, President and Trustee, Chairman and Chief
101 Huntington Avenue Chief Executive Officer Executive Officer
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Osbert M. Hood Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President
101 Huntington Avenue and Secretary
Boston, Massachusetts
Christopher M. Meyer Vice President and Treasurer None
101 Huntington Avenue
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-5
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Anne C. Hodsdon Director, Executive President
101 Huntington Avenue Vice President
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard O. Hansen Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington avenue
Boston, Massachusetts
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
C-6
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Keith Harstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Benintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
Karen Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
The Registrant maintains the records required to be maintained by it under
Rules 31a-1 (a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 101 Huntington Avenue, Boston
Massachusetts 02199-7603. Certain records, including records relating to
Registrant's shareholders and the physical possession of its securities,
may be maintained pursuant to Rule 31a-3 at the main offices of
Registrant's Transfer Agent and Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus with respect to a series of the Registrant is delivered with a
copy of the latest annual report to shareholders with respect to that
series upon request and without charge.
(d) Registrant undertakes to comply with Section 16(c) of the Investment
Company Act of 1940, as amended which relates to the assistance to be
rendered to shareholders by the Trustees of the Registrant in calling a
meeting of shareholders for the purpose of voting upon the question of the
removal of a trustee.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Boston and The Commonwealth of Massachusetts on
the 10th day of July, 1997.
JOHN HANCOCK BOND TRUST
By: *
-------------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive
- ----------------------- Officer (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/ James B. Little Senior Vice President and Chief July 11, 1997
- ----------------------- Financial Officer (Principal
James B. Little Financial and Accounting Officer)
* Trustee
- -----------------------
James F. Carlin
* Trustee
- -----------------------
William H. Cunningham
* Trustee
- -----------------------
Charles F. Fretz
* Trustee
- -----------------------
Harold R. Hiser, Jr.
* Trustee
- -----------------------
Anne C. Hodsdon
C-8
<PAGE>
Signature Title Date
--------- ----- ----
* Trustee
- ----------------------
Charles L. Ladner
* Trustee
- ----------------------
Leo E. Linbeck, Jr.
* Trustee
- ----------------------
Patricia P. McCarter
* Trustee
- ----------------------
Steven R. Pruchansky
* Trustee
- ----------------------
Richard S. Scipione
* Trustee
- ----------------------
Norman H. Smith
* Trustee
- ----------------------
John P. Toolan
*By: /s/ Susan S. Newton July 11, 1997
--------------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
June 25, 1996.
</TABLE>
C-9
<PAGE>
JOHN HANCOCK BOND TRUST
(File No. 2-66906)
INDEX TO EXHIBITS
99.B1 Amended and Restated Declaration of Trust dated 7/1/96.*
99.B2 Amended and Restated By-Laws dated November 19, 1996.**
99.B3 Not Applicable.
99.B4 Specimen Share Certificates for Class A Shares and Class B Shares.*
99.B5 Investment Advisory Agreement between John Hancock Advisers, Inc.
and the Registrant on behalf of John Hancock Intermediate Maturity
Government Fund.*
99.B5.1 Investment Management Contract between John Hancock Advisers, Inc. and
the Registrant on behalf of John Hancock Government Income Fund dated
August 30, 1996.**
99.B5.2 Investment Management Contract between John Hancock Advisers, Inc. and
the Registrant on behalf of John Hancock High Yield Bond Fund dated
August, 30, 1996.**
99.B6 Distribution Agreement between John Hancock Broker Distribution
Services, Inc. and the Registrant.*
99.B6.1 Form of Soliciting Dealer Agreement between John Hancock Funds,
Inc. and the John Hancock funds.*
99.B6.2 Form of Financial Institution Sales and Service Agreement between
John Hancock Funds, Inc. and the John Hancock funds.*
99.B6.3 Amendment to Distribution Agreement dated August 30, 1996.**
99.B7 Not Applicable.
99.B8 Master Custodian Agreement between the John Hancock funds and Investors
Bank & Trust Company.*
99.B9 Master Transfer Agency and Service Agreement between John Hancock
Funds, Inc. and John Hancock Signature Services, Inc. dated
June 3, 1997.+
99.B10 None.
C-10
<PAGE>
99.B11 Auditors Consents.+
99.B12 Not Applicable.
99.B13 Not Applicable.
99.B14 Not Applicable.
99.B15 Rule 12b-1 Plans for Class A Shares for John Hancock Intermediate
Maturity Government Fund.*
99.B15.1 Rule 12b-1 Plans for Class B Shares for John Hancock Intermediate
Maturity Government Fund.*
99.B15.2 Rule 12b-1 Plans for Class A Shares for John Hancock High Yield Bond
Fund dated August 30, 1996.**
99.B15.3 Rule 12b-1 Plans for Class B Shares for John Hancock High Yield Bond
Fund dated August 30, 1996.**
99.B15.4 Rule 12b-1 Plans for Class A Shares for John Hancock Government Income
Fund dated August 30, 1996.**
99.B15.5 Rule 12b-1 Plans for Class B Shares for John Hancock Government Income
Fund dated August 30, 1996.**
99.B16 Schedule of computation of each performance quotation provided in the
Registration Statement in response to Item 22.*
27.1A Intermediate Maturity Government - Annual+
27.1B Intermediate Maturity Government - Annual+
27.2A Government Income - Annual+
27.2B Government Income - Annual
27.3A Government Income - Semi-Annual+
27.3B Government Income - Semi-Annual+
27.4A High Yield Bond - Annual+
27.4B High Yield Bond - Annual+
27.5A High Yield Bond - Semi-Annual+
27.5B High Yield Bond - Semi-Annual+
* Previously filed electronically with Registration Statement and/or
post-effective amendment no. 31 file nos. 811-03006 and 2-66906 on July 17,
1995, accession number 0000950135-95-001528.
** Previously filed electronically with post-effective amendment number 36
(file nos. 811-3006 and 2-66906) on February 28, 1997, accession number
0001010521-97-000232.
+ Filed herewith
C-11
MASTER TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN JOHN HANCOCK
FUNDS AND JOHN HANCOCK SIGNATURE SERVICES, INC.
AGREEMENT made as of the 3rd day of June, 1997 by and between each investment
company advised by John Hancock Advisers, Inc., having its principal office and
place of business at 101 Huntington Avenue, Boston, Massachusetts, 02199, and
John Hancock Signature Services, Inc., a Delaware corporation having its
principal office and place of business at 101 Huntington Avenue, Boston,
Massachusetts 02199 ("JHSS").
WITNESSETH:
WHEREAS, each investment company desires to appoint JHSS as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities;
and
WHEREAS, JHSS desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
Article 1 Definitions
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
(a)"Fund" shall mean the investment company which has adopted this
agreement and is listed on Appendix A hereto. If the Fund is a
Massachusetts business trust or Maryland corporation, it may in the
future establish and designate other separate and distinct series of
shares, each of which may be called a "series" or a "portfolio"; in
such case, the term "Fund" shall also refer to each such separate
series or portfolio.
(b)"Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
Article 2 Terms of Appointment; Duties of JHSS
2.01 Subject to the terms and conditions set forth in this Agreement, the Fund
hereby employs and appoints JHSS to act, and JHSS agrees to act, as transfer
agent and dividend dispersing agent with respect to the authorized and issued
shares of beneficial interest ("Shares") of the Fund subject to this Agreement
and to provide to the shareholders of the Fund ("Shareholders") such services in
connection therewith as may be set out in the prospectus of the Fund from time
to time.
2.02 JHSS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and JHSS, JHSS shall:
1
<PAGE>
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
therefor to the Fund's Custodian authorized pursuant to the
Fund's Declaration of Trust or Articles of Incorporation (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii) Receive for acceptance, redemption requests and redemption
directions and deliver the appropriate documentation therefor to
the Custodian;
(iv) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay over
or cause to be paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund, processing the reinvestment
of distributions on the Fund at the net asset value per share for
the Fund next computed after the payment (in accordance with the
Fund's then-current prospectus);
(vii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(viii) Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) of the rules and regulations of the
Securities Exchange Act of 1934 a record of the total number of
Shares of the Fund which are authorized, based upon data provided
to it by the Fund, and issued and outstanding. JHSS shall also
provide the Fund, on a regular basis, with the total number of
Shares which are authorized and issued and outstanding and shall
have no obligation, when recording the issuance of Shares, to
monitor the issuance of these Shares or to take cognizance of any
laws relating to the issue or sale of these Shares, which
functions shall be the sole responsibility of the Fund.
(b) In calculating the number of Shares to be issued on purchase or
reinvestment, or redeemed or repurchased, or the amount of the purchase
payment or redemption or repurchase payments owed, JHSS shall use the
net asset value per share (as described in the Fund's then-current
prospectus) computed by it or such other person as may be designated by
the Fund's Board. All issuances, redemptions or repurchases of the
Funds' shares shall be effected at net asset values per share next
computed after receipt of the orders therefore and said orders shall
become irrevocable at the time as of which said value is next computed.
(c) In addition to and not in lieu of the services set forth in the
above paragraph (a), JHSS shall: (i) perform all of the customary
services of a transfer agent and dividend disbursing agent including
but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating
proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing appropriate forms required with respect
to dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and statements
of account to Shareholders for all purchases and redemptions of Shares
2
<PAGE>
and other confirmable transactions in Shareholder accounts, preparing
and mailing activity statements for Shareholders, and providing
Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of the Fund's Shares sold
in each State.
(d) In addition, the Fund shall (i) identify to JHSS in writing those
transactions and assets to be treated as exempt from the blue sky
reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of JHSS for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and the reporting of these
transactions to the Fund as provided above.
(e) Additionally, JHSS shall:
(i) Utilize a system to identify all share transactions which
involve purchase and redemption orders that are processed at a
time other than the time of the computation of net asset value
per share next computed after receipt of such orders, and shall
compute the net effect upon the Fund of the transactions so
identified on a daily and cumulative basis.
(ii) If upon any day the cumulative net effect of such
transactions upon the Fund is negative and exceeds a dollar
amount equivalent to 1/2 of 1 cent per share, JHSS shall promptly
make a payment to the Fund in cash or through the use of a credit
in the manner described in paragraph (iv) below, in such amount
as may be necessary to reduce the negative cumulative net effect
to less than 1/2 of 1 cent per share.
(iii) If on the last business day of any month the cumulative net
effect upon the Fund of such transactions (adjusted by the amount
of all prior payments and credits by JHSS and the Fund) is
negative, the Fund shall be entitled to a reduction in the fee
next payable under the Agreement by an equivalent amount, except
as provided in paragraph (iv) below. If on the last business day
in any month the cumulative net effect upon the Fund of such
transactions (adjusted by the amount of all prior payments and
credits by JHSS and the Fund) is positive, JHSS shall be entitled
to recover certain past payments and reductions in fees, and to a
credit against all future payments and fee reductions that may be
required under the Agreement as herein described in paragraph
(iv) below.
(iv) At the end of each month, any positive cumulative net effect
upon a Fund of such transactions shall be deemed to be a credit
to JHSS which shall first be applied to permit JHSS to recover
any prior cash payments and fee reductions made by it to the Fund
under paragraphs (ii) and (iii) above during the calendar year,
by increasing the amount of the monthly fee under the Agreement
next payable in an amount equal to prior payments and fee
reductions made by JHSS during such calendar year, but not
exceeding the sum of that month's credit and credits arising in
prior months during such calendar year to the extent such prior
credits have not previously been utilized as contemplated by this
paragraph. Any portion of a credit to JHSS not so used by it
shall remain as a credit to be used as payment against the amount
of any future negative cumulative net effects that would
otherwise require a cash payment or fee reduction to be made to
the Fund pursuant to paragraphs (ii) or (iii) above (regardless
of whether or not the credit or any portion thereof arose in the
same calendar year as that in which the negative cumulative net
effects or any portion thereof arose).
3
<PAGE>
(v) JHSS shall supply to the Fund from time to time, as mutually
agreed upon, reports summarizing the transactions identified
pursuant to paragraph (i) above, and the daily and cumulative net
effects of such transactions, and shall advise the Fund at the
end of each month of the net cumulative effect at such time. JHSS
shall promptly advise the Fund if at any time the cumulative net
effects exceeds a dollar amount equivalent to 1/2 of 1 cent per
share.
(vi) In the event that this Agreement is terminated for whatever
cause, or this provision 2.02 (d) is terminated pursuant to
paragraph (vii) below, the Fund shall promptly pay to JHSS an
amount in cash equal to the amount by which the cumulative net
effect upon the Fund is positive or, if the cumulative net effect
upon the Fund is negative, JHSS shall promptly pay to the Fund an
amount in cash equal to the amount of such cumulative net effect.
(vii) This provision 2.02 (e) of the Agreement may be terminated
by JHSS at any time without cause, effective as of the close of
business on the date written notice (which may be by telex) is
received by the Fund.
Procedures applicable to certain of these services may be established from time
to time by agreement between the Fund and JHSS.
Article 3 Fees and Expenses
3.01 For performance by JHSS pursuant to this Agreement, the Fund agrees to pay
JHSS an annual maintenance fee for each Shareholder account, except that for
Class C and the Institutional Series Trust, the Fund agrees to pay JHSS a
percentage of that Class' daily net assets, as set out in Appendix A attached
hereto. Such fees and out-of-pocket expenses and advances identified under
Section 3.02 below may be changed from time to time subject to mutual written
agreement between the Fund and JHSS.
3.02 In addition to the fee paid under Section 3.01 above, the Fund agrees to
reimburse JHSS for out-of-pocket expenses or advances incurred by JHSS for the
items set out in the fee schedule attached hereto. In addition, any other
expenses incurred by JHSS at the request or with the consent of the Fund, will
be reimbursed by the Fund.
3.03 The Fund agrees to pay all fees and reimbursable expenses promptly
following the mailing of the respective billing notice. Postage for mailing of
proxies to all shareholder accounts shall be advanced to JHSS by the Funds at
least seven (7) days prior to the mailing date of such materials.
Article 4 Representations and Warranties of JHSS
JHSS represents and warrants to the Fund that:
4.01 It is a corporation duly organized and existing and in good standing under
the laws of the State of Delaware, and is duly qualified and in good standing as
a foreign corporation under the Laws of The Commonwealth of Massachusetts.
4.02 It has corporate power and authority to enter into and perform its
obligations under this Agreement.
4
<PAGE>
4.03 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.04 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 5 Representations and Warranties of the Fund
The Fund represents and warrants to JHSS that:
5.01 It is a business trust duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts or, in the case of John
Hancock Cash Reserve, Inc., a Maryland corporation duly organized and existing
and in good standing under the laws of the State of Maryland.
5.02 It has power and authority to enter into and perform this Agreement.
5.03 All proceedings required by the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
5.04 It is an open-end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
5.05 A registration statement under the Securities Act of 1933, as amended, with
respect to the shares of the Fund subject to this Agreement has become
effective, and appropriate state securities law filings have been made and will
continue to be made.
Article 6 Indemnification
6.01 JHSS shall not be responsible for, and the Fund shall indemnify and hold
JHSS harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or attributable
to:
(a) All actions of JHSS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken
in good faith and without negligence or willful misfeasance.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's bad faith, gross
negligence or willful misfeasance or which arise out of the reckless
disregard of any representation or warranty of the Fund hereunder.
(c) The reliance on or use by JHSS or its agents or subcontractors of
information, records and documents which (i) are received by JHSS or
its agents or subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained by the Fund or
any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by JHSS or its agents or
subcontractors of, any instructions or requests of the Fund.
5
<PAGE>
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or
regulations of any state that Fund Shares be registered in that state
or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of
Shares in that state.
(f) It is understood and agreed that the assets of the Fund may be
used to satisfy the indemnity under this Article 6 only to the extent
that the loss, damage, cost, charge, counsel fee, payment, expense and
liability arises out of or is attributable to services hereunder with
respect to the Shares of such Fund.
6.02 JHSS shall indemnify and hold harmless the Fund from and against any and
all losses, damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributed to any action or failure or omission to
act by JHSS as a result of JHSS's lack of good faith, negligence or willful
misfeasance.
6.03 At any time JHSS may apply to any officer of the Fund for instructions, and
may consult with legal counsel with respect to any matter arising in connection
with the services to be performed by JHSS under this Agreement, and JHSS and its
agents or subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such instructions or
upon the opinion of such counsel. JHSS, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided JHSS or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by the
Fund, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Fund. JHSS, its agents
and subcontractors shall also be protected and indemnified in recognizing share
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officer of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
6.04 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
6.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
6.06 In order that the indemnification provisions contained in this Article 6
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
6
<PAGE>
Article 7 Covenants of the Fund and JHSS
7.01 The Fund shall promptly furnish to JHSS the following:
(a) A certified copy of the resolution(s) of the Trustees of the Trust
or the Directors of the Corporation authorizing the appointment of
JHSS and the execution and delivery of this Agreement.
(b) A copy of the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws and all amendments thereto.
7.02 JHSS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of share certificates and
facsimile signature imprinting devices, if any; and for the preparation or use,
and for keeping account of, such certificates and devices.
7.03 JHSS shall keep records relating to the services to be performed hereunder,
in the form and manner as it may deem advisable. To the extent required by
Section 31 of the Investment Company Act of 1940 and the rules and regulations
of the Securities and Exchange Commission thereunder, JHSS agrees that all such
records prepared or maintained by JHSS relating to the services to be performed
by JHSS hereunder are the property of the Fund and will be preserved, maintained
and made available in accordance with such Act and rules, and will be
surrendered to the Fund promptly on and in accordance with the Fund's request.
7.04 JHSS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person without
the consent of the other party to this Agreement, except as may be required by
law.
7.05 JHSS agrees that, from time to time or at any time requested by the Fund,
JHSS will make reports to the Fund, as requested, of JHSS's performance of the
foregoing services.
7.06 JHSS will cooperate generally with the Fund to provide information
necessary for the preparation of registration statements and periodic reports to
be filed with the Securities and Exchange Commission, including registration
statements on Form N-1A, semi-annual reports on Form N-SAR, periodic statements,
shareholder communications and proxy materials furnished to holders of shares of
the Fund, filings with state "blue sky" authorities and with United States and
foreign agencies responsible for tax matters, and other reports and filings of
like nature.
7.07 In case of any requests or demands for the inspection of the Shareholder
records of the Fund, JHSS will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such inspection. JHSS
reserves the right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable for the failure
to exhibit the Shareholder records to such person.
7
<PAGE>
Article 8 No Partnership or Joint Venture
8.01 The Fund and JHSS are not currently partners of or joint venturers with
each other and nothing in this Agreement shall be construed so as to make them
partners or joint venturers or impose any liability as such on them.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon one hundred twenty
(120) days' written notice to the other party.
9.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses
associated with the movement of records and material will be borne by the Fund.
Additionally, JHSS reserves the right to charge for any other reasonable
expenses associated with such termination.
Article 10 Assignment
10.01 Except as provided in Section 10.03 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
10.03 JHSS may, without further consent on the part of the Fund, subcontract for
the performance hereof with (i) Boston Finanacial Data Services, Inc., a
Massachusetts corporation ("BE") which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section
17A(c)(1)") or any other entity registered as a transfer agent under Section
17A(c)(1) JHSS deems appropriate in order to comply with the terms and
conditions of this Agreement; provided, however, that JHSS shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
Article 11 Amendment
11.01 This Agreement may be amended or modified by a written agreement executed
by both parties and authorized or approved by a resolution of the Trustees of
the Trust or Directors of the Corporation.
Article 12 Massachusetts Law to Apply
12.01 This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the internal substantive laws of The Commonwealth
of Massachusetts.
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
8
<PAGE>
Article 14 Limitation on Liability
14.01 If the Fund is a Massachusetts business trust, JHSS expressly acknowledges
the provision in the Fund's Declaration of Trust limiting the personal liability
of the trustees and shareholders of the Fund; and JHSS agrees that it shall have
recourse only to the assets of the Fund for the payment of claims or obligations
as between JHSS and the Fund arising out of this Agreement, and JHSS shall not
seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. In any case, each Fund, and each series or portfolio
of each Fund, shall be liable only for its own obligations to JHSS under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf under their seals by and through their duly
authorized officers, as of the day and year first above written.
JOHN HANCOCK FUNDS Listed on Appendix A
By: /s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President
JOHN HANCOCK SIGNATURE SERVICES, INC.
By: /s/Charles J. McKenney, Jr.
---------------------------
Charles J. McKenney, Jr.
Vice President
9
<PAGE>
APPENDIX A
TRANSFER AGENT FEE SCHEDULE, EFFECTIVE JUNE 3, 1997
Effective June 3, 1997, the transfer agent fees payable monthly under the
transfer agent agreement between each fund and John Hancock Signature Services,
Inc. shall be the following rates plus certain out-of-pocket expenses as
described to the Board:
Annual Rate Per Account
Equity Fund Class A Shares Class B Shares
John Hancock Capital Series $19.00 $21.50
- -JH Independence Equity Fund
- -JH Special Value Fund
- -JH Utilities Fund
John Hancock Special Equities Fund
John Hancock World Fund
- -JH Pacific Basin Fund
- -JH Global Rx Fund
- -JH Global Marketplace Fund
John Hancock Investment Trust
- -JH Growth & Income Fund
- -JH Sovereign Balanced Fund
- -JH Sovereign Investors Fund
John Hancock Investment Trust II
- -JH Disciplined Growth Fund
- -JH Financial Industries Fund
- -JH Regional Bank Fund
John Hancock Investment Trust III
- -John Hancock Global Fund
- -John Hancock Growth Fund
- -John Hancock International Fund
- -John Hancock Special Opportunities Fund
John Hancock Investment Trust IV
- -JH Discovery Fund
John Hancock Series Trust
- -JH Emerging Growth Fund
- -JH Global Technology Fund
10
<PAGE>
Annual Rate Per Account
Money Market Funds Class A Shares Class B Shares
John Hancock Current Interest $20.00 $22.50
- -JH Money Market Fund
- -JH US Government Cash Reserve
John Hancock Cash Reserve
Annual Rate Per Account
Tax Free Funds Class A Shares Class B Shares
John Hancock Tax-Exempt Series Fund $20.00 $22.50
- -JH Massachusetts Tax-Free Income Fund
- -JH New York Tax-Free Income Fund
John Hancock California Tax-Free
Income Fund
John Hancock Tax-Free Bond Trust
- -JH High Yield Tax-Free Fund
- -JH Tax Free Bond Fund
Annual Rate Per Account
Income Funds Class A Shares Class B Shares
John Hancock Limited Term Government Fund $20.00 $22.50
John Hancock Sovereign Bond Fund
John Hancock Strategic Series
- -JH Strategic Income Fund
- -JH Sovereign US Government Income Fund
John Hancock Investment Trust III
- -JH Short-Term Strategic Income Fund
- -JH World Bond Fund
John Hancock Bond Trust
- -JH Government Income Fund
- -JH HighYield Bond Fund
- -JH Intermediate Maturity Government Fund
11
<PAGE>
The following funds are at a % of daily net assets of the Fund.
Out-of-pocket expenses are paid by John Hancock Signature Services, Inc.
Class C Funds % of Daily Net Assets of the Fund
John Hancock Special Equities Fund 0.10%
John Hancock Sovereign Investors Fund
John Hancock Institutional Series Trust 0.05%
- -JH Active Bond fund
- -JH Dividend Performers Fund
- -JH Fundamental Value Fund
- -JH Global Bond Fund
- -JH Independence Balanced Fund
- -JH Independence Diversified Core Equity Fund II
- -JH Independence Growth Fund
- -JH Independence Medium Capitalization Fund
- -JH Independence Value Fund
- -JH International Equity Fund
- -JH Multi-Sector Growth Fund
- -JH Small Capitalization Equity Fund
These fees are agreed to by the undersigned as of June 3, 1997.
/s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President of Each Fund
/s/Charles McKenney, Jr.
------------------------
Charles McKenney, Jr.
Vice President of John Hancock
Signature Services, Inc.
12
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for Intermediate Maturity Government Fund in the Supplement to the
John Hancock Income Funds Prospectus and the John Hancock Income Funds
Prospectus and "Independent Auditors" in the John Hancock Intermediate Maturity
Government Fund Class A and Class B Shares Statement of Additional Information
in Post-Effective Amendment No. 38 to the Registration Statement (Form N-1A, No.
2-66906) dated July 15, 1997.
We also consent to the incorporation by reference therein of our report dated
May 9, 1997, with respect to the financial statements and financial highlights
of the John Hancock Intermediate Maturity Government Fund (one of the portfolios
constituting John Hancock Bond Trust) in the Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
July 11, 1997
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for Government Income Fund in the Supplement to the John Hancock
Income Funds Prospectus and the John Hancock Income Funds Prospectus and
"Independent Auditors" in the combined John Hancock Government Income Fund and
John Hancock High Yield Bond Fund Class A and Class B Shares Statement of
Additional Information in Post-Effective Amendment No. 38 to the Registration
Statement (Form N-1A, No. 2-66906) dated July 15, 1997.
We also consent to the incorporation by reference therein of our report dated
December 10, 1996, with respect to the financial statements and financial
highlights of the John Hancock Government Income Fund (one of the portfolios
constituting John Hancock Bond Trust) in the Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
July 11, 1997
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" for High Yield Bond Fund in the Supplement to the John Hancock
Income Funds Prospectus and the John Hancock Income Funds Prospectus and
"Independent Auditors" in the combined John Hancock High Yield Bond Fund and
John Hancock Government Income Fund Class A and Class B Shares Statement of
Additional Information in Post-Effective Amendment No. 38 to the Registration
Statement (Form N-1A, No. 2-66906) dated July 15, 1997.
We also consent to the incorporation by reference therein of our report dated
December 10, 1996, with respect to the financial statements and financial
highlights of the John Hancock High Yield Bond Fund (one of the portfolios
constituting John Hancock Bond Trust) in the Form N-1A.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
July 11, 1997
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<NAME> JOHN HANCOCK INTERMEDIATE MATURITY GOVERNMENT FUND - CLASS A
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<NAME> JOHN HANCOCK INTERMEDIATE MATURITY GOVERNMENT FUND - CLASS B
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<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS A
<S> <C>
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<PERIOD-START> NOV-01-1995
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<INVESTMENTS-AT-VALUE> 535,784,928
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<PER-SHARE-GAIN-APPREC> (0.25)
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</TABLE>
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<NUMBER> 092
<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS B
<S> <C>
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<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS A
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<NAME> JOHN HANCOCK GOVERNMENT INCOME FUND - CLASS B
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<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS A
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<NUMBER> 102
<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS B
<S> <C>
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<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS A
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<NAME> JOHN HANCOCK HIGH YIELD BOND FUND - CLASS B
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