ANNUAL REPORT
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[GRAPHIC OMITTED]
Intermediate
Maturity
Government
Fund
MAY 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
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DIRECTORS
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ
HAROLD R. HISER, JR.
ANNE C. HODSDON
CHARLES L. LADNER
LEO E. LINBECK, JR.
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)
JOHN P. TOOLAN
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President and Chief Operating Officer
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5072
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===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year
wondering what the market would do for an encore in 1998. The answer so far has
been more of the same, even with the recent increase in volatility caused by
tremors from Asia. This achievement continues to bolster many investors'
convictions that the market will produce these results forever, or, in the worst
case, that market declines will always be short-lived. While the economy remains
solid and the environment favorable, history and reason tell us it's a highly
unlikely scenario.
This doesn't mean we know what the market will do next, or that it's
riding for a fall. But after such a run, even in this "new era" of strong
economic growth with low inflation, we believe it would be wise for investors to
set more realistic expectations. As we've said before, markets do indeed move in
two directions. Over the long term, the market's historical results have been
more in the 10% per year range, which is still a solid result, considering it
has been produced despite wars, depressions and other social upheavals along the
way.
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[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
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In addition to adjusting, or at least re-examining, expectations, now
could also be a good time to review with your investment professional how your
assets are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping you keep
your feet on the ground as you pursue your dreams.
Sincerely,
/S/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY BARRY EVANS, CFA, PORTFOLIO MANAGER
John Hancock
Intermediate Maturity
Government Fund
U.S. bond market rallies through year end,
then stalls in early '98
Recently, Barry Evans assumed leadership of the Fund's management team. Mr.
Evans, a senior vice president, is head of the government and municipal
fixed-income departments at John Hancock Funds.
The U.S. bond market started the past year off with a roar and ended it with a
yawn. Bonds began to rally last summer and kept up their pace through December,
thanks to lower-than-expected inflation and the expectation that Asia's
financial crisis would slow U.S. economic growth. By January, with the U.S.
economy showing no signs of weakening, the rally ended. Yields on the 10-year
Treasury, which had tumbled from 6.66% on May 31, 1997, to 5.36% on January 12,
1998, settled in between 5.4% and 5.8% for the next five months.
Initially, when interest rates were falling, Treasuries posted strong
returns. Long-term Treasuries did especially well as inflation fears waned. But
prices on mortgage bonds rose at a slower rate, as interest rates fell and
prepayment concerns grew. Prepayments occur when homeowners pay off their
existing mortgage loans before their due dates to refinance at lower rates.
"Bonds began to rally last summer and kept up their pace through December..."
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[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Fund management
team members (l-r): Seth Robbins, Dawn Baillie and Barry Evans.]
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3
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John Hancock Funds - Intermediate Maturity Government Fund
"The Fund also benefited from adjusting its asset allocation..."
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["Pie chart with the heading "Portfolio Diversification" at the top left hand
column. The chart is divided into 3 sections. Going from top left to right;
Short-Term Investments 4%; U.S. Treasuries 46%; U.S. Government Agencies 50%.
Footnote below states "As a percentage of net assets on May 31, 1998."]
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When prepayments rise, mortgage bond investors lose the opportunity for higher
yields and have to reinvest at lower rates. As interest rates started leveling
off in 1998, however, bonds like mortgages that had a yield advantage over
Treasuries edged ahead.
In this changing environment, John Hancock Intermediate Maturity Government
Fund managed to come out ahead. The Fund's Class A and Class B shares had total
returns of 9.56% and 8.74%, respectively, at net asset value, for the year ended
May 31, 1998. Keep in mind that your net asset value return will be different
from this performance if you were not invested in the Fund for the entire period
and did not reinvest all distributions. By comparison, the average
intermediate-term government fund returned 9.32%, according to Lipper Analytical
Services, Inc.(1) During the same period, the Lehman Brothers Intermediate
Government Bond Index returned 8.58%. For longer-term performance information,
please see pages six and seven.
Some of the Fund's gains came from its slightly long duration of 4.3 years.
Duration measures how sensitive a bond's price is to interest-rate changes. The
longer a bond's duration, the more its price will rise as interest rates fall --
or fall as rates rise. This helped the Fund initially. Although interest rates
stabilized beginning in January, we kept duration unchanged. Our expectation was
that any rise in interest rates would be minimal, given how high real (or
after-inflation) yields were and the fact that new Treasury issuance was
declining.
Staying nimble
The Fund also benefited from adjusting its asset allocation as market conditions
shifted. During the fall, the Fund maintained a lighter-than-average stake in
mortgage bonds and a large investment in interest-sensitive U.S. Treasuries.
This worked well when interest rates were declining and bond prices were rising.
Then, in early 1998, we boosted our mortgage stake to 37%, up from 25% at the
end of November. A wave of prepayment fears had weakened prices, making
traditional mortgage bonds more attractive. Our focus was on 30-year bonds
issued by the Government National Mortgage Association (GNMAs) with 7% coupons
(or stated interest rates) and 15-year bonds issued by Federal National Mortgage
Association (FNMAs) with 6.5% coupons. We targeted bonds with lower coupons than
those on mortgages that were being prepaid, but higher coupons than those on
newly issued mortgages.
During the months after we bought them, the Fund benefited as prepayment
fears eased and prices on mortgage bonds regained some of the ground they had
lost relative to Treasuries. With hindsight, the Fund would have benefited even
more from a higher mortgage stake. However, we were cautious about further
increasing our investment in this area because we were concerned that if the
economy began to slow and
4
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John Hancock Funds - Intermediate Maturity Government Fund
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["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 2% with the 10% at the top and 0% at the bottom. The
first represents the 9.56% total return for John Hancock Intermediate Maturity
Government Fund Class A. The second represents the 8.74% total return for John
Hancock Intermediate Maturity Government Fund : Class B. The third represents
the 9.32% total return for Average intermediate term government fund. A Footnote
below reads " The total return for John Hancock Intermediate Maturity Government
Fund are at net asset value with all distributions reinvested. The average
intermediate term government fund is tracked by Lipper Analytical Services, Inc.
See the following two pages for historical performance information."]
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interest rates began to fall, prepayments would accelerate even more. To boost
our mortgage stake, we trimmed Treasuries to 46% of total net assets, down from
54% at the end of November. We also pared back our adjustable rate mortgages
(ARMs), which were experiencing faster prepayments than expected as homeowners
raced to lock in lower rates on fixed-rate mortgages.
A 13% stake in other types of U.S. government agency bonds also helped the
Fund later in the period. Once the rally was over, these bonds -- mostly
short-term bonds that could be "called" or paid off in less than two years --
offered a slight yield advantage over Treasuries.
Expecting a slowdown
Our expectation is that the economy will eventually grow at a more moderate
pace, causing interest rates to fall. For starters, it's unlikely that consumer
spending will continue at the brisk rate we saw in the first quarter of 1998
when unseasonably warm winter weather boosted sales. A gigantic inventory
build-up in the first quarter may also lead to decreased industrial production
going forward. Finally, as Asia's problems play out, we expect the U.S. trade
deficit to widen and lower gross domestic production. We'll be keeping a close
eye on all these areas for signs of a slowdown. We'll also be watching corporate
earnings to see whether they're growing at a slower rate than before.
Given this outlook, we're mildly optimistic about the bond market. There are
two positives already at work. Real rates -- interest rates after inflation --
are historically high. Plus, as the budget deficit has narrowed, the government
has had less need to issue U.S. Treasury bonds. If supply continues to shrink
and demand continues to remain strong, bond prices will move up. Once the
economy shows signs of more moderate growth, we believe yields could break
through the bottom of the range they've been in since January. When this will
happen is hard to say because the effect of the Asian credit and currency crisis
on the U.S. economy is still such an unknown. While we're waiting for the
economy to slow, we'll stick with our current duration and possibly add to our
stake in bonds issued by U.S. government agencies.
"Our expectation is that the economy will eventually grow at a more moderate
pace..."
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This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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John Hancock Funds - Intermediate Maturity Government Fund
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A LOOK AT PERFORMANCE
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The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Intermediate Maturity Government Fund. Total
return measures the change in value of an investment from the beginning to the
end of a period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 3%.
Class B performance reflects a maximum contingent deferred sales charge (maximum
3% and declining to 0% over four years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
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CLASS A
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For the period ended March 31, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
---- ----- ----------
Cumulative Total Returns 7.20% 26.16% 36.46%
Average Annual Total Returns(1) 7.20% 4.76% 5.10%
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CLASS B
For the period ended March 31, 1998
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
---- ----- ----------
Cumulative Total Returns 6.70% 25.76% 34.94%
Average Annual Total Returns(1) 6.70% 4.69% 4.91%
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YIELDS
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As of May 31, 1998
SEC 30-DAY
YIELD
----------
John Hancock Intermediate Maturity
Government Fund: Class A 4.76%
John Hancock Intermediate Maturity
Government Fund: Class B 4.16%
Notes to Performance
(1) The Adviser voluntarily reduced a portion of the management fee during the
period. Without the reduction of expenses, the average annual total return
for the one-year, five-year and since inception periods would have been
6.90%, 4.33% and 4.62% for Class A shares, respectively, and 6.39%, 4.26%
and 4.43% for Class B shares, respectively.
6
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John Hancock Funds - Intermediate Maturity Government Fund
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Intermediate Maturity Government Fund would be worth, assuming all distributions
were reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Lipper Intermediate U.S. Government Index and the
Lehman Brothers Government Bond Index. The Lipper Intermediate U.S. Government
Index is an equally weighted unmanaged index that measures the performance of
funds with at least 65% of their assets in securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities with dollar-weighted
average maturities of five to ten years. The Lehman Brothers Government Bond
Index is an unmanaged index that measures the performance of U.S.Treasury bonds
and U.S. government agency bonds. Past performance is not indicative of future
results.
*No contingent deferred sales charge applicable.
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Intermediate Maturity Government Fund
Class A shares
Line chart with the heading Intermediate Maturity Government Fund Class A
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are four lines. The first line represents the value
of the Lehman Government Bond Index and is equal to $15,741 as of May 31, 1998.
The second line represents the value of the Lipper Intermediate U.S. Government
Index and is equal to $14,707 as of May 31, 1998. The third line represents the
value of the hypothetical $10,000 investment made in the Intermediate Maturity
Government Fund on December 31, 1991, before sales charge, and is equal to
$14,242 as of May 31, 1998. The fourth line represents the Intermediate Maturity
Government Fund after sales charge and is equal to $13,815 as of May 31, 1998.
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Intermediate Maturity Government Fund
Class B shares
Line chart with the heading Intermediate Maturity Government Fund Class B
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines. The first line represents the value
of the Lehman Government Bond Index and is equal to $15,741 as of May 31, 1998.
The second line represents the value of the Lipper Intermediate U.S. Government
Index and is equal to $14,707 as of May 31, 1998. The third line represents the
value of the hypothetical $10,000 investment made in the Intermediate Maturity
Government Fund on December 31, 1991, before sales charge, and is equal to
$13,644 as of May 31, 1998.
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7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Intermediate Maturity Government Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1998. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
May 31, 1998
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Assets:
Investments at value - Note C:
U.S. government and agencies securities
(cost - $174,410,630) .................................. $175,384,447
Joint repurchase agreement (cost - $5,729,000) ........... 5,729,000
Corporate savings account ................................ 479
-------------
181,113,926
Interest receivable ....................................... 1,839,497
Other assets .............................................. 25,213
-------------
Total Assets ............................ 182,978,636
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Liabilities:
Payable for shares repurchased ............................ 17,112
Dividend payable .......................................... 73,345
Payable to John Hancock Advisers, Inc. ....................
and affiliates - Note B .................................. 168,564
Accounts payable and accrued expenses ..................... 248,462
-------------
Total Liabilities ....................... 507,483
-----------------------------------------------------------
Net Assets:
Capital paid-in ........................................... 198,654,009
Accumulated net realized gain on investments .............. (17,173,457)
Net unrealized appreciation of investments ................ 975,981
Undistributed net investment income ....................... 14,620
-------------
Net Assets .............................. $182,471,153
===========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $163,358,246/16,813,847 ......................... $9.72
=============================================================================
Class B - $19,112,907/1,967,219 ........................... $9.72
=============================================================================
Maximum Offering Price Per Share*
Class A - ($9.72 x 103.09%) ............................... $10.02
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended May 31, 1998
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Investment Income:
Interest ................................................... $7,733,924
-----------
Expenses:
Investment management fee - Note B ...................... 412,737
Distribution and service fee - Note B
Class A ............................................... 229,302
Class B ............................................... 114,633
Transfer agent fee - Note B ............................. 360,197
Custodian fee ........................................... 50,216
Auditing fee ............................................ 38,167
Registration and filing fees ............................ 24,823
Printing ................................................ 22,582
Financial services fee - Note B ......................... 18,259
Trustees' fees .......................................... 10,427
Miscellaneous ........................................... 1,615
Legal fees .............................................. 984
-----------
Total Expenses ........................... 1,283,942
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Less Expense Reductions -
Note B ................................... (77,035)
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Net Expenses ............................. 1,206,907
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Net Investment Income .................... 6,527,017
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ...................... 1,939,903
Change in net unrealized appreciation/depreciation
of investments ............................................ (317,027)
-----------
Net Realized and Unrealized
Gain on Investments ...................... 1,622,876
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................ $8,149,893
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SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Intermediate Maturity Government Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 1, 1997 YEAR ENDED
MARCH 31, 1997 TO MAY 31, 1997(1) MAY 31, 1998
-------------- ------------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................ $2,253,515 $333,510 $6,527,017
Net realized gain (loss) on investments sold ..................... (759,398) (50,466) 1,939,903
Change in net unrealized appreciation/depreciation of investments (37,403) 334,487 (317,027)
------------- ------------- -------------
Net Increase in Net Assets Resulting from Operations ............ 1,456,714 617,531 8,149,893
------------- ------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6612, $0.1092, and $0.6222 per share, respectively) (1,787,778) (261,624) (5,879,115)
Class B - ($0.5968, $0.0973, and $0.5497 per share, respectively) (466,451) (68,448) (647,299)
Distributions from net realized gain on investments sold
Class A - ($0.0782, none and none per share, respectively) ...... (189,501) -- --
Class B - ($0.0782, none and none per share, respectively) ...... (58,760) -- --
------------- ------------- -------------
Total Distributions to Shareholders ........................... (2,502,490) (330,072) (6,526,414)
------------- ------------- -------------
From Fund Share Transactions - Net: * .............................. (7,687,534) 96,288 151,641,791
------------- ------------- -------------
Net Assets:
Beginning of period .............................................. 37,555,446 28,822,136 29,205,883
------------- ------------- -------------
End of period (including distributions in excess of net
investment income of $6,462 and undistributed net investment
income of $8,468 and $14,620, respectively) ..................... $28,822,136 $29,205,883 $182,471,153
============= ============= =============
* Analysis of Fund Share Transactions:
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 1, 1997 YEAR ENDED
MARCH 31, 1997 TO MAY 31, 1997(1) MAY 31, 1998
---------- ----------- -------- ---------- ----------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ................................. 387,191 $3,706,355 222,104 $2,089,262 3,794,449 $36,863,657
Shares issued in reorganization - Note D .... -- -- -- -- 15,475,727 149,668,850
Shares issued to shareholders in reinvestment
of distributions ........................... 77,547 741,124 10,430 98,314 457,237 4,435,608
---------- ----------- -------- ---------- ----------- ------------
464,738 4,447,479 232,534 2,187,576 19,727,413 190,968,115
Less shares repurchased ..................... (1,107,750) (10,635,603) (180,446) (1,700,404) (5,318,845) (51,730,310)
---------- ----------- -------- ---------- ----------- ------------
Net increase (decrease) ..................... (643,012) ($6,188,124) 52,088 $487,172 14,408,568 $139,237,805
========== =========== ======== ========== =========== ============
CLASS B
Shares sold ................................. 465,120 $4,452,149 187,610 $1,766,769 2,201,425 $21,367,420
Shares issued in reorganization - Note D .... -- -- -- -- 996,713 9,639,411
Shares issued to shareholders in reinvestment
of distributions ........................... 32,043 306,162 3,959 37,319 37,530 363,774
---------- ----------- -------- ---------- ----------- ------------
497,163 4,758,311 191,569 1,804,088 3,235,668 31,370,605
Less shares repurchased ..................... (654,247) (6,257,721) (233,349) (2,194,972) (1,950,374) (18,966,619)
---------- ----------- -------- ---------- ----------- ------------
Net increase (decrease) ..................... (157,084) ($1,499,410) (41,780) ($390,884) 1,285,294 $12,403,986
========== =========== ======== ========== =========== ============
</TABLE>
(1) Effective May 31, 1997, the fiscal period end changed from March 31 to May
31.
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Intermediate Maturity Government Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
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<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD FROM
--------------------------------------- APRIL 1, 1997 TO YEAR ENDED
1994 1995(1) 1996 1997 MAY 31, 1997(8) MAY 31, 1998
------- ------- ------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $10.05 $9.89 $9.79 $9.69 $9.37 $9.46
------- ------- ------- ------- ------- --------
Net Investment Income ................................... 0.41 0.49 0.62 0.67 0.11(7) 0.62(7)
Net Realized and Unrealized Gain (Loss) on Investments .. (0.16) (0.11) (0.08) (0.25) 0.09 0.26
------- ------- ------- ------- ------- --------
Total from Investment Operations .................... 0.25 0.38 0.54 0.42 0.20 0.88
------- ------- ------- ------- ------- --------
Less Distributions:
Dividends from Net Investment Income .................. (0.41) (0.48) (0.64) (0.66) (0.11) (0.62)
Distributions from Net Realized Gain on Investments
Sold ................................................. -- -- -- (0.08) -- --
------- ------- ------- ------- ------- --------
Total Distributions ................................. (0.41) (0.48) (0.64) (0.74) (0.11) (0.62)
------- ------- ------- ------- ------- --------
Net Asset Value, End of Period .......................... $9.89 $9.79 $9.69 $9.37 $9.46 $9.72
======= ======= ======= ======= ======= ========
Total Investment Return at Net Asset Value (2) .......... 2.51% 3.98% 5.60% 4.56% 2.13%(10) 9.56%
Total Adjusted Investment Return at Net Asset
Value (2,3) ............................................ 2.27% 3.43% 4.83% 4.19% 1.93%(10) 9.49%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $24,310 $12,950 $29,024 $22,043 $22,755 $163,358
Ratio of Expenses to Average Net Assets (4) ............. 0.75% 0.80% 0.75% 0.75% 0.75%(9) 1.09%
Ratio of Adjusted Expenses to Average Net Assets (4,5) .. 0.99% 1.35% 1.45% 1.12% 1.92%(9) 1.16%
Ratio of Net Investment Income to Average Net Assets .... 4.09% 4.91% 6.49% 6.99% 7.07%(9) 6.43%
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) ......................................... 3.85% 4.36% 5.79% 6.62% 5.90%(9) 6.36%
Fee Reduction Per Share (7) ............................. $0.02 $0.05 $0.07 $0.04 $0.02 $0.01
Portfolio Turnover Rate ................................. 244% 341% 423%(6) 427% 77% 250%(6)
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: the net investment income, net realized
and unrealized gains (losses), dividends and total investment return of the
Fund. It shows how the Fund's net asset value for a share has changed since the
end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Intermediate Maturity Government Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD FROM
--------------------------------------- APRIL 1, 1997 TO YEAR ENDED
1994 1995(1) 1996 1997 MAY 31, 1997(8) MAY 31, 1998
------- ------- ------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................... $10.05 $9.89 $9.79 $9.69 $9.37 $9.46
------- ------ ------ ------ ------ -------
Net Investment Income ................................... 0.34 0.43 0.57 0.60 0.10(7) 0.55(7)
Net Realized and Unrealized Gain (Loss) on Investments .. (0.16) (0.11) (0.10) (0.24) 0.09 0.26
------- ------ ------ ------ ------ -------
Total from Investment Operations .................... 0.18 0.32 0.47 0.36 0.19 0.81
------- ------ ------ ------ ------ -------
Less Distributions:
Dividends from Net Investment Income .................. (0.34) (0.42) (0.57) (0.60) (0.10) (0.55)
Distributions from Net Realized Gain on Investments
Sold ................................................. -- -- -- (0.08) -- --
------- ------ ------ ------ ------ -------
Total Distributions ................................. (0.34) (0.42) (0.57) (0.68) (0.10) (0.55)
------- ------ ------ ------ ------ -------
Net Asset Value, End of Period .......................... $9.89 $9.79 $9.69 $9.37 $9.46 $9.72
======= ====== ====== ====== ====== =======
Total Investment Return at Net Asset Value (2) .......... 1.85% 3.33% 4.92% 3.84% 2.01%(10) 8.74%
Total Adjusted Investment Return at Net Asset
Value (2,3) ............................................ 1.61% 2.78% 4.15% 3.47% 1.81%(10) 8.67%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................ $11,626 $9,506 $8,532 $6,779 $6,451 $19,113
Ratio of Expenses to Average Net Assets (4) ............. 1.40% 1.45% 1.40% 1.43% 1.50%(9) 1.84%
Ratio of Adjusted Expenses to Average Net Assets (4,5) .. 1.64% 2.00% 2.10% 1.80% 2.67%(9) 1.91%
Ratio of Net Investment Income to Average Net Assets .... 3.44% 4.26% 5.80% 6.30% 6.04%(9) 5.66%
Ratio of Adjusted Net Investment Income to Average
Net Assets (5) ......................................... 3.20% 3.71% 5.10% 5.93% 4.87%(9) 5.59%
Fee Reduction Per Share (7) ............................. $0.02 $0.05 $0.07 $0.04 $0.02 $0.01
Portfolio Turnover Rate ................................. 244% 341% 423%(6) 427% 77% 250%(6)
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into
consideration fee reductions by the Adviser during the periods shown.
(4) 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.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover rate excludes merger activity.
(7) Based on average of shares outstanding at the end of each month.
(8) Effective May 31, 1997, the fiscal period end changed from March 31 to May
31.
(9) Annualized.
(10) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Intermediate Maturity Government Fund
Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Intermediate Maturity Government Fund on May 31, 1998. It's divided into two
main categories: U.S. government and agencies securities and short-term
investments. Short-term investments, which represent the Fund's "cash" position,
are listed last.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (45.73%)
United States Treasury,
Bond.............................................. 11.125% 08-15-03 $2,000 $2,489,060
Bond.............................................. 11.875 11-15-03 17,000 21,895,490
Bond.............................................. 10.750 08-15-05 15,000 19,448,400
Bond.............................................. 12.000 08-15-13 10,910 16,078,612
Bond.............................................. 6.125 11-15-27 15,400 16,090,536
Note.............................................. 6.125 12-31-01 1,885 1,915,330
Note.............................................. 6.250 08-31-02 5,000 5,116,400
Note.............................................. 5.750 10-31-02 400 402,000
-----------
83,435,828
-----------
Government - U.S. Agencies (50.39%)
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf............................... 8.500 06-01-06 3,065 3,183,046
15 Yr Pass Thru Ctf............................... 8.500 11-01-06 679 701,848
15 Yr Pass Thru Ctf............................... 8.500 07-01-07 1,153 1,197,080
30 Yr Adjustable Rate Mortgage.................... 7.875# 05-01-17 51 52,487
30 Yr Adjustable Rate Mortgage.................... 7.625# 10-01-18 57 58,301
CMO REMIC Ser 1204 Class G........................ 7.000 11-15-05 1,767 1,769,266
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf............................... 7.500 06-01-10 1,790 1,848,312
15 Yr Pass Thru Ctf............................... 6.500 04-01-13 to 26,910 27,061,300
05-01-13
30 Yr Adjustable Rate Mortgage.................... 6.837# 03-01-14 to 44 44,361
06-01-14
30 Yr Adjustable Rate Mortgage ................... 7.500# 05-01-17 43 43,783
30 Yr Adjustable Rate Mortgage.................... 7.625# 03-01-22 292 295,552
30 Yr Adjustable Rate Mortgage.................... 7.300# 03-01-27 40 40,306
30 Yr Pass Thru Ctf............................... 7.000 02-01-26 9,728 9,868,293
CMO REMIC Ser G-29 Class N........................ 8.500 06-25-07 790 790,051
Note Ser 04-J..................................... 8.250 10-12-04 23,000 23,733,010
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Intermediate Maturity Government Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage.................... 7.000%# 10-20-23 $1,053 $1,083,121
30 Yr Pass Thru Ctf............................... 12.000 02-15-14 23 27,003
30 Yr Pass Thru Ctf............................... 12.500 07-15-15 35 41,535
30 Yr Pass Thru Ctf............................... 7.000 11-15-27 to 19,800 20,109,964
04-15-28
------------
91,948,619
------------
TOTAL U.S. GOVERNMENT AND
AGENCIES SECURITIES
(Cost $174,410,630) (96.12%) 175,384,447
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.14%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion, dated
05-29-98, due 06-01-98 (Secured by U.S.
Treasury Notes, 5.125% thru 9.25%, due
08-15-98 thru 11-15-05 and U.S. Treasury
Bonds, 6.00% thru 12.00%, due 08-15-13
thru 08-15-27) - Note A........................... 5.570 5,729 5,729,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%................................ 479
------------
TOTAL SHORT-TERM INVESTMENTS (3.14%) 5,729,479
-------- ------------
TOTAL INVESTMENTS (99.26%) 181,113,926
-------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.74%) 1,357,227
-------- ------------
TOTAL NET ASSETS (100.00%) $182,471,153
======== ============
</TABLE>
# Represents rate in effect on May 31, 1998.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Intermediate Maturity Government Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is a diversified, open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust consists of three series: John Hancock Intermediate Maturity Government
Fund (the "Fund"), John Hancock Government Income Fund and John Hancock High
Yield Bond Fund. The other two series of the Trust are reported in separate
financial statements. The investment objective of the Fund is to achieve a high
level of current income consistent with preservation of capital and maintenance
of liquidity.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B. The shares of each class represent
an interest in the same portfolio of investments of the Fund and have equal
rights to voting, redemption, dividends and liquidation, except that certain
expenses, subject to the approval of the Trustees, may be applied differently to
each class of shares in accordance with current regulations of the Securities
and Exchange Commission. Shareholders of a class which bears distribution and
service expenses under the terms of a distribution plan have exclusive voting
rights to that distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement transaction. Aggregate
cash balances are invested in one or more repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
FEDERAL INCOME TAX The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gains on
investments, to its shareholders. Therefore, no federal income or excise tax
provision is required. For federal income tax purposes, the Fund has $17,040,448
of a capital loss carryforward available, to the extent provided by regulations,
to offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gain distributions will be made.
The carryforward expires as follows: May 31, 1999 -- $1,018,204, May 31, 2000 --
$23,234, May 31, 2001 -- $11,348,721, May 31, 2002 -- $427,159, May 31, 2003 --
$1,950,205, May 31, 2004 -- $1,741,681 and May 31, 2005 -- $531,244. The Fund's
tax year end is May 31. Expired capital loss carryforwards are reclassified to
capital paid-in, in the year of expiration.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund, if any, with respect to each
class of shares will be calculated in the same manner, at the same time and will
be in the same amount, except for the effect of expenses that may be applied
differently to each class.
EXPENSES The majority of the expenses of the Trust were directly identifiable to
an individual fund. Expenses which were not readily identifiable to a specific
fund were allocated in such a manner as deemed
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Intermediate Maturity Government Fund
equitable, taking into consideration, among other things, the nature and type of
expense and the relative sizes of the funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 million,
collectively. Interest is charged to each fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the line of credit, is allocated among the participating funds.
The Fund had no borrowing activity for the year ended May 31, 1998.
NOTE B -
MANAGEMENT FEE, ADMINISTRATIVE SERVICES AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent on
an annual basis of 0.40% of the Fund's average daily net asset value.
Through December 5, 1997, the Adviser had temporarily agreed to limit fund
expenses, including the management fee, to 0.75% and 1.50% of the average net
assets attributable to the Class A and Class B shares, respectively.
Accordingly, during that period, the reduction in the Adviser's fee amounted to
$77,035.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended May 31,
1998, net sales charges received with regard to sales of Class A shares amounted
to $96,964. Out of this amount, $13,316 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $27,154 was paid
as sales commissions to unrelated broker-dealers and $56,494 was paid as sales
commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within four years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 3.00% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended May 31, 1998,
contingent deferred sales charges amounted to $21,713.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.25% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
could occur under certain circumstances.
The Board of Trustees approved a shareholder servicing agreement between the
Fund and John Hancock Signature Services, Inc. ("Signature
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Intermediate Maturity Government Fund
Services"), an indirect subsidiary of JHMLICo. The Fund pays transfer agent fees
based on the number of shareholder accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are trustees and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1998 the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $2,164.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
obligations, during the year ended May 31, 1998 aggregated $258,656,306 and
$252,506,197, respectively.
The cost of investments owned at May 31, 1998 (including the joint repurchase
agreement) for federal income tax purposes was $180,272,639. Gross unrealized
appreciation and depreciation of investments aggregated $1,893,411, and
$1,052,603, respectively, resulting in net unrealized appreciation of $840,808.
NOTE D -
REORGANIZATION
On November 12, 1997, the shareholders of the John Hancock Limited-Term
Government Fund ("Limited-Term Government Fund") approved a plan of
reorganization between Limited-Term Government Fund and the Fund providing for
the transfer of substantially all of the assets and liabilities of Limited-Term
Government Fund to the Fund in exchange solely for Class A and Class B shares of
the Fund. The acquisition was accounted for as a tax free exchange of 15,475,727
Class A shares and 996,713 Class B shares of John Hancock Intermediate Maturity
Government Fund for the net assets of Limited-Term Government Fund, which
amounted to $149,668,850 and $9,639,411 for Class A and Class B shares,
respectively, including $1,284,544 of unrealized appreciation, after the close
of business on December 5, 1997.
NOTE E -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
a decrease in accumulated net realized gain on investments of $18,339,461, an
increase in undistributed net investment income of $5,549 and an increase in
capital paid-in of $18,333,912. This represents the cumulative amount necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of May 31, 1998. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to certain
differences in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles.
16
<PAGE>
================================================================================
John Hancock Funds - Intermediate Maturity Government Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
We have audited the accompanying statement of assets and liabilities of the John
Hancock Intermediate Maturity Government Fund (one of the portfolios
constituting the John Hancock Bond Trust) (the "Fund"), including the schedule
of investments, as of May 31, 1998, and the related statement of operations for
the year then ended, and the statement of changes in net assets and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1998, by correspondence with the custodian and brokers, or other appropriate
auditing procedures where replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
John Hancock Intermediate Maturity Government Fund of the John Hancock Bond
Trust at May 31, 1998, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for each of the
indicated periods, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 10, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended May 31,
1998.
All of the dividends paid for the fiscal year are taxable as ordinary income.
None of the dividends qualify for the dividends received deduction available to
corporations.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the total of all distributions which are taxable
for calendar year 1998.
17
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Intermediate Maturity Government Fund
18
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Intermediate Maturity Government Fund
19
<PAGE>
================================================================================
----------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Intermediate Maturity Government Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
[Recycle Logo] Printed on Recycled Paper 5500A 5/98
7/98
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm." A recycled logo in lower left hand corner
with caption "Printed on Recycled Paper."]
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Government Income Fund
MAY 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
----------------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ
HAROLD R. HISER, JR.
ANNE C. HODSDON
CHARLES L. LADNER
LEO E. LINBECK, JR.
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)
JOHN P. TOOLAN
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President and Chief Operating Officer
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5072
----------------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year
wondering what the market would do for an encore in 1998. The answer so far has
been more of the same, even with the recent increase in volatility caused by
tremors from Asia. This achievement continues to bolster many investors'
convictions that the market will produce these results forever, or, in the worst
case, that market declines will always be short-lived. While the economy remains
solid and the environment favorable, history and reason tell us it's a highly
unlikely scenario.
This doesn't mean we know what the market will do next, or that it's
riding for a fall. But after such a run, even in this "new era" of strong
economic growth with low inflation, we believe it would be wise for investors to
set more realistic expectations. As we've said before, markets do indeed move in
two directions. Over the long term, the market's historical results have been
more in the 10% per year range, which is still a solid result, considering it
has been produced despite wars, depressions and other social upheavals along the
way.
- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
- --------------------------------------------------------------------------------
In addition to adjusting, or at least re-examining, expectations, now
could also be a good time to review with your investment professional how your
assets are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping you keep
your feet on the ground as you pursue your dreams.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY BARRY EVANS, CFA, PORTFOLIO MANAGER
John Hancock
Government Income Fund
U.S. bond market takes breather in '98,
after rallying in '97
Over the past year, most of the action in the U.S. bond market came during the
summer and fall of 1997, when bonds rallied as inflation remained low even
though economic growth was strong. The Asian financial crisis added further
momentum, sending investors fleeing to safe havens like U.S. Treasuries and
setting off global deflation (or falling prices) that helped eliminate lingering
inflation fears here. As bond prices rose, yields on 30-year Treasuries fell
from 6.90% on May 31, 1997, to 5.93% by year end. But by mid-January the rally
was over. For the rest of the winter and spring, bond yields stayed in a narrow
range, buffeted back and forth by the opposing forces of global deflation and
strong domestic economic growth. Yields on 30-year Treasuries hovered between
6.12% and 5.69%.
As conditions changed, so did the market leaders. During the rally in
1997, Treasuries were the best place to be since they are the most sensitive to
changes in interest rates. Longer-term Treasuries, whose yields reflect
inflation expectations, did especially well. All that changed, however, in
January. With bond prices staying relatively stable, the biggest gainers were
spread securities -- like mortgage bonds and U.S. government agency bonds --
that offer a slight yield advantage over Treasuries. For the year ended May 31,
1998, the Lehman Brothers Treasury Composite Index returned 11.29%, compared to
9.68% for the Lehman Brothers Mortgage-Backed Securities Fixed-Rate Index.
Outside the United States,
"...most of the action in the U.S. bond market came during the summer and fall
of 1997..."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Fund management
team members (l-r): Seth Robbins, Dawn Baillie and
Barry Evans.]
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - Government Income Fund
"We benefited from a sizable stake in 10-year and 30-year Treasuries..."
- --------------------------------------------------------------------------------
["Pie chart with the heading "Portfolio Diversification" at the top left hand
column. The chart is divided into 5 sections. Going from top left to right;
Multi-Family Mortgage-Backed Bonds 2%; Short-Term & Other 2%; U.S. Treasuries
38%; U.S. Government Agencies 47%; Foreign Governments 11%; Footnote below
states "As a percentage of net assets on May 31, 1998."]
- --------------------------------------------------------------------------------
bonds had more of a bumpy ride. Foreign government bonds, which had tumbled
following the Asian crisis, recovered in early 1998. But in late spring, signs
of increasing credit problems in Asia and a decline in U.S. exports to the
region caused them to retreat again.
John Hancock Government Income Fund weathered these changes well. For the
year ended May 31, 1998, the Fund's Class A and Class B shares had total returns
of 10.82% and 10.01%, respectively, at net asset value. Keep in mind that your
net asset value return will be different from this performance if you were not
invested in the Fund for the entire period and did not reinvest all
distributions. By comparison, the average general U.S. government income fund
returned 10.46%, according to Lipper Analytical Services, Inc.1 For longer-term
performance information, please see pages six and seven.
Fine-tuning asset allocation
The Fund picked up a little ground in several different places. We benefited
from a sizable stake in 10-year and 30-year Treasuries, which outperformed
spread securities early on, as well as shorter-maturity Treasuries throughout
the period. We also had a slightly longer duration than our peers. Duration
measures how sensitive a bond's price is to changes in interest rates. The
longer a bond's duration, the more its price will rise as interest rates fall --
or fall as interest rates rise. As interest rates came down in 1997, the Fund's
longer duration gave it more opportunity for price gains. The Fund's duration,
which began the period at five years, stayed around 5.4 years for most of the
period. Finally, we picked up some extra yield in 1998 by increasing our stakes
in bonds issued by U.S. government agencies and foreign governments.
Among the U.S. government agencies we owned were mortgage-backed
securities. We boosted our stake in mortgage bonds to 37%, up from 33% at the
end of November. Our main focus was GNMAs with 7.5% and 7% coupons (or stated
interest rates). We pruned our stake in mortgage bonds with coupons of 8% or
higher as interest rates fell and prepayment concerns mounted during December
and early January. Prepayments occur when homeowners pay off their existing
mortgage loans before their due dates and refinance at lower prevailing rates.
We held onto our 11% stake in short-term and long-term collateralized mortgage
obligations, known as CMOs, which carried less prepayment risk than our
traditional mortgage securities. CMOs separate the cash flows of mortgage pools
into various classes with different maturities. Our stake in bonds issued by
other U.S. government agencies also held relatively steady at 10% of net assets.
In the foreign government sector, our timing worked out well. We had pared
back on foreign government bonds shortly before the Asian crisis. Then, in 1998,
we rebuilt our stake by buying on weakness. Our main addition was to
4
<PAGE>
================================================================================
John Hancock Funds - Government Income Fund
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 2% with the 12% at the top and 0% at the bottom. The
first represents the 10.82% total return for John Hancock Government Income Fund
Class A. The second represents the 10.01% total return for John Hancock
Government Income Fund : Class B. The third represents the 10.46% total return
for Average general U.S. government income fund. A Footnote below reads " The
total return for John Hancock Government Income Fund are at net asset value with
all distributions reinvested. The average U.S. government income fund is tracked
by Lipper Analytical Services, Inc. See the following two pages for historical
performance information."]
- --------------------------------------------------------------------------------
our existing investment in bonds issued by Hydro-Quebec, the largest electric
utility in the Americas. As Quebec secession concerns again resurfaced, prices
on bonds backed by the province fell and yields rose. Since our purchase, fears
have abated and prices have again risen.
A look ahead
We believe there are two possible scenarios ahead. If the Asian situation
continues to deteriorate, we expect the U.S. economy to slow, interest rates to
fall and bond prices to rally. If Asia's problems begin to fade and U.S. wage
pressures accelerate, we expect a rise in short-term interest rates. To
determine which direction we're headed, we'll be closely watching the Asian
banking system, commodity prices, U.S. wages and corporate earnings growth.
Although it's hard to know what the outcome will be, the first scenario
currently seems most likely. Just recently, we've seen Japanese banks
acknowledging worse non-performing loans, more credit strains from Asian
companies and a noticeable decline in U.S. exports to the Pacific rim.
We're cautiously optimistic about the bond market's prospects in the next
six months. If Asia's problems continue to multiply, bond investors will start
anticipating a slowdown in the economy. Once this happens, we expect interest
rates to move modestly lower and U.S. bond prices to rally. To position the Fund
for this possibility, we've already lengthened duration slightly to 5.6 years by
selling some of our shorter-maturity Treasuries and buying more 10-year and
30-year Treasuries. If a rally looks increasingly likely, we may increase
duration a bit more. Overall, we expect few dramatic changes in the bond market.
As long as the market continues to remain stable, we'll keep or build our stake
in mortgage and foreign government bonds to take advantage of the extra yield
they offer.
"Overall, we expect few dramatic changes in the bond market."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
John Hancock Funds - Government Income Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Government Income Fund. Total return measures
the change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Prior to May 15, 1995, the maximum applicable sales charge for
Class A shares was 4.75%. Class B performance reflects a maximum contingent
deferred sales charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended March 31, 1998
SINCE
ONE INCEPTION
YEAR (9/30/94)
---- ---------
Cumulative Total Returns 6.80% 28.36%
Average Annual Total Returns 6.80% 7.40%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended March 31, 1998
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
Cumulative Total Returns 6.01% 27.92% 99.15%
Average Annual Total Returns 6.01% 5.05% 7.13%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of May 31, 1998
SEC 30-DAY
YIELD
-----
John Hancock Government Income Fund: Class A 5.21%
John Hancock Government Income Fund: Class B 4.69%
6
<PAGE>
================================================================================
John Hancock Funds - Government Income Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Government Income Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Treasury Composite Index -- an
unmanaged index of fixed-income securities that are similar, but not identical,
to the bonds in the Fund's portfolio. Past performance is not indicative of
future results.
- --------------------------------------------------------------------------------
Government Income Fund
Class A shares
Line chart with the heading Government Income Fund Class A representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Lehman
Brothers Treasury Composite Index and is equal to $13,767 as of May 31, 1998.
The second line represents the value of the hypothetical $10,000 investment made
in the Government Income Fund on September 30, 1994, before sales charge, and is
equal to $13,627 as of May 31, 1998. The third line represents the Government
Income Fund, after sales charge and is equal to $13,014 as of May 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Government Income Fund
Class B shares
Line chart with the heading Government Income Fund Class B representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are two lines. The first line represents the value of the Lehman
Brothers Treasury Composite Index and is equal to $23,649 as May 31, 1998. The
second line represents the value of the hypothetical $10,000 investment made in
the Government Income Fund on February 23, 1988, and is equal to $20,491 as of
May 31, 1998.
- --------------------------------------------------------------------------------
* No contingent deferred sales charge applicable.
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1998. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
May 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
U.S. government and agencies securities
(cost - $382,366,660) ................................ $390,364,116
Foreign government bonds (cost - $48,512,640) .......... 50,403,508
Multi-family mortgage-backed bonds
(cost - $9,155,734) .................................. 9,294,018
Joint repurchase agreement (cost - $331,000) ........... 331,000
-------------
450,392,642
Receivable for investments sold .......................... 2,000,000
Interest receivable ...................................... 5,716,511
Receivable for variation margin - Note A ................. 9,594
Other assets ............................................. 169,881
-------------
Total Assets ........................ 458,288,628
--------------------------------------------------------
Liabilities:
Payable for shares repurchased ........................... 142,886
Dividend payable ......................................... 187,921
Payable to John Hancock Advisers, Inc. and
affiliates - Note B .................................... 417,195
Accounts payable and accrued expenses .................... 138,542
-------------
Total Liabilities ................... 886,544
--------------------------------------------------------
Net Assets:
Capital paid-in .......................................... 466,992,440
Accumulated net realized loss on investments ............. (19,511,299)
Net unrealized appreciation of investments ............... 10,016,602
Distributions in excess of net investment income ......... (95,659)
-------------
Net Assets .......................... $457,402,084
========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of
beneficial interest outstanding -
unlimited number of shares authorized
with no par value)
Class A - $339,572,173/36,721,182 ........................ $9.25
=============================================================================
Class B - $117,829,911/12,742,073 ........................ $9.25
=============================================================================
Maximum Offering Price Per Share*
Class A - ($9.25 x 104.71%) .............................. $9.69
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended May 31, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................... $39,112,329
Dividends (net of foreign withholding taxes of $25,949) ..... 6,205
------------
39,118,534
------------
Expenses:
Investment management fee - Note B ........................ 3,155,183
Distribution and service fee - Note B
Class A ................................................. 882,463
Class B ................................................. 1,428,604
Transfer agent fee - Note B ............................... 720,458
Custodian fee ............................................. 113,125
Financial services fee - Note B ........................... 88,284
Trustees' fees ............................................ 43,338
Auditing fee .............................................. 39,667
Registration and filing fees .............................. 29,962
Printing .................................................. 22,478
Legal fees ................................................ 5,934
Miscellaneous ............................................. 1,377
------------
Total Expenses ......................... 6,530,873
--------------------------------------------------------
Net Investment Income .................. 32,587,661
--------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Future Contracts:
Net realized gain on investments sold ....................... 2,984,658
Net realized loss on financial futures contracts ............ (1,300,470)
Change in net unrealized appreciation/depreciation
of investments ............................................ 16,089,104
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................ 204,281
------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ............ 17,977,573
--------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .............. $50,565,234
========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 TO YEAR ENDED
OCTOBER 31, 1996 MAY 31, 1997(1) MAY 31, 1998
---------------- --------------- ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................. $43,226,352 $21,630,521 $32,587,661
Net realized gain (loss) on investments sold
and financial futures contracts ................................ (3,061,217) 1,636,094 1,684,188
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts ................. (14,982,333) (10,617,602) 16,293,385
------------- ------------- -------------
Net Increase in Net Assets Resulting from Operations ........... 25,182,802 12,649,013 50,565,234
------------- ------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6475, $0.3686 and $0.6201 per share, respectively) (30,301,964) (15,469,416) (23,933,295)
Class B - ($0.5817, $0.3301 and $0.5522 per share, respectively) (12,924,388) (6,102,517) (8,694,560)
Distributions in excess of net investment income
Class A - ($0.0006, none and none per share, respectively) ..... (24,790) -- --
Class B - ($0.0003, none and none per share, respectively) ..... (6,308) -- --
------------- ------------- -------------
Total Distributions to Shareholders ............................ (43,257,450) (21,571,933) (32,627,855)
------------- ------------- -------------
From Fund Share Transactions - Net:* ................................. (105,001,453) (52,375,680) (73,683,952)
------------- ------------- -------------
Net Assets:
Beginning of period ............................................... 697,523,358 574,447,257 513,148,657
------------- ------------- -------------
End of period (distributions in excess of net investment income of
$9,046, $56,331 and $95,659, respectively) ..................... $574,447,257 $513,148,657 $457,402,084
============= ============= =============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 TO YEAR ENDED
OCTOBER 31, 1996 MAY 31, 1997(1) MAY 31, 1998
---------------------------- ---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ..................... 2,410,470 $21,862,541 917,678 $8,339,272 3,514,206 $32,316,797
Shares issued to shareholders in
reinvestment of distributions 1,608,652 14,641,736 843,678 7,579,076 1,297,997 11,906,095
------------ ------------ ------------ ------------ ------------ ------------
4,019,122 36,504,277 1,761,356 15,918,348 4,812,203 44,222,892
Less shares repurchased ......... (10,824,321) (98,756,948) (5,149,479) (46,344,996) (8,394,226) (77,025,351)
============ ============ ============ ============ ============ ============
Net decrease .................... (6,805,199) ($62,252,671) (3,388,123) ($30,426,648) (3,582,023) ($32,802,459)
============ ============ ============ ============ ============ ============
CLASS B
Shares sold ..................... 1,969,851 $18,166,729 1,548,490 $13,820,117 1,846,293 $16,924,452
Shares issued to shareholders in
reinvestment of distributions 734,239 6,692,313 361,894 3,251,553 505,095 4,632,894
------------ ------------ ------------ ------------ ------------ ------------
2,704,090 24,859,042 1,910,384 17,071,670 2,351,388 21,557,346
Less shares repurchased ......... (7,418,441) (67,607,824) (4,353,270) (39,020,702) (6,793,426) (62,438,839)
------------ ------------ ------------ ------------ ------------ ------------
Net decrease .................... (4,714,351) ($42,748,782) (2,442,886) ($21,949,032) (4,442,038) ($40,881,493)
============ ============ ============ ============ ============ ============
</TABLE>
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to
May 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 30, 1994
(COMMENCEMENT OF YEAR ENDED OCTOBER 31, PERIOD FROM YEAR ENDED
OPERATIONS) TO ---------------------- NOVEMBER 1, 1996 MAY 31,
OCTOBER 31, 1994 1995(1) 1996 TO MAY 31, 1997(7) 1998
---------------- -------- -------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................. $8.85 $8.75 $9.32 $9.07 $8.93
----- -------- -------- -------- --------
Net Investment Income ................................. 0.06 0.72 0.65(5) 0.37(5) 0.62(5)
Net Realized and Unrealized Gain (Loss) on
Investments, Options and Financial Futures Contracts (0.10) 0.57 (0.25) (0.14) 0.32
----- -------- -------- -------- --------
Total from Investment Operations .................... (0.04) 1.29 0.40 0.23 0.94
----- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .................. (0.06) (0.72) (0.65) (0.37) (0.62)
----- -------- -------- -------- --------
Net Asset Value, End of Period ........................ $8.75 $9.32 $9.07 $8.93 $9.25
===== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2,3) ....... (0.45%)(4) 15.32% 4.49% 2.57%(4) 10.82%
Total Adjusted Investment Return at Net Asset Value(3) (0.46%)(4) 15.28% -- -- --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............. $223 $470,569 $396,323 $359,758 $339,572
Ratio of Expenses to Average Net Assets(2) ............ 0.12%(4) 1.19% 1.17% 1.13%(6) 1.10%
Ratio of Net Investment Income to Average Net Assets(2) 0.71%(4) 7.38% 7.10% 7.06%(6) 6.79%
Portfolio Turnover Rate ............................... 92% 102%(8) 106% 129% 106%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED OCTOBER 31, NOVEMBER 1,
--------------------------------------------- 1996 TO YEAR ENDED
1993 1994 1995(1) 1996 MAY 31, 1997(7) MAY 31, 1998
-------- -------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............. $9.83 $10.05 $8.75 $9.32 $9.08 $8.93
-------- -------- -------- -------- -------- --------
Net Investment Income ............................ 0.70 0.65 0.65 0.58(5) 0.33(5) 0.55(5)
Net Realized and Unrealized Gain (Loss) on
Investments, Options and Financial Futures
Contracts ...................................... 0.24 (1.28) 0.57 (0.24) (0.15) 0.32
-------- -------- -------- -------- -------- --------
Total from Investment Operations ............... 0.94 (0.63) 1.22 0.34 0.18 0.87
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ............. (0.72) (0.65) (0.65) (0.58) (0.33) (0.55)
Distributions from Net Realized Gains on
Investments
Sold and Financial Futures Contracts ........... -- (0.02) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ............................ (0.72) (0.67) (0.65) (0.58) (0.33) (0.55)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ................... $10.05 $8.75 $9.32 $9.08 $8.93 $9.25
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(2,3) .. 9.86% (6.42%) 14.49% 3.84% 2.02%(4) 10.01%
Total Adjusted Investment Return at Net Asset
Value(3) ....................................... 9.85% (6.43%) 14.47% -- -- --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ......... $293,413 $241,061 $226,954 $178,124 $153,390 $117,830
Ratio of Expenses to Average Net Assets(2) ....... 2.00% 1.93% 1.89% 1.90% 1.86%(6) 1.85%
Ratio of Net Investment Income to Average Net
Assets(2) ...................................... 7.06% 6.98% 7.26% 6.37% 6.32%(6) 6.05%
Portfolio Turnover Rate .......................... 138% 92% 102%(8) 106% 129% 106%
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(2) Excluding interest expense, which equalled 0.01% and 0.04% for Class A for
the years ended October 31, 1994 and 1995, respectively, and 0.01%, 0.01%
and 0.02% for Class B for the years ended October 31, 1993, 1994 and 1995,
respectively.
(3) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(4) Not annualized.
(5) Based on the average of the shares outstanding at the end of each month.
(6) Annualized.
(7) Effective May 31, 1997, the fiscal period end changed from October 31 to
May 31.
(8) Portfolio turnover excludes merger activity.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Government Income Fund on May 31, 1998. It's divided into four main categories:
U.S. government and agencies securities, foreign government bonds, multi-family
mortgage-backed bonds and short-term investments. Short-term investments, which
represent the Fund's "cash" position, are listed last.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (38.17%)
United States Treasury,
Bond ....................................... 15.750% 11-15-01 $14,340 $18,875,025
Bond ....................................... 10.750 02-15-03 to 27,000 33,061,440
08-15-05
Bond ....................................... 11.875 11-15-03 5,000 6,439,850
Bond ....................................... 12.750 11-15-10 14,000 19,860,260
Bond ....................................... 12.000 08-15-13 24,200 35,664,750
Bond ....................................... 8.125 08-15-19 31,000 39,234,220
Bond ....................................... 6.125 11-15-27 16,000 16,717,440
Note ....................................... 8.500 02-15-00 4,500 4,711,635
------------
174,564,620
------------
Government - U.S. Agencies (47.18%)
Federal Farm Credit Bank,
Note ....................................... 7.200 09-10-01 2,500 2,509,875
Federal Home Loan Mortgage Corp.,
CMO REMIC 1094-K ........................... 7.000 06-15-21 2,300 2,341,676
CMO REMIC 1608-L ........................... 6.500 09-15-23 7,000 7,035,000
CMO REMIC 1634-PN .......................... 4.500 12-15-23 10,575 8,658,281
CMO REMIC 1667-PE .......................... 6.000 03-15-08 11,750 11,779,375
Note ....................................... 7.256 09-17-01 8,200 8,242,312
Note ....................................... 8.400 11-30-01 2,500 2,534,375
Federal Judiciary Office Building,
Bond ....................................... Zero 02-15-01 250 214,727
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf ........................ 8.500 09-01-24 to 9,422 9,855,051
10-01-24
CMO REMIC 1990-51-H ........................ 7.500 05-25-20 189 194,157
CMO REMIC 1990-58-J ........................ 7.000 05-25-20 3,700 3,769,375
CMO REMIC 1990-94-D ........................ 6.500 08-25-20 1,363 1,370,724
CMO REMIC 1991-56-M ........................ 6.750 06-25-21 4,000 4,045,000
Medium Term Note ........................... 11.875 05-19-00 6,800 7,573,500
Note ....................................... 9.400 08-10-98 6,540 6,588,004
Note ....................................... 9.550 03-10-99 7,450 7,662,996
10 Yr Pass Thru Ctf Ser SM-2004-K........... 8.400 10-25-04 11,600 12,004,144
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Financing Corp.,
Bond ................................... 9.400% 02-08-18 $4,000 $5,476,240
Bond ................................... 9.650 11-02-18 1,600 2,240,496
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf .................... 11.000 01-15-14 to 6,250 7,048,924
12-15-15
30 Yr Pass Thru Ctf .................... 6.875 03-20-23 9,203 9,447,943
30 Yr Pass Thru Ctf .................... 7.500 05-15-23 to 63,648 65,658,842
12-15-25
30 Yr Pass Thru Ctf .................... 8.000 09-15-23 5,029 5,252,097
30 Yr Pass Thru Ctf .................... 7.000 01-15-28 to 19,935 20,246,551
05-15-28
Small Business Administration,
Pass Thru Ctf Ser 97-E ................. 7.300 05-01-17 3,836 4,049,831
------------
215,799,496
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $382,366,660) (85.35%) 390,364,116
--------- ------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar-Denominated Foreign Government Bonds (11.02%)
Argentina, Republic of,
Deb ................................... 6.625# 03-31-05 2,850 2,558,046
Global Bond ............................ 9.750 09-19-27 2,389 2,220,686
Brazil, Republic of,
Deb Ser A .............................. 6.875# 01-01-01 5,005 4,822,968
Hydro-Quebec Corp.,
Deb Ser HK ............................. 9.375 04-15-30 5,440 7,340,410
Gtd Bond ............................... 9.400 02-01-21 10,000 13,187,200
Landeskreditbank Baden - Wuerttemberg,
Sub Note ............................... 7.625 02-01-23 11,650 13,334,823
United Mexican States,
Bond ................................... 11.375 09-15-16 3,000 3,431,250
Bond ................................... 11.500 05-15-26 3,000 3,508,125
------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $48,512,640) (11.02%) 50,403,508
--------- ------------
MULTI-FAMILY MORTGAGE-BACKED BONDS (2.03%)
DLJ Mortgage Acceptance Corp.,
CMO REMIC 1993-M10-A2 .................. 7.200 07-15-03 4,356 4,503,225
CMO REMIC 1993-MF7-A1 .................. 7.400 06-18-03 4,590 4,790,793
------------
TOTAL MULTI-FAMILY MORTGAGE-BACKED BONDS
(Cost $9,155,734) (2.03%) 9,294,018
--------- ------------
TOTAL BONDS
(Cost $440,035,034) (98.40%) 450,061,642
--------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.07%)
Investment in a joint repurchase agreement transaction
with Toronto Dominion, dated 05-29-98, due 06-01-98
(Secured by U.S. Treasury Notes, 5.125% thru 9.25%,
due 08-15-98 thru 11-15-05 and U.S. Treasury Bonds,
6.00% thru 12.00%, due 8-15-13 thru 08-15-27) - Note A..... 5.570% $331 $331,000
------------
TOTAL SHORT-TERM INVESTMENTS (0.07%) 331,000
--------- ------------
TOTAL INVESTMENTS (98.47%) 450,392,642
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (1.53%) 7,009,442
--------- ------------
TOTAL NET ASSETS (100.00%) $457,402,084
========= ============
</TABLE>
# Represents rate in effect on May 31, 1998.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Government Income Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is a diversified open-end management
investment company, registered under the Investment Company Act of 1940, as
amended. The Trust consists of three series: John Hancock Government Income Fund
(the "Fund"), John Hancock High Yield Bond Fund and John Hancock Intermediate
Maturity Government Fund. The other two series of the Trust are reported in
separate financial statements. The investment objective of the Fund is to earn a
high level of current income consistent with preservation of capital by
investing primarily in securities that are issued or guaranteed as to principal
and interest by the U.S. government, its agencies or instrumentalities ("U.S.
government securities").
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in joint repurchase agreement transactions. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis for both financial
reporting and federal income tax purposes.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $18,749,417 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent such carryforwards are used by
the Fund, no capital gains distribution will be made. The carryforwards expire
as follows: May 31, 2002 -- $13,280,667, May 31, 2004 -- $1,419,401, May 31,
2005 -- $1,964,217 and May 31, 2006 -- $2,085,132. Expired capital loss
carryforwards are reclassified to capital paid-in in the year of expiration.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment securities
is recorded on the accrual basis. Foreign income may be subject to foreign
withholding taxes, which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund, if any,
with respect to each class of shares will be calculated in the same manner, at
the same time and will be in the same amount, except for the effect of expenses
that may be applied differently to each class.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Government Income Fund
estimates made by management in determining the reported amounts of assets,
liabilities, revenues and expenses of the Fund. Actual results could differ from
these estimates.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the fund.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 million,
collectively. Interest is charged to each fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the line of credit, is allocated among the participating funds. The
Fund had no borrowing activity for the year ended May 31, 1998.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it is required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at the
official settlement price of the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market," are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At May 31, 1998, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- ----------------- -------- ------------
SEP 98 191 TREASURY BOND LONG ($16,305)
SEP 98 55 TREASURY NOTE LONG (1,289)
------------
($17,594)
============
At May 31, 1998, the Fund had deposited in a segregated account $9,263,455
par value of U.S. Treasury Bond, 8.125%, 08-15-19 to cover margin requirements
on open financial futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Government Income Fund
be included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be subsequently marked
to market to reflect the current market value of the written option.
The Fund may use option contracts to manage its exposure to the bond
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and writing calls will tend to
decrease the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to
the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the year ended May 31, 1998.
NOTE B -
MANAGEMENT FEE, ADMINISTRATIVE SERVICES AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.65% of the first $200,000,000 of the Fund's
average daily net asset value, (b) 0.625% of the next $300,000,000 and (c) 0.60%
of the Fund's average daily net asset value in excess of $500,000,000.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended May 31,
1998, net sales charges received with regard to sales of Class A shares amounted
to $176,340. Out of this amount, $20,547 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $141,990 was
paid as sales commissions to unrelated broker-dealers and $13,803 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended May 31, 1998,
contingent deferred sales charges paid to JH Funds amounted to $272,098.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.25% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
17
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Government Income Fund
JHMLICo. The Fund pays transfer agent fees based on the number of shareholder
accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are directors and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $7,588.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
obligations, during the year ended May 31, 1998, aggregated $506,426,797 and
$582,636,390, respectively.
The cost of investments (including the joint repurchase agreement) owned
at May 31, 1998 for federal income tax purposes was $440,840,282. Gross
unrealized appreciation and depreciation of investments aggregated $16,013,103
and $6,460,743, respectively, resulting in net unrealized appreciation of
$9,552,360.
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
a decrease in accumulated net realized loss on investments of $4,273, a decrease
in distributions in excess of net investment income of $866, and a decrease in
capital paid-in of $5,139. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of May 31,
1998. Additional adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of the
Fund, are primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
18
<PAGE>
================================================================================
John Hancock Funds - Government Income Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
We have audited the accompanying statement of assets and liabilities of the John
Hancock Government Income Fund (one of the portfolios constituting the John
Hancock Bond Trust) (the "Fund"), including the schedule of investments, as of
May 31, 1998, and the related statement of operations for the year then ended,
and the statement of changes in net assets and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1998, by correspondence with the custodian and brokers, or other appropriate
auditing procedures where replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
John Hancock Government Income Fund of the John Hancock Bond Trust at May 31,
1998, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 10, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended May 31,
1998.
All of the dividends paid for the fiscal year are taxable as ordinary
income. None of the dividends qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV
in January 1999. This will reflect the total of all distributions which are
taxable for calendar year 1998.
19
<PAGE>
================================================================================
----------------
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
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PAID
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1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Government Income Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[Recycle Logo] Printed on Recycled Paper 5600A 5/98
7/98
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
High Yield
Bond Fund
MAY 31, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
----------------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ
HAROLD R. HISER, JR.
ANNE C. HODSDON
CHARLES L. LADNER
LEO E. LINBECK, JR.
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
RICHARD S. SCIPIONE
LT. GEN. NORMAN H. SMITH, USMC (RET.)
JOHN P. TOOLAN
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President and Chief Operating Officer
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116-5072
----------------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year
wondering what the market would do for an encore in 1998. The answer so far has
been more of the same, even with the recent increase in volatility caused by
tremors from Asia. This achievement continues to bolster many investors'
convictions that the market will produce these results forever, or, in the worst
case, that market declines will always be short-lived. While the economy remains
solid and the environment favorable, history and reason tell us it's a highly
unlikely scenario.
This doesn't mean we know what the market will do next, or that it's
riding for a fall. But after such a run, even in this "new era" of strong
economic growth with low inflation, we believe it would be wise for investors to
set more realistic expectations. As we've said before, markets do indeed move in
two directions. Over the long term, the market's historical results have been
more in the 10% per year range, which is still a solid result, considering it
has been produced despite wars, depressions and other social upheavals along the
way.
- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
- --------------------------------------------------------------------------------
In addition to adjusting, or at least re-examining, expectations, now
could also be a good time to review with your investment professional how your
assets are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial
objectives and maintain wealth. One way we can do that is by helping you keep
your feet on the ground as you pursue your dreams.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY ARTHUR CALAVRITINOS, CFA, PORTFOLIO MANAGER
John Hancock
High Yield Bond Fund
High-yield bonds post solid gains
despite Asian turbulence in the year's second half
It was another good year for high-yield bond investors, although not without its
ups and downs. High-yield bonds' fortunes were boosted by the robust U.S.
economy and tame inflation. Demand also remained strong, as investors seeking
income in the continued low interest-rate environment clamored in record numbers
for their higher yields.
The year turned particularly volatile in the second half, however, in the
wake of the Asian currency and financial troubles that struck world markets in
October. All lower-quality bonds, from the U.S. high-yield bond market to the
emerging markets of Asia and Latin America, went into a tailspin as investors
fled to the safe haven of top-quality U.S. Treasury bonds. In the new year,
solid earnings reports quelled investors' fears and high-yield bonds rallied in
February and March, lifting some of the Latin American markets as well.
High-yield bonds reversed course again in May when Indonesia's problems boiled
over into political unrest and a change in government, provoking further market
quivers.
In this fluid environment, John Hancock High Yield Bond Fund posted a
strong return on both an absolute and competitive basis. For the year ended May
31, 1998, the Fund's Class A and Class B shares posted total returns of 17.03%
and 16.16%, respectively, at net asset value. Class C shares, which were
introduced on May 1, 1998, returned -1.59% from inception to
"The year turned particularly volatile in the second half..."
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team members. Standing (l-r): Janet
Clay, Fred Cavanaugh, Jamie Kellogg and Lester Duke. Seated (l-r): Geoff Plume
and Arthur Calavritinos.]
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - High Yield Bond Fund
"...a growing issuance of high-yield bonds by many foreign corporations..."
- --------------------------------------------------------------------------------
["Chart with the heading Top Five Securities. They are numbered from 1 - 5. The
first one represents 1. Northwest Airlines 3.0%. The second represents Galileo
International 2.1%. The third represents Key Energy Group 2.0%. The fourth
represents Repap New Brunswick 1.9%. The fifth represents SFX Broadcasting 1.8%.
The footnote at the bottom states As a percentage of net assets on May 31,
1998."]
- --------------------------------------------------------------------------------
May 31, 1998. Keep in mind that your net asset value return will be different
from this performance if you were not invested in the Fund for the entire period
and did not reinvest all distributions. The Fund's performance surpassed that of
the average high current yield fund, which returned 13.29% during the same
period, according to Lipper Analytical Services, Inc.(1) Please see pages six
and seven for longer-term performance information.
Leaders and laggards
We attribute our outperformance to making good securities selections and
avoiding major problems. Some of our cyclical holdings performed well over the
last year, including our steel and paper companies, despite the year-end
turmoil. The catalyst there has been the significant merger and acquisition
activity that is changing the face of the paper industry. We did particularly
well with our Stone Container stock after its announced merger with Jefferson
Smurfit Corp. Overseas, we sold Brazilian paper company Aracruz at a profit,
after having bought the bond earlier in the year when its price fell along with
all emerging-market debt.
We were not immune to the downturn in May, however, which hit Canadian
paper company Abitibi Consolidated and Indonesian giants Indah Kiat and Asia
Pulp & Paper (APPInternational Finance) as fears grew of a slowdown in paper
demand. We're sticking with these companies, because they remain world-class,
low-cost producers. In the case of the Indonesian paper companies, their large
portion of dollar-based revenues should also shield them from currency moves.
Within the steel group, Alabama-based Gulf States Steel served us well, as did
new addition CSN Iron, a Brazilian company.
Other winners included Galileo International, which owns the second
largest airline reservation system. Its stock rose as the market recognized its
strong position in a consolidating business where barriers to entry are very
high. Galileo also benefited from its strong international presence. Another
airline stock, top holding Northwest Airlines, didn't fare as well, suffering
all year because of labor issues. We still believe in the airline, and the
potential for further improvements if the merger with Continental goes through.
Strategy
As we have mentioned in our last several reports, the task of finding solid U.S.
high-yield companies that we can buy at attractive prices for the risks we're
taking remains challenging. Careful fundamental analysis and in-depth industry
knowledge -- our specialties -- have become increasingly important requirements
for choosing the best quality deals, as well as the
- --------------------------------------------------------------------------------
["Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance...and what's behind the numbers. The first listing is Galileo
followed by an up arrow and the phrase "Strong international presence boots
reservations system". The second listing is Gulf States Steel followed by a up
arrow with the phrase "Financial results better than market expectations". The
third listing is Key Energy Group followed by a down arrow with the phrase "Drop
in crude oil prices". Footnote at the bottom states See "Schedule of
Investments." Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
4
<PAGE>
================================================================================
John Hancock Funds - High Yield Bond Fund
- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 5% with the 20% at the top and -5% at the bottom. The
first represents the 17.03% total return for John Hancock High Yield Bond Fund
Class A. The second represents the 16.16% total return for John Hancock High
Yield Bond Fund : Class B. The third represents the - 1.59%* John Hancock Bond
Fund Class C. The fourh represents the 13.29% total return for Average high
current yield fund. A Footnote below reads " The total return for John Hancock
High Yield Bond Fund are at net asset value with all distributions reinvested.
The average high current yield fund is tracked by Lipper Analytical Services,
Inc. See the following two pages for historical performance information."]
*From inception May 1, 1998 to May 31, 1998
- --------------------------------------------------------------------------------
best companies and managements. What's more, many companies are now selling at
what we consider to be peak earnings potential, which in our view doesn't leave
much margin for error.
Conversely, we continue to find good values, attractive yields and more
potential for price appreciation among foreign issuers of high-yield bonds. This
coincides with a growing issuance of high-yield bonds by many foreign
corporations, especially from Europe and the big Latin American countries of
Mexico, Argentina and Brazil. As always, we continue to apply the same rigorous
analysis and selection process here.
Within the last year, we took advantage of the emerging-market downturn to
buy the bonds of some Brazilian companies. That has served us well with such
holdings as industrial giant Trikem, since prices have rebounded since then
after the government took fiscal and monetary steps to regain investors'
confidence. More recently, we bought the bonds of two Japanese banks, Fuji and
Sumitomo. These "Yankee" bonds -- dollar-denominated and issued in the United
States -- carry an attractive yield. Despite Japan's lingering economic
problems, we believe these two banks could now be experiencing the worst of
their bad loans. They have also begun the process of writing off this debt in
order to satisfy international banking requirements, and we believe in their
longer-term outlook for improvement.
Outlook
We are keeping our outlook cautious for high-yield bonds. We remain encouraged
by the prospect of strong demand for high-yield bonds and by the vibrant U.S.
economy. Yet the horizon is not without its potential storm clouds. More
high-yield companies are missing their earnings targets, and there has been an
uptick in defaults over the last year, albeit off a very low base. We're also
monitoring the impact of Asia on the U.S. economy this year. In this
environment, we will continue to search for solid companies that we can buy at
attractive prices and hold, with an eye toward both high current income and
appreciation potential.
"We are keeping our outlook cautious for high-yield bonds."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
International investing involves special risks such as political, economic and
currency risks and differences in accounting standards and financial reporting.
See the Fund's prospectus for a detailed discussion of the risks of investing in
high-yield bonds.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
John Hancock Funds - High Yield Bond Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock High Yield Bond Fund. Total return measures
the change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Prior to May 15, 1995, the maximum applicable sales charge for
Class A shares was 4.75%.
Class B performance reflects a maximum contingent deferred sales charge (maximum
5% and declining to 0% over six years).
Class C shares became effective on May 1, 1998 and do not have a cumulative
total return or an average annual total return as of March 31, 1998.
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended March 31, 1998
SINCE
ONE INCEPTION
YEAR (6/30/93)
---- ---------
Cumulative Total Returns 18.42% 64.95%
Average Annual Total Returns 18.42% 11.10%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended March 31, 1998
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
Cumulative Total Returns 18.08% 71.81% 164.73%
Average Annual Total Returns 18.08% 11.43% 10.23%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of May 31, 1998
SEC 30-DAY
YIELD
-----------
John Hancock High Yield Bond Fund: Class A 9.23%
John Hancock High Yield Bond Fund: Class B 8.89%
John Hancock High Yield Bond Fund: Class C 8.89%
6
<PAGE>
================================================================================
John Hancock Funds - High Yield Bond Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
High Yield Bond Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers High Yield Bond Index -- an unmanaged index of
fixed-income securities that are similar, but not identical, to the bonds in the
Fund's portfolio.
Assuming all distributions were reinvested for the same period indicated, a
$10,000 investment in the Fund's Class C shares at inception on May 1, 1998,
would be worth $9,841 without sales charge and $9,741 with maximum sales charge.
For comparison, the same $10,000 investment in the Lehman Brothers High Yield
Bond Index would be worth $9,989. Past performance is not indicative of future
results.
- --------------------------------------------------------------------------------
High Yield Bond Fund
Class A shares
Line chart with the heading High Yield Bond Fund Class A representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines. The first line represents the value of the hypothetical $10,000
investment made in the High Yield Bond Fund on June 30, 1993, before sales
charge, and is equal to $17,096 as of May 31, 1998. The second line represents
the High Yield Bond Fund, after sales charge, and is equal to $16,327 as of May
31, 1998. The third line represents the value of the Lehman Brothers High Yield
Bond Index and is equal to $16,171 as of May 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
High Yield Bond Fund
Class B shares
Line chart with the heading High Yield Bond Fund Class B representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are two lines. The first line represents the value of the Lehman Brothers High
Yield Bond Index and is equal to $27,563 as of May 31, 1998. The second line
represents the value of the hypothetical $10,000 investment made in the High
Yield Bond Fund on October 26, 1987, before sales charge, and is equal to
$26,132 of May 31, 1998.
- --------------------------------------------------------------------------------
* No contingent deferred sales charge applicable.
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1998. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
May 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $865,986,092) ............................... $860,914,429
Common and preferred stocks
and warrants (cost - $165,819,565) ...................... 186,554,717
Joint repurchase agreement (cost - $11,654,000) ........... 11,654,000
Corporate savings account ................................. 18,295
--------------
1,059,141,441
Foreign currency, at value (cost - $9,234) .................. 9,234
Receivable for investments sold ............................. 3,469,581
Receivable for shares sold .................................. 7,992,767
Interest receivable ......................................... 23,302,728
Dividends receivable ........................................ 33,072
Other assets ................................................ 372,474
--------------
Total Assets ........................... 1,094,321,297
---------------------------------------------------------
Liabilities:
Payable for investments purchased ........................... 17,548,248
Payable for shares repurchased .............................. 840,673
Payable for forward foreign currency exchange contracts
sold - Note A ............................................. 124,772
Payable for futures variation margin - Note A ............... 35,000
Dividend payable ............................................ 226,013
Payable to John Hancock Advisers, Inc. ......................
and affiliates - Note B ................................... 689,016
Accounts payable and accrued expenses ....................... 215,595
--------------
Total Liabilities ...................... 19,679,317
---------------------------------------------------------
Net Assets:
Capital paid-in ............................................. 1,039,456,407
Accumulated net realized gain on investments, financial
futures contracts and foreign currency transactions ....... 19,033,474
Net unrealized appreciation of investments, financial
futures contracts and foreign currency transactions ....... 15,523,756
Undistributed net investment income ......................... 628,343
--------------
Net Assets ............................. $1,074,641,980
=========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - 125,000,000 shares
authorized with $0.01 per share par value)
Class A - $273,277,124/33,080,281 ........................... $8.26
==============================================================================
Class B - $798,169,753/96,618,698 ........................... $8.26
==============================================================================
Class C** - $3,195,103/386,768 .............................. $8.26
==============================================================================
Maximum Offering Price Per Share*
Class A - ($8.26 x 104.71%) ................................. $8.65
==============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
** Class C shares commenced operations on May 1, 1998.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended May 31, 1998
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................... $73,598,087
Dividends (net of foreign withholding taxes of $73,926) ..... 5,835,191
-------------
79,433,278
-------------
Expenses:
Investment management fee - Note B ........................ 3,997,329
Distribution and service fee - Note B
Class A ................................................. 454,875
Class B ................................................. 5,891,744
Class C ................................................. 1,395
Transfer agent fee - Note B ............................... 837,991
Custodian fee ............................................. 227,601
Registration and filing fees .............................. 157,888
Financial services fee - Note B ........................... 136,741
Trustees' fees ............................................ 62,223
Auditing fee .............................................. 41,667
Printing .................................................. 29,174
Miscellaneous ............................................. 15,982
Legal fees ................................................ 13,784
-------------
Total Expenses ......................... 11,868,394
--------------------------------------------------------
Net Investment Income .................. 67,564,884
--------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts
and Foreign Currency Transactions:
Net realized gain on investments sold ....................... 37,606,831
Net realized gain on financial futures contracts ............ 377,587
Net realized gain on foreign currency transactions .......... 279,417
Change in net unrealized appreciation/depreciation
of investments ............................................ (462,934)
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................ (5,000)
Change in net unrealized appreciation/depreciation
of foreign currency transactions .......................... (136,104)
-------------
Net Realized and Unrealized
Gain on Investments, Financial
Futures Contracts and Foreign
Currency Transactions .................. 37,659,797
--------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .............. $105,224,681
========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1996 TO YEAR ENDED
OCTOBER 31, 1996 MAY 31, 1997(1) MAY 31, 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................................... $22,815,855 $21,437,615 $67,564,884
Net realized gain on investments sold, financial futures
contracts and foreign currency transactions ........................... 8,029,590 8,136,023 38,263,835
Change in net unrealized appreciation/depreciation of investments,
financial futures contracts and foreign currency transactions ......... 3,085,336 8,545,138 (604,038)
--------------- --------------- ---------------
Net Increase in Net Assets Resulting from Operations ................. 33,930,781 38,118,776 105,224,681
--------------- --------------- ---------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.7560, $0.4529 and $0.7764 per share, respectively) ...... (3,878,979) (4,535,707) (16,953,911)
Class B - ($0.7024, $0.4192 and $0.7146 per share, respectively) ...... (18,935,736) (16,798,872) (50,686,687)
Class C** - (none, none and $0.0559 per share, respectively) .......... -- -- (9,346)
Distributions from net realized gain on investments sold
Class A - (none, none and $0.1196 per share, respectively) ............ -- -- (2,604,121)
Class B - (none, none and $0.1196 per share, respectively) ............ -- -- (8,869,961)
--------------- --------------- ---------------
Total Distributions to Shareholders .................................. (22,814,715) (21,334,579) (79,124,026)
--------------- --------------- ---------------
From Fund Share Transactions - Net: * ..................................... 77,581,499 164,429,074 571,592,436
--------------- --------------- ---------------
Net Assets:
Beginning of period ..................................................... 207,038,053 295,735,618 476,948,889
--------------- --------------- ---------------
End of period (including distributions in excess of net investment
income of $51,675 and undistributed net investment income of
$415,886 and $628,343, respectively) .................................. $295,735,618 $476,948,889 $1,074,641,980
=============== =============== ===============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 TO YEAR ENDED
OCTOBER 31, 1996 MAY 31, 1997(1) MAY 31, 1998
-------------------------- ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ...................... 8,767,330 $65,045,830 9,294,156 $71,427,228 31,229,630 $257,394,198
----------- ------------ ---------- ------------ ----------- ------------
Shares issued to shareholders in
reinvestment of distributions .. 274,586 2,040,722 296,915 2,292,966 1,211,071 9,931,813
----------- ------------ ---------- ------------ ----------- ------------
9,041,916 67,086,552 9,591,071 73,720,194 32,440,701 267,326,011
Less shares repurchased .......... (5,722,882) (42,359,728) (4,147,415) (31,953,487) (11,797,149) (97,377,925)
----------- ------------ ---------- ------------ ----------- ------------
Net increase ..................... 3,319,034 $24,726,824 5,443,656 $41,766,707 20,643,552 $169,948,086
=========== ============ ========== ============ =========== ============
CLASS B
Shares sold ...................... 16,014,384 $119,134,111 22,945,002 $176,520,972 61,535,597 $505,917,005
Shares issued to shareholders in
reinvestment of distributions .. 1,109,704 8,233,250 848,334 6,554,413 2,683,654 21,976,417
----------- ------------ ---------- ------------ ----------- ------------
17,124,088 127,367,361 23,793,336 183,075,385 64,219,251 527,893,422
Less shares repurchased .......... (10,029,960) (74,512,686) (7,837,914) (60,413,018) (15,737,486) (129,495,166)
----------- ------------ ---------- ------------ ----------- ------------
Net increase ..................... 7,094,128 $52,854,675 15,955,422 $122,662,367 48,481,765 $398,398,256
=========== ============ ========== ============ =========== ============
CLASS C**
Shares sold ...................... -- -- -- -- 386,561 $3,244,400
Shares issued to shareholders in
reinvestment of distributions .. -- -- -- -- 442 3,652
----------- ------------ ---------- ------------ ----------- ------------
-- -- -- -- 387,003 3,248,052
Less shares repurchased .......... -- -- -- -- (235) (1,958)
----------- ------------ ---------- ------------ ----------- ------------
Net increase ..................... -- -- -- -- 386,768 $3,246,094
=========== ============ ========== ============ =========== ============
</TABLE>
** Class C shares commenced operations on May 1, 1998.
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to
May 31.
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last three periods, along
with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JUNE 30, 1993 NOVEMBER 1,
(COMMENCEMENT OF YEAR ENDED OCTOBER 31, 1996
OPERATIONS) TO ------------------------------- TO MAY 31, YEAR ENDED
OCTOBER 31, 1993 1994 1995(1) 1996 1997(6) MAY 31, 1998
---------------- ------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........... $8.10 $8.23 $7.33 $7.20 $7.55 $7.87
------ ------- ------- ------- ------- --------
Net Investment Income .......................... 0.33 0.80(2) 0.72 0.76(2) 0.45 0.78(2)
Net Realized and Unrealized Gain (Loss)
on Investments, Financial Futures Contracts
and Foreign Currency Transactions ............ 0.09 (0.83) (0.12) 0.35 0.32 0.51
------ ------- ------- ------- ------- --------
Total from Investment Operations ............. 0.42 (0.03) 0.60 1.11 0.77 1.29
------ ------- ------- ------- ------- --------
Less Distributions:
Dividends from Net Investment Income ......... (0.29) (0.82) (0.73) (0.76) (0.45) (0.78)
Distributions from Net Realized Gain
on Investments Sold .......................... -- (0.05) -- -- -- (0.12)
------ ------- ------- ------- ------- --------
Total Distributions .......................... (0.29) (0.87) (0.73) (0.76) (0.45) (0.90)
------ ------- ------- ------- ------- --------
Net Asset Value, End of Period ................. $8.23 $7.33 $7.20 $7.55 $7.87 $8.26
====== ======= ======= ======= ======= ========
Total Investment Return at Net Asset Value(3) .. 4.96%(4) (0.59%) 8.83% 16.06% 10.54%(4) 17.03%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ....... $2,344 $11,696 $26,452 $52,792 $97,925 $273,277
------ ------- ------- ------- ------- --------
Ratio of Expenses to Average Net Assets ........ 0.91%(5) 1.16% 1.16% 1.10% 1.05%(5) 0.97%
Ratio of Net Investment Income to Average
Net Assets ................................... 12.89%(5) 10.14% 10.23% 10.31% 10.19%(5) 9.33%
Portfolio Turnover Rate ........................ 204% 153% 98% 113% 78% 100%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the Fund's net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD FROM
---------------------------------------------- NOVEMBER 1, 1996 YEAR ENDED
1993 1994 1995(1) 1996 TO MAY 31, 1997(6) MAY 31, 1998
-------- -------- -------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ......... $7.43 $8.23 $7.33 $7.20 $7.55 $7.87
-------- -------- -------- -------- -------- --------
Net Investment Income ........................ 0.80 0.74(2) 0.67 0.70(2) 0.42 0.71(2)
Net Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts
and Foreign Currency Transactions .......... 0.75 (0.83) (0.13) 0.35 0.32 0.51
-------- -------- -------- -------- -------- --------
Total from Investment Operations ........... 1.55 (0.09) 0.54 1.05 0.74 1.22
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ....... (0.75) (0.76) (0.67) (0.70) (0.42) (0.71)
Distributions from Net Realized Gain on
Investments Sold ........................... -- (0.05) -- -- -- (0.12)
-------- -------- -------- -------- -------- --------
Total Distributions ........................ (0.75) (0.81) (0.67) (0.70) (0.42) (0.83)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ............... $8.23 $7.33 $7.20 $7.55 $7.87 $8.26
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset
Value(3) ................................... 21.76% (1.33%) 7.97% 15.24% 10.06%(4) 16.16%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..... $154,214 $160,739 $180,586 $242,944 $379,024 $798,170
Ratio of Expenses to Average Net Assets ...... 2.08% 1.91% 1.89% 1.82% 1.80%(5) 1.72%
Ratio of Net Investment Income to Average
Net Assets ................................. 10.07% 9.39% 9.42% 9.49% 9.45%(5) 8.62%
Portfolio Turnover Rate ...................... 204% 153% 98% 113% 78% 100%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31, 1998
---------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................... $8.45
---------
Net Investment Income(2) ................................... 0.06
Net Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts and
Foreign Currency Transactions ............................ (0.19)
---------
Total from Investment Operations ......................... (0.13)
---------
Less Distributions:
Dividends from Net Investment Income ..................... (0.06)
---------
Total Distributions ...................................... (0.06)
---------
Net Asset Value, End of Period ............................. $8.26
=========
Total Investment Return at Net Asset Value(3) .............. (1.59%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $3,195
Ratio of Expenses to Average Net Assets .................... 1.72%(5)
Ratio of Net Investment Income to Average Net Assets ....... 6.70%(5)
Portfolio Turnover Rate .................................... 100%
(1) On December 22, 1994, John Hancock Advisers, Inc., became the investment
adviser of the Fund.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(4) Not annualized.
(5) Annualized.
(6) Effective May 31, 1997, the fiscal period end changed from October 31 to
May 31.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by High
Yield Bond Fund on May 31, 1998. It's divided into three main categories: bonds,
common and preferred stocks and warrants, and short-term investments. The bonds
are further broken down by industry groups. Under each industry group is a list
of the bonds owned by the Fund. Short-term investments, which represent the
Fund's "cash" position, are listed last.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
BONDS
Agricultural Operations (0.46%)
Iowa Select Farms L.P./ISF Finance, Inc.,
Sr Sub Note 12-01-05 (R) .......................................... 10.750% B3 $4,990 $4,990,000
-----------
Automobile/Trucks (1.44%)
Harvard Industries, Inc.,
Sr Note 07-15-04 .................................................. 12.000 D 1,500 645,000
Sr Note 08-01-05 .................................................. 11.125 D 7,885 3,390,550
J.B. Poindexter & Co., Inc.,
Sr Note 05-15-04 .................................................. 12.500 B- 9,725 9,968,125
Key Plastics, Inc.,
Sr Note 11-15-99 .................................................. 14.000 B2 1,365 1,515,150
-----------
15,518,825
-----------
Banks - Foreign (1.48%)
Fuji JGB Inv LLC Pfd.,
Bond Ser A 12-31-49 (R) *** ....................................... 9.870 BB+ 17,865 15,542,550
Sumitomo Bank International Finance N.V.,
Gtd Sub Note (Japan) 05-31-01# (R) ................................ 0.750 A2 50,000 395,421
-----------
15,937,971
-----------
Banks - United States (0.39%)
CSBI Capital Trust I,
Gtd Sec Bond Ser A 06-06-27 (R) ................................... 11.750 B- 3,890 4,201,200
-----------
Building (1.40%)
Fortress Group, Inc.,
Sr Note 05-15-03 .................................................. 13.750 B3 4,000 4,520,000
The Presley Companies,
Gtd Sr Note 07-01-01 .............................................. 12.500 CCC 5,994 5,634,360
Webb (Del E.) Corp.,
Sr Sub Deb 05-01-09 ............................................... 9.375 B- 5,000 4,912,500
-----------
15,066,860
-----------
Business Services - Misc. (0.30%)
COMFORCE Operating, Inc.,
Sr Note Ser B 12-01-07 ............................................ 12.000 B- 3,000 3,225,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Chemicals (1.53%)
American Pacific Corp.,
Sr Note 03-01-05 (R) .............................................. 9.250% BB- $1,650 $1,703,625
OPP Petroquimica S.A.,
Bond (Brazil) 10-29-04 (R) (Y) .................................... 11.000 B+ 2,000 1,990,600
RBX Corp.,
Sr Sec Note 01-15-03 (R) .......................................... 12.000 B+ 2,000 2,000,000
Trikem S.A.,
Bond (Brazil) 07-24-07 (R) (Y) .................................... 10.625 BB- 12,000 10,800,000
-----------
16,494,225
-----------
Computers (0.32%)
Interact Systems, Inc.,
Sr Discount Note, Step Coupon 08-01-03 ............................ 14.000 CCC 6,000 2,640,000
PSINet, Inc.,
Sr Note 02-15-05 (R) .............................................. 10.000 B- 750 761,250
-----------
3,401,250
-----------
Consumer Products Misc. (0.31%)
Diamond Brands Operating Corp.,
Sr Sub Note 04-15-08 (R) .......................................... 10.125 CCC+ 850 858,500
Indesco International, Inc.,
Sr Sub Note 04-15-08 (R) .......................................... 9.750 B- 2,450 2,425,500
-----------
3,284,000
-----------
Containers (4.68%)
Gaylord Container Corp.,
Sr Note Ser B 06-15-07 ............................................ 9.375 B 4,975 5,012,313
Sr Sub Note Ser B 02-15-08 ........................................ 9.875 B 15,300 15,414,750
MVE, Inc.,
Sr Sec Note 02-15-02 .............................................. 12.500 B 7,011 7,151,220
Riverwood International Corp.,
Gtd Sr Sub Note 04-01-08 .......................................... 10.875 CCC+ 8,980 9,114,700
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 ........... 12.250 B- 13,200 13,563,000
-----------
50,255,983
-----------
Cosmetics & Personal Care (0.48%)
Carson, Inc.,
Gtd Sr Sub Note Ser B 11-01-07 .................................... 10.375 B3 2,000 2,000,000
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) .............................................. 11.000 B+ 3,175 3,111,500
-----------
5,111,500
-----------
Electronics (0.29%)
Electronic Retailing Systems International, Inc.,
Sr Disc Note, Step Coupon (13.25%, 02-01-00)
02-01-04 (A) ...................................................... Zero CCC 1,000 510,000
Spin Cycle, Inc.,
Unit (Sr Disc Note & Warrants), Step Coupon
(12,750%, 05-01-01) 05-01-05 (A) (R) .............................. Zero CCC+ 3,625 2,573,750
-----------
3,083,750
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Energy (1.55%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) .......................................... 9.625% B $16,300 $16,687,125
-----------
Finance (3.59%)
Advance Agro Public Co.,
Sr Note (Thailand) 11-15-07 (R) (Y) ............................... 13.000 CCC+ 6,950 6,950,000
FSW International Finance Company B.V.,
Gtd Sr Sec Note (Indonesia) 11-01-06 (Y) .......................... 12.500 D 5,000 1,500,000
Mercury Finance Co.,
Commercial Paper 10-01-00 ......................................... 7.000 D 3,828 3,636,636
MSX International, Inc.,
Sr Sub Note 01-15-08 (R) .......................................... 11.375 B- 3,500 3,640,000
Nationwide Credit, Inc.,
Sr Note 01-15-08 (R) .............................................. 10.250 B- 4,000 4,060,000
Pindo Deli Finance Mauritius Ltd.,
Gtd Sr Deb (Indonesia) 10-01-02 (Y) ............................... 10.250 CCC+ 1,000 680,000
Polysindo International Finance B.V.,
Gtd Note (Indonesia) 02-12-99 (Y) *** ............................. 8.648 CCC- 1,990 1,094,500
Sampoerna International Finance Co., B.V.,
Gtd Yankee Bond (Indonesia) 06-15-06 (R) (Y) ...................... 8.375 CCC- 15,100 8,607,000
Sumitomo Bank Treasury Co. LLC,
Bond Ser A, 12-29-49 (R) *** ...................................... 9.400 BBB- 5,900 5,737,750
Tjiwi Kimia Finance Mauritius Ltd.,
Gtd Sr Note (Indonesia) 08-01-04 (Y) .............................. 10.000 BB 1,500 1,050,000
Tjiwi Kimia International Finance Co. B.V.,
Gtd Note (Indonesia) 08-01-01 (Y) ................................. 13.250 CCC+ 2,000 1,620,000
-----------
38,575,886
-----------
Food (5.37%)
Del Monte Foods Co.,
Sr Disc Note, Step Coupon (12.50%, 12-15-02) 12-15-07 (A) (R) ..... Zero B- 10,630 6,882,925
Grupo Azucarero Mexico, S.A. de C.V.,
Sr Note (Mexico) 01-15-05 (R) (Y) ................................. 11.500 B+ 4,500 4,005,000
Mastellone Hermanos S.A.,
Sr Bond (Argentina) 04-01-08 (R) (Y) .............................. 11.750 B+ 14,350 14,565,250
SC International Services, Inc.,
Gtd Sr Sub Note, Ser B 09-01-07 ................................... 9.250 B 13,575 14,118,000
Specialty Foods Acquisition Corp.,
Sr Sub Note Ser B 08-15-03 ........................................ 11.250 CCC 16,700 15,364,000
Specialty Foods Corp.,
Sr Sec Disc Deb Ser B, Step Coupon (13.00%, 08-15-99)
08-15-05 (A) ...................................................... Zero Ca 7,000 2,800,000
-----------
57,735,175
-----------
Glass Products (0.91%)
Glasstech, Inc.,
Sr Note Ser B 07-01-04 ............................................ 12.750 B+ 4,475 4,430,250
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R) (Y) ............................. 11.375 B+ 5,000 5,350,000
-----------
9,780,250
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Insurance (1.05%)
SIG Captial Trust I,
Gtd Trust Preferred Security 08-15-27 (R) ......................... 9.500% BB+ $9,000 $9,135,000
Superior National Capital Trust I,
Gtd Trust Pfd Security 12-01-17 ................................... 10.750 BB 2,000 2,130,000
-----------
11,265,000
-----------
Leisure (6.99%)
Agrosy Gaming Co.,
1st Mtg Note 06-01-04 ............................................. 13.250 B+ 4,950 5,581,125
Casino America, Inc.,
Sr Sec Note 08-01-03 .............................................. 12.500 B+ 11,200 12,600,000
Casino Magic - Louisiana,
1st Mtg Note Ser B 08-15-03 ....................................... 13.000 B- 6,500 7,572,500
Claridge Hotel & Casino Corp.,
1st Mtg Note 02-01-02 ............................................. 11.750 CC 7,736 7,600,620
Coast Hotels & Casinos, Inc.,
1st Mtg Ser B 12-15-02 ............................................ 13.000 B+ 3,000 3,472,500
Fitzgeralds Gaming Corp.,
Gtd Sr Sec Note 12-15-04 (R) ...................................... 12.250 B- 9,450 9,450,000
IHF Holdings, Inc.,
Sr Sub Disc Note Ser B, Step Coupon (15.00%, 11-15-99) 11-15-04 (A) Zero Caa2 7,425 6,162,750
Production Resource Group LLC,
Sr Sub Note 01-15-08 (R) .......................................... 11.500 B- 3,000 2,940,000
Showboat, Inc.,
Sr Sub Note 08-01-09 .............................................. 13.000 B 2,000 2,440,000
Six Flags Theme Parks/Premier Parks, Inc.,
Sr Sub Note, Ser A, Step Coupon (12.25%, 06-15-00) 06-15-05 (A) ... Zero B- 3,000 3,386,250
Trump Hotels & Casino Resorts Funding, Inc./Holdings, L.P.,
Sr Sec Note 06-15-05 .............................................. 15.500 B- 8,630 9,751,900
Venetian Casino Resort LLC,
1st Mtg Note 11-15-04 (R) ......................................... 12.250 B- 4,000 4,120,000
-----------
75,077,645
-----------
Manufacturing (3.33%)
American Architectural Products Corp.,
Sr Note 12-01-07 (R) .............................................. 11.750 B 4,000 4,180,000
AP Holdings, Inc.,
Sr Disc Note, Step Coupon (11.25%, 03-15-03) 03-15-08 (A) (R) ..... Zero B- 1,800 1,093,500
Doe Run Resources Corp.,
Sr Note 03-15-05 (R) .............................................. 11.250 B+ 6,990 7,129,800
Sr Sub Note 03-15-03 (R) *** ...................................... 6.813 B+ 4,975 5,024,750
Icon Health & Fitness, Inc.,
Sr Sub Note Ser B 07-15-02 ........................................ 13.000 CCC+ 6,610 7,287,525
International Semi-Tech Microelectronics, Inc.,
Sr Disc Note, Step Coupon (11.50%, 08-15-00) (Canada)
08-15-03 (A) (Y) .................................................. Zero B+ 17,282 5,530,240
RAB Holdings, Inc.,
Sr Note 05-01-08 (R) .............................................. 13.000 CCC+ 1,380 1,393,800
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Manufacturing (continued)
Scovill Fasteners, Inc.,
Sr Note Ser B 11-30-07 ............................................ 11.250% B $3,000 $3,097,500
Tokheim Corp.,
Sr Sub Note Ser B 08-01-06 ........................................ 11.500 B 916 1,016,760
-----------
35,753,875
-----------
Media (2.27%)
Alabama River Newsprint Co.,+
Commercial Paper .................................................. Zero BB 5,458 5,021,145
CD Radio, Inc.,
Sr Disc Note, Step Coupon (15.00%, 12-01-02) 12-01-07 (A) ......... Zero CCC 2,990 1,779,050
Digital Television Services LLC,
Gtd Sr Sub Note 08-01-07 .......................................... 12.500 CCC 11,095 12,759,250
Radio One, Inc.,
Gtd Sr Sub Note Ser B, Step Coupon (12.00%, 05-15-00) 05-15-04 (A) *** 7.000 B- 3,000 3,060,000
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) ................................. 7.250 B 1,555 1,780,475
-----------
24,399,920
-----------
Metal (1.71%)
Bar Technologies,
Sr Sec Note 04-01-01 .............................................. 13.500 CCC 7,500 7,940,625
Echo Bay Mines Ltd.,
Jr Sub Deb (Canada) 04-01-27 (Y) .................................. 11.000 C 2,000 1,800,000
Freeport-McMoRan Copper & Gold, Inc.,
Sr Note 11-15-06 .................................................. 7.500 CCC+ 4,990 4,247,787
Metallurg, Inc.,
Sr Note 12-01-07 (R) .............................................. 11.000 B3 4,270 4,440,800
-----------
18,429,212
-----------
Oil & Gas (4.73%)
Gothic Energy Corp.,
Unit (Sr Sec Disc Note & Warrants) 05-01-06 (R) ................... 14.125 CCC 4,990 2,919,150
Gothic Production Corp.,
Sr Sec Note 05-01-05 (R) .......................................... 11.125 B- 3,200 3,136,000
Great Lakes Acquisition,
Sr Disc Deb, Step Coupon (13.125%, 05-15-03) 05-15-09 (A) (R) ..... Zero B- 9,300 5,068,500
HarCor Energy, Inc.,
Sr Sec Note Ser B 07-15-02 ........................................ 14.875 A- 2,000 2,360,000
Key Energy Group, Inc.,
Conv Sub Note 09-15-04 (R) ........................................ 5.000 B 26,300 21,697,500
Conv Sub Note 09-15-04 ............................................ 5.000 B 8,100 6,682,500
Mariner Energy, Inc.,
Sr Sub Note Ser B 08-01-06 ........................................ 10.500 B- 3,990 4,179,525
PANACO, Inc.,
Gtd Sr Sub Note Ser B 10-01-04 .................................... 10.625 B- 2,990 3,004,950
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Oil & Gas (continued)
Universal Compression, Inc.,
Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) (R) ..... Zero% B $2,740 $1,753,600
-----------
50,801,725
-----------
Paper & Paper Products (5.85%)
American Pad & Paper Co.,
Sr Sub Note Ser B 11-15-05 ........................................ 13.000 B- 1,990 2,069,600
APP Finance II Mauritius Ltd.,
Bond (Indonesia) 12-29-49 (Y) ..................................... 12.000 Caa 7,500 5,550,000
APP International Finance Co. B.V.,
Gtd Sec Note (Indonesia) 10-01-05 (Y) ............................. 11.750 CCC+ 5,900 5,133,000
Gtd Note (Indonesia) 09-15-99 (Y) ................................. 8.742 Caa1 3,800 3,268,000
Bear Island Paper Co. LLC,
Sr Sec Note Ser B 12-01-07 ........................................ 10.000 B 4,475 4,609,250
Florida Coast Paper LLC,
1st Mtg Ser B 06-01-03 ............................................ 12.750 B- 4,000 4,420,000
Grupo Industrial Durango, S.A.,
Note (Mexico) 08-01-03 (Y) ........................................ 12.625 BB- 615 685,725
Indah Kiat Finance Mauritius Ltd.,
Gtd Sr Note (Indonesia) 07-01-07 (Y) .............................. 10.000 Caa1 7,000 5,180,000
Indah Kiat International Finance Co.,
Gtd Sec Bond Ser C (Indonesia) 06-15-06 (Y) ....................... 12.500 CCC+ 2,500 2,100,000
Repap New Brunswick, Inc.,
Sr Sec Note (Canada) 06-01-04 (R) (Y) *** + ....................... 9.438 B- 6,000 6,067,500
Sr Note (Canada) 04-15-05 (Y) ..................................... 10.625 CCC+ 20,000 20,500,000
Sappi BVI Finance Ltd.,
Gtd Conv Bond (South Africa) 08-01-02 (R) (Y) ..................... 7.500 BB- 3,550 3,301,500
-----------
62,884,575
-----------
Pollution Control (0.86%)
ICF Kaiser International, Inc.,
Sr Note Ser B 12-31-03 ............................................ 13.000 B- 1,000 1,100,000
Sr Sub Note 12-31-03 .............................................. 13.000 B- 750 808,125
Unit (Sr Sub Note & Warrant) 12-31-03 ............................. 13.000 B- 7,000 7,332,500
-----------
9,240,625
-----------
Printing - Commercial (0.19%)
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 .............................................. 12.750 B- 2,000 2,090,000
-----------
Real Estate Operations (0.49%)
Signature Resorts, Inc.,
Conv Sub Note 01-15-07 ............................................ 5.750 B 5,990 5,226,275
-----------
Retail (4.23%)
American Restaurant Group, Inc.,
Sr Sec Note 02-15-03 (R) .......................................... 11.500 B 7,950 7,989,750
Barry's Jewelers, Inc.,
Sr Note 12-22-00 .................................................. 11.000 D 6,000 3,900,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Retail (continued)
Frank's Nursery & Crafts,
Sr Sub Note 03-01-08 (R) .......................................... 10.250% B- $3,795 $3,795,000
Hills Stores Co.,
Sr Note Ser B 07-01-03 ............................................ 12.500 B- 14,957 14,844,822
Imperial Home Decor Group, Inc.,
Sr Sub Note 03-15-08 (R) .......................................... 11.000 B- 2,875 2,975,625
P & C Food Markets, Inc.,
Sr Note 10-15-01 .................................................. 11.500 B 6,150 5,542,688
Penn Traffic Co.,
Sr Note 02-15-02 .................................................. 10.250 B3 1,000 880,000
Sr Note 10-01-04 .................................................. 10.375 B 6,505 5,512,988
-----------
45,440,873
-----------
Revenue Bonds (0.43%)
Port of Walla Walla Public Corp.,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj 01-01-26 . 9.125 BB- 6,000 4,680,000
-----------
Steel (7.44%)
Acindar Industria Argentina de Aceros S.A.,
Bond (Argentina) 02-15-04 (Y) ..................................... 11.250 B+ 1,990 2,039,750
Algoma Steel, Inc.,
1st Mtg 07-15-05 .................................................. 12.375 B 1,500 1,732,500
Altos Hornos de Mexico, S.A. de C.V.,
Bond Ser B (Mexico) 04-30-04 (Y) .................................. 11.875 BB 3,000 3,052,500
CSN Iron S.A.,
Gtd Note (Brazil) 06-01-07 (Y) .................................... 9.125 B1 4,950 4,356,000
Gulf States Steel, Inc. of Alabama,
1st Mtg 04-15-03 .................................................. 13.500 B- 17,750 18,282,500
Haynes International, Inc.,
Sr Note 09-01-04 .................................................. 11.625 B- 10,000 11,300,000
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) ..................................... 11.500 B+ 2,321 2,561,804
NS Group, Inc.,
Sr Note 07-15-03 .................................................. 13.500 B+ 5,732 6,548,810
NSM Steel, Inc./NSM Steel Ltd.,
Unit (Sr Sub Mtg Note, Ser B & Warrant) (Thailand)
02-01-08 (R) (Y) .................................................. 12.250 CCC 15,150 14,013,750
Oregon Steel CF&I,
Note 03-31-03 + (r) ............................................... 9.500 B 6,900 6,684,789
Renco Steel Holdings,
Sr Sec Note 02-01-05 (R) .......................................... 10.875 B- 2,000 2,020,000
Republic Engineered Steels, Inc.,
1st Mtg 12-15-01 .................................................. 9.875 CCC+ 3,650 3,631,750
Sheffield Steel Corp.,
1st Mtg Note 12-01-05 ............................................. 11.500 B- 3,625 3,751,875
-----------
79,976,028
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Telecommunications (11.02%)
Advanced Radio Telecom Corp.,
Sr Note 02-15-07 .................................................. 14.000% CCC+ $2,250 $2,317,500
American Mobile Satellite Corp./AMSC Acquisition Co., Inc.,
Unit (Sr Note & Warrant) 04-01-08 (R) ............................. 12.250 B- 9,960 9,910,200
Barak I.T.C.,
Sr Sub Disc Note Ser B, Step Coupon (12.50%, 11-15-02)
(Israel) 11-15-07 (A) (Y) ......................................... Zero CCC 9,100 5,460,000
COLT Telecom Group Plc,
Sr Disc Note, Step Coupon (12.000%, 12-15-01) 12-15-06
(United Kingdom) (A) (Y) .......................................... Zero B 4,500 3,566,250
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%, 11-01-02) 11-15-07 (A) (R) .... Zero B 2,950 1,998,625
e.spire Communications, Inc.,
Sr Note 07-15-07 .................................................. 13.750 B- 3,000 3,450,000
Echostar DBS Corp.,
Gtd Sr Sec Note 07-01-02 .......................................... 12.500 B- 5,000 5,612,500
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) ............................. 11.500 B- 7,150 7,579,000
Facilicom International,
Sr Note 01-15-08 (R) .............................................. 10.500 B- 5,325 5,298,375
Fonorola, Inc.,
Gtd Sr Sec Note (Canada) 08-15-02 (Y) ............................. 12.500 BB- 1,500 1,676,250
FWT, Inc.,
Sr Sub Note 11-15-07 .............................................. 9.875 B3 2,000 1,900,000
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 .............................................. 13.250 B 5,100 5,865,000
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 (Y) ..................................... 12.875 B- 2,000 2,105,000
International Wireless Communications, Inc.,
Sr Sec Disc Note 08-15-01 ......................................... Zero B- 13,450 5,380,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A) (Y) ................................. Zero Caa3 6,960 1,879,200
Sr Note (United Kingdom) 08-15-06 (Y) ............................. 13.500 Caa3 4,990 3,293,400
Long Distance International, Inc.,
Unit (Sr Note & Warrant) 04-15-08 (R) ............................. 12.250 B- 1,900 1,881,000
McCaw International Ltd.,
Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) ......... Zero CCC+ 13,050 8,645,625
MetroNet Communications Corp.,
Sr Note (Canada) 08-15-07 (Y) ..................................... 12.000 B 5,250 6,037,500
Paging Network do Brasil S.A.,
Sr Note (Brazil) 06-06-05 (Y) ..................................... 13.500 B- 2,550 2,422,500
Pratama Datakom Asia B.V.,
Gtd Sr Note (Indonesia) 07-15-05 (R) (Y) .......................... 12.750 CC 7,000 3,640,000
Primus Telecommunications Group, Inc.,
Sr Sec Note 08-01-04 .............................................. 11.750 B- 6,750 7,256,250
Satelites Mexicanos S.A. de C.V.,
Sr Note (Mexico) 11-01-04 (R) (Y) ................................. 10.125 B- 4,100 4,089,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Telecommunications (continued)
Startec Global Communications Corp.,
Unit (Sr Note & Warrant) 05-15-08 (R) ............................. 12.000% CCC $3,000 $3,000,000
Telefonica de Argentina S.A.,
Note (Argentina) 11-01-04 (Y) ..................................... 11.875 BBB- 1,975 2,192,250
Teletrac, Inc.,
Sr Note Ser B 08-01-07 ............................................ 14.000 B- 3,500 3,500,000
Teligent, Inc.,
Sr Note 12-01-07 .................................................. 11.500 CCC 3,000 3,052,500
Viatel, Inc.,
Unit (Sr Note & Jr Sub Deb) 04-15-08 (R) .......................... 11.150 Caa1 4,830 2,818,381
WinStar Communications, Inc.,
Sr Sub Def Note 03-01-07 .......................................... 15.000 B- 2,000 2,580,000
-----------
118,407,056
-----------
Textile (1.30%)
Apparel Ventures, Inc.,
Sr Note Ser B 12-31-00 ............................................ 12.250 Caa3 3,350 3,316,500
Steel Heddle Group, Inc.,
Sr Disc Deb, Step Coupon (13.75%, 06-01-03) 06-01-09 (A) (R) ...... Zero CCC+ 4,700 2,444,000
Steel Heddle Manufacturing Co.,
Sr Sub Note 06-01-08 (R) .......................................... 10.625 CCC+ 3,950 3,999,375
Willcox & Gibbs, Inc.,
Gtd Sr Note Ser B 12-15-03 ........................................ 12.250 B+ 5,000 4,250,000
-----------
14,009,875
-----------
Tobacco (0.07%)
Liggett Group, Inc.,
Sr Note Ser B 02-01-99 ............................................ 11.500 CCC+ 1,000 755,000
-----------
Transport (1.26%)
MRS Logistica S.A.,
Bond Ser B (Brazil) 08-15-05 (R) (Y) .............................. 10.625 B 6,000 5,640,000
Navigator Gas Transport Plc,
Unit (Mtg Note & Warrant) (United Kingdom) 06-30-07 (R) (Y) ....... 12.000 B 3,000 3,435,000
Pacific & Atlantic Holding, Inc.,
1st Mtg Note (Greece) 05-30-08 (R) (Y) ............................ 11.500 B 2,950 2,927,875
World Airways, Inc.,
Conv Sr Sub Deb 08-26-04 (R) ...................................... 8.000 B- 2,000 1,500,000
-----------
13,502,875
-----------
Utilities (1.31%)
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A (Philippines) 11-15-05 (Y) .......................... 11.450 BB 2,000 2,040,000
Empire Gas Corp.,
Gtd Sr Sec Note 07-15-04 .......................................... 7.000 CC 4,950 4,603,500
Eskom,
Sec Note Ser E169 (South Africa) 10-01-98 # ....................... 15.000 BBB+ 19,140 3,702,120
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
Utilities (continued)
Espirito Santo Centrais Electric,
Sr Note (Brazil) 07-15-07 (R) (Y) ................................. 10.000% BB- $3,975 $3,696,750
-----------
14,042,370
-----------
Waste Disposal Service & Equip. (1.08%)
Waste Systems International, Inc.,
Conv Sub Note 05-13-05 (R) ........................................ 7.000 CCC+ 11,300 11,582,500
-----------
TOTAL BONDS
(Cost $865,986,092) (80.11%) 860,914,429
---------- -----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OR WARRANTS
---------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Abitibi-Consolidated, Inc., Common Stock (Canada) (Y) ...................................... 1,233,500 16,806,438
Aeroporti di Roma SpA, Common Stock (Italy) (Y) ** ......................................... 80,000 1,206,637
American Pacific Corp., Common Stock ** .................................................... 110,000 1,182,500
American Telecasting, Inc., Warrant ** ..................................................... 2,000 200
Ampex Corp. (Class A), Common Stock ** ..................................................... 100,000 225,000
AVI Holdings, Inc., Warrant ** ............................................................. 1,500 9,000
Barry's Jewelers, Inc., Common Stock ** .................................................... 40,000 400
Brooke Group Ltd., Common Stock ............................................................ 3,330 33,300
Burlington Motor Carriers, Inc., Warrant ** ................................................ 95 --
Burlington Motor Carriers, Inc., 7.00%, Preferred Stock .................................... 90 37,500
Capstar Broadcasting Partners, 12.00%, Payment-In-Kind, Preferred Stock .................... 7,026 728,069
CORE Cap, Inc. (Class A), Common Stock (r) ................................................. 67,000 1,340,000
CORE Cap, Inc. Ser A/I, 10.00%, Preferred Stock (r) ........................................ 67,000 1,675,000
Crown Packaging Holdings Ltd., Warrant (Canada) (Y) ** ..................................... 2,750 22,000
Decorative Home Accents, Inc., Common Stock ** ............................................. 1,000 10
e.spire Communications, Inc., 12.75%, Payment-In-Kind, Preferred Stock ..................... 531 642,510
Electronic Retailing Systems International, Inc., Warrant ** ............................... 1,000 20,000
Farm Fresh Holdings Corp. (Class B), Common Stock ** ....................................... 1,000 10
Fitzgeralds Gaming Corp., Preferred Stock .................................................. 125,000 4,312,500
Galileo International, Inc., Common Stock .................................................. 570,000 22,443,750
Gaylord Container Corp. (Class A), Common Stock ** ......................................... 1,053,200 8,820,550
Geneva Steel Co., 14.00%, Ser B, Preferred Stock ........................................... 10,000 1,620,000
Glasstech, Inc., Warrant ** ................................................................ 2,000 2,500
Granite Broadcasting Corp., 12.75%, Payment-In-Kind, Preferred Stock ....................... 71,441 8,358,650
Great Atlantic & Pacific Tea Co., Inc., Common Stock ....................................... 169,800 5,433,600
Haynes Holdings, Inc., Common Stock ** ..................................................... 67,938 1,137,961
Hyperion Telecommunications, Inc., 12.875%, Ser B, Preferred Stock ......................... 1 422
ICF Kaiser International, Inc., Warrant ** ................................................. 7,000 3,500
Interact Systems, Inc., Warrant ** ......................................................... 6,000 1,500
International Wireless, Inc., Warrant ** ................................................... 1,500 15
Ithaca Industries, Inc., Common Stock ** ................................................... 235,000 851,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
ISSUER, DESCRIPTION OR WARRANTS VALUE
- ------------------- ----------- -----
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS (continued)
Kelley Oil & Gas Corp., $2.625, Convertible, Preferred Stock ............................... 125,000 $3,187,500
KLM Royal Dutch Air Lines N.V., Common Stock (Netherlands) # ............................... 135,000 5,256,562
Lufthansa AG, Common Stock (Germany) (Y) ................................................... 300,000 7,454,580
McCaw International Ltd., Warrant ** ....................................................... 10,050 37,688
MetroNet Communications Corp., Warrant (Canada) (R) (Y) ** ................................. 5,250 252,000
Nextel Communications, Inc., 13.00%, Payment-in-Kind, Ser D, Preferred Stock ............... 17,573 19,681,760
Nextlink Communications, Inc., Warrant (R) ** .............................................. 30,000 --
Northwest Airlines Corp. (Class A), Common Stock ** ........................................ 725,000 32,670,312
Paging do Brazil Holding Co. LLC (Class B), Common Stock (R) ** ............................ 2,550 --
Petroleum Heat & Power Company, Inc., 12.875%, Ser B, Preferred Stock ...................... 200,000 3,400,000
Renaissance Cosmetics, Warrant ** .......................................................... 4,000 4,000
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock .................................... 166,943 19,699,274
Sheffield Steel Corp., Common Stock ** ..................................................... 500 1,000
Sterling Chemicals Holdings, Warrant ** .................................................... 1,000 24,000
Stone Container Corp., $1.75, Ser E, Preferred Stock ....................................... 200,000 4,200,000
Supermarkets General Holding Corp., $3.52, Preferred Stock ................................. 71,964 2,194,902
Takefuji Corp., Common Stock (Japan) # ..................................................... 100,000 4,950,740
Teletrac, Inc., Warrant ** ................................................................. 3,500 --
Wang Laboratories, Inc., Ser B Preferred Stock (R) ......................................... 100,000 5,350,000
Weirton Steel Corp., Common Stock ** ....................................................... 100,000 406,250
Westshore Terminals Income Fund, Common Stock (Canada) # ................................... 160,000 868,752
---------- -----------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $165,819,565) (17.36%) 186,554,717
---------- -----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAR VALUE
RATE (000s OMITTED)
---- --------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.09%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion - dated 05-29-98,
due 06-01-98 (secured by U.S. Treasury Notes, 5.125%
thru 9.25%, due 08-15-98 thru 11-15-05 and U.S. Treasury Bonds,
6.00% thru 12.00%, due 08-15-13 thru 08-15-27) - Note A..................... 5.570% $11,654 11,654,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%.......................................................... 18,295
--------------
TOTAL SHORT-TERM INVESTMENTS (1.09%) 11,672,295
---------- --------------
TOTAL INVESTMENTS (98.56%) 1,059,141,441
---------- --------------
OTHER ASSETS AND LIABILITIES, NET (1.44%) 15,500,539
---------- --------------
TOTAL NET ASSETS (100.00%) $1,074,641,980
========== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
NOTES TO THE SCHEDULE OF INVESTMENTS
* Credit ratings are unaudited and rated by Moody's Investors Service or
John Hancock Advisers, Inc. where Standard and Poor's ratings are not
available.
** Non-income producing security.
*** Represents rate in effect on May 31, 1998.
# Par value of foreign bonds and shares outstanding of common stocks is
expressed in local currency, as shown parenthetically in security
description.
+ These securities having an aggregate value of $17,773,434 or 1.65% of the
Fund's net assets, have been purchased as forward commitments; that is,
the Fund has agreed on trade date, to take delivery of and make payment
for such securities on a delayed basis subsequent to this schedule. The
purchase price and the interest rate of such securities are fixed at trade
date, although the Fund does not earn any interest on such securities
until settlement date. The Fund has instructed its Custodian Bank to
segregate assets with a current value at least equal to the amounts of the
forward commitments. Accordingly, the market values of $3,168,275 of
Agrosy Gaming Corp. 13.25%, 06-01-04, $3,150,675 of American Architectural
Products Corp., 11.75%, 12-01-07, $7,019,250 of SC International Services,
Inc., 9.25%, 09-01-07, and $5,047,000 of Stone Container Corp., 12.25%,
04-01-02, have been segregated to cover the forward commitments.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $324,948,302 or 30.24% of the funds net
assets as of May 31, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of a foreign issuer; however, security is U.S. dollar
denominated.
(r) Direct placement securities are restricted to resale. They have been
valued in accordance with procedures approved by the Trustees after
consideration of restrictions as to resale, financial condition and
prospects of the issuer, general market conditions and pertinent
information in accordance with the Fund's By-Laws and the Investment
Company Act of 1940, as amended. The Fund has limited rights to
registration under the Securities Act of 1933 with respect to these
restricted securities.
Additional information on each restricted security is as follows:
<TABLE>
<CAPTION>
MARKET
VALUE AS A
PERCENTAGE MARKET
ACQUISITION ACQUISITION OF FUND'S VALUE ASOF
DATE COST NET ASSETS MAY 31, 1998
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
CORE Cap, Inc.(Class A), Common Stock ................. 10-31-97 $1,340,000 0.12% $1,340,000
CORE Cap, Inc. Ser A/I, 10.00%, Preferred Stock ....... 10-31-97 1,675,000 0.16 1,675,000
Oregon Steel CF&I...................................... 05-14-98 6,684,789 0.62 6,684,789
------- ------------
TOTALS 0.90% $9,699,789
======= ============
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - High Yield Bond Fund
Portfolio Concentration
May 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The High Yield Bond Fund invests primarily in securities issued in the United
States of America. The performance of this Fund is closely tied to the economic
and financial conditions of the countries within which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the Schedule of Investments.
In addition, the concentration of investments can be aggregated by various
countries. The table below shows the percentages of the Fund's investments at
May 31, 1998 assigned to country categories.
<TABLE>
<CAPTION>
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
<S> <C>
Argentina........................................................... 1.75%
Brazil.............................................................. 2.69
Canada.............................................................. 5.78
Germany............................................................. 0.69
Greece.............................................................. 0.27
Indonesia............................................................ 3.67
Israel.............................................................. 0.51
Italy............................................................... 0.11
Japan............................................................... 0.50
Luxembourg.......................................................... 0.17
Mexico.............................................................. 1.80
Netherlands......................................................... 0.49
Philippines......................................................... 0.19
South Africa........................................................ 0.65
Thailand............................................................ 1.95
United Kingdom...................................................... 1.84
United States....................................................... 75.50
------
TOTAL INVESTMENTS 98.56%
======
</TABLE>
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
<TABLE>
<CAPTION>
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- -------------------- ----------
<S> <C>
A................................................................... 0.26%
BBB................................................................. 1.08
BB.................................................................. 6.00
B................................................................... 49.92
CCC................................................................. 19.73
CC.................................................................. 1.47
C................................................................... 0.43
D................................................................... 1.22
------
TOTAL BONDS 80.11%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Bond Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of three series: John Hancock High Yield Bond Fund (the "Fund"), John Hancock
Intermediate Maturity Government Fund and John Hancock Government Income Fund
(collectively, the "Funds"). The other two series of the Trust are reported in
separate financial statements. The investment objective of the Fund is to
maximize current income without assuming undue risk by investing in a
diversified portfolio consisting primarily of lower-rated, high-yielding debt
securities.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A, Class B and Class C shares. The Trustees
authorized the issuance of Class C shares effective May 1, 1998. The shares of
each class represent an interest in the same portfolio of investments of the
Fund and have equal rights to voting, redemptions, dividends and liquidation,
except that certain expenses, subject to the approval of the Trustees, may be
applied differently to each class of shares in accordance with current
regulations of the Securities and Exchange Commission and the Internal Revenue
Service. Shareholders of a class which bears distribution and service expenses
under terms of a distribution plan have exclusive voting rights to that
distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Board of Trustees. Short-term debt investments maturing within
60 days are valued at amortized cost, which approximates market value. All
portfolio transactions initially expressed in terms of foreign currencies have
been translated into U.S. dollars as described in "Foreign Currency Translation"
below.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement. Aggregate cash balances
are invested in one or more repurchase agreements, whose underlying securities
are obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment securities
is recorded on the ex-dividend date or in the case of some foreign securities,
on the date thereafter when the Fund is made aware of the dividend. Interest
income on investment securities is recorded on the accrual basis. Foreign income
may be subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class
26
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Bond Fund
and the specific expense rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative size of the fund.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or date of purchase over the life of the security,
as required by the Internal Revenue Code.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 million,
collectively. Interest is charged to each fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the line of credit, is allocated among the participating funds. The
Fund had no borrowing activity for the year ended May 31, 1998.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. At the time the
Fund enters into a financial futures contract, it will be required to deposit
with its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of the
financial future contracts being traded. Each day, the futures contract is
valued at the official settlement price of the board of trade or U.S.
commodities exchange on which it trades. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market," are recorded by the Fund
as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuations imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures transactions.
At May 31, 1998, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
SEP 98 160 U.S. TREASURY BOND SHORT ($5,000)
===========
At May 31, 1998, the Fund had deposited in a segregated account $320,000
to cover margin requirements on open financial futures contracts.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially expressed in
terms of foreign currencies are translated into U.S. dollars based on London
currency exchange quotations as of 5:00 P.M., London time, on the date of any
determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/(loss) on investments are
translated at the rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currency, currency gains or losses realized between the
27
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Bond Fund
trade and settlement dates on securities transactions and the difference between
the amounts of dividends, interest and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains or losses arise from changes in the
value of assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward
foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the contracts are
marked to market daily at the applicable foreign currency exchange rates. Any
resulting unrealized gains and losses are included in the determination of the
Fund's daily net assets. The Fund records realized gains and losses at the time
the forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering these contracts from potential inability
of counterparties to meet the terms of the contract and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the unrealized
gain or loss reflected in the Fund's Statement of Assets and Liabilities. The
Fund may also purchase and sell forward contracts to facilitate the settlement
of foreign currency denominated portfolio transactions, under which it intends
to take delivery of the foreign currency. Such contracts normally involve no
market risk if they are offset by the currency amount of the underlying
transaction.
Open foreign currency forward contracts at May 31, 1998, were as follows:
PRINCIPAL AMOUNT EXPIRATION UNREALIZED
CURRENCY COVERED BY CONTRACT MONTH DEPRECIATION
- -------- ------------------- ----- ------------
SELLS
Deutsche Mark 11,890,000 AUG 98 ($116,239)
Italian Lira 1,300,000,000 JUN 98 (8,533)
---------
($124,772)
=========
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.625% of the first $75,000,000 of the Fund's
average daily net asset value, (b) 0.5625% of the next $75,000,000 and (c) 0.50%
of the Fund's average daily net asset value in excess of $150,000,000.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended May 31,
1998, net sales charges received with regard to sales of Class A shares amounted
to $4,186,986. Out of this amount, $461,370 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $3,288,788 was
paid as sales commissions to unrelated broker-dealers and $436,828 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.00% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended May 31, 1998,
contingent deferred sales charges paid to JH Funds amounted to $1,229,001.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% of the lesser of the current market value
at the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in whole or
in part to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of Class C shares. For the year
ended May 31, 1998, contingent
28
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - High Yield Bond Fund
deferred sales charges paid to JHFunds amounted to $18.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses, at an annual rate not to exceed
0.25% of Class A average daily net assets and 1.00% of Class B and Class
Caverage daily net assets to reimburse JH Funds for its distribution and service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Funds. The compensation for the year was
at an annual rate of less than 0.02% of the average net assets of each Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and/or its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne
by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $1,867.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended May 31, 1998, aggregated $1,096,963,353 and $608,676,533, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies during the year ended May 31, 1998, aggregated $131,226,563 and
$608,676,533, respectively.
The cost of investments (including the joint repurchase agreement) owned
at May 31, 1998 for federal income tax purposes was $1,043,686,155. Gross
unrealized appreciation and depreciation of investments aggregated $55,933,003
and $40,496,012, respectively, resulting in net unrealized appreciation of
$15,436,991.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
a decrease in accumulated net realized gain on investments of $2,897,697, an
increase in accumulated net investment income of $297,517 and an increase in
capital paid-in of $2,600,180. This represents the amount necessary to report
these balances on a tax basis, excluding certain temporary differences, as of
May 31, 1998. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to the treatment of foreign currency gains
and losses, and equalization debits used in the computation of distributable
income and capital gains under federal tax rules versus generally accepted
accounting principles. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
29
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John Hancock Funds - High Yield Bond Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
We have audited the accompanying statement of assets and liabilities of the John
Hancock High Yield Bond Fund (one of the portfolios constituting the John
Hancock Bond Trust) (the "Fund"), including the schedule of investments, as of
May 31, 1998, and the related statement of operations for the year then ended,
and the statement of changes in net assets and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1998, by correspondence with the custodian and brokers, or other appropriate
auditing procedures where replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
John Hancock High Yield Bond Fund of the John Hancock Bond Trust at May 31,
1998, the results of its operations for the year then ended, and the changes in
its net assets and the financial highlights for each of the indicated periods,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 10, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended May 31,
1998.
The Fund designated distributions to shareholders of $5,066,127 as
long-term capital gain dividend. Of this capital gain distribution, $1,898,119
is subject to the 28% tax rate and $3,168,008 is subject to the 20% tax rate.
Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the total of all distributions which are taxable
for calendar year 1998.
With respect to the Fund's ordinary taxable income for the year ended May
31, 1998, 6.23% of the distributions qualify for the dividends received
deduction available to corporations.
30
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John Hancock Funds - High Yield Bond Fund
31
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