As filed with the Securities and Exchange Commission on August 21, 1998.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
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Pre-Effective Amendment No. __ /____/
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Post-Effective Amendment No. ___ /____/
(Check appropriate box or boxes)
JOHN HANCOCK BOND TRUST
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(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
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(Address of principal executive office) Zip Code
(617) 375-1702
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(Registrant's Telephone Number, including Area Code)
Susan S. Newton, Esq.
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199
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(Name and address of agent for service)
Title of Securities Being Registered: shares of beneficial interest of John
Hancock Bond Trust.
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. This Registration Statement relates to shares previously registered
on Form N-1A (File Nos. 2-66906 and 811-3006).
It is proposed that this filing will become effective on September 20, 1998
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
JOHN HANCOCK BOND TRUST
CROSS-REFERENCE SHEET
Items Required by Form N-14
<TABLE>
<CAPTION>
PART A
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Item No. Item Caption Prospectus Caption
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<S> <C> <C>
1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE OF
Cover Page of Prospectus PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis and Risk Factors SUMMARY; INVESTMENT RISKS
4. Information About the INTRODUCTION; SUMMARY; INVESTMENT
Transaction RISKS; INFORMATION CONCERNING THE
MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF REORGANIZATION;
CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Registrant SUMMARY; ADDITIONAL INFORMATION
ABOUT THE FUNDS' BUSINESSES
6. Information About the PROSPECTUS COVER PAGE; INTRODUCTION;
Company Being Acquired SUMMARY; ADDITIONAL INFORMATION
ABOUT THE FUNDS' BUSINESSES
7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS;
SUMMARY; INFORMATION CONCERNING
THE MEETING; VOTING RIGHTS AND
REQUIRED VOTE
8. Interest of Certain Persons EXPERTS
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be
Underwriters
<PAGE>
PART B
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Caption in Statement of
Item No. Item Caption Additional Information
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10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION ABOUT
About the Registrant GOVERNMENT INCOME FUND
13. Additional Information About ADDITIONAL INFORMATION ABOUT
the Company Being Acquired SOVEREIGN US GOVERNMENT INCOME
FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT GOVERNMENT INCOME
FUND; ADDITIONAL INFORMATION ABOUT SOVEREIGN US
GOVERNMENT FUND; PRO FORMA COMBINED FINANCIAL
STATEMENTS
PART C
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Item No. Item Caption
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15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
</TABLE>
<PAGE>
Important Information
September 24,1998
Dear Fellow Shareholder:
I am writing to ask for your vote on an important matter that will affect your
investment in the John Hancock Sovereign U.S. Government Income Fund.
You may be aware that in addition to your Fund, John Hancock Funds offers a
similar U.S. government fund - the John Hancock Government Income Fund. The
Government Income Fund seeks to earn a high level of current income with
preservation of capital by investing primarily in U.S. government and agency
securities.
After careful consideration, your Fund's Trustees have unanimously agreed that
merging your Fund into the John Hancock Government Income Fund will offer you a
similar investment objective and strategy with lower anticipated operating
expenses. This proposed merger is detailed in the enclosed proxy statement and
summarized in the questions and answers on the following page. I suggest you
read both thoroughly prior to voting.
Your Vote Makes a Difference!
No matter what the size of your investment may be, your vote is critical. I urge
you to review the enclosed materials and to complete, sign and return the
enclosed proxy ballot to us immediately. Your prompt response will help avoid
the need for additional mailings at your Fund's expense. For your convenience,
we have provided a postage-paid envelope.
If you have any questions or need additional information, please contact your
investment professional or call your Customer Service Representative at
1-800-225-5291, Monday through Friday between 8:00 a.m. and 8:00 p.m. Eastern
Time. I thank you for your prompt vote on this matter.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
<PAGE>
Q: What are the benefits of merging the Sovereign U.S. Govern-ment Income Fund
into the Government Income Fund?
A: Offering two similar U.S. government funds has made it more difficult for
both your Fund and the Government Income Fund to raise assets and reduce
expenses. Your Trustees firmly believe this merger will allow you to continue
pursuing a high level of income through investment in U.S. government and agency
securities at a lower overall anticipated operating expense.
The Government Income Fund's larger asset base after the merger, coupled with
the adviser's plan to limit management fees to 0.50%, is expected to allow for
lower operating expenses than your Fund has now. Following the merger, annual
fees are projected to be 1.01% for Class A shareholders, down from 1.14%, and
1.76% for Class B shareholders, down from 1.84%. These projected lower expenses
should help keep more of your money invested, which often helps to bolster an
investment's total return over time.
Q: How does the Government Income Fund's strategy compare with that of the
Sovereign U.S. Government Income Fund?
A: The Government Income Fund seeks to earn a high level of current income
consistent with preservation of capital. Your Fund seeks to provide as high a
level of income as is consistent with long-term total return. Both funds focus
on securities of varying maturities issued by the U.S. government, its agencies
or instrumentalities. Unlike your Fund, the Government Income Fund can invest up
to 20% of its assets in U.S. dollar-denominated bonds of foreign governments as
noted in the enclosed prospectus. This investment flexibility makes the
Government Income Fund somewhat less conservative than your Fund, due to the
increased potential risk associated with these securities. However, the
Government Income Fund applies a relatively conservative investment approach,
which attempts to minimize these risks. Keep in mind that this approach also
allows the Government Income Fund to seek higher current income than your Fund,
while still focusing on preservation of capital.
Q: How has the Government Income Fund performed?
A: Although past performance does not guarantee future results, the Government
Income Fund has been a steady performer over the years. The Fund's Class B
shares have posted average annual returns of 4.69% over the past year, 5.12%
over the past five years and 7.30% over the past ten years, with maximum sales
charges, as of June 30, 1998. As of this ending date, the Fund's Class A shares
have posted average annual total returns of 5.53% for the year and 7.54% since
inception on September 30, 1994, with maximum sales charges.* To review the
Government Income Fund in greater detail, please refer to the John Hancock
Income Funds prospectus and the Government Income Fund's most recent shareholder
report, both of which are enclosed.
Q: How do I vote?
A: Most shareholders typically vote by completing, signing and returning the
enclosed proxy card using the postage-paid envelope provided. If you prefer to
vote in person, you are cordially invited to attend a meeting of shareholders of
your Fund, which will be held at 9:00 a.m. on November 11, 1998 at our 101
Huntington Avenue headquarters in Boston, Massachusetts. If you vote now, you
will help avoid further solicitations at your Fund's expense.
Q: How will the merger happen?
A: If the merger is approved, your Sovereign U.S. Government Fund shares will be
exchanged for Government Income Fund shares, using the Funds' net asset value
share prices, excluding sales charges, at the close of trading on December 4,
1998. This conversion will not affect the total dollar value of your investment.
Q: Will the merger have tax consequences?
A: Although taxable dividends and capital gains will be paid prior to the
merger, the merger itself is a non-taxable event and does not need to be
reported on your 1998 tax return.
*Performance figures assume all distributions are reinvested and reflect a
maximum sales charge on Class A shares of 4.5% and the applicable contingent
deferred sales charge on Class B shares. The CDSC declines annually between
years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales
charge will be assessed after the sixth year. The return and principal value of
any mutual fund investment will fluctuate, so that shares, when redeemed, may be
worth more or less than their original cost.
<PAGE>
JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
(a series of John Hancock Strategic Series)
101 Huntington Avenue
Boston, MA 02199
NOTICE OF MEETING OF SHAREHOLDERS
SCHEDULED FOR NOVEMBER 11, 1998
This is the formal agenda for your fund's shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting, in case you want
to attend in person.
To the shareholders of John Hancock Sovereign U.S. Government Income Fund:
A shareholder meeting for your fund will be held at 101 Huntington Avenue,
Boston, Massachusetts on Wednesday, November 11, 1998 at 9:00 a.m., Eastern
Time, to consider the following:
1. A proposal to approve an Agreement and Plan of Reorganization between
your fund and John Hancock Government Income Fund. Under this
Agreement, your fund would transfer all of its assets to Government
Income Fund in exchange for shares of Government Income Fund. These
shares would be distributed proportionately to you and the other
shareholders of your fund. Government Income Fund would also assume
your fund's liabilities. Your board of trustees recommends that you
vote FOR this proposal.
2. Any other business that may properly come before the meeting.
Shareholders of record as of the close of business on September 16, 1998 are
entitled to vote at the meeting and any related follow-up meetings.
Whether or not you expect to attend the meeting, please complete and return the
enclosed proxy card. If shareholders do not return their proxies in sufficient
numbers, your fund will incur the cost of extra solicitations, which is
indirectly borne by you and other shareholders.
By order of the board of trustees,
Susan S. Newton
Secretary
September 24, 1998
1
<PAGE>
PROXY STATEMENT OF
JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
(a series of John Hancock Strategic Series)
PROSPECTUS FOR
CLASS A AND CLASS B SHARES OF
JOHN HANCOCK GOVERNMENT INCOME FUND
(a series of John Hancock Bond Trust)
This proxy statement and prospectus contains the information you should know
before voting on the proposed reorganization of your fund into John Hancock
Government Income Fund. Please read it carefully and retain it for future
reference.
How the Reorganization Will Work
o Your fund will transfer all of its assets to Government Income Fund.
Government Income Fund will assume your fund's liabilities.
o Government Income Fund will issue Class A shares to your fund in an
amount equal to the value of your fund's Class A shares. These shares
will be distributed to your fund's Class A shareholders in proportion
to their holdings on the reorganization date.
o Government Income Fund will issue Class B shares to your fund in an
amount equal to the value of your fund's Class B shares. These shares
will be distributed to your fund's Class B shareholders in proportion
to their holdings on the reorganization date.
o The reorganization will be tax-free.
o Your fund will be liquidated and you will become a shareholder of
Government Income Fund.
Shares of Government Income Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank or other depository institution. These
shares are not federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
Shares of Government Income Fund have not been approved or disapproved by the
Securities and Exchange Commission. The Securities and Exchange Commission
has not passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
2
<PAGE>
Why Your Fund's Trustees are Recommending the Reorganization
The trustees of your fund believe that reorganizing your fund into a larger fund
with similar investment policies will enable the shareholders of your fund to
benefit from increased diversification, the ability to achieve better net prices
on securities trades and economies of scale that could contribute to a lower
expense ratio. Therefore, the trustees recommend that your fund's shareholders
vote FOR the reorganization.
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Investment Objectives
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Sovereign U.S. Government Government Income
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High level of income consistent with High level of current income
long-term total return. consistent with preservation of
capital.
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Where to Get More Information
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Prospectus of your fund and Government In the same envelope as this proxy
Income Fund dated 5/1/98. statement and prospectus.
Incorporated by reference into this
proxy statement and prospectus.
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Government Income Fund's annual report to
shareholders.
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Your fund's annual report to On file with the Securities and
shareholders. Exchange Commission ("SEC") and
available at no charge by calling
1-800-225-5291. Incorporated by
reference into this proxy statement
and prospectus.
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A statement of additional information
dated 9/24/98. It contains additional
information about your fund and
Government Income Fund.
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To ask questions about this proxy Call our toll-free telephone
statement and prospectus. number: 1-800-225-5291
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The date of this proxy statement and prospectus is September 24, 1998.
3
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION ..................................................................4
SUMMARY .......................................................................4
INVESTMENT RISKS .............................................................15
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION .....................16
CAPITALIZATION ...............................................................24
ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES ...........................24
BOARDS' EVALUATION AND RECOMMENDATION ........................................25
VOTING RIGHTS AND REQUIRED VOTE ..............................................26
INFORMATION CONCERNING THE MEETING ...........................................27
OWNERSHIP OF SHARES OF THE FUNDS .............................................29
EXPERTS ......................................................................29
AVAILABLE INFORMATION ........................................................29
EXHIBITS
A- Agreement and Plan of Reorganization between John Hancock Sovereign
U.S. Government Income Fund and John Hancock Government Income Fund
(attached to this document).
4
<PAGE>
INTRODUCTION
This proxy statement and prospectus is being used by your fund's board of
trustees to solicit proxies to be voted at a special meeting of your fund's
shareholders. This meeting will be held at 101 Huntington Avenue, Boston,
Massachusetts on Wednesday, November 11, 1998 at 9:00 a.m., Eastern Time. The
purpose of the meeting is to consider a proposal to approve an Agreement and
Plan of Reorganization providing for the reorganization of your fund into John
Hancock Government Income Fund. This proxy statement and prospectus is being
mailed to your fund's shareholders on or about September 24, 1998.
Who is Eligible to Vote?
Shareholders of record on September 16, 1998 are entitled to attend and vote at
the meeting or any adjourned meeting. Each share is entitled to one vote. Shares
represented by properly executed proxies, unless revoked before or at the
meeting, will be voted according to shareholders' instructions. If you sign a
proxy but do not fill in a vote, your shares will be voted to approve the
Agreement and Plan of Reorganization. If any other business comes before the
meeting, your shares will be voted at the discretion of the persons named as
proxies.
SUMMARY
The following is a summary of more complete information appearing later in this
proxy statement. You should read the entire proxy statement, Exhibit A and the
enclosed documents carefully, because they contain details that are not in the
summary.
5
<PAGE>
Comparison of Sovereign U.S. Government Income Fund to Government Income Fund
- ------------------- ------------------------------ -----------------------------
Sovereign U.S. Government Government Income
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Business: A diversified series of John A diversified series of John
Hancock Strategic Series. Hancock Bond Trust. The trust
The trust is an open-end is an open-end investment
investment company organized company organized as a
as a Massachusetts business Massachusetts business trust.
trust.
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Net assets as of $367.9 million. $457.4 million.
May 31, 1998:
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Investment Each fund's investment adviser is John Hancock Advisers,
adviser and Inc. Barry H. Evans, CFA, has been the leader of each fund's
portfolio portfolio management team since January 1995. He is a senior
managers: vice president of the adviser and has been in the investment
business since joining John Hancock Funds 1986.
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Investment As high a level of income as High level of current income
objective: is consistent with long-term consistent with preservation
total return by investing in of capital by investing
securities issued, primarily in securities that
guaranteed or otherwise are issued or guaranteed as
backed by the U.S. to principal and interest by
government, its agencies or the U.S. government, its
instrumentalities. This agencies or instrumentalities.
objective cannot be changed Government Income Fund's
without shareholder approval. objective can be changed
without shareholder approval.
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6
<PAGE>
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Sovereign U.S. Government Government Income
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Primary At least 65% of total assets At least 80% of total assets
Investments: in government securities in U.S. government securities
which include obligations which include obligations
issued by the U.S. Treasury issued by the U.S. Treasury
differing only in their differing only in their
interest rates, maturities interest rates, maturities
and times of issuance; and and times of issuance; and
obligations issued or obligations issued or
guaranteed by the U.S. guaranteed by the U.S.
government, its agencies or government, its agencies or
instrumentalities. instrumentalities.
- ------------------- ------------------------------ -----------------------------
Foreign debt May not invest in foreign May invest up to 20% of total
securities: debt securities or in Brady assets in U.S. dollar-
bonds. denominated securities
issued by foreign governments
as well as up to 10% of total
assets in Brady bonds. Up to
10% of total assets may be
invested in securities rated
as low as B by S&P or
Moody's.
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Pay-in-kind, Each fund may invest in pay-in-kind, delayed and zero coupon
delayed and zero debt securities. There are no percentage limits on the
coupon debt amounts of fund assets that the funds may invest in these
securities: instruments.
- ------------------- ------------------------------ -----------------------------
Illiquid May invest up to 15% of net May invest up to 10% of total
securities: assets in illiquid assets in illiquid
securities. This limitation securities. This limitation
does not apply to liquid does not apply to liquid Rule
Rule 144A securities, but 144A securities, but does
does apply to other apply to other restricted
restricted securities. securities.
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7
<PAGE>
Sovereign U.S. Government Government Income
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Financial Each fund may use financial futures, options on futures and
futures and options on securities and indices. There are no percentage
related options; limits on the amounts of fund assets that the fund may
options on invest in these instruments.
securities and
indices:
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Structured Each fund may invest in structured securities, which include
securities: indexed and/or leveraged mortgage-backed and other debt
securities. There is no limit on the amount of fund assets
that may be invested in these securities.
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Swaps, caps, Each fund may, but typically does not, invest in swaps,
floors and caps, floors and collars, which are over-the-counter
collars: contracts that involve the right or obligation to receive or
make payments based on two different income streams. There
is no limit on the amount of fund assets that may be
invested in these securities.
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When-issued and Both funds may purchase when-issued securities and purchase
forward or sell securities in forward commitment transactions.
commitment
transactions:
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Short-term Neither fund is subject to any limitations on short-term
trading: trading.
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Repurchase Both funds may invest without limitation in repurchase
agreements: agreements.
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Securities Each fund may lend portfolio securities representing up to
lending: 30% of total assets.
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Borrowing and Both funds may temporarily borrow from banks or through
reverse reverse repurchase agreements for extraordinary or emergency
repurchase purposes. These borrowings may not exceed 33.3% of a fund's
agreements: total assets.
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Covered mortgage Each fund may engage in covered mortgage dollar roll
dollar roll transactions. There is no limit on the amount of fund
transactions: assets that may engage in these transactions.
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Asset-backed May invest up to 35% of May invest up to 20% of total
securities: total assets in asset-backed assets in asset-backed
securities. securities.
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8
<PAGE>
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Sovereign U.S. Government Government Income
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Mortgage-backed Each fund may purchase mortgage-backed securities. There
securities: are no limits on the amount of fund assets that may be
invested in these securities.
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Rights and May not invest in rights and May invest in rights and
warrants: warrants. warrants.
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CLASSES OF SHARES
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Sovereign U.S. Government Government Income
- ------------------- ------------------------------------------------------------
Class A sales The Class A shares of both funds have the same
charges: characteristics and fee structure except for Class A 12b-1
fees.
o Class A shares are offered with front-end sales
charges ranging from 2% to 4.5% of each fund's
offering price, depending on the amount invested.
o There is no front-end sales charge for investments of
$1 million or more, but there is a contingent
deferred sales charge ranging from 0.25% to 1.00% on
shares sold within one year of purchase.
o Investors can combine multiple purchases of Class A
shares to take advantage of breakpoints in the sales
charge schedule.
o Sales charges are waived for the categories of
investors listed in the funds' prospectus.
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Class A 12b-1 Class A shares are subject to Class A shares are subject
fees a 12b-1 distribution fee to a 12b-1 distribution fee
equal to 0.30% annually of equal to 0.25% annually of
average net assets. average net assets.
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9
<PAGE>
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CLASSES OF SHARES
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Sovereign U.S. Government Government Income
- ------------------- ------------------------------------------------------------
Class B sales The Class B shares of both funds have the same
charges and 12b-1 characteristics and fee structure.
fees: o Class B shares are offered without a front-end sales
charge, but are subject to a contingent deferred sales
charge (CDSC) if sold within six years after purchase.
The CDSC ranges from 1.00% to 5.00% depending on how
long they are held. No CDSC is imposed on shares held
more than six years.
o CDSCs are waived for the categories of investors listed
in the funds' prospectus.
o Class B shares are subject to 12b-1 distribution and
service fees equal to 1.00% annually of average net
assets.
o Class B shares automatically convert to Class A shares
after eight years.
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BUYING, SELLING AND EXCHANGING SHARES
- --------------------------------------------------------------------------------
Both Sovereign U.S. Government and Government Income Funds
- ------------------- ------------------------------------------------------------
Buying shares: Investors may buy shares at their public offering price
through a financial representative or the funds' transfer
agent, John Hancock Signature Services, Inc. After
September 16, 1998, investors will not be allowed to open
new accounts in Sovereign U.S. Government Income Fund but
can add to existing accounts.
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Minimum initial $1,000 for non-retirement accounts and $250 for retirement
Investments: accounts and group investments.
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Exchanging shares: Shareholders may exchange their shares at net asset value
with no sales charge for shares of the same class of any
other John Hancock fund.
- ------------------- ------------------------------------------------------------
Selling shares: Shareholders may sell their shares by submitting a proper
written or telephone request to John Hancock Signature
Services, Inc.
- ------------------- ------------------------------------------------------------
Net asset value: All purchases, exchanges and sales are made at a price based
on the next determined net asset value per share (NAV) of
the fund. Both funds' NAVs are determined at the close of
regular trading on the New York Stock Exchange, which is
normally 4:00 p.m. Eastern Time.
- ------------------- ------------------------------------------------------------
10
<PAGE>
The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The first two expense tables appearing below show the expenses for the
twelve-month period ended May 31, 1998, adjusted to reflect any changes. Future
expenses may be greater or less. The examples contained in each expense table
show what you would pay if you invested $1,000 over the various time periods
indicated. Each example assumes that you reinvested all dividends and that the
average annual return was 5%. The examples are for comparison purposes only and
are not a representation of either fund's actual expenses or returns, either
past or future.
Sovereign U.S. Government Fund
Shareholder transaction expenses Class A Class B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.34% 0.34%
Total fund operating expenses 1.14% 1.84%
Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $56 $80 $105 $177
Class B shares
Assuming redemption
at end of period $69 $88 $120 $197
Assuming no redemption $19 $58 $100 $197
11
<PAGE>
Government Income Fund
Shareholder transaction expenses Class A Class B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
Annual fund operating expenses
(as a % of average net assets) Class A Class B
Management fee 0.64% 0.64%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.21% 0.21%
Total fund operating expenses 1.10% 1.85%
Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $56 $78 $103 $173
Class B shares
Assuming redemption
at end of period $69 $88 $120 $197
Assuming no redemption $19 $58 $100 $197
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may pay more than
the equivalent of the maximum permitted front-end sales charge.
Pro Forma Expense Table
The next expense table shows the pro forma expenses of Government Income Fund
assuming that a reorganization with your fund occurred on May 31, 1998. The
expenses shown in the table are based on fees and expenses incurred during the
twelve months ended May 31, 1998, adjusted to reflect any changes. Government
Income Fund's actual expenses after the reorganization may be greater or less
than those shown. The example contained in the pro forma expense table shows
what you would pay on a $1,000 investment if the reorganization had occurred on
May 31, 1998. The example assumes that you reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of Government Income Fund's actual expenses or
returns, either past or future.
12
<PAGE>
Government Income Fund (PRO FORMA)
(Assuming reorganization with Sovereign U.S. Government Income Fund)
Shareholder transaction expenses Class A Class B
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends None none
Maximum deferred sales charge None(1) 5.00%
Redemption fee(2) None none
Exchange fee None none
Annual fund operating expenses
(as a % of average net assets) Class A Class B
Management fee (after expense limitation)(3) 0.50% 0.50%
12b-1 fee(4) 0.25% 1.00%
Other expenses 0.26% 0.26%
Total fund operating expenses (after expense
limitation)(3) 1.01% 1.76%
Pro Forma Example
Share class Year 1 Year 3 Year 5 Year 10
Class A shares $55 $76 $98 $163
Class B shares
Assuming redemption
at end of period $68 $85 $115 $187
Assuming no redemption $18 $55 $95 $187
(1) Except for investments of $1 million or more.
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's voluntary agreement to limit expenses (except
for 12b-1 and transfer agent expenses). Without this limitation,
management fees would be 0.62% for each class and total fund operating
expenses would be 1.13% for Class A and 1.88% for Class B. The adviser
may discontinue this limitation at any time.
(4) Because of the 12b-1 fee, long-term shareholders may pay more than the
equivalent of the maximum permitted front-end sales charge.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern
Time, on December 4, 1998, but may occur on any later date
before June 1, 1999. Your fund will transfer all of its assets
to Government Income Fund. Government Income Fund will assume
your fund's liabilities. The net asset value of both funds
will be computed as of 5:00 p.m., Eastern time, on the
reorganization date.
13
<PAGE>
o Government Income Fund will issue to your fund Class A
shares in an amount equal to the aggregate net asset value
of your fund's Class A shares. These shares will
immediately be distributed to your fund's Class A
shareholders in proportion to their holdings on the
reorganization date. As a result, Class A shareholders of
your fund will end up as Class A shareholders of Government
Income Fund.
o Government Income Fund will issue to your fund Class B
shares in an amount equal to the aggregate net asset value
of your fund's Class B shares. These shares will
immediately be distributed to your fund's Class B
shareholders in proportion to their holdings on the
reorganization date. As a result, Class B shareholders of
your fund will end up as Class B shareholders of Government
Income Fund.
o After the reorganization is over, your fund will be
terminated.
o The reorganization will be tax-free and will not take place
unless both funds receive a satisfactory opinion concerning
the tax consequences of the reorganization from Hale and Dorr
LLP, counsel to the funds.
14
<PAGE>
The following diagram shows how the reorganization would be carried out.
------------------- ------------------------
Sovereign U.S. Government Income
Government Fund Sovereign U.S. Fund receives assets &
transfers assets & Government Fund assumes liabilities of
liabilities to assets and Sovereign U.S.
Government Income liabilities Government Fund
Fund ---------------
------------------- ------------------------
Your fund receives Government Income Fund
Class B shares and
distributes them to your fund's Class B shareholders
----------------------------------------------------
Your fund receives Government Income Fund
Class A shares and
distributes them to your fund's Class A shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- ----------------------------------------- --------------------- ----------------
Sovereign U.S. Government
Fund Asset Breakpoints Government Income
- ----------------------------------------- --------------------- ----------------
First $200 million 0.50% 0.650%
- ----------------------------------------- --------------------- ----------------
Next $300 million 0.50% 0.625%
- ----------------------------------------- --------------------- ----------------
Over $500 million 0.45% 0.600%
- ----------------------------------------- --------------------- ----------------
Although at all asset levels the advisory fee rates paid by your fund are lower
than the rates paid by Government Income Fund, the adviser has agreed to limit
Government Income Fund's management fee to an annual rate of 0.50% of the Fund's
average daily net assets if Sovereign U.S. Government Income Fund's shareholders
approve the Reorganization.
In addition to the same advisory fee rates, Government Income Fund's other
15
<PAGE>
expenses of 0.21%, as well as its pro forma other expenses of 0.26%, are lower
than your fund's other expenses of 0.34%. Furthermore, Government Income Fund's
12b-1 fee rate of 0.25% for Class A shares is below your fund's Class A fee rate
of 0.30%. Both funds pay the same Class B 12b-1 fee rate of 1.00%. Government
Income Fund's current annual Class A expense ratio (equal to 1.10% of average
net assets) is lower than your fund's current Class A expense ratio (equal to
1.14% of average net assets) and its current annual Class B expense ratio (equal
to 1.85% of average net assets) is higher than your fund's current Class B
expense ratio (equal to 1.84% of average net assets). However, Government Income
Fund's Proforma total annual operating expenses for both Class A and Class B
shares are expected to be less than your fund's current Class A and Class B
total annual operating expenses.
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table shows that the
risks affecting each fund are similar.
- --------------------------------------------------------------------------------
Both Sovereign U.S. Government and Government Income Funds
- --------------------------------------------------------------------------------
Risks of debt The value of the funds' portfolios will change in response
securities to movements of the bond market. As with any fund that
invests primarily in debt securities, a rise in interest
rates typically causes the value of debt securities and
hence the value of the fund to fall. A fall in interest
rates typically causes the value of debt securities to rise.
The debt securities held by the funds are also subject to
the risk that the issuer of a security will default or
otherwise fail to meet its obligations.
- ------------------- ------------------------------------------------------------
Foreign securities Government Income Fund's investments in foreign securities
and currency risks are subject to the risks of adverse foreign government
actions, political instability or a lack of adequate and
accurate information.
- ------------------- ------------------------------------------------------------
Risks of Each fund's investments in restricted and illiquid
restricted and securities may be difficult or impossible to sell at a
illiquid desirable time or a fair price. Restricted and illiquid
securities securities also present a greater risk of inaccurate
valuation.
- ------------------- ------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Both Sovereign U.S. Government and Government Income Funds
- ------------------- ------------------------------------------------------------
Risks of Unleveraged derivative instruments involve the risk that a
unleveraged rise in interest rates will cause the value of the
derivative instrument to fall. A fall in interest rates will typically
instruments cause the value of these instruments to rise. These
including instruments are also subject to the risk that the issuer
asset-backed and will default or otherwise fail to meet its obligations. In
mortgage-backed addition, mortgage-backed securities are subject to the risk
securities that the life of the security will be extended beyond its
expected repayment time. This typically occurs during
periods of rising interest rates and often reduces the
security's value. During periods of falling interest rates,
unanticipated prepayments may occur which also reduces the
security's value.
- ------------------- ------------------------------------------------------------
Risks of Most derivative instruments involve leverage, which
derivative increases market risks. Leverage magnifies gains and losses
instruments, on derivatives relative to changes in the value of
including underlying assets. If a derivative is used for hedging
financial purposes, changes in the value of the derivative may not
futures, match those of the hedged asset. Over the counter
options on derivatives may be illiquid or hard to value accurately. In
futures, addition, the other party may default on its obligations.
securities and If markets for underlying assets do not move in the right
index options, direction, a fund's performance may be worse than if it had
swaps, caps, not used derivatives.
floors, collars
and structured
securities
- ------------------- ------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a copy
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
17
<PAGE>
o The reorganization is scheduled to occur at 5:00 p.m.,
Eastern time, on December 4, 1998, but may occur on any
later date before June 1, 1999. Your fund will transfer all
of its assets to Government Income Fund and Government
Income Fund will assume all of your fund's liabilities.
This will result in the addition of your fund's assets to
Government Income Fund's portfolio. The net asset value of
both funds will be computed as of 5:00 p.m., Eastern time,
on the reorganization date.
o Government Income Fund will issue to your fund Class A
shares in an amount equal to the aggregate net asset value
of your fund's Class A shares. As part of the liquidation
of your fund, these shares will immediately be distributed
to Class A shareholders of record of your fund in proportion
to their holdings on the reorganization date. As a result,
Class A shareholders of your fund will end up as Class A
shareholders of Government Income Fund.
o Government Income Fund will issue to your fund Class B
shares in an amount equal to the aggregate net asset value
of your fund's Class B shares. As part of the liquidation
of your fund, these shares will immediately be distributed
to Class B shareholders of record of your fund in proportion
to their holdings on the reorganization date. As a result,
Class B shareholders of your fund will end up as Class B
shareholders of Government Income Fund.
o After the reorganization is over, the existence of your fund
will be terminated.
Reasons for the Proposed Reorganization
The board of trustees of your fund believes that the proposed reorganization
will be advantageous to the shareholders of your fund for several reasons. The
board of trustees considered the following matters, among others, in approving
the proposal.
First, shareholders may be better served by a fund offering greater
diversification. Government Income Fund has a larger asset size than your fund
and may invest in a broader range of debt securities including those of foreign
issuers. Combining the funds' assets into a single investment portfolio will
allow your fund's shareholders to diversify their investments to a greater
degree than may be possible through your fund alone. Greater diversification is
expected to benefit the
18
<PAGE>
shareholders of your fund because it may reduce the negative effect that the
adverse performance of any one security or security type may have on the
performance of the entire portfolio.
Second, Government Income Fund Class A shares have performed better than your
fund over the past 1 and 3 year periods and Class B shares have performed better
than your fund over the past 1, 3, and 5 year periods. While past performance
cannot predict future results, the trustees believe that Government Income Fund
is better positioned than your fund to continue to generate strong returns,
because of its superior diversification and greater flexibility to choose from
among a broader range of investment opportunities.
Third, a combined fund offers economies of scale that are expected to lead to
better control over expenses than is possible for your fund. Both funds incur
substantial costs for accounting, legal, transfer agency services, insurance,
and custodial and administrative services.
Fourth, because John Hancock Funds has offered two funds with substantially
similar investment characteristics simultaneously, it has been increasingly
difficult to attract assets to your fund.
Fifth, the Government Income Fund shares received in the reorganization will
provide your fund's shareholders with substantially the same investment at a
comparable level of risk.
The board of trustees of Government Income Fund considered that the
reorganization presents an excellent opportunity for Government Income Fund to
acquire investment assets without the obligation to pay commissions or other
transaction costs that are normally associated with the purchase of securities.
The trustees believe that Government Income Fund shareholders will also benefit
from improved diversification as a result of the reorganization. Because
Government Income Fund is a larger fund than your fund, the trustees feel that
the addition of your fund's assets will improve the diversification of
Government Income Fund's overall portfolio. This opportunity provides an
economic benefit to Government Income Fund and its shareholders. The trustees
also considered the fact that the management fee of Government Income Fund is
higher than the management fee of Sovereign U.S. Government Income Fund.
However, if Sovereign U.S. Government Income Fund's shareholders approve the
Reorganization, the adviser has agreed to limit Government Income Fund's
management fee to an annual rate of 0.50% of the fund's average daily net
assets.
The boards of trustees of both funds also considered that the adviser and the
funds' distributor will also benefit from the reorganization. For example, the
19
<PAGE>
adviser might realize time savings from a consolidated portfolio management
effort and from the need to prepare fewer reports and regulatory filings as well
as prospectus disclosure for one fund instead of two. The trustees believe,
however, that these savings will not amount to a significant economic benefit.
Comparative Fees and Expense Ratios. As discussed above in the Summary, at all
asset levels, the advisory fee rates paid by your fund are lower than the rates
paid by Government Income Fund. However, the adviser has agreed to limit
Government Income Fund's management fee to an annual rate of 0.50% of the Fund's
average daily net assets if Sovereign U.S. Government Income Fund's shareholders
approve the Reorganization.
In addition to the same advisory fee rates, Government Income Fund's other
expenses of 0.21%, as well as its pro forma other expenses of 0.26%, are lower
than your fund's other expenses of 0.34%. Furthermore, Government Income Fund's
12b-1 fee rate of 0.25% for Class A shares is below your fund's Class A fee rate
of 0.30%. Both funds pay the same Class B 12b-1 fee rate of 1.00%. Government
Income Fund's current annual Class A expense ratio (equal to 1.10% of average
net assets) is lower than your fund's current Class A expense ratio (equal to
1.14% of average net assets) and its current annual Class B expense ratio (equal
to 1.85% of average net assets) is higher than your fund's current Class B
expense ratio (equal to 1.84% of average net assets). However, Government Income
Fund's proforma total annual operating expenses for both Class A shares and
Class B shares are expected to be less than your fund's current Class A and
Class B total annual operating expenses.
Your fund has not increased its asset size. The trustees do not believe, given
your fund's current size and historical growth rate, that your fund will grow to
an asset size that would allow your fund to realize the benefits of economies of
scale, including better control over expenses. The trustees also do not believe
that your fund will reach an asset size which will allow your fund to
significantly broaden the diversification of its investment portfolio.
Comparative Performance. The trustees also took into consideration the
relative performance of your fund and Government Income Fund.
<TABLE>
<CAPTION>
- -------------------------------- -------------------------- --------------------------
Average Annual
Total Return Sovereign U.S. Government Government Income
(without including sales
charges)
-------------------------- --------------------------
Class A Class B Class A Class B
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
- -------------------------------- ------------- ------------ ------------ -------------
1 year ended 5/31/98 5.70% 4.93% 5.84% 5.01%
- -------------------------------- ------------- ------------ ------------ -------------
3 years ended 5/31/98 5.15% 5.20% 5.53% 5.50%
- -------------------------------- ------------- ------------ ------------ -------------
5 years ended 5/31/98 5.07% 5.17% 7.47%(B) 5.32%
- -------------------------------- ------------- ------------ ------------ -------------
10 years ended 5/31/98 5.74%(A) 8.10% N/A 7.38%
- -------------------------------- ------------- ------------ ------------ -------------
</TABLE>
(A) Since January 3, 1992.
(B) Since September 30, 1994.
20
<PAGE>
Your fund's Class A performance has lagged behind the performance of Government
Income Fund for the 1 and 3 year periods as shown above and Class B performance
has lagged behind for the 1, 3 and 5 year periods as shown above.
Unreimbursed Distribution and Shareholder Service Expenses
The boards of trustees of your fund and Government Income Fund have determined
that, if the reorganization occurs, unreimbursed distribution and shareholder
service expenses incurred under your fund's Rule 12b-1 Plans will be
reimbursable expenses under Government Income Fund's Rule 12b-1 Plans. However,
the maximum amounts payable annually under Government Income Fund's Rule 12b-1
Plans (0.25% and 1.00% of average daily net assets attributable to Class A
shares and Class B shares, respectively) will not increase.
The following table shows the actual and pro forma unreimbursed distribution and
shareholder service expenses of both classes of your fund and Government Income
Fund. The table shows both the dollar amount of these expenses and the
percentage of each class' average net assets that they represent.
<TABLE>
<CAPTION>
- -------------------------------- -------------------------- ---------------------------
Unreimbursed Distribution and Government Income
Shareholder Service Expenses Sovereign U.S. Government
-------------------------- ---------------------------
----------- -------------- ------------ --------------
Class A Class B Class A Class B
----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
- -------------------------------- ----------- -------------- ------------ --------------
Actual expenses as of May 31, $411,357 $6,178,787 $155,402 $12,062,593
1998 0.141% 7.133% 0.045% 8.979%
- -------------------------------- ----------- -------------- ------------ --------------
- -------------------------------- ------------ --------------
Pro forma combined expenses as $566,759 $18,241,380
of May 31, 1998 0.089% 8.255%
- -------------------------------- -------------------------- ------------ --------------
</TABLE>
If the reorganization had taken place on May 31, 1998, the pro forma combined
unreimbursed expenses of Government Income Fund's Class A and Class B shares
would have been higher than if no reorganization had occurred. Nevertheless,
Government Income Fund's assumption of your fund's unreimbursed Rule 12b-1
expenses will have no immediate effect upon the payments made under Government
Income Fund's Rule 12b-1 Plans. Their payments will continue to be 0.25% and
1.00% of average daily net assets attributable to Class A and Class B shares,
respectively.
John Hancock Funds, Inc. hopes to recover unreimbursed distribution and
21
<PAGE>
shareholder service expenses for Class B shares over an extended period of time.
However, if Government Income Fund's board terminates either class' Rule 12b-1
Plan, that class will not be obligated to reimburse these distribution and
shareholder service expenses. Accordingly, until they are paid or accrued,
unreimbursed distribution and shareholder service expenses do not and will not
appear as an expense or liability in the financial statements of either fund. In
addition, unreimbursed expenses are not reflected in a fund's net asset value or
the formula for calculating Rule 12b-1 payments. The staff of the SEC has not
approved or disapproved the treatment of the unreimbursed distribution and
shareholder service expenses described in this proxy statement.
Tax Status of the Reorganization
The reorganization will be tax-free for federal income tax purposes and will not
take place unless both funds receive a satisfactory opinion from Hale and Dorr
LLP, counsel to the funds, substantially to the effect that:
o The reorganization described above will be a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986 (the "Code"), and each fund will be "a
party to a reorganization" within the meaning of Section 368
of the Code;
o No gain or loss will be recognized by your fund upon (1) the
transfer of all of its assets to Government Income Fund as
described above or (2) the distribution by your fund of Growth
and Income Fund shares to your fund's shareholders;
o No gain or loss will be recognized by Government Income Fund
upon the receipt of your fund's assets solely in exchange for
the issuance of Government Income Fund shares and the
assumption of all of your fund's liabilities by Government
Income Fund;
o The basis of the assets of your fund acquired by Government
Income Fund will be the same as the basis of those assets in
the hands of your fund immediately before the transfer;
o The tax holding period of the assets of your fund in the hands
of Government Income Fund will include your fund's tax holding
period for those assets;
o The shareholders of your fund will not recognize a gain or a
loss upon the exchange of all their shares of your fund solely
22
<PAGE>
for Government Income Fund shares as part of the
reorganization;
o The basis of Government Income Fund shares received by your
fund's shareholders in the reorganization will be the same as
the basis of the shares of your fund surrendered in exchange;
and
o The tax holding period of the Government Income Fund shares
you receive will include the tax holding period of the shares
of your fund surrendered in the exchange, provided that shares
of your fund were held as capital assets on the reorganization
date.
Additional Terms of Agreement and Plan of Reorganization
Surrender of Share Certificates. If your shares are represented by one or more
share certificates before the reorganization date, you must either surrender the
certificates to your fund or deliver to your fund a lost certificate affidavit,
in the form and accompanied by the surety bonds that your fund may require
(collectively, an "Affidavit"). On the reorganization date, all certificates
that have not been surrendered will be canceled, will no longer evidence
ownership of your fund's shares and will evidence ownership of Government Income
Fund shares. Shareholders may not redeem or transfer Government Income Fund
shares received in the reorganization until they have surrendered their fund
share certificates or delivered an Affidavit. Government Income Fund will not
issue share certificates in the reorganization.
Conditions to Closing the Reorganization. The obligation of your fund to
consummate the reorganization is subject to the satisfaction of certain
conditions, including the performance by Government Income Fund of all its
obligations under the Agreement and the receipt of all consents, orders and
permits necessary to consummate the reorganization (see Agreement, paragraph 6).
The obligation of Government Income Fund to consummate the reorganization is
subject to the satisfaction of certain conditions, including your fund's
performance of all of its obligations under the Agreement, the receipt of
certain documents and financial statements from your fund and the receipt of all
consents, orders and permits necessary to consummate the reorganization (see
Agreement, paragraph 7).
The obligations of both funds are subject to the approval of the Agreement by
the necessary vote of the outstanding shares of your fund, in accordance with
23
<PAGE>
the provisions of your fund's declaration of trust and by-laws. The funds'
obligations are also subject to the receipt of a favorable opinion of Hale and
Dorr LLP as to the federal income tax consequences of the reorganization. (see
Agreement, paragraph 8).
Termination of Agreement. The board of trustees of either your fund or
Government Income Fund may terminate the Agreement (even if the shareholders of
your fund have already approved it) at any time before the reorganization date,
if that board believes that proceeding with the reorganization would no longer
be advisable.
Expenses of the Reorganization. Government Income Fund and your fund will each
be responsible for its own expenses incurred in connection with entering into
and carrying out the provisions of the Agreement, whether or not the
reorganization occurs. These expenses are estimated to be approximately
$250,410 in total.
CAPITALIZATION
The following table sets forth the capitalization of each fund as of May 31,
1998, and the pro forma combined capitalization of both funds as if the
reorganization had occurred on such date. The table reflects pro forma exchange
ratios of approximately 1.0724 Class A Government Income Fund shares being
issued for each Class A share of your fund and approximately 1.0724 Class B
Government Income Fund shares being issued for each Class B share of your fund.
If the reorganization is consummated, the actual exchange ratios on the
reorganization date may vary from the exchange ratios indicated. This is due to
changes in the market value of the portfolio securities of both Government
Income Fund and your fund between May 31, 1998 and the reorganization date,
changes in the amount of undistributed net investment income and net realized
capital gains of Government Income Fund and your fund during that period
resulting from income and distributions, and changes in the accrued liabilities
of Government Income Fund and your fund during the same period.
24
<PAGE>
MAY 31, 1998
Sovereign U.S.
Government Government Pro Forma
Income
Net Assets $367,931,348 $457,402,084 $825,333,432
Net Asset Value Per Share
Class A $9.92 $9.25 $9.25
Class B $9.92 $9.25 $9.25
Shares Outstanding
Class A 28,777,805 36,721,182 67,568,291
Class B 8,330,255 12,742,073 13,642,641
It is impossible to predict how many Class A shares and Class B shares of
Government Income Fund will actually be received and distributed by your fund on
the reorganization date. The table should not be relied upon to determine the
amount of Government Income Fund shares that will actually be received and
distributed.
ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES
The following table shows where in the funds' combined prospectus you can find
additional information about the business of each fund.
- -------------------------- -----------------------------------------------------
Type of Information Headings in Combined Prospectus for both Sovereign
U.S. Government Income Fund and Government Income
Fund
- -------------------------- -----------------------------------------------------
Organization Fund Details: Business Structure: How the Funds are
and operation Organized
- -------------------------- -----------------------------------------------------
Investment objective and Goal and Strategy, Portfolio Securities, Risk
policies Factors; Fund Details: Business Structure: Portfolio
Trades, Investment Goals, Diversification; More
About Risk
- -------------------------- -----------------------------------------------------
Portfolio Portfolio Management
management
- -------------------------- -----------------------------------------------------
Investment adviser and Overview: The Management Firm; Fund Details:
distributor Business Structure, How the Funds are Organized,
Sales Compensation
- -------------------------- -----------------------------------------------------
Expenses Investor Expenses
- -------------------------- -----------------------------------------------------
Custodian and Fund Details: Business Structure: How the Funds are
transfer agent Organized
- -------------------------- -----------------------------------------------------
25
<PAGE>
- ---------------------------- ---------------------------------------------------
Type of Information Headings in Combined Prospectus for both Sovereign
U.S. Government Income Fund and Government Income
Fund
---------------------------------------------------
- ---------------------------- ---------------------------------------------------
Shares of beneficial Your Account: Choosing a Share Class
interest
- ---------------------------- ---------------------------------------------------
Purchase of shares Your Account: Choosing a Share Class, Sales Charge
Reductions and Waivers, Opening an Account, Buying
Shares; Transaction Policies; Additional Investor
Services
- ---------------------------- ---------------------------------------------------
Redemption Your Account: Selling Shares, How Sales Charges
or sale of shares are Calculated; Transaction Policies; Additional
Investor Services; Systematic Withdrawal Plan
- ---------------------------- ---------------------------------------------------
Dividends, distributions Dividends and Account Policies
and taxes
- ---------------------------- ---------------------------------------------------
BOARDS' EVALUATION AND RECOMMENDATION
For the reasons described above, the board of trustees of your fund, including
the trustees who are not "interested persons" of either fund or the adviser
("independent trustees"), approved the reorganization. In particular, the
trustees determined that the reorganization was in the best interests of your
fund and that the interests of your fund's shareholders would not be diluted as
a result of the reorganization. Similarly, the board of trustees of Government
Income Fund, including the independent trustees, approved the reorganization.
They also determined that the reorganization was in the best interests of
Government Income Fund and that the interests of Government Income Fund's
shareholders would not be diluted as a result of the reorganization.
- --------------------------------------------------------------------------------
The trustees of your fund recommend that the
shareholders of your fund vote for the proposal to
approve the agreement and plan of reorganization.
- --------------------------------------------------------------------------------
VOTING RIGHTS AND REQUIRED VOTE
Each share of your fund is entitled to one vote. Approval of the above proposal
requires the affirmative vote of a majority of the shares of your fund
outstanding and entitled to vote. For this purpose, a majority of the
outstanding shares of your fund means the vote of the lesser of
(1) 67% or more of the shares present at the meeting, if the holders of more
than 50% of the shares of the fund are present or represented by proxy, or
26
<PAGE>
(2) more than 50% of the outstanding shares of the fund.
Shares of your fund represented in person or by proxy, including shares which
abstain or do not vote with respect to the proposal, will be counted for
purposes of determining whether there is a quorum at the meeting. Accordingly,
an abstention from voting has the same effect as a vote against the proposal.
However, if a broker or nominee holding shares in "street name" indicates on the
proxy card that it does not have discretionary authority to vote on the
proposal, those shares will not be considered present and entitled to vote on
the proposal. Thus, a "broker non-vote" has no effect on the voting in
determining whether the proposal has been adopted in accordance with clause (1)
above, if more than 50% of the outstanding shares (excluding the "broker
non-votes") are present or represented. However, for purposes of determining
whether the proposal has been adopted in accordance with clause (2) above, a
"broker non-vote" has the same effect as a vote against the proposal because
shares represented by a "broker non-vote" are considered to be outstanding
shares.
If the required approval of shareholders is not obtained, your fund will
continue to engage in business as a separate mutual fund and the board of
trustees will consider what further action may be appropriate.
INFORMATION CONCERNING THE MEETING
Solicitation of Proxies
In addition to the mailing of these proxy materials, proxies may be solicited by
telephone, by fax or in person by the trustees, officers and employees of your
fund; by personnel of your fund's investment adviser, John Hancock Advisers,
Inc. and its transfer agent, John Hancock Signature Services, Inc.; or by
broker-dealer firms. Signature Services, together with a third party
solicitation firm, has agreed to provide proxy solicitation services to your
fund at a cost of approximately $100,360.
Revoking Proxies
A Sovereign U.S. Government Income Fund shareholder signing and returning a
proxy has the power to revoke it at any time before it is exercised:
o By filing a written notice of revocation with your fund's
transfer agent, John Hancock Signature Services, Inc., 1 John
Hancock Way, Suite 1000, Boston, Massachusetts 02217-1000, or
27
<PAGE>
o By returning a duly executed proxy with a later date before
the time of the meeting, or
o If a shareholder has executed a proxy but is present at the
meeting and wishes to vote in person, by notifying the
secretary of your fund (without complying with any
formalities) at any time before it is voted.
Being present at the meeting alone does not revoke a previously executed and
returned proxy.
Outstanding Shares and Quorum
As of September 16, 1998, _______ and _______ Class A and Class B shares of
beneficial interest of your fund were outstanding. Only shareholders of record
on September 16, 1998 (the "record date") are entitled to notice of and to vote
at the meeting. A majority of the outstanding shares of your fund that are
entitled to vote will be considered a quorum for the transaction of business.
Other Business
Your fund's board of trustees knows of no business to be presented for
consideration at the meeting other than the proposal. If other business is
properly brought before the meeting, proxies will be voted according to the best
judgment of the persons named as proxies.
Adjournments
If a quorum is not present in person or by proxy at the time any session of the
meeting is called to order, the persons named as proxies may vote those proxies
that have been received to adjourn the meeting to a later date. If a quorum is
present but there are not sufficient votes in favor of the proposal, the persons
named as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies concerning the proposal. Any adjournment will
require the affirmative vote of a majority of your fund's shares at the session
of the meeting to be adjourned. If an adjournment of the meeting is proposed
because there are not sufficient votes in favor of the proposal, the persons
named as proxies will vote those proxies favoring the proposal in favor of
adjournment, and will vote those proxies against the reorganization against
adjournment.
28
<PAGE>
Telephone Voting
In addition to soliciting proxies by mail, by fax or in person, your fund may
also arrange to have votes recorded by telephone by officers and employees of
your fund or by personnel of the adviser or transfer agent. The telephone voting
procedure is designed to verify a shareholder's identity, to allow a shareholder
to authorize the voting of shares in accordance with the shareholder's
instructions and to confirm that the voting instructions have been properly
recorded. If these procedures were subject to a successful legal challenge,
these telephone votes would not be counted at the meeting. Your fund has not
obtained an opinion of counsel about telephone voting, but is currently not
aware of any challenge.
o A shareholder will be called on a recorded line at the
telephone number in the fund's account records and will be
asked to provide the shareholder's social security number or
other identifying information.
o The shareholder will then be given an opportunity to authorize
proxies to vote his or her shares at the meeting in accordance
with the shareholder's instructions.
o To ensure that the shareholder's instructions have been
recorded correctly, the shareholder will also receive a
confirmation of the voting instructions by mail.
o A toll-free number will be available in case the voting
information contained in the confirmation is incorrect.
o If the shareholder decides after voting by telephone to attend
the meeting, the shareholder can revoke the proxy at that time
and vote the shares at the meeting.
OWNERSHIP OF SHARES OF THE FUNDS
To the knowledge of the fund, as of August 14, 1998, no person owned of record
or beneficially 5% or more of the outstanding Class A and Class B shares of your
fund or of the outstanding Class A shares of Government Income Fund. As of
August 14, 1998, the following person owned of record or beneficially 5% or
more of the outstanding class B shares of Government Income Fund.
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- --------------------------------------- ------------------------------
Names and Addresses of Owners of More Government Income
Than 5% of Shares Fund
- --------------------------------------- ------------------------------
MLPF&S 15.22% of Class B
SOLE BENEFIT OF ITS CUSTOMERS
ATTN: FUND ADMINISTRATION 974U0
4800 DEERLAKE DRIVE EAST 2ND FL
JACKSONVILLE FL 32246-6484
- --------------------------------------- ------------------------------
As of August 14, 1998, the trustees and officers of your fund and Government
Income Fund, each as a group, owned in the aggregate less than 1% of the
outstanding shares of their respective funds.
EXPERTS
The financial statements and the financial highlights of Sovereign U.S.
Government Income Fund and Government Income Fund, each as of May 31, 1998 and
for the periods then ended are incorporated by reference into this proxy
statement and prospectus. These financial statements and financial highlights
have been independently audited by PricewaterhouseCoopers LLP and Ernst & Young
LLP, respectively, as stated in their reports appearing in the statement of
additional information. These financial statements and financial highlights have
been included in reliance on their reports given on their authority as experts
in accounting and auditing.
AVAILABLE INFORMATION
Each fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 and files reports,
proxy statements and other information with the SEC. These reports, proxy
statements and other information filed by the funds can be inspected and copied
(at prescribed rates) at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C., and at the following regional offices: Chicago
(500 West Madison Street, Suite 1400, Chicago, Illinois); and New York (7 World
Trade Center, Suite 1300, New York, New York). Copies of such material can also
be obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies
of these documents may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 11th
day of August, 1998, by and between John Hancock Government Income Fund (the
"Acquiring Fund"), a series of John Hancock Bond Trust, a Massachusetts business
trust (the "Trust II"), and John Hancock Sovereign U.S. Government Income Fund
(the "Acquired Fund"), a series of John Hancock Strategic Series, a
Massachusetts business trust (the "Trust") each with their principal place of
business at 101 Huntington Avenue, Boston, Massachusetts 02199. The Acquiring
Fund and the Acquired Fund are sometimes referred to collectively herein as the
"Funds" and individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization,"
as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization will consist of the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the
issuance of Class A and Class B shares of beneficial interest of the Acquiring
Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by
the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by
the distribution by the Acquired Fund, on or promptly after the Closing Date
hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation and termination of the Acquired Fund as provided
herein, all upon the terms and conditions set forth in this Agreement.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and
interest receivables, cash and other assets), as set forth in the
statement of assets and liabilities referred to in Paragraph 7.2 hereof
(the "Statement of Assets and Liabilities"), to the Acquiring Fund free
and clear of all liens and encumbrances, except as otherwise provided
herein, in exchange for (i) the assumption by the Acquiring Fund of the
known and unknown liabilities of the Acquired Fund, including the
liabilities set forth in the Statement of Assets and Liabilities (the
"Acquired Fund Liabilities"), which shall be assigned and transferred to
the Acquiring Fund by the Acquired Fund and assumed by the Acquiring
Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund, for
distribution pro rata by the Acquired Fund to its shareholders in
proportion to their respective ownership of Class A and/or Class B shares
of beneficial interest of the Acquired Fund, as of the close of business
on December 4, 1998 (the "Closing Date"), of a number of the Acquiring
Fund Shares having an aggregate net asset value equal, in the case of
each class of Acquiring Fund Shares, to the value of the assets, less
such liabilities (herein referred to as the "net value of the assets")
1
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attributable to the applicable class, assumed, assigned and delivered,
all determined as provided in Paragraph 2.1 hereof and as of a date and
time as specified therein. Such transactions shall take place at the
closing provided for in Paragraph 3.1 hereof (the "Closing"). All
computations shall be provided by Investors Bank & Trust Company (the
"Custodian"), as custodian and pricing agent for the Acquiring Fund and
the Acquired Fund.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of
execution of this Agreement. The Acquired Fund reserves the right to sell
any of these securities (except to the extent sales may be limited by
representations made in connection with issuance of the tax opinion
provided for in paragraph 8.6 hereof) but will not, without the prior
approval of the Acquiring Fund, acquire any additional securities other
than securities of the type in which the Acquiring Fund is permitted to
invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses
in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record (the "Acquired Fund shareholders"),
determined as of the close of regular trading on the New York Stock
Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund, to open accounts on the share records of the
Acquiring Fund in the names of the Acquired Fund shareholders and
representing the respective pro rata number and class of Acquiring Fund
Shares due such shareholders. Acquired Fund shareholders who own Class A
shares of the Acquired Fund will receive Class A Acquiring Fund Shares
and Acquired Fund shareholders who own Class B shares of the Acquired
Fund will receive Class B Acquiring Fund Shares. The Acquiring Fund shall
not issue certificates representing Acquiring Fund Shares in connection
with such exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the
Acquired Fund may require (collectively, an "Affidavit"), to John Hancock
Signature Services, Inc. prior to the Closing Date. Any Acquired Fund
share certificate which remains outstanding on the Closing Date shall be
deemed to be canceled, shall no longer evidence ownership of shares of
beneficial interest of the Acquired Fund and shall evidence ownership of
Acquiring Fund Shares. Unless and until any such certificate shall be so
surrendered or an Affidavit relating thereto shall be delivered,
dividends and other distributions payable by the Acquiring Fund
subsequent to the Liquidation Date with respect to Acquiring Fund Shares
shall be paid to the holder of such certificate(s), but such shareholders
may not redeem or transfer Acquiring Fund Shares received in the
Reorganization. The Acquiring Fund will not issue share certificates in
the Reorganization.
2
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1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund Shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Trust, including, but not limited to,
the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commissions, and any federal, state
or local tax authorities or any other relevant regulatory authority, is
and shall remain the responsibility of the Trust.
2. VALUATION
2.1 The net asset values of the Class A and Class B Acquiring Fund Shares and
the net values of the assets and liabilities of the Acquired Fund
attributable to its Class A and Class B shares to be transferred shall,
in each case, be determined as of the close of business (4:00 p.m. Boston
time) on the Closing Date. The net asset values of the Class A and Class
B Acquiring Fund Shares shall be computed by the Custodian in the manner
set forth in the Acquiring Fund's Declaration of Trust as amended and
restated (the "Declaration"), or By-Laws and the Acquiring Fund's
then-current prospectus and statement of additional information and shall
be computed in each case to not fewer than four decimal places. The net
values of the assets of the Acquired Fund attributable to its Class A and
Class B shares to be transferred shall be computed by the Custodian by
calculating the value of the assets of each class transferred by the
Acquired Fund and by subtracting therefrom the amount of the liabilities
of each class assigned and transferred to and assumed by the Acquiring
Fund on the Closing Date, said assets and liabilities to be valued in the
manner set forth in the Acquired Fund's then current prospectus and
statement of additional information and shall be computed in each case to
not fewer than four decimal places.
2.2 The number of shares of each class of Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Acquired Fund's
assets shall be determined by dividing the value of the Acquired Fund's
assets attributable to a class, less the liabilities attributable to that
class assumed by the Acquiring Fund, by the Acquiring Fund's net asset
value per share of the same class, all as determined in accordance with
Paragraph 2.1 hereof.
2.3 All computations of value shall be made by the Custodian in accordance
with its regular practice as pricing agent for the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be December 4, 1998 or such other date on or
before June 30, 1999 as the parties may agree. The Closing shall be held
as of 5:00 p.m. at the offices of the Trust II and the Trust, 101
3
<PAGE>
Huntington Avenue, Boston, Massachusetts 02199, or at such other time
and/or place as the parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name of
the Custodian as record holder for the Acquired Fund shall be presented
by the Acquired Fund to the Custodian for examination no later than three
business days preceding the Closing Date. Portfolio securities which are
not held in book-entry form shall be delivered by the Acquired Fund to
the Custodian for the account of the Acquiring Fund on the Closing Date,
duly endorsed in proper form for transfer, in such condition as to
constitute good delivery thereof in accordance with the custom of
brokers, and shall be accompanied by all necessary federal and state
stock transfer stamps or a check for the appropriate purchase price
thereof. Portfolio securities held of record by the Custodian in
book-entry form on behalf of the Acquired Fund shall be delivered to the
Acquiring Fund by the Custodian by recording the transfer of beneficial
ownership thereof on its records. The cash delivered shall be in the form
of currency or by the Custodian crediting the Acquiring Fund's account
maintained with the Custodian with immediately available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted or (b)
trading or the reporting of trading on said Exchange or elsewhere shall
be disrupted so that accurate appraisal of the value of the net assets of
the Acquiring Fund or the Acquired Fund is impracticable, the Closing
Date shall be postponed until the first business day after the day when
trading shall have been fully resumed and reporting shall have been
restored; provided that if trading shall not be fully resumed and
reporting restored on or before June 30, 1999, this Agreement may be
terminated by the Acquiring Fund or by the Acquired Fund upon the giving
of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding
and nonresident alien withholding status of the Acquired Fund
shareholders and the number of outstanding shares of each class of
beneficial interest of the Acquired Fund owned by each such shareholder,
all as of the close of business on the Closing Date, certified by its
Treasurer, Secretary or other authorized officer (the "Shareholder
List"). The Acquiring Fund shall issue and deliver to the Acquired Fund a
confirmation evidencing the Acquiring Fund Shares to be credited on the
Closing Date, or provide evidence satisfactory to the Acquired Fund that
such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party
shall deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of the Acquired Fund represents, warrants and
covenants to the Acquiring Fund as follows:
4
<PAGE>
(a) The Trust is a business trust, duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and, subject to
approval by the shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the Trust nor the
Acquired Fund is required to qualify to do business in any jurisdiction
in which it is not so qualified or where failure to qualify would
subject it to any material liability or disability. The Trust has all
necessary federal, state and local authorizations to own all of its
properties and assets and to carry on its business as now being
conducted;
(b) The Trust is a registered investment company classified as a management
company and its registration with the Commission as an investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"), is in full force and effect. The Acquired Fund is a diversified
series of the Trust;
(c) The Trust and the Acquired Fund are not, and the execution, delivery and
performance of their obligations under this Agreement will not result,
in violation of any provision of the Trust's Declaration of Trust, as
amended and restated (the "Trust's Declaration") or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking
to which the Trust or the Acquired Fund is a party or by which it is
bound;
(d) Except as otherwise disclosed in writing and accepted by the Acquiring
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust or the Acquired Fund or any of
the Acquired Fund's properties or assets. The Trust knows of no facts
which might form the basis for the institution of such proceedings, and
neither the Trust nor the Acquired Fund is a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects the Acquired Fund's business
or its ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other commitments (other
than this Agreement or agreements for the purchase of securities entered
into in the ordinary course of business and consistent with its
obligations under this Agreement) which will not be terminated without
liability to the Acquired Fund at or prior to the Closing Date;
(f) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquired Fund as of May 31, 1998 and the related
statement of operations (copies of which have been furnished to the
Acquiring Fund) present fairly in all material respects the financial
condition of the Acquired Fund as of May 31, 1998 and the results of its
operations for the period then ended in accordance with generally
accepted accounting principles consistently applied, and there were no
known actual or contingent liabilities of the Acquired Fund as of the
respective dates thereof not disclosed therein;
(g) Since May 31, 1998, there has not been any material adverse change in
the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Acquired Fund of indebtedness
5
<PAGE>
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by the Acquiring
Fund;
(h) At the date hereof and by the Closing Date, all federal, state and other
tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, and all
federal, state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge no such return
is currently under audit and no assessment has been asserted with
respect to such returns or reports;
(i)Each of the Acquired Fund and its predecessors has qualified as a
regulated investment company for each taxable year of its operation and
the Acquired Fund will qualify as such as of the Closing Date with
respect to its taxable year ending on the Closing Date;
(j)The authorized capital of the Acquired Fund consists of an unlimited
number of shares of beneficial interest, no par value. All issued and
outstanding shares of beneficial interest of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable by the Trust. All of the issued and
outstanding shares of beneficial interest of the Acquired Fund will, at
the time of Closing, be held by the persons and in the amounts and
classes set forth in the Shareholder List submitted to the Acquiring Fund
pursuant to Paragraph 3.4 hereof. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares of beneficial interest, nor is there
outstanding any security convertible into any of its shares of beneficial
interest;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the assets to be transferred to the Acquiring Fund pursuant to
Paragraph 1.1 hereof, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the Securities
Act of 1933, as amended (the "1933 Act");
(l)The execution, delivery and performance of this Agreement have been duly
authorized by all necessary action on the part of the Trust on behalf of
the Acquired Fund, and this Agreement constitutes a valid and binding
obligation of the Trust and the Acquired Fund enforceable in accordance
with its terms, subject to the approval of the Acquired Fund's
shareholders;
(m) The information to be furnished by the Acquired Fund to the Acquiring
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations thereunder applicable thereto;
6
<PAGE>
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in Paragraph 5.7
hereof (other than written information furnished by the Acquiring Fund
for inclusion therein, as covered by the Acquiring Fund's warranty in
Paragraph 4.2(m) hereof), on the effective date of the Registration
Statement, on the date of the meeting of the Acquired Fund shareholders
and on the Closing Date, shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of the
Acquired Fund have been offered for sale and sold in conformity with all
applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated May 1, 1998 (the "Acquired
Fund Prospectus"), previously furnished to the Acquiring Fund, does not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were
made, not misleading.
4.2 The Trust II on behalf of the Acquiring Fund represents, warrants and
covenants to the Acquired Fund as follows:
(a) The Trust II is a business trust duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and
has the power to own all of its properties and assets and to carry out
the Agreement. Neither the Trust II nor the Acquiring Fund is required
to qualify to do business in any jurisdiction in which it is not so
qualified or where failure to qualify would subject it to any material
liability or disability. The Trust II has all necessary federal, state
and local authorizations to own all of its properties and assets and to
carry on its business as now being conducted;
(b) The Trust II is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect. The
Acquiring Fund is a diversified series of the Trust II;
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information for Class A and Class B shares of the Acquiring
Fund, each dated May 1, 1998, and any amendments or supplements thereto
on or prior to the Closing Date, and the Registration Statement on Form
N-14 to be filed in connection with this Agreement (the "Registration
Statement") (other than written information furnished by the Acquired
Fund for inclusion therein, as covered by the Acquired Fund's warranty
in Paragraph 4.1(m) hereof) will conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder, the Acquiring Fund
7
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Prospectus does not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading and the Registration
Statement will not include any untrue statement of material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading;
(d) At the Closing Date, the Trust II on behalf of the Acquiring Fund will
have good and marketable title to the assets of the Acquiring Fund;
(e) The Trust II and the Acquiring Fund are not, and the execution, delivery
and performance of their obligations under this Agreement will not
result, in violation of any provisions of the Trust II's Declaration, or
By-Laws or of any agreement, indenture, instrument, contract, lease or
other undertaking to which the Trust II or the Acquiring Fund is a party
or by which the Trust II or the Acquiring Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the Acquired
Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Trust II or the Acquiring Fund or any
of the Acquiring Fund's properties or assets. The Trust II knows of no
facts which might form the basis for the institution of such
proceedings, and neither the Trust II nor the Acquiring Fund is a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects the
Acquiring Fund's business or its ability to consummate the transactions
herein contemplated;
(g) The audited statement of assets and liabilities, including the schedule
of investments, of the Acquiring Fund as of May 31, 1998 and the related
statement of operations (copies of which have been furnished to the
Acquired Fund) present fairly in all material respects the financial
condition of the Acquiring Fund as of May 31, 1998 and the results of
its operations for the period then ended in accordance with generally
accepted accounting principles consistently applied, and there were no
known actual or contingent liabilities of the Acquiring Fund as of the
respective dates thereof not disclosed therein;
(h) Since May 31, 1998, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by the Trust II on behalf of the Acquiring
Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as disclosed to and accepted by the
Acquired Fund;
(i)Each of the Acquiring Fund and its predecessors has qualified as a
regulated investment company for each taxable year of its operation and
the Acquiring Fund will qualify as such as of the Closing Date;
(j)The authorized capital of the Trust II consists of an unlimited number
of shares of beneficial interest, no par value per share. All issued and
outstanding shares of beneficial interest of the Acquiring Fund are, and
8
<PAGE>
at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable by the Trust II. The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for
or purchase any of its shares of beneficial interest, nor is there
outstanding any security convertible into any of its shares of beneficial
interest;
(k) The execution, delivery and performance of this Agreement has been duly
authorized by all necessary action on the part of the Trust II on behalf
of the Acquiring Fund, and this Agreement constitutes a valid and
binding obligation of the Acquiring Fund enforceable in accordance with
its terms;
(l)The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial interest
of the Acquiring Fund and will be fully paid and nonassessable by the
Trust II;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials and
other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated by the Agreement, except for the
registration of the Acquiring Fund Shares under the 1933 Act and the
1940 Act.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Trust on
behalf of the Acquired Fund and the Trust II on behalf of Acquiring Fund,
will operate their respective businesses in the ordinary course between
the date hereof and the Closing Date, it being understood that such
ordinary course of business will include customary dividends and
distributions and any other distributions necessary or desirable to avoid
federal income or excise taxes.
5.2 The Trust will call a meeting of the Acquired Fund shareholders to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution thereof other than in accordance with the terms
of this Agreement.
5.4 The Trust on behalf of the Acquired Fund will provide such information
within its possession or reasonably obtainable as the Trust II on behalf
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of the Acquiring Fund requests concerning the beneficial ownership of the
Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable
to consummate the transactions contemplated by this Agreement.
5.6 The Trust on behalf of the Acquired Fund shall furnish to the Trust II on
behalf of the Acquiring Fund on the Closing Date the Statement of Assets
and Liabilities of the Acquired Fund as of the Closing Date, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by the
Acquired Fund's Treasurer or Assistant Treasurer. As promptly as
practicable but in any case within 60 days after the Closing Date, the
Acquired Fund shall furnish to the Acquiring Fund, in such form as is
reasonably satisfactory to the Trust II, a statement of the earnings and
profits of the Acquired Fund for federal income tax purposes and of any
capital loss carryovers and other items that will be carried over to the
Acquiring Fund as a result of Section 381 of the Code, and which
statement will be certified by the President of the Acquired Fund.
5.7 The Trust II on behalf of the Acquiring Fund will prepare and file with
the Commission the Registration Statement in compliance with the 1933 Act
and the 1940 Act in connection with the issuance of the Acquiring Fund
Shares as contemplated herein.
5.8 The Trust on behalf of the Acquired Fund will prepare a Proxy Statement,
to be included in the Registration Statement in compliance with the 1933
Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the 1940 Act and the rules and regulations thereunder (collectively,
the "Acts") in connection with the special meeting of shareholders of the
Acquired Fund to consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF THE ACQUIRED
FUND
The obligations of the Trust on behalf of the Acquired Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Trust II on behalf of the Acquiring Fund of all the
obligations to be performed by it hereunder on or before the Closing Date, and,
in addition thereto, the following further conditions:
6.1 All representations and warranties of the Trust II on behalf of the
Acquiring Fund contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the
Closing Date with the same force and effect as if made on and as of the
Closing Date; and
6.2 The Trust II on behalf of the Acquiring Fund shall have delivered to the
Acquired Fund a certificate executed in its name by the Trust II's
President or Vice President and its Treasurer or Assistant Treasurer, in
10
<PAGE>
form and substance satisfactory to the Acquired Fund and dated as of the
Closing Date, to the effect that the representations and warranties of
the Trust II on behalf of the Acquiring Fund made in this Agreement are
true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Trust on behalf of the Acquired Fund shall
reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE
ACQUIRING FUND
The obligations of the Trust II on behalf of the Acquiring Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Acquired Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1 All representations and warranties of the Acquired Fund contained in this
Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same
force and effect as if made on and as of the Closing Date;
7.2 The Trust on behalf of the Acquired Fund shall have delivered to the
Trust II on behalf of the Acquiring Fund the Statement of Assets and
Liabilities of the Acquired Fund, together with a list of its portfolio
securities showing the federal income tax bases and holding periods of
such securities, as of the Closing Date, certified by the Treasurer or
Assistant Treasurer of the Trust;
7.3 The Trust on behalf of the Acquired Fund shall have delivered to the
Trust II on behalf of the Acquiring Fund on the Closing Date a
certificate executed in the name of the Acquired Fund by a President or
Vice President and a Treasurer or Assistant Treasurer of the Trust, in
form and substance satisfactory to the Trust II on behalf of the
Acquiring Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquired Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Trust II on behalf of the Acquiring Fund shall
reasonably request; and
7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser,
or an affiliate thereof, shall have made all payments, or applied all
credits, to the Acquired Fund required by any applicable contractual
expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST AND THE TRUST II
The obligations hereunder of the Trust II on behalf of the Acquiring Fund and
the Trust on behalf of the Acquired Fund are each subject to the further
conditions that on or before the Closing Date:
11
<PAGE>
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares
of beneficial interest of the Acquired Fund in accordance with the
provisions of the Trust's Declaration and By-Laws, and certified copies
of the resolutions evidencing such approval by the Acquired Fund's
shareholders shall have been delivered by the Acquired Fund to the Trust
II on behalf of the Acquiring Fund;
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain
or prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits
of federal, state and local regulatory authorities (including those of
the Commission and their "no-action" positions) deemed necessary by the
Trust or the Trust II to permit consummation, in all material respects,
of the transactions contemplated hereby shall have been obtained, except
where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties
of the Acquiring Fund or the Acquired Fund, provided that either party
hereto may waive any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933 Act
and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto,
no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act
or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its shareholders, in a
distribution or distributions qualifying for the deduction for dividends
paid under Section 561 of the Code, all of its investment company taxable
income (as defined in Section 852(b)(2) of the Code determined without
regard to Section 852(b)(2)(D) of the Code) for its taxable year ending
on the Closing Date, all of the excess of (i) its interest income
excludable from gross income under Section 103(a) of the Code over (ii)
its deductions disallowed under Sections 265 and 171(a)(2) of the Code
for its taxable year ending on the Closing Date, and all of its net
capital gain (as such term is used in Sections 852(b)(3)(A) and (C) of
the Code), after reduction by any available capital loss carryforward,
for its taxable year ending on the Closing Date; and
8.6 The parties shall have received an opinion of Hale and Dorr LLP,
satisfactory to the Trust on behalf of the Acquired Fund and the Trust II
on behalf of the Acquiring Fund, substantially to the effect that for
federal income tax purposes:
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund
Shares to the Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by the Acquiring Fund, followed by the distribution by
the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring
Fund Shares to the shareholders of the Acquired Fund in exchange for
their shares of beneficial interest of the Acquired Fund and the
termination of the Acquired Fund, will constitute a "reorganization"
12
<PAGE>
within the meaning of Section 368(a) of the Code, and the Acquired Fund
and the Acquiring Fund will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund upon (i) the
transfer of all of its assets to the Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund; and (ii) the distribution by the Acquired Fund of such Acquiring
Fund Shares to the shareholders of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
issuance of the Acquiring Fund Shares to the Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund;
(d) The basis of the assets of the Acquired Fund acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets in
the hands of the Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the Acquired Fund in the hands
of the Acquiring Fund will, in each instance, include the Acquired
Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize gain or loss
upon the exchange of all of their shares of beneficial interest of the
Acquired Fund solely for Acquiring Fund Shares as part of the
transaction;
(g) The basis of the Acquiring Fund Shares received by the Acquired Fund
shareholders in the transaction will be the same as the basis of the
shares of beneficial interest of the Acquired Fund surrendered in
exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares received by the
Acquired Fund shareholders will include, for each shareholder, the tax
holding period for the shares of the Acquired Fund surrendered in
exchange therefor, provided that the Acquired Fund shares were held as
capital assets on the date of the exchange.
The Trust II and the Trust agree to make and provide representations with
respect to the Acquiring Fund and the Acquired Fund, respectively, which are
reasonably necessary to enable Hale and Dorr LLP to deliver an opinion
substantially as set forth in this Paragraph 8.6. Notwithstanding anything
herein to the contrary, neither the Trust nor the Trust II may waive the
conditions set forth in this Paragraph 8.6.
13
<PAGE>
9. BROKERAGE FEES AND EXPENSES
9.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of
the Acquired Fund each represent and warrant to the other that there are
no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for
its own expenses incurred in connection with entering into and carrying
out the provisions of this Agreement whether or not the transactions
contemplated hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of
the Acquired Fund agree that neither party has made any representation,
warranty or covenant not set forth herein or referred to in Paragraph 4
hereof and that this Agreement constitutes the entire agreement between
the parties.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Trust II,
on behalf of the Acquiring Fund, and the Trust on behalf of the Acquired
Fund. In addition, either party may at its option terminate this
Agreement at or prior to the Closing Date:
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed at or
prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and which
reasonably appears will not or cannot be met;
(c) by resolution of the Trust II's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interests of the Acquiring
Fund's shareholders; or
(d) by resolution of the Trust's Board of Trustees if circumstances should
develop that, in the good faith opinion of such Board, make proceeding
with the Agreement not in the best interests of the Acquired Fund's
shareholders.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Trust II, the Acquiring Fund, the Trust, or
the Acquired Fund, or the Trustees or officers of the Trust II or the
Trust, but each party shall bear the expenses incurred by it incidental
to the preparation and carrying out of this Agreement.
14
<PAGE>
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust and the Trust II.
However, following the meeting of shareholders of the Acquired Fund held
pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions regarding the method for determining the
number of Acquiring Fund Shares to be received by the Acquired Fund shareholders
under this Agreement to the detriment of such shareholders without their further
approval; provided that nothing contained in this Article 12 shall be construed
to prohibit the parties from amending this Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the Acquiring Fund or to the Acquired
Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
President, and, in either case, with copies to Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109, Attention: Pamela J.
Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made
by any party without the prior written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm or corporation, other than the
parties hereto and their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
14.5 All persons dealing with the Trust or the Trust II must look solely to
the property of the Trust or the Trust II, respectively, for the
enforcement of any claims against the Trust or the Trust II as the
Trustees, officers, agents and shareholders of the Trust or the Trust II
assume no personal liability for obligations entered into on behalf of
the Trust or the Trust II, respectively. None of the other series of the
Trust or the Trust II shall be responsible for any obligations assumed by
on or behalf of the Acquired Fund or the Acquiring Fund, respectively,
under this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed as of the date first set forth above by its President or Vice President
and has caused its corporate seal to be affixed hereto.
JOHN HANCOCK BOND TRUST on behalf of
JOHN HANCOCK GOVERNMENT INCOME FUND
By: /s/Anne C. Hodsdon
-----------------------------------------
Anne C. Hodsdon
President
JOHN HANCOCK STRATEGIC SERIES on behalf of
JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
By: /s/Susan S. Newton
------------------------------------------
Susan S. Newton
Vice President and Secretary
<PAGE>
JOHN HANCOCK
Income Funds
[LOGO]
- --------------------------------------------------------------------------------
Prospectus
May 1, 1998*
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank or
government agency
o are not guaranteed to achieve
their goal(s)
Some of these funds may invest up to 100% in junk bonds; read risk information
carefully.
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
*October 1, 1997 for Sovereign Bond Fund
Government Income Fund
High Yield Bond Fund
Intermediate Maturity
Government Fund
Sovereign Bond Fund
Sovereign U.S. Government Income Fund
Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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<TABLE>
<S> <C> <C>
A fund-by-fund look at goals, Government Income Fund 4
strategies, risks, expenses and
financial history. High Yield Bond Fund 6
Intermediate Maturity Government Fund 8
Sovereign Bond Fund 10
Sovereign U.S. Government Income Fund 12
Strategic Income Fund 14
Policies and instructions for opening, Your account
maintaining and closing an account
in any income fund. Choosing a share class 16
How sales charges are calculated 16
Sales charge reductions and waivers 17
Opening an account 18
Buying shares 19
Selling shares 20
Transaction policies 22
Dividends and account policies 22
Additional investor services 23
Details that apply to the income Fund details
funds as a group.
Business structure 24
Sales compensation 25
More about risk 27
For more information back cover
</TABLE>
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Portfolio securities The primary types of securities in which the
fund invests. Secondary investments are described in "More about risk" at the
end of the prospectus.
[Clip Art] Risk factors The major risk factors associated with the fund.
[Clip Art] Portfolio management The individual or group designated by the
investment adviser to handle the fund's day-to-day management.
[Clip Art] Expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
[Clip Art] Financial highlights A table showing the fund's financial performance
for up to ten years, by share class. A bar chart showing total return allows you
to compare the fund's historical risk level to those of other funds.
GOAL OF THE INCOME FUNDS
John Hancock income funds seek current income without sacrificing total return.
Some of the funds also invest for stability of principal. Each fund has its own
strategy and its own risk/reward profile. Because you could lose money by
investing in these funds, be sure to read all risk disclosure carefully before
investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking a regular stream of income
o are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
o want to diversify their portfolios
o are seeking a mutual fund for the income portion of an asset allocation
portfolio
o are retired or nearing retirement
Income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $30 billion in assets.
<PAGE>
Government Income Fund
REGISTRANT NAME:
JOHN HANCOCK BOND TRUST TICKER SYMBOL CLASS A: JHGIX CLASS B: TSGIX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks to earn a high level of current income consistent with
preservation of capital. To pursue this goal, the fund invests primarily in U.S.
Government and agency securities of any maturity, as described below. Stability
of share price is a secondary goal.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 80% of assets
in securities that are issued, or guaranteed as to principal and interest, by
the U.S. Government, its agencies or instrumentalities. These may include
Treasuries, mortgage-backed securities such as Ginnie Maes, Freddie Macs and
Fannie Maes, and repurchase agreements and forward commitments involving these
securities.
For liquidity and flexibility, the fund may place up to 20% of assets in
high-quality short-term securities. In abnormal market conditions, it may invest
more assets in these securities as a defensive tactic. The fund also may invest
in certain higher-risk investments, including asset-backed securities, U.S.
dollar-denominated foreign government securities and derivative and leveraged
investments, and may engage in other investment practices. Investments in
asset-backed and foreign government securities must be in the two highest and
four highest rating categories, respectively, or if unrated, be of comparable
quality. Up to 10% of assets may be invested in foreign government bonds rated
BB/Ba or B (junk bonds).
RISK FACTORS
[Clip Art] As with most income funds, the value of your investment will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
27. Other factors may affect the market price and yield of the fund's
securities, including investor demand and domestic and worldwide economic
conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Barry H. Evans, CFA, leader of the fund's portfolio management team
since January 1995, is a senior vice president of the adviser. He has been in
the investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.63% 0.63%
12b-1 fee(3) 0.25% 1.00%
Other expenses 0.25% 0.25%
Total fund operating expenses 1.13% 1.88%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $79 $104 $176
Class B shares
Assuming redemption
at end of period $69 $89 $122 $200
Assuming no redemption $19 $59 $102 $200
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
4 GOVERNMENT INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment
return (%) 2.40(6) 10.22 3.71 14.38 8.81(7) 9.86(7) (6.42)(7) 14.49(7) 3.84 2.02(6) 6.25(6,13)
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 10/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $8.85 $8.75 $9.32
Net investment income (loss) 0.06 0.72 0.65(4)
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.25)
Total from investment operations (0.04) 1.29 0.40
Less distributions:
Dividends from net investment income (0.06) (0.72) (0.65)
NAV, end of period $8.75 $9.32 $9.07
Total investment return at NAV(5) (%) (0.45)(6) 15.32(7) 4.49
Total adjusted investment return at NAV(5) (%) (0.46)(6) 15.28 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 223 470,569 396,323
Ratio of expenses to average net assets(7) (%) 0.12(6) 1.19 1.17
Ratio of net investment income (loss) to average net assets(7) (%) 0.71(6) 7.38 7.10
Portfolio turnover rate (%) 92 102(9) 106
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
Average daily amount of debt outstanding during the period (000s omitted)(10) ($) 349 N/A N/A
Average monthly number of shares outstanding during the period (000s omitted) 28,696 N/A N/A
Average daily amount of debt outstanding per share
during the period(10) ($) 0.01 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/97(3) 11/97(13)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $9.07 $8.93
Net investment income (loss) 0.37(4) 0.31(4)
Net realized and unrealized gain (loss) on investments (0.14) 0.27
Total from investment operations 0.23 0.58
Less distributions:
Dividends from net investment income (0.37) (0.31)
NAV, end of period $8.93 $9.20
Total investment return at NAV(5) (%) 2.57(6) 6.65(6)
Total adjusted investment return at NAV(5) (%) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 359,758 353,318
Ratio of expenses to average net assets(7) (%) 1.13(8) 1.13(8)
Ratio of net investment income (loss) to average net assets(7) (%) 7.06(8) 6.92(8)
Portfolio turnover rate (%) 129 53
Debt outstanding at end of period (000s omitted)(10) ($) -- --
Average daily amount of debt outstanding during the period (000s omitted)(10) ($) N/A N/A
Average monthly number of shares outstanding during the period (000s omitted) N/A N/A
Average daily amount of debt outstanding per share
during the period(10) ($) N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/88(1) 10/89 10/90 10/91 10/92
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $10.58 $10.01 $9.98 $9.37 $9.79
Net investment income (loss) 0.69(4) 0.98 0.88 0.89 0.80
Net realized and unrealized gain (loss) on investments (0.45) (0.01) (0.54) 0.40 0.03
Total from investment operations 0.24 0.97 0.34 1.29 0.83
Less distributions:
Dividends from net investment income (0.64) (1.00) (0.95) (0.87) (0.79)
Distributions from net realized gain on investments sold (0.17) -- -- -- --
Total distributions: (0.81) (1.00) (0.95) (0.87) (0.79)
NAV, end of period $10.01 $9.98 $9.37 $9.79 $9.83
Total investment return at NAV(5) (%) 2.40(6) 10.22 3.71 14.38 8.81(7)
Total adjusted investment return at NAV(5,11) (%) 1.02(6) 9.40 3.67 -- 8.66
Ratios and supplemental data
Net assets end of period (000s omitted) ($) 6,966 26,568 64,707 129,014 225,540
Ratio of expenses to average net assets (%) 1.38(6) 2.00 2.00 2.00 2.00(7)
Ratio of adjusted expenses to average net assets(12) (%) 2.76(6) 2.82 2.04 -- --
Ratio of net investment income (loss) to average
net assets (%) 6.34(6) 9.64 9.22 9.09 8.03(7)
Ratio of adjusted net investment income (loss)
to average net assets(12) (%) 4.96(6) 8.82 9.18 -- --
Portfolio turnover rate (%) 174 151 83 162 112
Fee reduction per share ($) 0.15 0.08 0.004 -- --
Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- -- --
Average daily amount of debt outstanding during the
period (000s omitted)(10) ($) -- -- -- -- 6,484
Average monthly number of shares outstanding during
the period (000s omitted) -- -- -- -- 18,572
Average daily amount of debt outstanding per share
during the period(10) ($) -- -- -- -- 0.35
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2) 10/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $9.83 $10.05 $8.75 $9.32
Net investment income (loss) 0.70 0.65 0.65 0.58(4)
Net realized and unrealized gain (loss) on investments 0.24 (1.28) 0.57 (0.24)
Total from investment operations 0.94 (0.63) 1.22 0.34
Less distributions:
Dividends from net investment income (0.72) (0.65) (0.65) (0.58)
Distributions from net realized gain on investments sold -- (0.02) -- --
Total distributions: (0.72) (0.67) (0.65) (0.58)
NAV, end of period $10.05 $8.75 $9.32 $9.08
Total investment return at NAV(5) (%) 9.86(7) (6.42)(7) 14.49(7) 3.84
Total adjusted investment return at NAV(5,11) (%) 9.85 (6.43) 14.47 --
Ratios and supplemental data
Net assets end of period (000s omitted) ($) 293,413 241,061 226,954 178,124
Ratio of expenses to average net assets (%) 2.00(7) 1.93(7) 1.89(7) 1.90
Ratio of adjusted expenses to average net assets(12) (%) -- -- -- --
Ratio of net investment income (loss) to average
net assets (%) 7.06(7) 6.98(7) 7.26(7) 6.37
Ratio of adjusted net investment income (loss)
to average net assets(12) (%) -- -- -- --
Portfolio turnover rate (%) 138 92 102(9) 106
Fee reduction per share ($) -- -- -- --
Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- --
Average daily amount of debt outstanding during the
period (000s omitted)(10) ($) 503 349 N/A N/A
Average monthly number of shares outstanding during
the period (000s omitted) 26,378 28,696 N/A N/A
Average daily amount of debt outstanding per share
during the period(10) ($) 0.02 0.01 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class B - period ended: 5/97(3) 11/97(13)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
NAV, beginning of period $9.08 $8.93
Net investment income (loss) 0.33(4) 0.28(4)
Net realized and unrealized gain (loss) on investments (0.15) 0.27
Total from investment operations 0.18 0.55
Less distributions:
Dividends from net investment income (0.33) (0.28)
Distributions from net realized gain on investments sold -- --
Total distributions: (0.33) (0.28)
NAV, end of period $8.93 $9.20
Total investment return at NAV(5) (%) 2.02(6) 6.25(6)
Total adjusted investment return at NAV(5,11) (%) -- --
Ratios and supplemental data
Net assets end of period (000s omitted) ($) 153,390 147,385
Ratio of expenses to average net assets (%) 1.87(8) 1.88(8)
Ratio of adjusted expenses to average net assets(12) (%) -- --
Ratio of net investment income (loss) to average
net assets (%) 6.32(8) 6.18(8)
Ratio of adjusted net investment income (loss)
to average net assets(12) (%) -- --
Portfolio turnover rate (%) 129 53
Fee reduction per share ($) -- --
Debt outstanding at end of period (000s omitted)(10) ($) -- --
Average daily amount of debt outstanding during the
period (000s omitted)(10) ($) N/A N/A
Average monthly number of shares outstanding during
the period (000s omitted) N/A N/A
Average daily amount of debt outstanding per share
during the period(10) ($) N/A N/A
</TABLE>
(1) Class A and Class B shares commenced operations on September 30, 1994 and
February 23, 1988, respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Excludes interest expense, which equalled 0.04% for Class A for the year
ended October 31, 1995 and 0.15%, 0.01%, 0.01% and 0.02% for Class B for
the years ended October 31, 1992, 1993, 1994 and 1995, respectively.
(8) Annualized.
(9) Portfolio turnover rate excludes merger activity.
(10) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
(11) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(12) Unreimbursed, without fee reduction.
(13) Unaudited.
GOVERNMENT INCOME FUND 5
<PAGE>
High Yield Bond Fund
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: JHHBX CLASS B: TSHYX CLASS C: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks to maximize current income without assuming undue
risk. To pursue this goal, the fund invests primarily in junk bonds, i.e.
lower-rated, higher-yielding debt securities.
Because the performance of junk bonds has historically been influenced by
economic conditions, the fund may rotate securities selection by business sector
according to the economic outlook.
The fund also seeks capital appreciation, but only when consistent with its
primary goal.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 65% of assets
in bonds rated lower than BBB/Baa and their unrated equivalents. Up to 30% of
assets may be invested in bonds rated CC/Ca. Up to 40% of assets may be invested
in the securities of issuers in the electric utility and telephone industries.
For all other industries, the limitation is 25% of assets.
Types of bonds include, but are not limited to, domestic and foreign corporate
bonds, debentures, notes, convertible securities, preferred stocks, municipal
obligations and government obligations.
The fund may also invest up to 20% of net assets in U.S. or foreign equities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including restricted securities, and
may engage in other investment practices.
RISK FACTORS
[Clip Art] Investors should expect greater fluctuations in share price, yield
and total return compared with less aggressive bond funds. These fluctuations,
whether positive or negative, may be sharp and unanticipated.
Issuers of junk bonds are typically in weak financial health and their ability
to pay interest and principal is uncertain. Compared with issuers of
investment-grade bonds, they are more likely to encounter financial difficulties
and to be materially affected by these difficulties when they do encounter them.
Junk bond markets may react strongly to adverse news about an issuer or the
economy, or to the perception or expectation of adverse news. Before you invest,
please read "More about risk" starting on page 27.
PORTFOLIO MANAGEMENT
[Clip Art] Arthur N. Calavritinos, CFA, leader of the fund's portfolio
management team since July 1995, is a vice president of the adviser. He joined
John Hancock Funds in 1988 and has been in the investment business since 1987.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Because no Class C shares were issued or outstanding during the past
year, Class C expenses are based on Class B expenses. Future expenses may be
greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 4.50% none none
Maximum sales charge imposed on
reinvested dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.54% 0.54% 0.54%
12b-1 fee(3) 0.25% 1.00% 1.00%
Other expenses 0.25% 0.25% 0.25%
Total fund operating expenses 1.04% 1.79% 1.79%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $55 $77 $100 $166
Class B shares
Assuming redemption
at end of period $68 $86 $117 $191
Assuming no redemption $18 $56 $97 $191
Class C shares
Assuming redemption
at end of period $28 $56 $97 $211
Assuming no redemption $18 $56 $97 $211
This example is for comparison purposes only and is not a representation of
the fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 HIGH YIELD BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited
by the fund's independent auditors, Ernst & Young
LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as
indicated by Class B
year-by-year total
investment return (%) (0.10)(6) 9.77 (4.51) (8.04) 34.21 11.56 21.76 (1.33) 7.97 15.24 10.06(6) 8.27(6,11)
(scale varies from fund to fund) seven six
months months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/93(1) 10/94 10/95(2) 10/96
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $8.10 $8.23 $7.33 $7.20
Net investment income (loss) 0.33 0.80(4) 0.72 0.76(4)
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12) 0.35
Total from investment operations 0.42 (0.03) 0.60 1.11
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73) (0.76)
Distributions from net realized gain on investments sold -- (0.05) -- --
Total distributions (0.29) (0.87) (0.73) (0.76)
NAV, end of period $8.23 $7.33 $7.20 $7.55
Total investment return at NAV(5) (%) 4.96(6) (0.59) 8.83 16.06
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 52,792
Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16 1.10
Ratio of net investment income (loss) to average net assets (%) 12.89(7) 10.14 10.23 10.31
Portfolio turnover rate (%) 204 153 98 113
Average Brokerage Commission Rate(8)($) -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Class A - period ended: 5/97(3) 11/97(11)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $7.55 $7.87
Net investment income (loss) 0.45 0.39
Net realized and unrealized gain (loss) on investments 0.32 0.28
Total from investment operations 0.77 0.67
Less distributions:
Dividends from net investment income (0.45) (0.39)
Distributions from net realized gain on investments sold -- --
Total distributions (0.45) (0.39)
NAV, end of period $7.87 $8.15
Total investment return at NAV(5) (%) 10.54(6) 8.68(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 97,925 165,597
Ratio of expenses to average net assets (%) 1.05(7) 0.94(7)
Ratio of net investment income (loss) to average net assets (%) 10.19(7) 9.51(7)
Portfolio turnover rate (%) 78 61
Average Brokerage Commission Rate(8)($) 0.0583 0.0626
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/87(1) 10/88 10/89 10/90 10/91
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $9.95 $9.94 $9.70 $8.14 $6.45
Net investment income (loss) 0.01 1.07(4) 1.16 1.09 0.98
Net realized and unrealized gain (loss)
on investments (0.02) (0.14) (1.55) (1.68) 1.06
Total from investment operations (0.01) 0.93 (0.39) (0.59) 2.04
Less distributions:
Dividends from net investment income -- (1.17) (1.14) (1.09) (0.98)
Distributions from net realized gain on
investments sold -- -- -- -- --
Distributions from capital paid-in -- -- (0.03) (0.01) (0.07)
Total distributions -- (1.17) (1.17) (1.10) (1.05)
NAV, end of period $9.94 $9.70 $8.14 $6.45 $7.44
Total investment return at NAV(5) (%) (0.10)(6) 9.77 (4.51) (8.04) 34.21
Total adjusted investment return at NAV(5,9) (%) (0.41)(6) 9.01 (4.82) (8.07) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 110 20,852 33,964 37,097 72,023
Ratio of expenses to average net assets (%) 0.03(6) 2.00 2.20 2.22 2.24
Ratio of adjusted expenses to average
net assets(10) (%) 0.34(6) 2.76 2.51 2.25 --
Ratio of net investment income (loss) to
average net assets (%) 0.09(6) 10.97 12.23 14.59 13.73
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) (0.22)(6) 10.21 11.92 14.56 --
Portfolio turnover rate (%) -- 60 100 96 93
Fee reduction per share ($) 0.03 0.07 0.03 0.002 --
Average Brokerage Commission Rate(8)($) -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/92 10/93 10/94 10/95(2) 10/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $7.44 $7.43 $8.23 $7.33 $7.20
Net investment income (loss) 0.87 0.80 0.74(4) 0.67 0.70(4)
Net realized and unrealized gain (loss)
on investments (0.04) 0.75 (0.83) (0.13) 0.35
Total from investment operations 0.83 1.55 (0.09) 0.54 1.05
Less distributions:
Dividends from net investment income (0.84) (0.75) (0.76) (0.67) (0.70)
Distributions from net realized gain on
investments sold -- -- (0.05) -- --
Distributions from capital paid-in -- -- -- -- --
Total distributions (0.84) (0.75) (0.81) (0.67) (0.70)
NAV, end of period $7.43 $8.23 $7.33 $7.20 $7.55
Total investment return at NAV(5) (%) 11.56 21.76 (1.33) 7.97 15.24
Total adjusted investment return at NAV(5,9) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 98,560 154,214 160,739 180,586 242,944
Ratio of expenses to average net assets (%) 2.25 2.08 1.91 1.89 1.82
Ratio of adjusted expenses to average
net assets(10) (%) -- -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) 11.09 10.07 9.39 9.42 9.49
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) -- -- -- -- --
Portfolio turnover rate (%) 206 204 153 98 113
Fee reduction per share ($) -- -- -- -- --
Average Brokerage Commission Rate(8)($) -- -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
Class B - period ended: 5/97(3) 11/97(11)
- --------------------------------------------------------------------------------
Per share operating performance
NAV, beginning of period $7.55 $7.87
Net investment income (loss) 0.42 0.36
Net realized and unrealized gain (loss)
on investments 0.32 0.28
Total from investment operations 0.74 0.64
Less distributions:
Dividends from net investment income (0.42) (0.36)
Distributions from net realized gain on
investments sold -- --
Distributions from capital paid-in -- --
Total distributions (0.42) (0.36)
NAV, end of period $7.87 $8.15
Total investment return at NAV(5) (%) 10.06(6) 8.27(6)
Total adjusted investment return at NAV(5,9) (%) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 379,024 580,858
Ratio of expenses to average net assets (%) 1.80(7) 1.69(7)
Ratio of adjusted expenses to average
net assets(10) (%) -- --
Ratio of net investment income (loss) to
average net assets (%) 9.45(7) 8.78(7)
Ratio of adjusted net investment income (loss)
to average net assets(10) (%) -- --
Portfolio turnover rate (%) 78 61
Fee reduction per share ($) -- --
Average Brokerage Commission Rate(8)($) 0.0583 0.0626
(1) Class A and Class B shares commenced operations on June 30, 1993 and
October 26, 1987, respectively.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year changed from October 31 to May 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(9) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(10) Unreimbursed, without fee reduction.
(11) Unaudited.
HIGH YIELD BOND FUND 7
<PAGE>
Intermediate Maturity Government Fund
REGISTRANT NAME:
JOHN HANCOCK BOND TRUST TICKER SYMBOL CLASS A: TAUSX CLASS B: TSUSX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks to earn a high level of current income consistent with
preservation of capital and maintenance of liquidity. To pursue this goal, the
fund invests primarily in U.S. Government securities of any maturity, as
described below. The fund's weighted average maturity will typically be between
three and ten years.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 80% of assets
in securities that are issued, or guaranteed as to principal and interest, by
the U.S. Government, its agencies or instrumentalities. These may include
Treasuries and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
The fund may invest up to 20% in asset-backed securities or corporate debt
securities rated AAA/Aaa and their unrated equivalents.
For liquidity and flexibility, the fund may place up to 20% of assets in
high-quality short-term securities. In abnormal market conditions, it may invest
more assets in these securities as a defensive tactic. The fund also may invest
in certain higher-risk investments, including derivative and leveraged
investments, and may engage in other investment practices.
RISK FACTORS
[Clip Art] As with most income funds, the value of your investment will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
27. Other factors may affect the market price and yield of the fund's
securities, including investor demand and domestic and worldwide economic
conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Roger C. Hamilton, leader of the fund's portfolio management team
since January 1992 (with the fund's previous adviser), is a vice president of
the adviser. He joined John Hancock Funds in December 1994 and has been in the
investment business since 1980.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40%
12b-1 fee 0.25% 1.00%
Other expenses 0.70% 0.70%
Total fund operating expenses 1.35% 2.10%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $43 $71 $102 $188
Class B shares
Assuming redemption
at end of period $51 $86 $113 $198
Assuming no redemption $21 $66 $113 $198
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
8 INTERMEDIATE MATURITY GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited
by the fund's independent auditors, Ernst & Young
LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 1.96(7) 6.08 2.51 3.98 5.60 4.56 2.13(7) 5.85(7,12)
(scale varies from fund to fund) two six
months months
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/92(1) 3/93 3/94
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value("NAV"), beginning of period $10.00 $10.03 $10.05
Net investment income (loss) 0.17 0.58 0.41
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16)
Total from investment operations 0.20 0.60 0.25
Less distributions:
Dividends from net investment income (0.17) (0.58) (0.41)
Distributions from net realized gain on investments sold -- -- --
Total distributions (0.17) (0.58) (0.41)
NAV, end of period $10.03 $10.05 $9.89
Total investment return at NAV(5) (%) 1.96(7) 6.08 2.51
Total adjusted investment return at NAV(5,6) (%) 1.68(7) 5.53 2.27
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 13,775 33,273 24,310
Ratio of expenses to average net assets(8) (%) 0.50(8,9) 0.50(8) 0.75(8)
Ratio of adjusted expenses to average net assets(10) (%) 1.62(8,9) 1.05(8) 0.99(8)
Ratio of net investment income (loss) to average net assets (%) 6.47(9) 5.47 4.09
Ratio of adjusted net investment income (loss) to average assets(10) (%) 5.35(9) 4.92 3.85
Fee reduction per share(4) ($) 0.11 0.06 0.02
Portfolio turnover rate (%) 1 186 244
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/95(2) 3/96 3/97 5/97(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value("NAV"), beginning of period $9.89 $9.79 $9.69 $9.37
Net investment income (loss) 0.49 0.62 0.67 0.11(4)
Net realized and unrealized gain (loss) on investments (0.11) (0.08) (0.25) 0.09
Total from investment operations 0.38 0.54 0.42 0.20
Less distributions:
Dividends from net investment income (0.48) (0.64) (0.66) (0.11)
Distributions from net realized gain on investments sold -- -- (0.08) --
Total distributions (0.48) (0.64) (0.74) (0.11)
NAV, end of period $9.79 $9.69 $9.37 $9.46
Total investment return at NAV(5) (%) 3.98 5.60 4.56 2.13(7)
Total adjusted investment return at NAV(5,6) (%) 3.43 4.83 4.19 1.93(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 12,950 29,024 22,043 22,755
Ratio of expenses to average net assets(8) (%) 0.80(8) 0.75(8) 0.75 0.75(9)
Ratio of adjusted expenses to average net assets(10) (%) 1.35(8) 1.45(8) 1.12 1.92(9)
Ratio of net investment income (loss) to average net assets (%) 4.91 6.49 6.99 7.07(9)
Ratio of adjusted net investment income (loss) to average assets(10) (%) 4.36 5.79 6.62 5.90(9)
Fee reduction per share(4) ($) 0.05 0.07 0.04 0.02
Portfolio turnover rate (%) 341 423(11) 427 77
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Class A - period ended: 11/97(12)
- -----------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value("NAV"), beginning of period $9.46
Net investment income (loss) 0.32(4)
Net realized and unrealized gain (loss) on investments 0.23
Total from investment operations 0.55
Less distributions:
Dividends from net investment income (0.32)
Distributions from net realized gain on investments sold --
Total distributions (0.32)
NAV, end of period $9.69
Total investment return at NAV(5) (%) 5.85(7)
Total adjusted investment return at NAV(5,6) (%) 5.59(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 21,502
Ratio of expenses to average net assets(8) (%) 0.75(9)
Ratio of adjusted expenses to average net assets(10) (%) 1.27(9)
Ratio of net investment income (loss) to average net assets (%) 6.56(9)
Ratio of adjusted net investment income (loss) to average assets(10) (%) 6.04(9)
Fee reduction per share(4) ($) 0.02
Portfolio turnover rate (%) 263
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/92(1) 3/93 3/94
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
NAV, beginning of period $10.00 $10.03 $10.05
Net investment income (loss) 0.15 0.51 0.34
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16)
Total from investment operations 0.18 0.53 0.18
Less distributions:
Dividends from net investment income (0.15) (0.51) (0.34)
Distributions from net realized gain on investments sold -- -- --
Total distributions (0.15) (0.51) (0.34)
NAV, end of period $10.03 $10.05 $9.89
Total investment return at NAV(5) (%) 1.80(7) 5.40 1.85
Total adjusted investment return at NAV(5,6) (%) 1.52(7) 4.85 1.61
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,630 13,753 11,626
Ratio of expenses to average net assets(8) (%) 1.15(8,9) 1.15(8) 1.40(8)
Ratio of adjusted expenses to average net assets(10) (%) 2.27(8,9) 1.70(8) 1.64(8)
Ratio of net investment income (loss) to average net assets (%) 5.85(9) 4.82 3.44
Ratio of adjusted net investment income (loss) to average assets(10) (%) 4.73(9) 4.27 3.20
Fee reduction per share(4) ($) 0.11 0.06 0.02
Portfolio turnover rate (%) 1 186 244
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/95(2) 3/96 3/97 5/97(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $9.89 $9.79 $9.69 $9.37
Net investment income (loss) 0.43 0.57 0.60 0.10(4)
Net realized and unrealized gain (loss) on investments (0.11) (0.10) (0.24) 0.09
Total from investment operations 0.32 0.47 0.36 0.19
Less distributions:
Dividends from net investment income (0.42) (0.57) (0.60) (0.10)
Distributions from net realized gain on investments sold -- -- (0.08) --
Total distributions (0.42) (0.57) (0.68) (0.10)
NAV, end of period $9.79 $9.69 $9.37 $9.46
Total investment return at NAV(5) (%) 3.33 4.92 3.84 2.01(7)
Total adjusted investment return at NAV(5,6) (%) 2.78 4.15 3.47 1.81(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,506 8,532 6,779 6,451
Ratio of expenses to average net assets(8) (%) 1.45(8) 1.40(8) 1.43 1.50(9)
Ratio of adjusted expenses to average net assets(10) (%) 2.00(8) 2.10(8) 1.80 2.67(9)
Ratio of net investment income (loss) to average net assets (%) 4.26 5.80 6.30 6.04(9)
Ratio of adjusted net investment income (loss) to average assets(10) (%) 3.71 5.10 5.93 4.87(9)
Fee reduction per share(4) ($) 0.05 0.07 0.04 0.02
Portfolio turnover rate (%) 341 423(11) 427 77
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Class B - period ended: 11/97(12)
- -----------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
NAV, beginning of period $9.46
Net investment income (loss) 0.28(4)
Net realized and unrealized gain (loss) on investments 0.23
Total from investment operations 0.51
Less distributions:
Dividends from net investment income (0.28)
Distributions from net realized gain on investments sold --
Total distributions (0.28)
NAV, end of period $9.69
Total investment return at NAV(5) (%) 5.45(7)
Total adjusted investment return at NAV(5,6) (%) 5.19(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,123
Ratio of expenses to average net assets(8) (%) 1.50(9)
Ratio of adjusted expenses to average net assets(10) (%) 2.02(9)
Ratio of net investment income (loss) to average net assets (%) 5.79(9)
Ratio of adjusted net investment income (loss) to average assets(10) (%) 5.27(9)
Fee reduction per share(4) ($) 0.02
Portfolio turnover rate (%) 263
</TABLE>
(1) Class A and Class B shares commenced operations on December 31, 1991.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year end changed from March 31 to May
31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(7) Not annualized.
(8) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
fund plus expenses incurred indirectly from the Adjustable U.S. Government
fund (the "Portfolio"), the mutual fund in which the fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended
March 31, 1996 include the expenses of the Portfolio through September 22,
1995.
(9) Annualized.
(10) Unreimbursed, without fee reduction.
(11) Portfolio turnover rate excludes merger activity.
(12) Unaudited.
INTERMEDIATE MATURITY GOVERNMENT FUND 9
<PAGE>
Sovereign Bond Fund
REGISTRANT NAME:
JOHN HANCOCK SOVEREIGN BOND FUND TICKER SYMBOL CLASS A: JHNBX CLASS B: JHBBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks to generate a high level of current income consistent
with prudent investment risk. To pursue this goal, the fund invests in a
diversified portfolio of marketable debt securities. These securities are
primarily investment grade, although up to 25% of assets may be invested in junk
bonds rated as low as CC/Ca and their unrated equivalents. The fund does not
concentrate its investments in any particular industry.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 65% of assets
in corporate and government bonds and debentures. Typically, at least 75% of
assets will be:
o securities of any type of issuer that are rated among the four highest Moody's
or S&P rating categories and their unrated equivalents
o U.S. Government and agency securities
o cash and cash-equivalents
The fund may invest up to 25% of assets in U.S. dollar-denominated foreign
securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including asset-backed securities and
derivatives and leveraged investments, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] Investors should expect fluctuations in share price, yield and total
return, particularly with changes in interest rates. Typically, a rise in
interest rates causes a decline in the market value of debt securities. To the
extent that it invests in certain securities, the fund may be affected by
additional risks:
o junk bonds: above-average credit, market and other risks
o foreign securities: currency, information, natural event and political risks
o mortgage-backed securities: extension and prepayment risks
These risks are defined in "More about risk" starting on page 27. The longer the
fund's average weighted maturity, the more it is likely to be affected by a
change in interest rates. Please read "More about risk" carefully before
investing.
PORTFOLIO MANAGEMENT
[Clip Art] James K. Ho, CFA, leader of the fund's portfolio management team
since March 1988, is an executive vice president of the adviser. He joined John
Hancock Funds in 1985 and has been in the investment business since 1977.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past fiscal year, adjusted to
reflect any changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.31% 0.31%
Total fund operating expenses 1.11% 1.81%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $78 $103 $173
Class B shares
Assuming redemption
at end of period $69 $87 $118 $194
Assuming no redemption $19 $57 $98 $194
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 SOVEREIGN BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited
by the fund's independent auditors, Ernst & Young
LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 1.58 9.82 12.13 6.71 16.59 8.08 11.80 (2.75) 19.40 4.11 2.22(3)
(scale varies from fund to fund) five
months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/87 12/88 12/89 12/90 12/91 12/92
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.89 $14.53 $14.51 $14.77 $14.33 $15.31
Net investment income (loss) 1.40 1.44 1.43 1.32 1.29 1.20
Net realized and unrealized gain (loss) on
investments and financial futures contracts (1.17) (0.06) 0.27 (0.40) 0.98 (0.01)
Total from investment operations 0.23 1.38 1.70 0.92 2.27 1.19
Less distributions:
Dividends from net investment income (1.53) (1.40) (1.44) (1.35) (1.29) (1.21)
Distributions from net realized gain on
investments sold and financial futures contracts (0.06) -- -- -- -- --
Distributions from capital paid-in -- -- -- (0.01) -- --
Total distributions (1.59) (1.40) (1.44) (1.36) (1.29) (1.21)
Net asset value, end of period $14.53 $14.51 $14.77 $14.33 $15.31 $15.29
Total investment return at net asset value(2) (%) 1.58 9.82 12.13 6.71 16.59 8.08
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,095,208 1,103,691 1,110,394 1,103,391 1,249,980 1,386,260
Ratio of expenses to average net assets (%) 0.82 0.82 0.80 1.31 1.27 1.44
Ratio of net investment income (loss) to
average net assets (%) 9.32 9.77 9.68 9.18 8.81 7.89
Portfolio turnover rate (%) 159 66 64 92 90 87
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95 12/96 5/97(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.29 $15.53 $13.90 $15.40 $14.90
Net investment income (loss) 1.14 1.12 1.12 1.09 0.44
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.62 (1.55) 1.50 (0.50) (0.12)
Total from investment operations 1.76 (0.43) 2.62 0.59 0.32
Less distributions:
Dividends from net investment income (1.14) (1.12) (1.12) (1.09) (0.44)
Distributions from net realized gain on
investments sold and financial futures contracts (0.38) (0.08) -- -- --
Distributions from capital paid-in -- -- -- -- --
Total distributions (1.52) (1.20) (1.12) (1.09) (0.44)
Net asset value, end of period $15.53 $13.90 $15.40 $14.90 $14.78
Total investment return at net asset value(2) (%) 11.80 (2.75) 19.40 4.11 2.22(3)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204 1,416,116 1,361,924
Ratio of expenses to average net assets (%) 1.41 1.26 1.13 1.14 1.11(4)
Ratio of net investment income (loss) to
average net assets (%) 7.18 7.74 7.58 7.32 7.38(4)
Portfolio turnover rate (%) 107 85 103(5) 123 58
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93(6) 12/94 12/95 12/96 5/97(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.90 $15.52 $13.90 $15.40 $14.90
Net investment income (loss) 0.11 1.04 1.02 0.98 0.40
Net realized and unrealized gain (loss) on investments and
financial futures contracts -- (1.54) 1.50 (0.50) (0.12)
Total from investment operations 0.11 (0.50) 2.52 0.48 0.28
Less distributions:
Dividends from net investment income (0.11) (1.04) (1.02) (0.98) (0.40)
Distributions from net realized gain on investments sold
and financial futures contracts (0.38) (0.08) -- -- --
Total distributions (0.49) (1.12) (1.02) (0.98) (0.40)
Net asset value, end of period $15.52 $13.90 $15.40 $14.90 $14.78
Total investment return at net asset value(2) (%) 0.90(3) (3.13) 18.66 3.38 1.93(3)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112 132,885
Ratio of expenses to average net assets (%) 1.63(4) 1.78 1.75 1.84 1.81(4)
Ratio of net investment income (loss) to average net assets (%) 0.57(4) 7.30 6.87 6.62 6.68(4)
Portfolio turnover rate (%) 107 85 103(5) 123 58
</TABLE>
(1) Effective May 31, 1997, the fiscal year end changed from December 31 to
May 31.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Not annualized.
(4) Annualized.
(5) Portfolio turnover excludes merger activity.
(6) Class B shares commenced operations on November 23, 1993.
SOVEREIGN BOND FUND 11
<PAGE>
Sovereign U.S. Government Income Fund
REGISTRANT NAME:
JOHN HANCOCK STRATEGIC SERIES TICKER SYMBOL CLASS A: JHSGX CLASS B: FGOPX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks to provide as high a level of income as is consistent
with long-term total return. To pursue this goal, the fund invests in U.S.
Government and agency securities, as described below.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 65% of assets
in securities that are issued, or guaranteed as to principal and interest, by
the U.S. Government, its agencies or instrumentalities. These may include
Treasuries and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk investments, including derivative and leveraged
investments, and may engage in other investment practices.
RISK FACTORS
[Clip Art] As with most income investments, the value of your investment will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
27. Other factors may affect the market price and yield of the fund's
securities, including investor demand and economic conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Barry H. Evans, CFA, leader of the fund's portfolio management team
since January 1995, is a senior vice president of the adviser. He has been in
the investment business since joining John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.37% 0.37%
Total fund operating expenses 1.17% 1.87%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $56 $80 $106 $181
Class B shares
Assuming redemption
at end of period $69 $89 $121 $201
Assuming no redemption $19 $59 $101 $201
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 SOVEREIGN U.S. GOVERNMENT INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by
Class B year-by-year total
investment return (%) 3.70(5) 11.53 11.52 6.24 14.46 7.58 12.66 (7.05) 15.27 3.33 1.61(5) 6.28(5,10)
(scale varies from fund to fund) seven six
months months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $10.51 $10.29 $10.89 $9.24
Net investment income (loss) 0.64 0.68(3) 0.65 0.65
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.22) 0.61 (1.34) 0.77
Total from investment operations 0.42 1.29 (0.69) 1.42
Less distributions:
Dividends from net investment income (0.64) (0.68) (0.65) (0.65)
Distributions from net realized gain on investments sold -- (0.01) (0.31) --
Distributions from capital paid-in -- -- -- --
Total distributions (0.64) (0.69) (0.96) (0.65)
NAV, end of period $10.29 $10.89 $9.24 $10.01
Total investment return at NAV(4) (%) 5.33(5) 12.89 (6.66) 15.90
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 350,907 375,416 315,372 370,966
Ratio of expenses to average net assets (%) 1.06(6) 1.30 1.23 1.17
Ratio of net investment income (loss) to average net assets (%) 7.11(6) 6.47 6.62 6.76
Portfolio turnover rate (%) 140 273 127 94
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/96 5/97(2) 11/97(10)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $10.01 $9.75 $9.56
Net investment income (loss) 0.64(3) 0.37(3) 0.31(3)
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.26) (0.19) 0.31
Total from investment operations 0.38 0.18 0.62
Less distributions:
Dividends from net investment income (0.64) (0.36) (0.31)
Distributions from net realized gain on investments sold -- -- --
Distributions from capital paid-in -- (0.01) --
Total distributions (0.64) (0.37) (0.31)
NAV, end of period $9.75 $9.56 $9.87
Total investment return at NAV(4) (%) 4.02 1.92(5) 6.65(5)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 330,162 302,589 300,092
Ratio of expenses to average net assets (%) 1.15 1.17(6) 1.16(6)
Ratio of net investment income (loss) to average net assets (%) 6.58 6.69(6) 6.49(6)
Portfolio turnover rate (%) 143 88 71
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/87(7) 10/88 10/89 10/90 10/91 10/92
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $10.28 $9.45 $9.73 $10.01 $9.83 $10.29
Net investment income (loss) 0.48 0.78 0.81 0.85 0.85 0.76
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.75) 0.28 0.25 (0.25) 0.51 --
Total from investment operations (0.27) 1.06 1.06 0.60 1.36 0.76
Less distributions:
Dividends from net investment income (0.48) (0.77) (0.77) (0.78) (0.90) (0.77)
Distributions from net realized gain on
investments sold (0.08) (0.01) (0.01) -- -- --
Distributions from capital paid-in -- -- -- -- -- --
Total distributions (0.56) (0.78) (0.78) (0.78) (0.90) (0.77)
NAV, end of period $9.45 $9.73 $10.01 $9.83 $10.29 $10.28
Total investment return at NAV(4) (%) 3.70(5) 11.53 11.52 6.24 14.46 7.58
Total adjusted investment return at
NAV(4,8) (%) 3.65(5) 11.47 11.29 6.23 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 170,030 161,163 144,756 133,778 164,347 197,032
Ratio of expenses to average net assets (%) 1.24(6) 1.29 1.35 1.54 1.51 1.55
Ratio of adjusted expenses to
average net assets(9) (%) 1.32(6) 1.35 1.58 1.55 -- --
Ratio of net investment income (loss) to
average net assets (%) 7.94(6) 8.09 8.34 8.54 8.53 7.35
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) 7.86(6) 8.03 8.11 8.53 -- --
Portfolio turnover rate (%) 83 79 45 63 62 140
Fee reduction per share ($) 0.01 0.01 0.02 0.01 -- --
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95 10/96 5/97(2) 11/97(10)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $10.28 $10.88 $9.23 $10.00 $9.74 $9.56
Net investment income (loss) 0.66(3) 0.61 0.60 0.58(3) 0.33(3) 0.28(3)
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.61 (1.34) 0.77 (0.26) (0.18) 0.31
Total from investment operations 1.27 (0.73) 1.37 0.32 0.15 (0.59)
Less distributions:
Dividends from net investment income (0.66) (0.61) (0.60) (0.58) (0.32) (0.28)
Distributions from net realized gain on
investments sold (0.01) (0.31) -- -- -- --
Distributions from capital paid-in -- -- -- -- (0.01) --
Total distributions (0.67) (0.92) (0.60) (0.58) (0.33) (0.28)
NAV, end of period $10.88 $9.23 $10.00 $9.74 $9.56 $9.87
Total investment return at NAV(4) (%) 12.66 (7.05) 15.27 3.33 1.61(5) 6.28(5)
Total adjusted investment return at
NAV(4,8) (%) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 244,133 196,899 130,824 112,228 96,349 88,940
Ratio of expenses to average net assets (%) 1.51 1.64 1.72 1.82 1.86(6) 1.85(6)
Ratio of adjusted expenses to
average net assets(9) (%) -- -- -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) 6.23 6.19 6.24 5.91 5.99(6) 5.80(6)
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) -- -- -- -- -- --
Portfolio turnover rate (%) 273 127 94 143 88 71
Fee reduction per share ($) -- -- -- -- -- --
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(2) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) Annualized.
(7) For the period April 1, 1987 to October 31, 1987.
(8) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(9) Unreimbursed, without fee reduction.
(10) Unaudited.
SOVEREIGN U.S. GOVERNMENT INCOME FUND 13
<PAGE>
Strategic Income Fund
REGISTRANT NAME:
JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHFIX CLASS B: STIBX CLASS C: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income. To pursue this goal,
the fund invests primarily in three sectors:
o foreign government and corporate debt securities
o U.S. Government and agency securities
o junk bonds rated as low as CC/Ca and their unrated equivalents.
Under normal circumstances, the fund's assets will be invested in all three
sectors. However, the weighting of assets among sectors will be adjusted to
reflect current or anticipated market behavior, and the fund may invest up to
100% of assets in any sector.
PORTFOLIO SECURITIES
[Clip Art] The fund may invest in debt securities of all maturities and types,
including bonds, debentures, notes, preferred stock, mortgage-backed and
asset-backed securities and others. The fund may also invest up to 10% of net
assets in U.S. or foreign equities.
For liquidity and flexibility, the fund may invest in investment-grade
short-term securities. In abnormal market conditions, it may invest more assets
in these securities as a defensive tactic. The fund also may invest in certain
higher-risk investments, including derivative and leveraged investments, and may
engage in other investment practices.
RISK FACTORS
[Clip Art] Investors should expect fluctuations in share price, yield and total
return that are above-average for bond funds. Typically, a rise in interest
rates causes a decline in the market value of debt securities. The longer the
fund's average weighted maturity, the more it is likely to be affected by a
change in interest rates. To the extent that the fund invests in mortgage-backed
securities, it may also be subject to extension and prepayment risks. These
risks are defined in "More about risk" starting on page 27. Foreign securities
carry additional risks, including currency, information, natural event and
political risks. Issuers of junk bonds are typically in weak financial health,
and their ability to pay interest and principal is uncertain, especially in an
adverse economy. Junk bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception or expectation of adverse news.
Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Frederick L. Cavanaugh, Jr., leader of the fund's portfolio
management team since 1986, is a senior vice president of the adviser. He joined
John Hancock Funds in 1986 and has been in the investment business since 1973.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Because no Class C shares were issued or outstanding during the past
year, Class C expenses are based on Class B expenses. Future expenses may be
greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 4.50% none none
Maximum sales charge imposed on
reinvested dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.43% 0.43% 0.43%
12b-1 fee(3) 0.30% 1.00% 1.00%
Other expenses 0.27% 0.27% 0.27%
Total fund operating expenses 1.00% 1.70% 1.70%
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $55 $75 $98 $162
Class B shares
Assuming redemption
at end of period $67 $84 $112 $182
Assuming no redemption $17 $54 $92 $182
Class C shares
Assuming redemption
at end of period $27 $54 $92 $201
Assuming no redemption $17 $54 $92 $201
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
14 STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 6.89 9.72 (7.36) 12.31 19.92 6.81 4.54 9.33 11.37 12.99 7.15(7,9)
(scale varies from fund to fund) six
months
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/88 5/89 5/90 5/91 5/92
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $9.71 $9.24 $8.98 $7.33 $7.20
Net investment income (loss) 1.13 1.12 1.04 0.93 0.80
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.47) (0.26) (1.65) (0.13) 0.52
Total from investment operations 0.66 0.86 (0.61) 0.80 1.32
Less distributions:
Dividends from net investment income (1.13) (1.12) (1.04) (0.93) (0.74)(2)
Distributions in excess of net investment income -- -- -- -- --
Distributions from capital paid-in -- -- -- -- --
Total distributions (1.13) (1.12) (1.04) (0.93) (0.74)
NAV, end of period $9.24 $8.98 $7.33 $7.20 $7.78
Total investment return at NAV(3) (%) 6.89 9.72 (7.36) 12.31 19.92
Total adjusted investment return at NAV(3,4) (%) 6.49 9.58 (7.45) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 67,140 95,430 80,890 79,272 153,568
Ratio of expenses to average net assets (%) 1.09 1.33 1.53 1.75 1.69
Ratio of adjusted expenses to average net assets(5) (%) 1.49 1.47 1.62 -- --
Ratio of net investment income (loss) to
average net assets (%) 12.07 12.28 12.60 13.46 10.64
Ratio of adjusted net investment income (loss) to
average net assets(5) (%) 11.67 12.14 12.51 -- --
Portfolio turnover rate (%) 67 125 81 60 80
Fee reduction per share ($) 0.04 0.01 0.01 -- --
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/93 5/94 5/95 5/96 5/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value ("NAV"), beginning of period $7.78 $7.55 $7.17 $7.15 $7.27
Net investment income (loss) 0.71 0.68 0.64 0.66(1) 0.64(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.22) (0.33) (0.02) 0.12 0.27
Total from investment operations 0.49 0.35 0.62 0.78 0.91
Less distributions:
Dividends from net investment income (0.72) (0.58) (0.55) (0.66) (0.64)
Distributions in excess of net investment income -- (0.05) -- -- --
Distributions from capital paid-in -- (0.10) (0.09) -- --
Total distributions (0.72) (0.73) (0.64) (0.66) (0.64)
NAV, end of period $7.55 $7.17 $7.15 $7.27 $7.54
Total investment return at NAV(3) (%) 6.81 4.54 9.33 11.37 12.99
Total adjusted investment return at NAV(3,4) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 262,137 335,261 327,876 369,127 416,916
Ratio of expenses to average net assets (%) 1.58 1.32 1.09 1.03 1.00
Ratio of adjusted expenses to average net assets(5) (%) -- -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) 9.63 8.71 9.24 9.13 8.61
Ratio of adjusted net investment income (loss) to
average net assets(5) (%) -- -- -- -- --
Portfolio turnover rate (%) 97 91 55 78 132
Fee reduction per share ($) -- -- -- -- --
</TABLE>
- ------------------------------------------------------------------------------
Class A - period ended: 11/97(9)
- ------------------------------------------------------------------------------
Per share operating performance
Net asset value ("NAV"), beginning of period $7.54
Net investment income (loss) 0.32(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts 0.21
Total from investment operations 0.53
Less distributions:
Dividends from net investment income (0.32)
Distributions in excess of net investment income --
Distributions from capital paid-in --
Total distributions (0.32)
NAV, end of period $7.75
Total investment return at NAV(3) (%) 7.15(7)
Total adjusted investment return at NAV(3,4) (%) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 440,806
Ratio of expenses to average net assets (%) 0.94(8)
Ratio of adjusted expenses to average net assets(5) (%) --
Ratio of net investment income (loss) to
average net assets (%) 8.32(8)
Ratio of adjusted net investment income (loss) to
average net assets(5) (%) --
Portfolio turnover rate (%) 69
Fee reduction per share ($) --
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/94(6) 5/95 5/96 5/97 11/97(9)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
NAV, beginning of period $7.58 $7.17 $7.15 $7.27 $7.54
Net investment income (loss) 0.40 0.60(1) 0.61(1) 0.59 0.29(1)
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12 0.27 0.21
Total from investment operations (0.01) 0.58 0.73 0.86 0.51
Less distributions:
Dividends from net investment income (0.32) (0.52) (0.61) (0.59) (0.29)
Distributions in excess of net investment income (0.03) -- -- -- --
Distributions from capital paid-in (0.05) (0.08) -- -- --
Total distributions (0.40) (0.60) (0.61) (0.59) (0.30)
NAV, end of period $7.17 $7.15 $7.27 $7.54 $7.75
Total investment return at NAV(3) (%) (0.22)(7) 8.58 10.61 12.21 6.78(7)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751 328,487 384,849
Ratio of expenses to average net assets (%) 1.91(8) 1.76 1.73 1.70 1.64(8)
Ratio of net investment income (loss) to average net assets (%) 8.12(8) 8.55 8.42 7.90 7.60(8)
Portfolio turnover rate (%) 91 55 78 132 69
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) The dividend policy of the fund was changed, effective August 1, 1991,
from one that utilized daily dividend declarations to one that declares
dividends monthly. Additionally, the dividend policy of the fund was
changed, effective October 1, 1993, from one that declared dividends
monthly to daily dividend declarations.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Class B shares commenced operations on October 4, 1993.
(7) Not annualized.
(8) Annualized.
(9) Unaudited.
STRATEGIC INCOME FUND 15
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock income funds offer two classes of shares, Class A and Class B.
In addition, Class C shares are available for High Yield Bond Fund and Strategic
Income Fund. Each class has its own cost structure as outlined below, allowing
you to choose the one that best meets your requirements. For more details, see
"How sales charges are calculated." Your financial representative can help you
decide which share class is best for you.
- --------------------------------------------------------------------------------
Class A - for all funds
- --------------------------------------------------------------------------------
o Front-end sales charges. There are several ways to reduce these charges,
described under "Sales charge reductions and waivers" on the following page.
o Lower annual expenses than Class B and Class C shares.
- --------------------------------------------------------------------------------
Class B - for all funds
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o A contingent deferred sales charge that declines from 3% over four years for
Intermediate Maturity Government Fund, and from 5% over 6 years for all
other income funds.
o Automatic conversion to Class A shares after five years for Intermediate
Maturity Government Fund and after eight years for all other income funds,
thus reducing future annual expenses.
- --------------------------------------------------------------------------------
Class C - for selected funds
- --------------------------------------------------------------------------------
Applies to High Yield Bond Fund and Strategic Income Fund.
o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o A 1% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so the fund's annual expenses
continue at the same level throughout the life of your investment.
For actual past expenses of Class A and Class B shares, see the fund-by-fund
information earlier in this prospectus.
It is presently the policy of Signature Services not to accept any order of
$100,000 or more for Class B shares or any order of $1 million or more for Class
C shares. In these circumstances it would be more beneficial for the investor to
purchase Class A shares.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Use the table below to find out which group the fund is in, then consult the
sales charge information for that group.
- --------------------------------------------------------------------------------
Group 1 Group 2
- --------------------------------------------------------------------------------
o Intermediate Maturity o Government Income
Government
o High Yield Bond
o Sovereign Bond
o Sovereign U.S. Government Income
o Strategic Income
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges - Group 1
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - Group 2
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments (Groups 1 and 2)
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
16 YOUR ACCOUNT
<PAGE>
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) on shares you sell within a certain time after you bought them, as
described in the table below. There is no CDSC on shares acquired through
reinvestment of dividends. The CDSC is based on the original purchase cost or
the current market value of the shares being sold, whichever is less. The longer
the time between the purchase and the sale of shares, the lower the rate of the
CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on Group 1 CDSC on Group 2
purchase shares being sold shares being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
Class C Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% on shares you sell within one year of purchase. There is no
CDSC on shares acquired through reinvestment of dividends. The CDSC is based on
the original purchase cost or the current market value of the shares being sold,
whichever is less.
CDSC calculations are based on the number of shares involved, not on the value
of your account. Each time you place a request to sell shares we will first sell
any shares in your account that carry no CDSC.
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge. Retirement plans investing $1 million in Class B
shares may add that value to Class A purchases to calculate charges.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds for
purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services to add these options or
consult the SAI (see the back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial investments must
total at least $250), and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
o to purchase a John Hancock Declaration annuity
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
YOUR ACCOUNT 17
<PAGE>
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee benefit plan into a John
Hancock fund
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 eligible
employees(one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for the
John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at
least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in John
Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully following
the instructions. If you have questions, please contact your financial
representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any purchase, exchange or sale of
shares.
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail to Signature Services slip is available, include
(address below). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
to Signature Services
(address below).
By exchange
[Clip art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clip art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clip art] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
- ----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone number
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
YOUR ACCOUNT 19
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip art] o Accounts of any type. o Write a letter of instruction
or complete a stock power
o Sales of any amount. indicating the fund name, your
share class, your account
number, the name(s) in which
the account is registered and
the dollar value or number of
shares you wish to sell.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clip art] o Most accounts. o For automated service 24 hours
a day using your touch-tone
o Sales of up to $100,000. phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clip art] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clip art] o Accounts of any type. o Obtain a current prospectus for
the fund into which you are
o Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
By check
[Clip art] o Government Income, Intermediate o Request checkwriting on your
Maturity Government, Sovereign account application.
U.S. Government Income and
Strategic Income Funds only. o Verify that the shares to be
sold were purchased more
o Any account with than 10 days earlier or were
checkwriting privileges. purchased by wire.
o Sales of over $100. o Write a check for any amount
over $100.
----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone number
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
----------------------------------------
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
20 YOUR ACCOUNT
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
The signature guarantee must be from a member of the Signature Guarantee
Medallion Program (generally, a broker or securities dealer). We may refuse any
other source. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip art]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o If the names of all trustees are
not registered on the account,
please also provide a copy of the
trust document certified within the
past twelve months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
YOUR ACCOUNT 21
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is received by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Signature Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are taken, Signature Services is not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B and Class
C shares will continue to age from the original date and will retain the same
CDSC rate as they had before the exchange, except that the rate will change to
the new fund's rate if that rate is higher. A CDSC rate that has increased will
drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
22 YOUR ACCOUNT
<PAGE>
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. Some dividends paid in January may be
taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. if you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, signature services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Signature Services,
Inc." Deliver your check and application to your financial representative or
Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and there
is no limit to the number of payees you may have, as long as they are all on
the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial representative
or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including Traditional and Roth IRAs, SIMPLE IRAs, SIMPLE 401(k)s, SEPs, 401(k)s,
money purchase pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund (except tax-free income funds) with a low
minimum investment of $250 or, for some group plans, no minimum investment at
all. To find out more, call Signature Services at 1-800-225-5291.
YOUR ACCOUNT 23
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock income fund is an open-end
management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock income funds may include
individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[The following information was represented as a flow chart in the printed
material.]
-----------------
Shareholders
-----------------
Distribution and
shareholder services
-------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
-------------------------------------------------
-------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
-------------------------------------------------
------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Handles shareholder services, including record-
keeping and statements, distribution of dividends
and processing of buy and sell requests.
------------------------------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
200 Clarendon Street
Boston, MA 02116
Hold the funds' assets, settles all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
Asset
management
------------------------------------
Trustees
Supervise the funds' activities.
------------------------------------
24 FUND DETAILS
<PAGE>
Accounting compensation The funds compensate the adviser for performing tax and
financial management services. Annual compensation is not expected to exceed
0.02% of each fund's average net assets.
Portfolio trades In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
Investment goals Except for Government Income Fund, High Yield Bond Fund and
Intermediate Maturity Government Fund, each fund's investment goal is
fundamental and may only be changed with shareholder approval.
Diversification All of the income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares.
These firms typically pass along a portion of this compensation to your
financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation that authorizes annual fees of this type). The 12b-1 fee
rates vary by fund and by share class, according to Rule 12b-1 plans adopted by
the funds. The sales charges and 12b-1 fees paid by investors are detailed in
the fund-by-fund information. The portions of these expenses that are reallowed
to financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B and Class C
shares, interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
Government Income $ 10,894,166 6.53%
High Yield Bond $ 8,666,437 2.80%
Intermediate Maturity Gov. $ 402,344 6.06%
Sovereign Bond $ 3,985,198 3.07%
Sovereign U.S. Gov. Income $ 5,738,472 5.53%
Strategic Income $ 5,664,567 2.11%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Class C shares Class C shares began operations during the 1997 fiscal year.
Therefore, there are no unreimbursed expenses to report.
Initial compensation Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
Annual compensation Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
FUND DETAILS 25
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A investments
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Group 1 funds
Up to $99,999 3.00% 2.26% 0.25% 2.50%
$100,000 - $499,999 2.50% 2.01% 0.25% 2.25%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Group 2 funds
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of $1
million or more (Groups 1 and 2)
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
Waiver investments(2) -- 0.00% 0.25% 0.25%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B investments
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
Group 1 funds
All amounts 2.25% 0.25% 2.50%
Group 2 funds
All amounts 3.75% 0.25% 4.00%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class C investments
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
All amounts 0.75% 0.25% 1.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
26 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and investment practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that a John Hancock income fund
will earn income or show a positive total return over any period of time --
days, months or years.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another security
or index) is used as a hedge against an opposite position that the fund also
holds, any loss generated by the derivative should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
Year 2000 risk The risk that the funds' operations could be disrupted by year
2000-related computer system problems. Although the adviser and the funds'
service providers are taking steps to address this issue, there may still be
some risk of adverse effects. Common to all mutual funds.
FUND DETAILS 27
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices
- --------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semiannual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
o Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
Sovereign
U.S.
Government High Yield Intermediate Sovereign Gov't Strategic
Income Bond Maturity Gov't Bond Income Income
- ------------------------------------------------------------------------------------------------------------------------------------
Investment practices
<S> <C> <C> <C> <C> <C> <C>
Borrowing; reverse repurchase agreements
The borrowing of money from banks or
through reverse repurchase agreements.
Leverage, credit risks. 33.3 33.3 33.3 33.3 33.3 33
Covered mortgage dollar roll
transactions The sale of mortgage-backed
securities with the commitment to buy
back similar securities at a future
date. Credit, interest rate, leverage,
market, opportunity risks. * * * * * *
Repurchase agreements The purchase of a
security that must later be sold back to
the issuer at the same price plus
interest. Credit risk. * * * * * *
Securities lending The lending of
securities to financial institutions,
which provide cash or government
securities as collateral. Credit risk. 30 30 33.3 33.3 30 33.3
Short-term trading Selling a security
soon after purchase. A portfolio
engaging in short-term trading will have
higher turnover and transaction
expenses. Market risk. * * * * * *
When-issued securities and forward
commitments The purchase or sale of
securities for delivery at a future
date; market value may change before
delivery. Market, opportunity, leverage
risks. * * * * * *
- -----------------------------------------------------------------------------------------------------------------------------------
Conventional securities
Brady bonds Dollar-denominated
securities issued to refinance foreign
government bank loans and other debt.
Credit, interest rate, market, political
risks. 10 o(1) -- 25 -- o(1)
Foreign debt securities Debt securities
issued by foreign governments or
companies. Credit, currency, interest
rate, market, political risks. 20 *(1) -- 25 -- *(1)
In-kind, delayed and zero coupon debt
securities Securities offering non-cash
or delayed-cash payment. Their prices
are typically more volatile than those
of conventional debt securities. Credit,
interest rate, market risks. * * * * * *
Restricted and illiquid securities
Securities not traded on the open
market. May include illiquid Rule 144A
securities. Liquidity, valuation, market
risks. 10 10 15 15 15 15
- -----------------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Asset-backed securities Securities
backed by unsecured debt, such as credit
card debt; these securities are often
guaranteed or over-collateralized to
enhance their credit quality. Credit,
interest rate risks. 20 * 20 * 35 *
Mortgage-backed securities Securities
backed by pools of mortgages, including
passthrough certificates, PACs, TACs and
other senior classes of collateralized
mortgage obligations (CMOs). Credit,
extension, prepayment, liquidity,
interest rate risks. * * * * * *
Participation interests Securities
representing an interest in another
security or in bank loans. Credit,
interest rate, liquidity, valuation
risks. -- 10(2) -- 15(2) -- 15(2)
Rights and warrants Securities offering
the right, or involving the promise, to
buy or sell certain securities at a
future date. Market risk. 5 5 5 5 -- 5
</TABLE>
(1) No more than 25% of the fund's assets will be invested in government
securities of any one foreign country.
(2) Part of the 10% or 15% limitation on illiquid securities.
28 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Sovereign
U.S.
Government High Yield Intermediate Sovereign Gov't Strategic
Income Bond Maturity Gov't Bond Income Income
- ------------------------------------------------------------------------------------------------------------------------------------
Leveraged derivative securities
<S> <C> <C> <C> <C> <C> <C>
Currency contracts Contracts involving
the right or obligation to buy or sell a
given amount of foreign currency at a
specified price and future date.
o Hedged. Currency, hedged leverage,
correlation, liquidity, opportunity
risks. -- * -- -- -- *
o Speculative. Currency, speculative
leverage, liquidity risks. -- -- -- -- -- o
Financial futures and options;
securities and index options Contracts
involving the right or obligation to
deliver or receive assets or money
depending on the performance of one or
more assets or an economic index.
o Futures and related options. Interest
rate, currency, market, hedged or
speculative leverage, correlation,
liquidity, opportunity risks. * * -- * * *
o Options on securities and indices.
Interest rate, currency, market,
hedged or speculative leverage,
correlation, liquidity, credit,
opportunity risks. * * -- o * o
Structured securities Indexed and/or
leveraged mortgage-backed and other
debt securities, including
principal-only and interest-only
securities, leveraged floating rate
securities, and others. These
securities tend to be highly sensitive
to interest rate movements and their
performance may not correlate to such
movements in a conventional fashion.
Credit, interest rate, extension,
prepayment, market, speculative
leverage, liquidity, valuation risks. * * * * * *
Swaps, caps, floors, collars OTC
contracts involving the right or
obligation to receive or make payments
based on two different income streams.
Correlation, credit, currency,
interest rate, hedged or speculative
leverage, liquidity, valuation risks. o o o o o o
</TABLE>
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality rating
(S&P/Moody's)(2) High Yield Bond Fund Sovereign Bond Fund Strategic Income Fund
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment- AAA/Aaa 2.1% 31.4% 26.1%
Grade AA/Aa 0.3% 8.6% 7.0%
Bonds A/A 0.1% 19.3% 0.0%
BBB/Baa 0.2% 13.1% 3.3%
- --------------------------------------------------------------------------------------------------------
Junk BB/Ba 8.2% 14.0% 12.2%
Bonds B/B 67.2% 8.4% 40.8%
CCC/Caa 6.3% 0.0% 1.6%
CC/Ca 0.0% 0.0% 0.0%
C/C 0.0% 0.0% 0.0%
D 0.2% 0.0% 0.3%
% of
portfolio
in bonds 84.6% 94.8% 91.3%
</TABLE>
o Rated by Standard & Poor's or Moody's Rated by the adviser
(1) Average weighted quality distribution for the most recent fiscal year.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
FUND DETAILS 29
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/semiannual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus). You may visit
the Securities and Exchange Commission's Internet website (www.sec.gov) to view
the SAI, material incorporated by reference and other information.
To request a free copy of the current annual/semiannual report or the SAI,
please write or call:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
Internet: www.jhancock.com/funds
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[LOGO] John Hancock (R) (C) 1996 John Hancock Funds, Inc.
INCPN 5/98
<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
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
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>
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
SPECIAL MEETING OF SHAREHOLDERS - NOVEMBER 11, 1998
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Susan S. Newton and James B. Little, with full power of
substitution in each, to vote all the shares of beneficial interest of John
Hancock Sovereign U.S. Government Income Fund ("Sovereign U.S. Government Fund")
which the undersigned is (are) entitled to vote at the Special Meeting of
Shareholders (the "Meeting") of Sovereign U.S. Government Fund to be held at 101
Huntington Avenue, Boston, Massachusetts, on November 11, 1998 at 9:00 a.m.,
Boston time, and at any adjournment(s) of the Meeting. All powers may be
exercised by a majority of all proxy holders or substitutes voting or acting,
or, if only one votes and acts, then by that one. Receipt of the Proxy Statement
dated September 24, 1998 is hereby acknowledged. If not revoked, this proxy
shall be voted for the proposal.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Date ___________________, 1998
NOTE: Signature(s) should agree with the
the name(s) printed herein. When signing
as attorney, executor, administrator,
trustee or guardian, please give your
full name as such. If a corporation,
please sign in full corporate name by
president or other authorized officer. If
a partnership, please sign in partnership
name by authorized person.
---------------------------------
---------------------------------
Signature(s)
<PAGE>
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO SPECIFICATION IS
MADE BELOW. AS TO ANY OTHER MATTER, THE PROXY OR PROXIES SHALL VOTE IN
ACCORDANCE WITH THEIR BEST JUDGEMENT.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW.
(1) To approve an Agreement and Plan of Reorganization between Sovereign
U.S. Government Fund and John Hancock Government Income Fund
("Government Income Fund"). Under this Agreement, Sovereign U.S.
Government Fund would transfer all of its assets to Government Income
Fund in exchange for shares of Government Income Fund. These shares
will be distributed proportionately to you and the other shareholders
of Sovereign U.S. Government Fund. Government Income Fund will also
assume Sovereign U.S.
Government Fund's liabilities.
FOR |_| AGAINST |_| ABSTAIN |_|
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE>
Part B
Statement of Additional Information
JOHN HANCOCK GOVERNMENT INCOME FUND
September 24, 1998
This Statement of Additional Information provides information and is not a
prospectus. It should be read in conjunction with the related proxy statement
and prospectus that is also dated September 24, 1998. This Statement of
Additional Information provides additional information about John Hancock
Government Income Fund and the Fund that it is acquiring, John Hancock Sovereign
U.S. Government Income Fund. Please retain this Statement of Additional
Information for future reference. A copy of the proxy statement and prospectus
can be obtained free of charge by calling John Hancock Signature Services, Inc.,
at 1-800-225-5291.
Table Of Contents
Page
Introduction
Additional Information about Government Income Fund 3
General Information and History 3
Investment Objective and Policies 3
Management of Government Income Fund 3
Control Persons and Principal Holders of Shares 3
Investment Advisory and Other Services 3
Brokerage Allocation 3
Capital Stock and Other Securities 3
Purchase, Redemption and Pricing of Government Income Fund Shares 4
Tax Status 4
Underwriters 4
Calculation of Performance Data 4
Financial Statements 4
Additional Information about Sovereign U.S. Government Income Fund 4
General Information and History 4
Investment Objective and Policies 4
Management of Sovereign U.S. Government Income Fund 4
Investment Advisory and Other Services 4
Brokerage Allocation 4
Capital Stock and Other Securities 4
Purchase, Redemption and Pricing of Sovereign U.S. Government Income Fund 4
Tax Status 5
Underwriters 5
Calculation of Performance Data 5
Financial Statements 5
1
<PAGE>
Exhibits
A- Statement of Additional Information, dated May 1, 1998, of John Hancock
Government Income Fund including audited financial statements as of May 31,
1998.
B- Statement of Additional Information, dated May 1, 1998, of John Hancock
Sovereign U.S. Government Income Fund including audited financial
statements as of May 31,1998.
C- Pro forma combined financial statements as of May 31, 1998, assuming the
reorganization of John Hancock Sovereign U.S. Government Income Fund into
John Hancock Government Income occurred on that date.
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INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a proxy statement and prospectus dated September 24,
1998. The proxy statement and prospectus has been sent to the shareholders of
Sovereign U.S. Government Income Fund in connection with the solicitation by the
Trustees of Sovereign U.S. Government Income Fund of proxies to be voted at the
special meeting of shareholders of Sovereign U.S. Government Income Fund to be
held on November 11, 1998. This Statement of Additional Information incorporates
by reference the Statement of Additional Information of Government Income Fund,
dated May 1, 1998, and the Statement of Additional Information of Sovereign U.S.
Government Income Fund, also dated May 1, 1998. The Government Income Fund SAI
and the Sovereign U.S. Government Income Fund SAI are included with this
Statement of Additional Information.
Additional Information About Government Income Fund
---------------------------------------------------
General Information and History
For additional information about Government Income Fund generally and its
history, see "Organization of the Funds" in the Government Income Fund SAI.
Investment Objective and Policies
For additional information about Government Income Fund's investment objective,
policies and restrictions, see "Investment Objectives and Policies" and
"Investment Restrictions" in the Government Income Fund SAI.
Management of Government Income Fund
For additional information about the Government Income Fund's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in the
Government Income Fund SAI.
Control Persons and Principal Holders of Shares
For additional information about control persons of Government Income Fund and
principal holders of shares of Government Income Fund, see "Those Responsible
for Management" in the Government Income Fund SAI.
Investment Advisory and Other Services
For additional information about Government Income Fund's investment adviser,
custodian, transfer agent and independent accountants, see "Investment Advisory
and Other Services", "Distribution Contracts", "Transfer Agent Services",
"Custody of Portfolio" and "Independent Auditors" in the Government Income Fund
SAI.
Brokerage Allocation and Other Practices
For additional information about Government Income Fund's brokerage allocation
practices, see "Brokerage Allocation" in the Government Income Fund SAI.
Capital Stock and Other Securities
For additional information about the voting rights and other characteristics of
Government Income Fund's shares of beneficial interest, see "Description of the
Funds' Shares" in the Government Income Fund SAI.
Purchase, Redemption and Pricing of Government Income Fund Shares
For additional information about the determination of net asset value, see "Net
Asset Value" in the Government Income Fund SAI.
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Tax Status
For additional information about the tax status of Government Income Fund, see
"Tax Status" in the Government Income Fund SAI.
Underwriters
For additional information about Government Income Fund's principal underwriter
and the distribution contract between the principal underwriter and Government
Income Fund, see "Distribution Contracts" in the Government Income Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of Government Income
Fund, see "Calculation of Performance" in the Government Income Fund SAI.
Financial Statements
Audited financial statements of Government Income Fund at May 31, 1998 are
attached to the Government Income Fund SAI.
Pro forma combined financial statements as of May 31, 1998 are also attached
hereto.
Additional Information About Sovereign U.S. Government Income Fund
------------------------------------------------------------------
General Information and History
For additional information about Sovereign U.S. Government Income Fund generally
and its history, see "Organization of the Funds" in the Sovereign U.S.
Government Income Fund SAI.
Investment Objective and Policies
For additional information about Sovereign U.S. Government Income Fund's
investment objective, policies and restrictions, see "Investment Objectives and
Policies" and "Investment Restrictions" in the Sovereign U.S.
Government Income Fund SAI.
Management of Sovereign U.S. Government Income Fund
For additional information about the Sovereign U.S. Government Income Fund's
Board of Trustees, officers and management personnel, see "Those Responsible for
Management" in the Sovereign U.S. Government Income Fund SAI.
Investment Advisory and Other Services
For additional information about Sovereign U.S. Government Income Fund's
investment adviser, custodian, transfer agent and independent accountants, see
"Investment Advisory and Other Services", "Distribution Contracts", "Transfer
Agent Services", "Custody of Portfolio" and "Independent Auditors" in the
Sovereign U.S. Government Income Fund SAI.
Brokerage Allocation and Other Practices
For additional information about Sovereign U.S. Government Income Fund's
brokerage allocation practices, see "Brokerage Allocation" in the Sovereign U.S.
Government Income Fund SAI.
Capital Stock and Other Securities
For additional information about the voting rights and other characteristics of
Sovereign U.S. Government Income Fund's shares of beneficial interest, see
"Description of the Funds' Shares" in the Sovereign U.S. Government Income Fund
SAI.
Purchase, Redemption and Pricing of Sovereign U.S. Government Income Fund Shares
For additional information about the net asset value of Sovereign U.S.
Government Income Fund, see "Net Asset Value" in the Sovereign U.S. Government
Income Fund SAI.
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Tax Status
For additional information about the tax status of Sovereign U.S. Government
Income Fund, see "Tax Status" in the Sovereign U.S. Government Income Fund SAI.
Underwriters
For additional information about Sovereign U.S. Government Income Fund's
principal underwriter and the distribution contract between the principal
underwriter and Sovereign U.S. Government Income Fund, see "Distribution
Contracts" in the Sovereign U.S. Government Income Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of Sovereign U.S.
Government Income Fund, see "Calculation of Performance" in the Sovereign U.S.
Government Income Fund SAI.
Financial Statements
Audited financial statements of Sovereign U.S. Government Income Fund at May 31,
1998 are attached to the Sovereign U.S. Government Income Fund SAI.
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[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
JOHN HANCOCK GOVERNMENT INCOME FUND
Class A and Class B Shares
JOHN HANCOCK HIGH YIELD BOND FUND
Class A, Class B and Class C Shares
Statement Of Additional Information
May 1, 1998
This Statement of Additional Information provides information about John Hancock
Government Income Fund ("Government Income Fund") and John Hancock High Yield
Bond Fund (High Yield Bond Fund"), (individually a "Fund" and collectively, the
"Funds"), in addition to the information that is contained in the combined
Income Funds' Prospectus dated May 1, 1998 (the "Prospectus"). Each Fund is a
diversified series of John Hancock Bond Trust (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Funds........................................... 2
Investment Objectives and Policies.................................. 2
Government Income Fund and High Yield Bond Fund.....................
Investment Restrictions............................................. 22
Those Responsible for Management.................................... 25
Investment Advisory and Other Services.............................. 35
Distribution Contracts.............................................. 37
Net Asset Value..................................................... 40
Initial Sales Charge on Class A Shares.............................. 40
Deferred Sales Charge on Class B and Class C Shares................. 43
Special Redemptions................................................. 47
Additional Services and Programs.................................... 47
Description of the Funds' Shares.................................... 49
Tax Status.......................................................... 50
Calculation of Performance.......................................... 55
Brokerage Allocation................................................ 58
Transfer Agent Services............................................. 60
Custody of Portfolio................................................ 60
Independent Auditors................................................ 60
Appendix A.......................................................... A-1
Financial Statements................................................ F-1
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ORGANIZATION OF THE FUNDS
The Funds are series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to December 22, 1994, the Government Income Fund was
called Transamerica Government Income Fund and the High Yield Bond Fund was
called Transamerica High Yield Bond Fund. Prior to August 30, 1996, the Funds
were series of John Hancock Series, Inc., a Maryland corporation.
John Hancock Advisers, Inc. (the "Adviser") is the Funds' investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862 ,with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds' investment
objectives and policies discussed in the Prospectus. There is no assurance that
either Fund will achieve its investment objective.
Government Income Fund
The Government Income Fund's investment objective is to earn a high level of
current income consistent with preservation of capital by investing primarily in
securities that are issued or guaranteed as to principal and interest by the
U.S. Government, its agencies or instrumentalities. The Fund may seek to enhance
its current return and may seek to hedge against changes in interest rates by
engaging in transactions involving options (subject to certain limits), futures
and options on futures.
The Fund expects that under normal market conditions, it will invest a least 80%
of its total assets in U.S. Government securities (and related repurchase
agreements and forward commitments) which include:
1. Obligations issued by the U.S. Treasury differing only in their
interest rates, maturities and times of issuance:
(a) U.S. Treasury bills with a maturity of one year or less;
(b) U.S. Treasury notes with maturities of one to ten years; or
(c) U.S. Treasury bonds generally with maturities greater than ten
years; and
2. Obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities which may be supported by:
(a) the full faith and credit of the U.S. Government (e.g., direct
pass-through certificates of the Government National Mortgage
Association ("Ginnie Mae"));
(b) the right of the issuer to borrow from the U.S. Government (e.g.,
securities of the Federal Home Loan banks); or
(c) the credit of the instrumentality (e.g., bonds issued by Federal
National Mortgage Association.)
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The Adviser will attempt to minimize excessive fluctuations in net asset value
per share, so at times the highest yielding government securities then available
may not be selected for investment if, in the view of the Adviser, future
interest rate movements could result in depreciation of value of such
securities. The Fund may take full advantage of the entire range of maturities
of U.S. Government securities and may adjust the dollar-weighted average
maturity of its portfolio from time to time based in large part on the Adviser's
expectation as to future changes in interest rates.
As to the balance of the Fund's assets, where consistent with the investment
objective, the Fund may:
1. invest in U.S. dollar denominated securities issued or guaranteed by
foreign governments which are considered stable by the Adviser, or any of the
political subdivisions, instrumentalities, authorities or agencies of these
governments. These securities generally will be rated within the four highest
rating categories by a nationally recognized rating organization (e.g. Standard
& Poor's Rating Group ("S&P") or Moody's Investors Service, Inc. ("Moody's")) or
if not so rated, determined to be of equivalent quality in the opinion of the
Adviser; provided that the Fund may invest up to 10% of its total assets in
securities which may be rated B or better by a nationally recognized rating
organization.
2. invest in other "asset backed securities" which are not included as
"government asset backed": securities and are rated in one of the two highest
rating categories by a nationally recognized credit rating organization or if
not so rated, determined to be of equivalent investment quality in the opinion
the Adviser;
3. engage in hedging transactions, including options, interest rate
futures contracts and options thereon, subject to certain limitations described
below;
4. enter into repurchase agreements and reverse repurchase agreements and
invest in when issued securities and restricted securities, subject to certain
limitations described below;
5. invest in (for liquidity purposes) high quality, short-term debt
securities with remaining maturities of one year or less ("money market
instruments") such as certificates of deposit, bankers' acceptances, corporate
debt securities, commercial paper and related repurchase agreements.
High Yield Bond Fund
The High Yield Bond Fund's primary investment objective is to maximize current
income without assuming undue risk by investing in a diversified portfolio
consisting primarily of lower-rated, high yielding, fixed income securities,
such as: domestic and foreign corporate bonds; debentures and notes; convertible
securities; preferred stocks; and domestic and foreign government obligations.
As a secondary objective, the Fund seeks capital appreciation, but only when it
is consistent with the primary objective of maximizing current income. The
Fund's investment objectives may not be changed without 30 days' prior written
notice to shareholders.
Under normal market conditions, at least 65% of the Fund's total assets may be
invested in bonds or debentures rated "Baa" or lower by Moody's, or "BBB" or
lower by S&P; however, no more than 30% of the Fund's total assets may be
invested in securities that are rated as low as "CC" by S&P or "Ca" by Moody's.
Unrated securities will also be considered for investment by the Fund when the
Adviser believes that the issuer's financial condition, or the protection
afforded by the
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terms of the securities themselves, limits the risk to the Fund to a degree
comparable to that of rated securities consistent with the Fund's objectives and
policies.
The Fund's investments in debt securities may include zero coupon bonds and
payment-in-kind bonds. Zero coupon bonds are issued at a significant discount
from their principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The market prices
of zero coupon and payment-in-kind bonds are affected to a greater extent by
interest rate changes, and thereby tend to be more volatile than securities
which pay interest periodically and in cash. The Fund accrues income on these
securities for tax and accounting purposes, and this income is required to be
distributed to shareholders. Because no cash is received at the time income
accrues on these securities, the Fund may be forced to liquidate other
investments to make distributions. At times when the Fund invests in zero-coupon
and payment-in-kind bonds, it will not be pursuing its primary objective of
maximizing current income.
Although the Fund intends to maintain investment emphasis on debt securities of
domestic issuers, the Fund may invest without limitation in debt securities of
foreign issuers, including those issued by supranational entities such as the
World Bank. The Fund may also purchase debt securities issued in an any country
developed or undeveloped. Investments in securities of issuers in
non-industrialized countries generally involve more risk and may be considered
speculative. The Fund may also enter into forward foreign currency exchange
contracts for the purchase or sale of foreign currency for hedging purposes. The
risks of foreign investments should be carefully considered by investors.
Included among domestic debt securities eligible for purchase by the Fund are
adjustable and variable or floating rate securities, mortgage related securities
(including stripped securities, collateralized mortgage obligations and
multi-class pass-through securities), asset-backed securities and callable
bonds. Callable bonds have a provision permitting the issuer, at its option to
"call" or redeem the bonds. If an issuer were to redeem bonds held by the Fund
during a time of declining interest rates, the Fund might not be able to
reinvest the proceeds in bonds providing the same coupon return as the bonds
redeemed.
To the extent that the Fund does not invest in the securities described above,
the Fund may:
1. invest (for liquidity purposes ) in high quality, short-term debt
securities with remaining maturities of one year or less ("money market
instruments") including government obligations, certificates of deposit,
bankers' acceptances, short-term corporate debt securities, commercial paper and
related repurchase agreements;
2. invest up to 10% of its total assets in municipal obligations,
including municipal bonds issued at a discount, in circumstances where the
Adviser determines that investing in such obligations would facilitate the
Fund's ability to accomplish its investment objectives;
3. lend its portfolio securities, enter into repurchase agreements and
reverse repurchase agreements, purchase restricted and illiquid securities and
purchase securities on a when issued or forward commitment basis;
4. write (sell) covered call and put options and purchase call and put
options on debt securities and securities indices in an effort to increase
current income and for hedging purposes; and
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5. purchase and sell interest rate futures contracts on debt securities
and securities index futures contracts, and write and purchase options on these
futures contracts for hedging purposes.
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, part or all of the
assets of the Fund may be invested in cash or cash equivalents consisting of:
1. obligations of banks (including certificates of deposit, bankers'
acceptances and repurchase agreements ) with assets of $100,000,0000 or more;
2. commercial paper rated within the two highest rating categories of a
nationally recognized rating organization;
3. investment grade short-term notes;
4. obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities; and
5. related repurchase agreements.
Government Securities. Each Fund may invest in U.S. Government securities, which
are obligations issued or guaranteed by the U.S. Government and its agencies,
authorities or instrumentalities. Certain U.S. Government securities, including
U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities, issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes").
Custodial Receipts. The Funds may acquire custodial receipts for U.S. government
securities. Custodial receipts evidence ownership of future interest payments,
principal payments or both, and include Treasury Receipts, Treasury Investors
Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities
("CATS"). Custodial receipts are not considered U.S.
government securities.
Bank and Corporate Obligations. Each of the Funds may invest in commercial
paper. Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Funds consists of direct U.S.
dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which a Fund may invest include certificates of deposit, bankers' acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate.
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Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Municipal Obligations. High Yield Bond Fund may invest in a variety of municipal
obligations which consist of municipal bonds, municipal notes and municipal
commercial paper.
Municipal Bonds. Municipal bonds are issued to obtain funds for various public
purposes including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
exempt from federal income tax. The payment of principal and interest by issuers
of certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. Such guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
Municipal Notes. Municipal notes are short-term obligations of municipalities,
generally with a maturity ranging from six months to three years. The principal
types of such notes include tax, bond and revenue anticipation notes and project
notes.
Municipal Commercial Paper. Municipal commercial paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or interim construction financing. Municipal
commercial paper is backed in many cases by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks and other institutions.
Federal tax legislation enacted in the 1980s placed substantial new restrictions
on the issuance of the bonds described above and in some cases eliminated the
ability of state or local governments to issue municipal obligations for some of
the above purposes. Such restrictions do not affect the Federal income tax
treatment of municipal obligations in which the Fund may invest which were
issued prior to the effective dates of the provisions imposing such
restrictions. The effect of these restrictions may be to reduce the volume of
newly issued municipal obligations.
Issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations.
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There is also the possibility that as a result of litigation or other conditions
the power or ability of any one or more issuers to pay when due the principal of
and interest on their municipal obligations may be affected.
The yields of municipal bonds depend upon, among other things, general money
market conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of S&P, Moody's and Fitch Investors Service ("Fitch") represent their
respective opinions on the quality of the municipal bonds they undertake to
rate. It should be emphasized, however, that ratings are general and not
absolute standards of quality. Consequently, municipal bonds with the same
maturity, coupon and rating may have different yields and municipal bonds of the
same maturity and coupon with different ratings may have the same yield. See the
Appendix for a description of ratings. Many issuers of securities choose not to
have their obligations rated. Although unrated securities eligible for purchase
by the Fund must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
Mortgage-Backed Securities. The Funds may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits REMIC, CMOs and stripped mortgage-backed securities
("SMBS"), and other types of "Mortgage-Backed Securities" that may be available
in the future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to Ginnie Mae, Fannie Mae and Freddie Macs.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass-through securities. Debt service on CMOs is
provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), and invests in certain mortgages
primarily secured by interests in real property and other permitted investments.
Investors may purchase "regular" or "residual" interests in REMICs, although the
Funds do not intend, absent a change in current tax law, to invest in residual
interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one
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class receiving some of the interest and most of the principal, while the other
class will receive most of the interest and the remaining principal. In the most
extreme case, one class will receive all of the interest (the "interest only"
class) while the other class will receive all of the principal (the "principal
only" class). The yields and market risk of interest only and principal only
SMBS, respectively, may be more volatile than those of other fixed income
securities. The staff of the SEC considers privately issued SMBS to be illiquid.
Structured or Hybrid Notes. Government Income Fund and High Yield Bond Fund may
invest in "structured" or "hybrid" notes. The distinguishing feature of a
structured or hybrid note is that the amount of interest and/or principal
payable on the note is based on the performance of a benchmark asset or market
other than fixed income securities or interest rates. Examples of these
benchmarks include stock prices, currency exchange rates and physical commodity
prices. Investing in a structured note allows a Fund to gain exposure to the
benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, a Fund may forego all or part of the interest and principal that would
be payable on a comparable conventional note; a Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 10% limitation on investments
in illiquid securities.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension
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risk. Extending the average life of a Mortgage-Backed Security increases the
risk of depreciation due to future increases in market interest rates.
Risk Associated with Mortgage-backed Securities. Different types of derivative
debt securities are subject to different combinations of prepayment, extension
and/or interest rate risk. Conventional mortgage pass-through securities and
sequential pay CMOs are subject to all of these risks, but are typically not
leveraged. Thus, the magnitude of exposure may be less than for more leveraged
Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage-Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only debt securities ("POs"),
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage-Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X- reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Convertible Securities. High Yield Bond Fund may invest in convertible
securities. Convertible securities may be converted at either a stated price or
stated rate into underlying shares of common stock of the same issuer.
Convertible securities have general characteristics similar to both fixed income
and equity securities. The market value of convertible securities declines as
interest rates increase, and increases as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stocks and therefore will also react to variations in the general market for
equity securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis,
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and consequently may not experience market value declines to the same extent as
the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer. However,
the issuers of convertible securities may default on their obligations.
Mortgage "Dollar Roll" Transactions. The Funds may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which a
Fund sells Mortgage-Backed Securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Funds will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of a Fund's borrowing and other senior securities. For financial reporting and
tax purposes, each Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. Neither Fund currently intends to enter into
mortgage rolls that are accounted for as financing.
Pay-In-Kind, Delayed and Zero Coupon Bonds. Each Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices of pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. A Fund's investments in pay-in-kind, delayed and
zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status." At times when a Fund invests in pay-in-kind,
delayed and zero coupon bonds, it will not be pursuing its primary objective of
maximizing current income.
Indexed Securities. High Yield Bond Fund may invest in indexed securities,
including floating rate securities that are subject to a maximum interest rate
("capped floaters") and leveraged inverse floating rate securities ("inverse
floaters") (up to 10% of the Fund's total assets). The interest rate or, in some
cases, the principal payable at the maturity of an indexed security may change
positively or inversely in relation to one or more interest rates, financial
indices or other financial indicators ("reference prices"). An indexed security
may be leveraged to the extent that the magnitude of any change in the interest
rate or principal payable on an indexed security is a multiple of the change in
the reference price. Thus, indexed securities may decline in value due to
adverse market changes in interest rates or other reference prices.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, each Fund may enter into interest rate swaps and
other types of swap agreements such as caps, collars and floors. Only High Yield
Bond Fund may enter into currency swaps, caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for
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payment in different currencies, the parties might agree to exchange the
notional principal amount as well. Swaps may also depend on other prices or
rates, such as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payment to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. For example, if a Fund agreed to exchange payments in
dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. Each Fund will maintain in a segregated account
with its custodian, cash or liquid securities equal to the net amount, if any,
of the excess of the Fund's obligations over its entitlements with respect to
swap, cap, collar or floor transactions.
Asset-Backed Securities. Government Income Fund and High Yield Bond Fund may
invest a portion of their assets in asset-backed securities. Asset backed
securities, like Ginnie Mae certificates, are securities which represent a
participation in or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another. Types of other asset backed securities include automobile receivable
securities, credit card receivable securities and mortgage backed securities
such as collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs").
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a
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risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large number
of vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may not
have a proper security interest in the underlying automobiles. Therefore, there
is the possibility that, in some cases, recoveries on repossessed collateral may
not be available to support payments on these securities.
Lower Rated High Yield Debt Obligations. Government Income Fund and High Yield
Bond Fund may invest in high yielding, fixed income securities rated below
investment grade (e.g., rated below Baa by Moody's or below BBB by S&P),
sometimes referred to as junk bonds. No more than 10% of Government Income
Fund's total assets may be invested in these securities, and Government Income
Fund may not invest in securities rated lower than B by a nationally recognized
rating organization. Ratings are based largely on the historical financial
condition of the issuer. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition, which may be better or worse than the rating would indicate.
See the Appendix to this Statement of Additional Information which describes the
characteristics of corporate bonds in the various rating categories. High Yield
Bond Fund may invest in comparable quality unrated securities which, in the
opinion of the Adviser, offer comparable yields and risks to those securities
which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The high yield fixed income market is relatively new and
its growth occurred during a period of economic expansion. The market has not
yet been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities generally
respond to short term corporate and market developments to a greater extent than
do the price and liquidity of higher rated securities because such developments
are perceived to have a more direct relationship to the ability of an issuer of
such lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately a Fund's assets. The reduced availability of
reliable, objective data may increase a Fund's reliance on management's judgment
in valuing high yield bonds. In addition, a Fund's investments in high yield
securities may be susceptible to adverse publicity and investor perceptions,
whether or not justified by fundamental factors. A Fund's investments, and
consequently its net asset value, will be subject to the market fluctuations and
risks inherent in all securities.
Brady Bonds. The Funds may invest in Brady Bonds and other sovereign debt
securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities described as part of a restructuring plan created by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally, commercial bank
debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan facilitate the exchange of commercial bank debt for newly
issued debt (known as Brady Bonds). The World Bank and the IMF provide funds
pursuant to loan
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agreements or other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under
these arrangements IMF debtor nations are required to implement domestic
monetary and fiscal reforms. These reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs promote the debtor country's ability to service its external
obligations and promote its economic growth and development. The Brady Plan only
sets forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors. The Adviser believes that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds make the
debt of countries which have issued or have announced plans to issue Brady Bonds
an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January 1, 1997, the Funds are not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have along payment
history. Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt, bonds issued at a discount of face value of such debt, bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Certain Brady Bonds have been
collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Ratings as Investment Criteria In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These rating will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information concerning the rating of Moody's and S&P and their
significance. Subsequent to its purchase by the Funds, an issue of securities
may cease to be rated, or its rating may be reduced below the minimum required
for purchase by the Funds. Neither of these events will require the sale of the
securities by the Funds.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
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Investments in Foreign Securities. Government Income Fund may invest in U.S.
dollar denominated securities of foreign governments. These securities will
generally be rated within the four highest rating categories by a nationally
recognized rating organization S&P or Moody's or if not so rated, determined to
be of equivalent quality in the opinion of the Adviser; provided that Government
Income Fund may invest up to 10% of its total assets in securities which may be
rated B or better by a nationally recognized rating organization.
High Yield Bond Fund may invest in securities of foreign issuers, including debt
and equity securities of corporate and governmental issuers in countries with
emerging economies or securities markets. High Yield Bond Fund may also invest
in American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs")
or other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs, in
bearer form, are designed for use in European securities markets.
Foreign Currency Transactions. High Yield Bond Fund may engage in foreign
currency transactions. The foreign currency exchange transactions of the Fund
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may enter
into forward foreign currency exchange contracts involving currencies of the
different countries in which it may invest as a hedge against possible
variations in the foreign exchange rate between these currencies. Forward
contracts are agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. Transaction hedging is
the purchase or sale of forward foreign currency contracts with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities quoted or denominated in the same
or related foreign currencies. Portfolio hedging is the use of forward foreign
currency contracts to offset portfolio security positions denominated or quoted
in the same or related foreign currencies. The Fund's dealings in forward
foreign currency exchange contracts will be limited to hedging either specified
transactions or portfolio positions. The Fund will not attempt to hedge all of
its foreign portfolio positions.
If High Yield Bond Fund enters into a forward contract requiring it to purchase
foreign currency, its custodian bank will segregate cash or liquid securities,
of any type or maturity, in a separate account of the Fund in an amount
necessary to complete the forward contract. These assets will be valued at
market daily and if the value of the securities in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment in
purchased forward contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of these securities decline. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency exchange transactions
varies with factors such as the currency involved, the length of the contract
period and the prevailing market conditions.
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Since transactions in foreign currency are usually conducted on a principal
basis, no fees or commissions are involved.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly, so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation, limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends in some cases, capital gains, and interest payable on certain of
the Fund's foreign portfolio securities may be subject to foreign withholding or
other foreign taxes, thus reducing the net amount of income or gains available
for distribution to the Fund's shareholders.
Repurchase Agreements. Each Fund may invest in repurchase agreements. In a
repurchase agreement the Fund buys a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the
issuer at a fixed time and price plus accrued interest. Each Fund will enter
into repurchase agreements only with member banks of the Federal Reserve System
and with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Funds
enter into repurchase agreements.
Each Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller
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of a repurchase agreement, the Fund could experience delays in liquidating the
underlying securities during the period in which the Fund seeks to enforce its
rights thereto, possible subnormal levels of income, a decline in value of the
underlying securities or lack of access to income during this period, and the
expense of enforcing its rights.
Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase
agreements which involve the sale of government securities held in its portfolio
to a bank with an agreement that the Fund will buy back the securities at a
fixed future date at a fixed price plus an agreed amount of "interest" which may
be reflected in the repurchase price. Reverse repurchase agreements are
considered to be borrowings by the Fund. Reverse repurchase agreements involve
the risk that the market value of securities purchased by a Fund with proceeds
of the transaction may decline below the repurchase price of the securities sold
by the Fund which it is obligated to repurchase. A Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. To minimize various risks associated with reverse repurchase
agreements, the Fund will establish and maintain with the Fund's custodian a
separate account consisting of liquid securities, of any type or maturity, in an
amount at least equal to the repurchase prices of the securities (plus any
accrued interest thereon) under such agreements. A Fund will not enter into
reverse repurchase agreements and other borrowings exceeding in the aggregate
more than 33 1/3% of the market value of its total assets. Government Income
Fund will not make additional investments while borrowings (including reverse
repurchase agreements) are in excess of 5% of the Fund's total assets. A Fund
will enter into reverse repurchase agreements only with federally insured banks
or savings and loan associations which are approved in advance as being
creditworthy by the Trustees. Under procedures established by the Trustees, the
Adviser will monitor the creditworthiness of the banks involved.
Restricted Securities. The Funds may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. Each Fund will not invest more than 10% of its total
assets in illiquid investments, based upon a continuing review of the trading
markets for specific Section 4(2) paper or Rule 144A securities, that they are
liquid, they will not be subject to the 10% limit on illiquid investments. The
Trustees may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring the liquidity of restricted securities. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor each Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Options on Securities, Securities Indices and Currency. Each Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or, in the
case of High Yield Bond Fund, on any currency in which Fund investments may be
denominated. These options may be listed on national domestic securities
exchanges or foreign securities exchanges or traded in the over-the-counter
market. Each Fund may write covered put and call options and purchase put and
call options to enhance total return, as a substitute for the purchase or sale
of securities or (in the case of High Yield Bond Fund) currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
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Writing Covered Options. A call option on securities or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the Fund's custodian with a value at least equal to the
Fund's obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the Fund's net
exposure on its written option position. A written call option on securities is
typically covered by maintaining the securities that are subject to the option
in a segregated account. A Fund may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of the
underlying index.
A Fund may terminate its obligations under an exchange traded call or put option
by purchasing an option identical to the one it has written. Obligations under
over-the-counter options may be terminated only by entering into an offsetting
transaction with the counterparty to such option. Such purchases are referred to
as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in anticipation
of an increase, or put options in anticipation of a decrease ("protective
puts"), in the market value of securities or (in the case of High Yield Bond
Fund) currencies of the type in which it may invest. A Fund may also sell call
and put options to close out its purchased options.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of a Fund's portfolio securities or (in
the case of High Yield Bond Fund) the currencies in which they are denominated.
Put options may also be purchased by a Fund for the purpose of affirmatively
benefiting from a decline in the price of securities or currencies which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities or currency decreased below the exercise
price sufficiently to cover the premium and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the put option.
Gains
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and losses on the purchase of put options may be offset by countervailing
changes in the value of a Fund's portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which a Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If a Fund is unable
to effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or (in the
case of High Yield Bond Fund) currency exchange rates, each Fund may purchase
and sell various kinds of futures contracts, and purchase
18
<PAGE>
and write call and put options on these futures contracts. The Fund may also
enter into closing purchase and sale transactions with respect to any of these
contracts and options. The futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies (in
the case of High Yield Bond Fund) and any other financial instruments and
indices. All futures contracts entered into by the Funds are traded on U.S. or
foreign exchanges or boards of trade that are licensed, regulated or approved by
the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, a Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that a Fund proposes to acquire or (in the
case of High Yield Bond Fund) the exchange rate of currencies in which portfolio
securities are quoted or denominated. When interest rates are rising or
securities prices are falling, a Fund can seek to offset a decline in the value
of its current portfolio securities through the sale of futures contracts. When
interest rates are falling or securities prices are rising, a Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
High Yield Bond Fund may seek to offset anticipated changes in the value of a
currency in which its portfolio securities, or securities that it intends to
purchase, are quoted or denominated by purchasing and selling futures contracts
on such currencies.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or (in the case of High Yield Bond
Fund) foreign currency rates that would adversely affect the dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. Similarly,
High Yield Bond Fund may sell futures contracts on any currencies in which its
portfolio securities are quoted or denominated or in one currency to hedge
against fluctuations in the value of securities denominated in a different
currency if there is an established historical pattern of correlation between
the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in a Fund's portfolio may
be more or less volatile than prices of such futures contracts, the Adviser will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any differential by having the Fund enter into a
greater or lesser number of futures contracts or by attempting to achieve only a
partial hedge against price changes affecting the Fund's portfolio securities.
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<PAGE>
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or (in the case of High Yield Bond Fund) currency exchange
rates then available in the applicable market to be less favorable than prices
that are currently available. A Fund may also purchase futures contracts as a
substitute for transactions in securities or (in the case of High Yield Bond
Fund) foreign currency, to alter the investment characteristics of or currency
exposure associated with portfolio securities or to gain or increase its
exposure to a particular securities market or currency.
Options on Futures Contracts. Each Fund may purchase and write options on
futures for the same purposes as its transactions in futures contracts. The
purchase of put and call options on futures contracts will give a Fund the right
(but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, a Fund obtains the
benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that a Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by a Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. Each Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that a Fund is using futures and
related options for hedging purposes, futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that the Fund owns or futures contracts will be purchased
to protect the Fund against an increase in the price of securities (or, in the
case of High Yield Bond Fund, the currency in which they are quoted or
denominated) it intends to purchase. Each Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or securities or instruments which it expects to purchase. As evidence
of its hedging intent, each Fund expects that on 75% or more of the occasions on
which it takes a long futures or option position (involving the purchase of
futures contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent
20
<PAGE>
amounts of related securities (or assets of High Yield Bond Fund denominated in
the related currency) in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for a Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Funds' portfolios are various futures
on U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent a Fund from closing out
positions and limiting its losses.
Lending of Securities. The Funds may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. A
Fund may reinvest any cash collateral in short-term securities and money markets
funds. When a Fund lends portfolio securities, there is a risk that the borrower
may fail to return the securities involved in the transaction. As a result, the
Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund
may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of each Fund not to lend portfolio securities having a total
value exceeding 30% of its total assets.
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<PAGE>
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Fundamental
Investment Restriction. Generally, warrants and stock purchase rights do not
carry with them the right to receive dividends or exercise voting rights with
respect to the underlying securities, and they do not represent any rights in
the assets of the issuer. As a result, an investment in warrants and rights may
be considered to entail greater investment risk than certain other types of
investments. In addition, the value of warrant and rights does not necessarily
change with the value of the underlying securities, and they cease to have value
if they are not exercised on or prior to their expiration date. Investment in
warrants and rights increases the potential profit or loss to be realized from
the investment of a given amount of the Fund's assets as compared with investing
the same amount in the underlying stock.
Forward Commitment and When-Issued Securities. Each Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Funds losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a when-
issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. Each Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income.
Short-term trading may have the effect of increasing portfolio turnover rate. A
high rate of portfolio turnover (100% or greater) involves correspondingly
greater brokerage transaction expenses and may make it more difficult for a Fund
to qualify as a regulated investment company for federal income tax purposes.
The Funds' portfolio turnover rate is set forth in the table under the caption
"Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed for a Fund without the approval of a majority of that Fund's
outstanding voting securities which, as
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<PAGE>
used in the Prospectus and this Statement of Additional Information, means the
approval by the lesser of (1) the holders of 67% or more of that Fund's shares
represented at a meeting if more than 50% of that Fund's outstanding shares are
present in person or by proxy at that meeting or (2) more than 50% of that
Fund's outstanding shares.
Each Fund may not:
(1) Borrow money in an amount in excess of 33-1/3% of its total assets, and then
only as a temporary measure for extraordinary or emergency purposes (except that
it may enter into a reverse repurchase agreement within the limits described in
the Prospectus or this Statement of Additional Information), or pledge, mortgage
or hypothecate an amount of its assets (taken at market value) in excess of 15%
of its total assets, in each case taken at the lower of cost or market value.
For the purpose of this restriction, collateral arrangements with respect to
options, futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margins are not considered a
pledge of assets.
(2) Underwrite securities issued by other persons except insofar as such Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Purchase or retain real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein and securities secured by real estate),
or mineral leases, commodities or commodity contracts (except contracts for the
future delivery of fixed income securities, stock index and currency futures and
options on such futures) in the ordinary course of its business. Each Fund
reserves the freedom of action to hold and to sell real estate or mineral
leases, commodities or commodity contracts acquired as a result of the ownership
of securities.
(4) Invest in direct participation interests in oil, gas or other mineral
exploration or development programs.
(5) Make loans to other persons except by the purchase of obligations in which
such Fund is authorized to invest and by entering into repurchase agreements;
provided that a Fund may lend its portfolio securities not in excess of 30% of
its total assets (taken at market value). Not more than 10% of a Fund's total
assets (taken at market value) will be subject to repurchase agreements maturing
in more than seven days. For these purposes the purchase of all or a portion of
an issue of debt securities shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time thereof,
would cause more than 5% of its total assets (taken at market value) to be
invested in the securities of such issuer, other than securities issued or
guaranteed by the United States or any state or political subdivision thereof,
or any political subdivision of any such state, or any agency or instrumentality
of the United States, any state or political subdivision thereof, or any
political subdivision of any such state. In applying these limitations, a
guarantee of a security will not be considered a security of the guarantor,
provided that the value of all securities issued or guaranteed by that
guarantor, and owned by the Fund, does not exceed 10% of the Fund's total
assets. In determining the issuer of a security, each state and each political
subdivision agency, and instrumentality of each state and each multi-state
agency of which such state is a member is a separate issuer. Where securities
are backed only by assets and revenues of a particular instrumentality, facility
or subdivision, such entity is considered the issuer.
23
<PAGE>
(7) Invest in companies for the purpose of exercising control or management.
(8) Purchase or retain in its portfolio any securities issued by an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of such Fund, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by such Fund one
or more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
(9) Purchase any securities or evidences of interest therein on margin, except
that each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and each Fund may make deposits
on margin in connection with futures contracts and related options.
(10) Sell any security which such Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon equivalent conditions.
(11) Knowingly invest in securities which are subject to legal or contractual
restrictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or market makers do not exist or will not
entertain bids or offers), except for repurchase agreements, if, as a result
thereof more than 10% of such Fund's total assets (taken at market value) would
be so invested.
(12) Issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "Investment Company Act") if such issuance is
specifically prohibited by the Investment Company Act or the rules and
regulations promulgated thereunder. For the purpose of this restriction,
collateral arrangements with respect to options, futures contracts and options
on futures contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior security.
(13) Government Income Fund may not invest more than 25% of its total assets
(taken at market value) in the securities of issuers engaged in any one
industry. High Yield Bond Fund may not invest more than 25% of its total assets
(taken at market value) in the securities of issuers engaged in any one
industry, except that the Fund may invest up to 40% of the value of its total
assets in the securities of issuers engaged in the electric utility and
telephone industries. The Adviser follows a policy of not causing the Fund to
invest more than 25% of its total assets in the securities of issuers engaged in
the electric utility industry or the telephone industry unless yields available
for four consecutive weeks in the four highest rating categories on new issue
bonds in this industry (issue size of $50 million or more) have averaged greater
than the yields of new issue long-tern industrial bonds similarly rated (issue
size of $50 million or more) and, in the opinion the Adviser, the relative
return available from the electric utility or telephone industry and the
relative risk, marketability, quality and availability of securities of this
industry justifies such an investment. Obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities are not subject to the
foregoing 25% limitation. In addition, for purposes of this limitation,
determinations of what constitutes an industry are made in accordance with
specific industry codes set forth in the Standard Industrial Classification
Manual and without considering groups of industries (e.g., all utilities, to be
an industry).
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<PAGE>
(14) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if such
purchase, at the time thereof, would cause a Fund to hold more than 10% of any
class of securities of such issuer. For this purpose, all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an issuer shall
be deemed a single class.
Non-Fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
(1) Neither Fund may purchase a security if, as a result, (i) more than 10% of
the Fund's total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the Fund's
total assets would be invested in the securities of any one investment company.
These limitations do not apply to (a) the investment of cash collateral,
received by the Fund in connection with lending of the Fund's portfolio
securities, in the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the assets of
another investment company. Subject to the above percentage limitations, each
Fund may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase securities of
other investment companies within the John Hancock Group of Funds.
If a percentage restriction or rating restriction on investment or utilization
of assets is adhered to at the time an investment is made or assets are so
utilized, a later change in percentage resulting from changes in the value of a
Fund's portfolio securities or a later change in the rating of a portfolio
security will not be considered a violation of policy.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by its Trustees who elect officers who are
responsible for the day-to-day operations of the Funds and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also Officers and Directors of the Adviser or Officers and Directors of the
Funds' principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
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<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Edward J. Boudreau, Jr. * Trustee, Chairman and Chairman, Director and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer,
Boston, MA 02199 (1, 2) the Adviser; Chairman,
October 1944 Trustee and Chief
Executive Officer, The
Berkeley Financial Group
("The Berkeley Group");
Chairman and Director, NM
Capital Management, Inc.
("NM Capital"), John
Hancock Advisers
International Limited
("Advisers International")
and Sovereign Asset
Management Corporation
("SAMCorp"); Chairman,
Chief Executive Officer
and President, John
Hancock Funds, Inc. ("John
Hancock Funds"); Chairman,
First Signature Bank and
Trust Company; Director,
John Hancock Insurance
Agency, Inc. ("Insurance
Agency, Inc."), John
Hancock Advisers
International (Ireland)
Limited ("International
Ireland"), John Hancock
Capital Corporation and
New England/Canada
Business Council; Member,
Investment Company
Institute Board of
Governors; Director, Asia
Strategic Growth Fund,
Inc.; Trustee, Museum of
Science; Director, John
Hancock Freedom Securities
Corporation (until
September 1996); Director,
John Hancock Signature
Services, Inc. ("Signature
Services") (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
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<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments);
April 1940 Director, Arbella Mutual
Insurance Company
(insurance), Health Plan
Services, Inc.,
Massachusetts Health and
Education Tax Exempt
Trust, Flagship
Healthcare, Inc., Carlin
Insurance Agency, Inc.,
West Insurance Agency,
Inc. (until May 1995), Uno
Restaurant Corp.;
Chairman, Massachusetts
Board of Higher Education
(since 1995).
William H. Cunningham Trustee Chancellor, University
601 Colorado Street of Texas System and
O'Henry Hall former President of the
Austin, TX 78701 University of Texas,
January 1944 Austin, Texas; Lee Hage
and Joseph D. Jamail
Regents Chair of Free
Enterprise; Director,
LaQuinta Motor Inns, Inc.
(hotel management
company); Director,
Jefferson-Pilot
Corporation (diversified
life insurance company)
and LBJ Foundation Board
(education foundation);
Advisory Director, Texas
Commerce Bank - Austin.
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
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<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Charles F. Fretz Trustee Retired; self employed;
RD #5, Box 300B Former Vice President
Clothier Springs Road and Director, Towers,
Malvern, PA 19355 Perrin, Foster & Crosby,
June 1928 Inc. (international
management consultants)
(1952-1985).
Harold R. Hiser, Jr. Trustee Executive Vice
123 Highland Avenue President,
Short Hill, NJ 07078 Schering-Plough
October 1931 Corporation
(pharmaceuticals)
(retired 1996);
Director, ReCapital
Corporation
(reinsurance) (until
1995).
Anne C. Hodsdon * Trustee and President President, Chief
101 Huntington Avenue (1,2) Operating Officer and
Boston, MA 02199 Director, the Adviser;
April 1953 Trustee, The Berkeley
Group; Director, John
Hancock Funds, Advisers
International, Insurance
Agency, Inc. and
International Ireland;
President and Director,
SAMCorp. and NM Capital;
Executive Vice
President, the Adviser
(until December 1994);
Director, Signature
Services (until January
1997).
Charles L. Ladner Trustee Director, Energy North,
UGI Corporation Inc. (public utility
P.O. Box 858 holding company) (until
Valley Forge, PA 19482 1992); Senior Vice
February 1938 President of UGI Corp.
Holding Company Public
Utilities, LPGAS, Vice
President of Amerigas
Partners L.P.
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
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<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee Chairman, President,
3810 W. Alabama Chief Executive Officer
Houston, TX 77027 and Director, Linbeck
August 1934 Corporation (a holding
company engaged in various
phases of the construction
industry and warehousing
interests); Former
Chairman, Federal Reserve
Bank of Dallas (1992,
1993); Chairman of the
Board and Chief Executive
Officer, Linbeck
Construction Corporation;
Director, PanEnergy
Corporation (a diversified
energy company), Daniel
Industries, Inc.
(manufacturer of gas
measuring products and
energy related equipment),
GeoQuest International
Holdings, Inc. (a
geophysical consulting
firm) (1980-1993); Former
Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee Director and Secretary,
1230 Brentford Road The McCarter Corp.
Malvern, PA 19355 (machine manufacturer).
May 1928
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
29
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1) Director and President,
4327 Enterprise Avenue Mast Holdings, Inc.
Naples, FL 33942 (since 1991); Director,
August 1944 First Signature Bank &
Trust Company (until
August 1991); Director,
Mast Realty Trust (until
1994); President,
Maxwell Building Corp.
(until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John
John Hancock Place Hancock Life Company;
P.O. Box 111 Director, the Adviser,
Boston, MA 02117 Advisers International,
August 1937 John Hancock Funds, John
Hancock Distributors,
Inc., Insurance Agency,
Inc., John Hancock
Subsidiaries, Inc.,
SAMCorp. and NM Capital;
Trustee, The Berkeley
Group; Director, JH
Networking Insurance
Agency, Inc.; Director,
Signature Services
(until January 1997).
Norman H. Smith Trustee Lieutenant General,
243 Mt. Oriole Lane United States Marine
Linden, VA 22642 Corps; Deputy Chief of
March 1933 Staff for Manpower and
Reserve Affairs,
Headquarters Marine Corps;
Commanding General III
Marine Expeditionary
Force/3rd Marine Division
(retired 1991).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
30
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee Director, The Smith
13 Chadwell Place Barney Muni Bond Funds,
Morristown, NJ 07960 The Smith Barney
September 1930 Tax-Free Money Funds,
Inc., Vantage Money Market
Funds (mutual funds), The
Inefficient-Market Fund,
Inc. (closed-end
investment company) and
Smith Barney Trust Company
of Florida; Chairman,
Smith Barney Trust Company
(retired December, 1991);
Director, Smith Barney,
Inc., Mutual Management
Company and Smith Barney
Advisers, Inc. (investment
advisers) (retired 1991);
Senior Executive Vice
President, Director and
member of the Executive
Committee, Smith Barney,
Harris Upham & Co.,
Incorporated (investment
bankers) (until 1991).
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the
Boston, MA 02199 Adviser; Director, the
July 1938 Adviser, Advisers
International, John
Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank
Fund and NM Capital;
Senior Vice President, The
Berkeley Group; President,
the Adviser (until
December 1994); Director,
Signature Services (until
January 1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
31
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Senior Vice President,
101 Huntington Avenue Chief Financial Officer the Adviser, The
Boston, MA 02199 Berkeley Group, John
February 1935 Hancock Funds.
John A. Morin Vice President Vice President and
101 Huntington Avenue Secretary, the Adviser,
Boston, MA 02199 The Berkeley Group,
July 1950 Signature Services and
John Hancock Funds;
Secretary, NM Capital and
SAMCorp.; Clerk, Insurance
Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until
February 1996), and Vice
President of John Hancock
Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Vice President, the
101 Huntington Avenue Secretary Adviser; John Hancock
Boston, MA 02199 Funds, Signature
March 1950 Services and The
Berkeley Group; Vice
President, John Hancock
Distributors, Inc.
(until April 1994).
James J. Stokowski Vice President and Vice President, the
101 Huntington Avenue Treasurer Adviser.
Boston, MA 02199
November 1946
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
32
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of February 2, 1998 the officers and Trustees of the Funds as a group
beneficially owned less than 1% of the outstanding shares of each of the Funds.
As of that date, the following shareholders were the only record holders and
beneficially owned of 5% or more of the shares of the respective Funds:
Percentage of Total
Name and Fund and Outstanding Shares
Address of Shareholder Class of Shares of the Class of the Fund
- ---------------------- --------------- ------------------------
MLPF&S For The Sole Government 13.05%
Benefit of Its Customers Income
Attn Fund Administration Class B
4800 Deerlake Drive East
Jacksonville FL 32246-6484
Continental Trust Co Cust Government 8.68%
C/F County Employee's Annuity & Income
Benefit Fund Class B
of Cook County IL
Attn Mutual Funds Dep 1976
209 W Jackson St Suite 700
Chicago IL 60606-6905
MLPF&S For The Sole High Yield Bond 6.13%
Benefit of Its Customers Class A
Attn Fund Administration
4800 Deerlake Drive East
Jacksonville FL 32246-6484
MLPF&S For The Sole High Yield Bond 24.37%
Benefit of Its Customers Class B
Attn Fund Administration
4800 Deerlake Drive East
Jacksonville FL 32246-6484
From December 22, 1994 until December 22, 1996, the Trustees established an
Advisory Board to facilitate a smooth transition between Transamerica Fund
Management Company ("TFMC"), the prior investment adviser, and the Adviser. The
members of the Advisory Board were distinct from the Trustees, did not serve the
Funds in any other capacity and were persons who had no power to determine what
securities were purchased or sold and behalf of the Funds.
Compensation of the Trustees and Advisory Board. The following tables provide
information regarding the compensation paid by the Funds and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services for the Funds' most
recently
33
<PAGE>
completed fiscal year. Messrs. Boudreau and Scipione and Ms. Hodsdon, each a
non-Independent Trustee, and each of the officers of the Fund are interested
persons of the Adviser, are compensated by the Adviser and/or its affiliates and
receive no compensation from the Funds for their services.
Total
Compensation
Aggregate all Funds in from
Compensation from Aggregate John Hancock Fund
Government Income Compensation from Complex to
Fund (1) High Yield Fund (1) Trustees(2)
-------- ------------------- -----------
James F. Carlin $ 4,558 $ 2,889 $ 74,250
William H. Cunningham* 4,558 2,889 74,250
Charles F. Fretz 4,558 2,889 74,500
Harold R. Hiser, Jr.* 4,558 2,889 70,250
Charles L. Ladner 4,558 2,889 74,500
Leo E. Linbeck, Jr. 4,558 2,889 74,250
Patricia P. McCarter* 4,558 2,889 74,250
Steven R. Pruchansky* 4,702 2,987 77,500
Norman H. Smith* 4,702 2,987 77,500
John P. Toolan* 4,558 2,889 74,250
-------- -------- ---------
Total $ 45,868 $29,086 $ 745,500
(1) Compensation for the period from November 1, 1996 to May 31, 1997.
(2) The total compensation paid by the John Hancock Funds Complex to the
Independent Trustees as of the calendar year ended December 31, 1996. As
of this date, there were sixty-seven funds in the John Hancock Funds
Complex with each of these Independent Trustees serving on thirty-two.
As of December 31, 1996, the value of the aggregate deferred compensation
from all funds in the John Hancock Funds Complex for Mr. Cunningham was
$131,741, for Mr. Hiser was $90,972, for Ms. McCarter was $67,548, for Mr.
Pruchansky was $28,731, for Mr. Smith was $32,314 and for Mr. Toolan was
$163,385 under the John Hancock Group of Funds Deferred Compensation Plan
for Independent Trustees.
Total Compensation
Aggregate Aggregate from all Funds in
Compensation from Compensation John Hancock Fund
Advisory Board Government from High Yield Complex to Board
Members Income Fund* Bond Fund* Members**
- -------------- ------------ ---------- ---------
R. Trent Campbell $0 $0 $ 47,000
Mrs. Lloyd Bentsen 0 0 47,000
Thomas R. Powers 0 0 47,000
Thomas B. McDade 0 0 47,000
-- -- --------
Total $0 $0 $188,000
* Compensation for the period from November 1, 1996 to May 31, 1997. The
Advisory Board was discontinued on December 22, 1996.
** For the calendar year ended December 31, 1996.
34
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Funds and the other mutual funds
and publicly traded investment companies in the John Hancock group of funds,
having a combined total of over 1,400,000 shareholders. The Adviser is an
affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard & Poor's
and A.M. Best's. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Funds have entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Funds' shareholders.
Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
Each Fund bears all cost of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to each Fund's plan of distribution; fees and expenses of custodian
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including and allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not other wise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meeting; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreements, each Fund pays
the Adviser a monthly a fee based on a stated percentage of the average of the
daily net assets of each Fund as follows:
Government Income Fund
Fee
Average Daily Net Assets (Annual Rate)
- ------------------------ -------------
First $200 million 0.650%
Next $300 million 0.625%
Over $500 million 0.600%
High Yield Bond Fund
Fee
Average Daily Net Assets (Annual Rate)
- ------------------------ -------------
First $75 million 0.625%
Next $75 million 0.5625%
Over $150 million 0.500%
35
<PAGE>
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by a Fund may also be held by other funds or investment advisory
clients for which the Adviser or its affiliates provide investment advice.
Because of different investment objectives or other factors, a particular
security may be bought for one or more funds or clients when one or more are
selling the same security. If opportunities for purchase or sale of securities
by the Adviser for the Funds or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreements, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by a Fund in connection with
the matters to which their respective contracts relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from its reckless disregard of the
obligations and duties under the applicable contract.
Under the Advisory Agreements, the Funds may use the name "John Hancock" or any
name derived from or similar to it only for as long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If a Fund's
Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
Each Advisory Agreement was approved by all of the Trustees. The Advisory
Agreement and the Distribution Agreement discussed below will continue in effect
from year to year, provided that its continuance is approved annually both (i)
by the holders of a majority of the outstanding voting securities of the Trust
or by the Trustees, and (ii) by a majority of the Trustees who are not parties
to the Agreement, or "interested persons" of any such parties. Both Agreements
may be terminated on 60 days written notice by any party or by a vote of a
majority of the outstanding voting securities of the Funds and will terminate
automatically if assigned.
Advisory fees payable by the Funds to the Adviser, were as follows:
Government Income Fund High Yield Bond Fund
---------------------- --------------------
12/22/94-10/31/95 $1,612,806 $ 897,349
10/31/96 $3,952,669 $1,326,701
11/1/96-5/31/97 $1,999,643 $1,204,001
36
<PAGE>
Administrative Services Agreement. Each Fund previously was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Funds. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, such staff
and office space, facilities and equipment was provided as necessary to provide
administrative services to the Funds. The Services Agreement was amended in
connection with the appointment of the Adviser as adviser to the Fund to permit
services under the Agreement to be provided to the Funds by the Adviser and its
affiliates. The Services Agreement was terminated during the 1995 fiscal year.
The following amounts for each of the Funds reflects the total of administrative
services fees paid to the Adviser for the fiscal year ended October 31, 1995:
Government Income Fund - $16,694 High Yield Bond Fund - $13,697
Accounting and Legal Services Agreement. The Trust, on behalf each Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides each Fund with certain tax, accounting
and legal services. For the fiscal year ended October 31, 1996, Government
Income Fund and High Yield Bond Fund paid the Adviser $96,304 and $37,927 for
services under this agreement. For the period from November 1, 1996 to May 31,
1997, Government Income Fund and High Yield Bond Fund paid the Adviser $59,313
and $42,106 for services under this agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are continually offered at net asset
value next determined, plus any applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receive
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
For the fiscal years ended October 31, 1995, 1996, and for the period from
November 1, 1996 to May 31, 1997, the following amounts reflect (a) the total
underwriting commissions for sales of the
37
<PAGE>
Funds' Class A shares and (b) the portion of such amount retained by John
Hancock Funds. The remainder of the underwriting commissions were reallowed to
dealers.
Government Income Fund High Yield Bond Fund
---------------------- --------------------
10/31/1995 (a) $ 35,314 and (b) $ 6,442 (a) $239,238 and (b) $ 19,285
10/31/1996 (a) $515,753 and (b) $ 65,449 (a) $696,959 and (b) $ 72,221
11/1/96-5/31/97 (a) $105,964 and (b) $115,430 (a) $946,242 and (b) $115,430
Government Income and High Yield Bond Funds Trustees adopted Distribution Plans
with respect to each Class of shares (the "Plans") pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Under the Plans, each Fund will pay
distribution and service fees at an aggregate annual rate of up to 0.25% for
Class A shares and 1.00% for Class B and Class C shares, of that Fund's average
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of each Fund's average daily net assets attributable to
each class of shares. In each case, up to 0.25% is for service expenses and the
remaining amount is for distribution expenses. The distribution fees will be
used to reimburse John Hancock Funds for their distribution expenses, including
but not limited to: (i) initial and ongoing sales compensation to Selling
Brokers and others (including affiliates of John Hancock Funds) engaged in the
sale of each Fund's shares; (ii) marketing, promotional and overhead expenses
incurred in connection with the distribution of each Fund's shares; and (iii)
with respect to Class B and Class C shares only, interest expenses on
unreimbursed distribution expenses. The service fees will by used to compensate
Selling Brokers and others for providing personal and account maintenance
services to shareholders. In the event the John Hancock Funds is not fully
reimbursed for payments they make under the Class A Plan, these expenses will
not carried beyond twelve months from the date they were incurred. Unreimbursed
expenses under the Class B and Class C Plans will be carried forward together
with interest on the balance of these unreimbursed expenses. The Funds do not
treat unreimbursed expenses under Class B and Class C Plans as a liability of
the Funds, because the Trustees may terminate the Class B and/or Class C Plans
at any time. For the fiscal period ended May 31, 1997 an aggregate of
$10,894,166 of distribution expenses or 6.53% of the average net assets of
Government Income Fund's Class B shares was not reimbursed or recovered by John
Hancock Funds through the receipt of deferred sales charges or Rules 12b-1 fees
in prior periods. For the same period, an aggregate of $8,666,437 of
distribution expenses or 2.80% of the average net assets of High Yield Bond
Fund's Class B shares was not reimbursed or recovered by John Hancock Funds
through the receipt of deferred sales charges or Rule 12b-1 fees in prior
periods. Class C shares of High Yield Bond Fund did not commence operations
until May 1, 1998; therefore, there are no unreimbursed expenses to report.
The Plans were approved by a majority of the voting securities of each Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of each Fund and who have no direct
or indirect financial interest in the operation of the Plans ( the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide each Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
38
<PAGE>
Each of the Plans provides that it will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. Each of the Plans may be terminated without penalty, (a)
by vote of a majority of the Independent Trustees, (b) by a vote of a majority
of the applicable Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. Each of the Plans further provides that it may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
applicable Fund which has voting rights to that Plan. Each of the Plans provide
that no material amendment to the Plan will be effective unless it is approved
by a vote of a majority of the Trustees and the Independent Trustees of the
applicable Fund. The holders of Class A, Class B and Class C shares have
exclusive voting rights with respect to the Plan applicable to their respective
class of shares. In adopting the Plans, the Trustees concluded that, in their
judgment, these is a reasonable likelihood that the Plans will benefit the
holders of the applicable class of shares of affected Fund.
Amounts paid to John Hancock Funds by any class of shares of each Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of that Fund; provided, however, that expenses attributable to each Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Funds may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Funds.
During the period from November 1, 1996 to May 31, 1997, the Funds paid the
Distributors the following amounts of expenses with respect to the Class A
shares and Class B shares of each of the Funds. Class C shares of High Yield
Bond Fund did not commence operations until May 1, 1998; therefore, there are no
expenses to report.
<TABLE>
<CAPTION>
Printing
and
Mailing of Expenses of Interest,
Prospectuses Compensation John Carrying or
to New to Selling Hancock Other Finance
Funds Advertising Shareholders Brokers Funds Charges
- ----- ----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Government Income
Class A Shares $ 35,193 $ 2,825 $418,906 $ 91,883 $ 0
Class B Shares $ 40,422 $ 3,458 $330,534 $106,526 $473,818
High Yield Bond
Class A Shares $ 15,976 $ 848 $ 27,869 $ 67,231 $ 0
Class B Shares $194,591 $10,051 $370,056 $830,976 $391,271
</TABLE>
39
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of the
Funds, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by the
events occurring after closing of a foreign market, assets are valued by a
method that Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class net assets by the number of its shares outstanding. On
any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable securities may be significantly affected on days when a shareholder
has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Funds are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares. The Trustees of each Fund reserve the right to
change or waive each Fund's minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Adviser such rejection is in the respective Fund's best interest.
40
<PAGE>
The sales charges applicable to purchases of Class A shares of the Funds are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the investor is
entitled to accumulate current purchases with the greater of the current value
(at offering price) of the Class A shares of the Funds, owned by the investor,
or if John Hancock Signature Services, Inc. ("Signature Services") is notified
by the investor's dealer or the investor at the time of the purchase, the cost
of the Class A shares owned.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales representatives
of any of the foregoing; retired officers, employees or Directors of any
of the foregoing; a member of the immediate family (spouse, children,
grandchildren, mother, father, sister, brother, mother-in-law,
father-in-law, daughter-in-law, son-in-law, niece, nephew, grandparents
and domestic partner) of any of the foregoing, or any fund, pension,
profit sharing or other benefit plan of the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into a signed agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if the
Plan has more than $3 million in assets or 500 eligible employees at the
date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed
retirement plans with at least 100 eligible employees at the inception of
the Fund account. Each of these investors may purchase Class A shares with
no initial sales charge. However, for each Fund, if the shares are
redeemed within 12 months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following rate:
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Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. Each Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
retirement plan, however, may opt to make the necessary investments called for
by the LOI over a forty- eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k),403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Such an investment (including accumulations and combinations
but not including reinvested dividends) must aggregate $100,000 or more invested
during the specified period from the date of the LOI or from a date within
ninety (90) days prior thereto, upon written request to Signature Services. The
sales charge applicable to all amounts invested under the LOI is computed as if
the aggregate amount intended to be invested had been invested immediately. If
such aggregate amount is not actually invested, the difference in the sales
charge actually paid and
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<PAGE>
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Signature Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by a Fund to sell, any additional shares and may be
terminated at any time.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of a sales charge so the Funds will receive the
full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
capital gain reinvestment, and next from the share you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not regarded
as a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
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<PAGE>
When requesting a redemption for a specific dollar amount, please indicate if
you require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
-------
o Amount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Funds
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to a CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to Trust accounts
unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" in the Prospectus.
* Redemption of Class B or Class C shares where the proceeds are used to
purchase a John Hancock Declaration Annuity.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or advisors
for advisory services, as long as your annual redemptions do not exceed
12% of your account value, including reinvested dividends, at the time you
established your periodic withdrawal plan and 12% of the value of
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<PAGE>
subsequent investments (less redemptions) in that account at the time you
notify Signature Services. (Please note that this waiver does not apply to
periodic withdrawal plan redemptions of Class A or Class C shares that are
subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A or Class C shares by retirement plans that invested
through the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(such as 401(k), Money Purchase Pension Plan, Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
45
<PAGE>
CDSC Waiver Matrix for Class B and Class C
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72+) or 12% (72+) or 12% (72+) or (72+) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- -------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
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<PAGE>
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such security would be valued for the purpose of making such payment
at the same value as used in determining the Fund's net asset value. Each Fund
has however elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Funds must redeem their shares for cash except to the
extent to that the redemption payments to any shareholder during any 90-day
period would exceed the lesser of $250,000 or 1% of the applicable Fund's net
asset value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The funds permit exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
Each Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
Each Fund may refuse any exchange order. Each Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. Each Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds from the redemption
of shares of the applicable Fund. Since the redemption price of the shares of a
Fund may be more or less than the shareholder's cost, depending upon the market
value of the securities owned by each Fund at the time of redemption, the
distribution of cash pursuant to this plan may result in realization of gain or
loss for purposes of Federal, state and local income taxes. The maintenance of a
Systematic
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<PAGE>
Withdrawal Plan concurrently with purchases of additional shares of the Funds
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A shares and the CDSC imposed on redemptions
of Class B and Class C shares and because redemptions are taxable events.
Therefore, a shareholder should not purchase shares at the same time a
Systematic Withdrawal Plan is in effect. The Funds reserve the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement and Reinvestment Privilege. If Signature Services is notified
prior to reinvestment, a shareholder who has redeemed a Fund's shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
that Fund or another John Hancock fund, subject to the minimum investment limit
of that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A shares of
any John Hancock fund. If a CDSC was paid upon a redemption, a shareholder may
reinvest the proceeds from this redemption at net asset value in additional
shares of the class from which the redemption was made. The shareholder's
account will be credited with the amount of any CDSC charged upon the prior
redemption and the new shares will continue to be subject to the CDSC. The
holding period of the shares acquired through reinvestment will, for purposes of
computing the CDSC payable upon a subsequent redemption, include the holding
period of the redeemed shares.
To protect the interests of other investors in each Fund, each Fund may cancel
the reinvestment privilege of any parties that, in the opinion of the Funds, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Funds may refuse any reinvestment
request.
Each Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS".
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<PAGE>
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
DESCRIPTION OF THE FUNDS' SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Funds. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of each Fund without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series and in one
or more classes, without further action by shareholders. As of the date of this
Statement of Additional Information, the Trustees have authorized shares of
these two Funds and one other series and the issuance of two classes of shares
of Government Income Fund, designated as Class A and Class B and three classes
of shares of High Yield Bond Fund, designated as Class A, Class B and Class C.
Additional series may be added in the future.
The shares of each class of the Funds represent an equal proportionate interest
in the aggregate net assets attributable to the classes of the Fund. Holders of
each Class of shares have certain exclusive voting rights on matters relating to
their respective distribution plans. The different classes of a Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Funds, if any, with respect to each class of shares will
be calculated in the same manner, at the same time and on the same day and will
be in the same amount, except for differences resulting from the facts that (i)
the distribution and service fees relating to each class will be borne
exclusively by that class, (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each Class of shares
will bear any class expenses properly allocable to that class of shares, subject
to the conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than in a majority of the Trustees holding
49
<PAGE>
office were elected by the shareholders, the Trustees will call a special
meeting of shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations and affairs of the
Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no fund included in the Prospectus shall be
liable for the liabilities of any other John Hancock fund. Liability is
therefore limited to circumstances in which the Trust itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. Use of
information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Each series of the Trust, including the Fund is treated as a separate entity for
tax purposes. Each Fund has qualified and elected to be treated as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to continue to so qualify for each taxable
year. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions, and the
diversification of its assets, each Fund will not be subject to Federal income
tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
Each Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. Each Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax.
Distributions from a Fund's current or accumulated earnings and profits ("E&P")
will be taxable under the Code for investors who are subject to tax. If these
distributions are paid from the Fund's "investment company taxable income," they
will be taxable as ordinary income; and if they are paid from the Fund's "net
capital gain," they will be taxable as capital gain. (Net capital gain is the
excess (if any) of net long-term capital gain over net short-term capital loss,
and investment company taxable income is all taxable income and capital gains,
other than those gains and losses included in computing net capital gain, after
reduction by deductible expenses). As a result of federal tax legislation
enacted on August 5, 1997 (the "Act"), gain recognized after May 6, 1997 from
the sale of a capital asset is taxable to individual (noncorporate) investors at
different maximum federal income tax rates, depending generally upon the tax
holding period for the asset,
50
<PAGE>
the federal income tax bracket of the taxpayer, and the dates the asset was
acquired and/ or sold. The Treasury Department has issued guidance under the Act
that enables the Fund to pass through to its shareholders the benefits of the
capital gains rates enacted in the Act. Shareholders should consult their own
tax advisers on the correct application of these new rules in their particular
circumstances. Some distributions may be paid to shareholders as if they had
been received on December 31 of the previous year. The tax treatment described
above will apply without regard to whether distributions are received in cash or
reinvested in additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by High Yield Bond Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of distributions to shareholders.
Transactions in foreign currencies that are not directly related to a Fund's
investment in stock or securities, possibly including speculative currency
positions or currency derivatives not used for hedging purposes, may increase
the amount of gain it is deemed to recognize from the sale of certain
investments or derivatives held for less than three months, which gain is
limited under the Code to less than 30% of gross income for each taxable year,
and could under future Treasury regulations produce income not among the types
of "qualifying income" from which the Fund must derive at least 90% of its gross
income for each taxable year. If the net foreign exchange loss for a year
treated as ordinary loss under Section 988 were to exceed a Fund's investment
company taxable income computed without regard to such loss but after
considering the post-October loss regulations the resulting overall ordinary
loss for such year would not be deductible by the Fund or its shareholders in
future years.
Government Income Fund and High Yield Bond Fund may be subject to withholding
and other taxes imposed by foreign countries with respect to their investments
in foreign securities. Some tax conventions between certain countries and the
U.S. may reduce or eliminate such taxes. Investors may be entitled to claim U.S.
foreign tax credits or deductions with respect to such taxes, subject to certain
provisions and limitations contained in the Code, if the Fund so elects. If more
than 50% of the value of a Fund's total assets at the close of any taxable year
consists of stock or securities of foreign corporations, the Fund may file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to (i) include in ordinary gross income (in addition to
taxable dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as qualified foreign
taxes paid by them. The Funds probably will not satisfy this 50% requirement.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required
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<PAGE>
to include their share of such taxes in gross income. Shareholders who claim a
foreign tax credit for such foreign taxes may be required to treat a portion of
dividends received from the Fund as a separate category of income for purposes
of computing the limitations on the foreign tax credit. Tax-exempt shareholders
will ordinarily not benefit from this election. Each year (if any) that a Fund
files the election described above, its shareholders will be notified of the
amount of (i) each shareholder's pro rata share of qualified foreign taxes paid
by the Fund and (ii) the portion of Fund dividends which represents income from
each foreign country. A Fund that cannot or does not make this election may
deduct such taxes in determining the amount it has available for distribution to
shareholders, and shareholders will not, in this event, include these foreign
taxes in their income, nor will they be entitled to any tax deductions or
credits with respect to such taxes.
High Yield Bond Fund is permitted to acquire stock in foreign corporations. If
this Fund invests in stock (including an option to acquire stock such as is
inherent in a convertible bond) of certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may be available to ameliorate these
adverse tax consequences, but any such election could require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. Those
investments could also result in the treatment of associated capital gains as
ordinary income. The Fund may limit and/or manage its holdings in passive
foreign investment companies to minimize its tax liability or maximize its
return from these investments.
The amount of a Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of such Fund to dispose of
portfolio securities or enter into options or futures transactions that will
generate capital gains. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of a Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Any gain
or loss will be treated as capital gain or loss if the shares are capital assets
in the shareholder's hands. A sales charge paid in purchasing Class A shares of
a Fund cannot be taken into account for purposes of determining gain or loss on
the redemption or exchange of such shares within 90 days after their purchase to
the extent shares of the Fund or another John Hancock fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Such disregarded load will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. Also, any loss
realized on a redemption or exchange may be disallowed to the extent the shares
disposed of are replaced with other shares of the same Fund within a period of
61 days beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the
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redemption of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of Shareholders should consult their own tax advisers regarding
their particular circumstances to determine whether a disposition of Fund shares
is properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion. Also, future Treasury Department guidance issued to implement the
Act may contain additional rules for determining the tax treatment of sales of
Fund shares held for various periods, including the treatment of losses on the
sales of shares held for six months or less that are recharacterized as
long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, each Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Funds
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation by the Fund, each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as capital gain income in his
return for his taxable year in which the last day of such Fund's taxable year
falls, (b) be entitled either to a tax credit on his return for, or to a refund
of, his pro rata share of the taxes paid by such Fund, and (c) be entitled to
increase the adjusted tax basis for his shares in such Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, each Fund is generally permitted to carry
forward a net capital loss in any year to offset its own net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent net capital gains are offset by such losses, they would not result in
Federal income tax liability to the applicable Fund and, as noted above, would
not be distributed as such to shareholders. As of May 31, 1997, High Yield Bond
Fund had capital loss carryforwards of $4,858,582 which expires in 2003, and
Government Income Fund had capital loss carryforwards of $20,815,945 of which
$15,347,195 expires in 2002, $1,419,401 expires in 2003 and $1,964,217 expires
in 2004 and $2,085,132 expires in 2005.
A Fund is required to accrue income on any debt securities that have more than a
de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market or constructive sales rules applicable to certain options, futures and
forward contracts may also require the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) a Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Funds will not seek to satisfy
any threshold or reporting
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requirements that may apply in particular taxing jurisdictions, although either
Fund may in its sole discretion provide relevant information to shareholders.
Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. A Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
Investments in debt obligations that are at risk of or are in default present
special tax issues for the Funds. Tax rules are not entirely clear about issues
such as when the Funds may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund that holds such obligations in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
Limitations imposed by the Code on regulated investment companies like the Funds
may restrict a Fund's ability to enter into options, futures, foreign currency
positions and foreign currency forward transactions.
Certain options, futures and forward foreign currency transactions undertaken by
a Fund may cause such Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of certain currency
forwards, options and futures, as ordinary income or loss) and timing of some
capital gains and losses realized by the Fund. Also, certain of a Fund's losses
on its transactions involving options, futures and forward foreign currency
contracts and/or offsetting or successor portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income or gains. Certain of such transactions may also cause a Fund to dispose
of investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of a Fund's distributions to
shareholders. The Funds will take into
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account the special tax rules (including consideration of available elections)
applicable to options, futures or forward contracts in order to seek to minimize
any potential adverse tax consequences.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, a Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Funds.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that each Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
The Fund may advertise yield, where appropriate. For the 30-day period ended
November 30, 1997, the yields of (a) High Yield Bond Fund's Class A and Class B
shares were 9.29% and 8.97%, respectively, and (b) Government Income Fund's
Class A and Class B shares were 5.39% and 4.88%, respectively. Class C shares of
High Yield Bond fund commenced operations on May 1, 1998; therefore, there is no
yield to report.
Each Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
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Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
Total Return. Average annual total return is determined separately for each
class of shares.
Set forth below are tables showing the performance on a total return basis
(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000
investment in the Class A and Class B shares of Government Income Fund and High
Yield Bond Fund. Class C shares of High Yield Bond Fund commenced operations on
May 1, 1998; therefore, there is no average annual total return to report.
Government Income Fund
----------------------
Class B Shares
Class A Shares Class A Shares Class B Shares Five Years Class B Shares
One Year Ended 9/30/94* to One Year Ended Ended 2/23/88* to
11/30/97 11/30/97 11/30/97 11/30/97 11/30/97
-------- -------- -------- -------- --------
2.41% 7.38% 1.45% 5.59% 7.04%
High Yield Bond Fund
--------------------
Class B Shares
Class A Shares Class A Shares Class B Shares Five Years Class B Shares
One Year Ended 6/30/93* to One Year Ended Ended 10/26/87* to
11/30/97 11/30/97 11/30/97 11/30/97 11/30/97
-------- -------- -------- -------- --------
12.25% 9.87% 11.67% 11.82% 9.75%
* Commencement of operations.
Total Return. Each Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
T = ((ERV/P)^(1/n)) - 1
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P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the 1-year and life-of-fund periods.
Because each class has its own charge and fee structure, the classes have
different performance results. In the case of each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. This calculation assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of a Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Funds' sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B or Class C shares into account. Excluding a Fund's sales
charge on Class A shares and the CDSC on Class B or Class C shares from a total
return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, a Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. A Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta reflects the market-related risk of the Fund by showing how
responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of a Fund for any
period in the future. The performance of a Fund is a function of many factors
including its earnings, expenses and number of outstanding shares. Fluctuating
market conditions; purchases, sales and maturities of portfolio securities;
sales and redemptions of shares of beneficial interest; and changes in operating
expenses are all examples of items that can increase or decrease a Fund's
performance.
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BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and Trustees who are
interested persons of the Funds. Orders for purchases and sales of securities
are placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the NASD and other policies that the Trustees may
determine, the Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute a Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Funds. The
Funds will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of each Fund's brokerage business, the policies and practices of
the Adviser in this regard must be consistent with the foregoing and at all
times be subject to review by the Trustees.
Negotiated brokerage commissions of the Funds for their respective reporting
periods are as follows:
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Government Income Fund - (a) $59,080 for the period from November 1, 1996 to May
31, 1997 (b) $135,622 for the fiscal year ended October 31, 1996; and (c)
$15,814 for the fiscal year ended October 31, 1995.
High Yield Bond Fund - (a) $67,481 for the period from November 1, 1996 to May
31, 1997 (b) $39,163 for the fiscal year ended October 31, 1996; and (c) $40,228
for the fiscal year ended October 31, 1995.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, each Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. For the period from November 1, 1996 to May 31,
1997, Government Income Fund paid $0 and High Yield Bond Fund paid $0 in
commissions to compensate brokers for research services such as industry,
economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company is the indirect sole shareholder
of John Hancock Distributors, Inc., a broker-dealer ("Distributors" or
"Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Funds may
execute portfolio transactions with or through Affiliated Brokers. For the
fiscal years ended October 31, 1995 and 1996, the Funds paid no brokerage
commission to any Affiliated Broker. For the period from November 1, 1996 to May
31, 1997, the Fund paid no brokerage commissions to any Affiliated Broker.
Distributors may act as broker for the Funds on exchange transactions, subject,
however, to the general policy of the Funds set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Funds as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Funds, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Broker, has, as an investment adviser to
the Fund, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Advisers may aggregate securities to
be sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
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TRANSFER AGENT SERVICES
John Hancock Signature Services Inc., 1 Hancock Way, Suite 1000, Boston, MA
02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Funds. Each Fund pays an annual fee
of $20.00 for each Class A shareholder account, $22.50 for each Class B
shareholder account and $21.50 for each Class C shareholder account. Each Fund
also pays certain out-of- pocket expenses and these expenses are aggregated and
charged to each Fund and allocated to each class on the basis of their relative
net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a custodian agreement
between the Funds and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has been
selected as the independent auditors of the Funds. The financial statements of
the Funds included in the Prospectus and this Statement of Additional
Information as of the Funds fiscal period ended May 31, 1997 have been audited
by Ernst & Young LLP for the periods indicated in their report, appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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APPENDIX A
DESCRIPTION OF BOND RATINGS AND FUND'S ASSET COMPOSITION
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
A-1
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STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
FITCH INVESTORS SERVICE ("Fitch")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of
the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
A-2
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TAX-EXEMPT NOTE RATINGS
Moody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal and interest.
Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Moody's - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
Other Considerations - The ratings of S&P, Moody's, and Fitch represent their
respective opinions of the quality of the municipal securities they undertake to
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal securities with the same
maturity, coupon and ratings may have different yields and municipal securities
of the same maturity and coupon with different ratings may have the same yield.
A-3
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FINANCIAL STATEMENTS
F-1
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JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
Class A and Class B Shares
Statement of Additional Information
May 1, 1998
This Statement of Additional Information provides information about John Hancock
Sovereign U.S. Government Income Fund (the "Fund"), in addition to the
information that is contained in the combined Income Funds' Prospectus dated May
1, 1998 (the "Prospectus"). The Fund is a diversified series portfolio of John
Hancock Strategic Series.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
Table of Contents
Page
Organization of the Fund.......................................................2
Investment Objective and Policies..............................................2
Investment Restrictions.......................................................14
Those Responsible for Management..............................................16
Investment Advisory and Other Services........................................25
Distribution Contracts........................................................27
Net Asset Value...............................................................28
Initial Sales Charge on Class A Shares........................................29
Deferred Sales Charge on Class B Shares.......................................31
Special Redemptions...........................................................35
Additional Services and Programs..............................................35
Description of the Fund's Shares..............................................37
Tax Status....................................................................38
Calculation of Performance....................................................42
Brokerage Allocation..........................................................44
Transfer Agent Services.......................................................45
Custody of Portfolio..........................................................46
Independent Auditors..........................................................46
Appendix A...................................................................A-1
Financial Statements.........................................................F-1
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ORGANIZATION OF THE FUND
The Fund is a diversified open-end investment management company organized as a
Massachusetts business trust under the laws of The Commonwealth of
Massachusetts. The Fund was organized on April 16, 1986. The Trustees have
authority to issue an unlimited number of shares of beneficial interest of
separate series without par value.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's goals,
strategies and risks discussed in the Prospectus. There is no assurance that the
Fund will achieve its investment objective.
The Fund's investment objective is to provide as high a level of income as is
consistent with long-term total return by investing in securities issued,
guaranteed or otherwise backed by the United States government, its agencies or
instrumentalities ("Government Securities"). The Adviser believes that a high
current income consistent with long-term total return may be derived from: (i)
interest income from Government Securities; (ii) income from premiums from
expired put and call options on Government Securities written by the Fund; (iii)
net gains from closing purchase and sale transactions with respect to options on
Government Securities; and (iv) net gains from sales of portfolio securities on
exercise of options or otherwise.
Since interest yields on Government Securities and opportunities to realize net
gains from options transactions may vary from time to time because of general
economic and market conditions and many other factors, it is anticipated that
the Fund's share price and yield will fluctuate.
Government Securities. Under normal circumstances, the Fund will invest at least
65% of its total assets in Government Securities. The Government Securities that
may be purchased by the Fund include, but are not limited to:
U.S. Treasury Securities. The Fund may invest in U.S. Treasury securities,
including Bills (maturities of one year or less), Notes (maturities of one to
ten years), Bonds (generally maturities of greater than ten years) and other
debt securities issued by the U.S. Treasury. These instruments are direct
obligations of the U.S. Government and differ primarily in their interest rates,
the lengths of their maturities and the times of their issuance.
Securities Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. The Fund may also invest in securities issued by agencies of
the U.S. Government or instrumentalities established or sponsored by the U.S.
Government. The obligations, including those which are guaranteed by Federal
agencies or instrumentalities, may or may not be backed by the "full faith and
credit" of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitments. Securities in which the
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Fund may invest but which are not backed by the full faith and credit of the
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation ("FHLMC") and the United
States Postal Service, each of which has the right to borrow from the United
States Treasury to meet its obligations, and obligations of the Federal Farm
Credit System, the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Banks, the obligations of which may only be satisfied by the
individual credit of the issuing agency. Obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration and the
Export-Import Bank are backed by the full faith and credit of the United States.
Securities of International Bank for Reconstruction and Development
The Fund may also purchase obligations of the International Bank for
Reconstruction and Development ("World Bank"), which, while technically not a
U.S. Government agency or instrumentality, has the right to borrow from the
participating countries, including the United States.
The Fund may invest in Government Securities of all maturities: short-term,
intermediate-term and long-term.
The Fund may, for purposes of liquidity and flexibility, place up to 35% of its
assets in investment-grade (equivalent to the top four bond rating categories of
a nationally recognized securities rating organization such as Standard & Poor's
Rating Group ("Standard & Poor's") or Moody's Investor's Service, Inc.
("Moody's")) short-term securities, including debt securities of corporations,
certificates of deposit of domestic banks, or repurchase agreements with respect
to Government Securities, including repurchase agreements that mature in more
than seven days. In the event these securities are subsequently downgraded below
such ratings, the Adviser will consider this event in its determination of
whether the Fund should continue to hold the securities. The Fund may also
invest in collateralized mortgage-backed obligations that are issued or
sponsored by a government agency. In abnormal market conditions, it may invest
more assets in these securities as a defensive tactic. See Appendix A to this
Statement of Additional Information for a description of the various ratings of
investment grade debt securities.
Mortgage-Related Securities. The Fund may invest in mortgage-backed securities,
including those representing an undivided ownership interest in a pool of
mortgage loans, e.g., securities of the GNMA and pass-through securities issued
by the FHLMC and FNMA.
GNMA Certificates. Certificates of the GNMA ("GNMA Certificates") are
mortgage-backed securities, which evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from bonds in that the principal is
paid back monthly by the borrower over the term of the loan rather than returned
in a lump sum at maturity. GNMA Certificates that the Fund purchases are the
"modified pass-through" type. "Modified pass-through" GNMA Certificates entitle
the holder to receive a share of all interest and principal payments paid and
owed on the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless
of whether or not the mortgagor actually makes the payment.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration ("FMHA"), or guaranteed by the Veterans Administration ("VA").
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The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limit from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the contractual maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee. Because they represent the underlying mortgages, GNMA Certificates
may not be an effective means of locking in long-term interest rates due to the
need for the Fund to reinvest scheduled and unscheduled principal payments. At
the time principal payments or prepayments are received by the Fund, prevailing
interest rates may be higher or lower than the current yield of the Fund's
portfolio.
Statistics published by the FHA indicate that the average life of single-family
dwelling mortgages with 25 to 30-year maturities, the type of mortgages backing
the vast majority of GNMA Certificates, is approximately 12 years. However,
because prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates.
Yield Characteristics of GNMA Certificates. The coupon rate of interest on GNMA
Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, by the amount of the fees
paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which will be
earned on GNMA Certificates. First, GNMA Certificates may be issued at a premium
or discount, rather than at par, and, after issuance, GNMA Certificates may
trade in the secondary market at a premium or discount. Second, interest is
earned monthly, rather than semiannually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher- yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced. Prepayments of
principal by mortgagors (which can be made at any time without penalty) may
increase during periods when interest rates are falling.
FHLMC Securities. The FHLMC was created in 1970 through enactment of Title III
of the Emergency Home Finance Act of 1970. Its purpose is to promote development
of a nationwide secondary market in conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. The FHLMC guarantees timely payment of interest on PCs and the full return
of principal.
GMC's also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments.
FNMA Securities. The FNMA was established in 1938 to create a secondary market
in mortgages insured by the FHA.
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FNMA Issued Guaranteed Mortgage Pass-through Certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest on FNMA
Certificates and the full return of principal.
Collateralized Mortgage-Backed Obligations ("CMO's"). CMOs are
fully-collateralized bonds which are the general obligations of the issuer
thereof, either the U.S. Government or a U.S. Government instrumentality. Such
bonds generally are secured by an assignment to a trustee (under the indenture
pursuant to which the bonds are issued) of collateral consisting of a pool of
mortgages. Payments with respect to the underlying mortgages generally are made
to the trustee under the indenture. Payments of principal and interest on the
underlying mortgages are not passed through to the holders of the CMOs as such
(i.e. the character of payments of principal and interest is not passed through,
and therefore payments to holders of CMOs attributable to interest paid and
principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
CMOs often are issued in two or more classes with varying maturities and stated
rates of interest. Because interest and principal payments on the underlying
mortgages are not passed through to holders of CMOs, CMOs of varying maturities
may be secured by the same pool of mortgages, the payments on which are used to
pay interest on each class and to retire successive maturities in sequence.
Unlike other mortgage-backed securities (discussed above), CMOs are designed to
be retired as the underlying mortgages are repaid. In the event of prepayment on
such mortgages, the class of CMO first to mature generally will be paid down.
Therefore, although in most cases the issuer of CMOs will not supply additional
collateral in the event of such prepayment, there will be sufficient collateral
to secure CMOs that remain outstanding.
Inverse Floating Rate Securities. The Fund may invest in inverse floating rate
securities. It is the current intention of the Fund to invest no more than 5% of
its net assets in inverse floating rate securities. The interest rate on an
inverse floating rate security resets in the opposite direction from the market
rate of interest to which the inverse floating rate security is indexed. An
inverse floating rate security may be considered to be leveraged to the extent
that its interest rate varies by a multiple of the index rate of interest. A
higher degree of leverage in the inverse floating rate security is associated
with greater volatility in the market value of such security.
The inverse floating rate securities that the Fund may invest in include but are
not limited to, an inverse floating rate class of a government agency issued CMO
and a government agency issued yield curve note. Typically, an inverse floating
rate class of a CMO is one of two components created from the cash flows from a
pool of fixed rate mortgages. The other component is a floating rate security in
which the amount of interest payable varies directly with a market interest rate
index. A yield curve note is a fixed income security that bears interest at a
floating rate that is reset periodically based on an interest rate benchmark.
The interest rate resets on a yield curve note in the opposite direction from
the interest rate benchmark.
Mortgage-backed securities have stated maturities of up to thirty years when
they are issued, depending upon the length of the mortgages underlying the
securities. In practice, however, unscheduled or early payments of principal and
interest on the underlying mortgages may make the securities' effective maturity
shorter than this, and the prevailing interest rates may be higher or lower than
the current yield of the Fund's portfolio at the time the Fund receives these
payments for reinvestment. Mortgage-backed securities may have less potential
for capital appreciation than comparable fixed-income securities due to the
likelihood of increased prepayments of mortgages as interest rates decline. If
the Fund buys mortgage-backed securities at a premium, mortgage foreclosures and
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prepayments of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Fund's principal investment, to the
extent of the premium paid.
In a rising interest rate environment, a declining prepayment rate will extend
the average life of many mortgage-backed securities. Extending the average life
of a mortgage-backed security increases the risk of depreciation due to future
increases in market interest rates.
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price plus accrued interest.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S. Government securities.
The Adviser will continuously monitor the creditworthiness of the parties with
whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. To minimize
various risks associated with reverse repurchase agreements, the Fund will
establish and maintain with the Fund's custodian a separate account consisting
of liquid securities, of any type or maturity, in an amount at least equal to
the repurchase prices of the securities (plus any accrued interest thereon)
under such agreements. The Fund will also continue to be subject to the risk of
a decline in the market value of the securities sold under the agreements
because it will reacquire those securities upon effecting their repurchase. The
Fund will not enter into reverse repurchase agreements and other borrowings
except from banks temporarily for extraordinary or emergency purposes (not for
leveraging or investment) and then in an aggregate amount not in excess of 33
1/3% of the value of the Fund's total assets (including the amount borrowed)
less liabilities (not including the amount borrowed). The Fund will enter into
reverse repurchase agreements only with federally insured banks which are
approved in advance as being creditworthy by the Trustees. Under procedures
established by the Trustees, the Adviser will monitor the creditworthiness of
the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determine based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
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on illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities. The Fund will not
invest more than 5% of its total assets in Rule 144A securities without first
supplementing the prospectus and providing additional information to
shareholders.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on any securities in which it may invest or on any
securities index based on securities in which it may invest. These options may
be listed on national domestic securities exchanges or traded in the
over-the-counter market. The Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by a Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
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The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
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The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates or securities prices, the Fund
may purchase and sell various kinds of futures contracts, and purchase and write
call and put options on these futures contracts. The Fund may also enter into
closing purchase and sale transactions with respect to any of these contracts
and options. The futures contracts may be based on various securities (such as
U.S. Government securities), securities indices and any other financial
instruments and indices. All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade that are licensed, regulated or
approved by the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
interest rates are rising or securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
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may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
10
<PAGE>
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish with
the custodian a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When- issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
11
<PAGE>
purchase of securities on a when-issued or forward commitment basis may also
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's borrowing and other senior securities. For financial reporting and
tax purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 15% limitation on investments
in illiquid securities.
12
<PAGE>
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
13
<PAGE>
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
The composition and weighted average maturity of the Fund's portfolio will vary
from time to time, based upon the determination of the Adviser of how best to
further the Fund's investment objective.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
Government Securities according to applicable regulatory requirements. The Fund
may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 30% of its total assets.
Trading of Securities. The Fund may trade those Government Securities which are
not covering outstanding options positions and are not on loan to broker-dealers
if the Fund's Adviser believes that there are opportunities to exploit
differentials in prices and yields or fluctuations in interest rates, consistent
with its investment objective. Such trading may have the effect of increasing
the Fund's portfolio turnover rate.
See "Portfolio Turnover".
Portfolio Turnover. If the Fund writes a number of call options and the market
prices of the underlying securities appreciate, or if the Fund writes a number
of put options and the market prices of the underlying securities depreciate,
there may be a substantial turnover of the portfolio. While the Fund will pay
commissions in connection with its options transactions, Government Securities
are generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission. A high rate of portfolio turnover
(100% or greater) involves correspondingly greater brokerage expenses. The
Fund's portfolio turnover rate is set forth in the table under the caption
"Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval by the lesser of (1) the holders of
67% or more of the Fund's shares represented at a meeting if more than 50% of
the Fund's outstanding shares are present in person or by proxy at that meeting
or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
1. Purchases on Margin and Short Sales. Purchase securities on margin or
sell short, except that the Fund may obtain such short term credits as
are necessary for the clearance of securities transactions. The deposit
or payment
14
<PAGE>
by the Fund of initial or maintenance margin in connection with futures
contracts or related options transactions is not considered the
purchase of a security on margin.
2. Borrowing. Borrow money, except from banks temporarily for
extraordinary or emergency purposes (not for leveraging or investment)
and then in an aggregate amount not in excess of 33 1/3% of the value
of the Fund's total assets (including the amount borrowed) less
liabilities (not including the amount borrowed).
3. Underwriting Securities. Act as an underwriter of securities of other
issuers, except to the extent that it may be deemed to act as an
underwriter in certain cases when disposing of restricted securities.
4. Senior Securities. Issue senior securities except as appropriate to
evidence indebtedness which the Fund is permitted to incur, provided
that, to the extent applicable, (i) the purchase and sale of futures
contracts or related options, (ii) collateral arrangements with respect
to futures contracts, related options, forward foreign currency
exchange contracts or other permitted investments of the Fund as
described in the Prospectus, including deposits of initial and
variation margin, and (iii) the establishment of separate classes of
shares of the Fund for providing alternative distribution methods are
not considered to be the issuance of senior securities for purposes of
this restriction.
5. Warrants. Invest in marketable warrants to purchase common stock.
Warrants acquired in units or attached to securities are not included
in this restriction.
6. Single Issuer Limitation/Diversification. Purchase securities of any
one issuer, except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of the Fund's total assets
would be invested in such issuer or the Fund would own or hold more
than 10% of the outstanding voting securities of such issuer; provided,
however, that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations.
7. Real Estate. Purchase or sell real estate although the Fund may
purchase and sell securities which are secured by real estate,
mortgages or interests therein, or issued by companies which invest in
real estate or interests therein; provided, however, that the Fund will
not purchase real estate limited partnership interests.
8. Commodities; Commodity Futures; Oil and Gas Exploration and Development
Programs. Purchase or sell commodities or commodity futures contracts
or interests in oil, gas or other mineral exploration or development
programs, except the Fund may engage in such forward foreign currency
contracts and/or purchase or sell such futures contracts and options
thereon as described in the Prospectus.
9. Making Loans. Make loans, except that the Fund may purchase or hold
debt instruments and may enter into repurchase agreements (subject to
Restriction 12) in accordance with its investment objective and
policies and make loans of portfolio securities provided that as a
result, no more than 30% of the total assets of the Fund, taken at
current value, would be so loaned.
10. Industry Concentration. Purchase any securities which would cause more
than 25% of the market value of the Fund's total assets at the time of
such purchase to be invested in the securities of one or more issuers
15
<PAGE>
having their principal business activities in the same industry,
provided that there is no limitation with respect to investments in
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
Nonfundamental Investment Restrictions. The following restrictions are
designated as nonfundamental and may be changed by the Trustees without
shareholder approval.
The Fund may not:
11. Options Transactions. Write, purchase, or sell puts, calls or
combinations thereof except that the Fund may write, purchase or sell
puts and calls on securities as described in the Prospectus and this
Statement of Additional Information.
12. Invest more than 15% of its net assets in illiquid securities.
13. Acquisition for Control Purposes. Purchase securities of any issuer for
the purpose of exercising control or management, except in connection
with a merger, consolidation, acquisition or reorganization.
14. Joint Trading Accounts. Participate on a joint or joint and several
basis in any trading account in securities (except for a joint account
with other funds managed by the Adviser for repurchase agreements
permitted by the Securities and Exchange Commission pursuant to an
exemptive order).
15. Securities of Other Investment Companies. Purchase a security if, as a
result, (i) more than 10% of the Fund's total assets would be invested
in the securities of other investment companies, (ii) the Fund would
hold more than 3% of the total outstanding voting securities of any one
investment company, or (iii) more than 5% of the Fund's total assets
would be invested in the securities of any one investment company.
These limitations do not apply to (a) the investment of cash
collateral, received by the Fund in connection with lending the Fund's
portfolio securities, in the securities of open-end investment
companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject
to the above percentage limitations, the Fund may, in connection with
the John Hancock Group of Funds Deferred Compensation Plan for
Independent Trustees/Directors, purchase securities of other investment
companies within the John Hancock Group of Funds.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will not be considered a violation
of any of the foregoing restrictions (with the exception of Restriction 2
permitting the Fund to borrow up to 33 1/3% of the value of its total assets).
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of the Adviser or officers and Directors of the
Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Director and Chief
October 1944 Executive Officer, The Berkeley
Financial Group, Inc. ("The
Berkeley Group"); Chairman and
Director, NM Capital Management,
Inc. ("NM Capital"), John Hancock
Advisers International Limited
("Advisers International") and
Sovereign Asset Management
Corporation ("SAMCorp"); Chairman,
Chief Executive Officer and
President, John Hancock Funds, Inc.
("John Hancock Funds"); Chairman,
First Signature Bank and Trust
Company; Director, John Hancock
Insurance Agency, Inc. ("Insurance
Agency, Inc."), John Hancock
Advisers International (Ireland)
Limited ("International Ireland"),
John Hancock Capital Corporation
and New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
Freeport-McMoRan Copper & Gold
Company, Inc., Hecla Mining Company,
Canyon Resources Corporation and
Original Sixteen to One Mines, Inc.
(1984-1987 and 1991-1995)
(management consultant).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser;
Boston, MA 02199 President, COO and Director, The
April 1953 Berkeley Group; Director, John
Hancock Funds, Advisers
International, Insurance Agency,
Inc. and International Ireland;
President and Director, SAMCorp. and
NM Capital; Executive Vice
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Director, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Director and Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994); Director, Signature
Services (until January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, NM Capital and
SAMCorp.; Clerk, Insurance Agency,
Inc.; Counsel, John Hancock Mutual
Life Insurance Company (until
February 1996), and Vice President
of John Hancock Distributors, Inc.
(until April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group, NM Capital;
March 1950 Vice President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
23
<PAGE>
The following table provides information regarding the compensation paid by the
Fund and other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. The Trustees not listed were not
Trustees of the Trust as of the end of the Fund's last completed fiscal year.
The three non-independent Trustees, Messrs. Boudreau and Scipione and Ms.
Hodsdon and each of the officers of the Fund are interested persons of the
Adviser, are compensated by the Adviser and receive no compensation from the
Fund for their services.
Total Compensation From the
Aggregate Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
Dennis S. Aronowitz+ $ 2,697 $ 72,450
Richard P. Chapman, Jr.++ 2,784 75,200
William J. Cosgrove++ 2,697 72,450
Douglas M. Costle 2,784 75,350
Leland O. Erdahl 2,697 72,350
Richard A. Farrell 2,784 75,350
Gail D. Fosler++ 2,697 68,450
William F. Glavin++ 2,693 72,250
Dr. John A. Moore 2,697 68,350
Patti McGill Peterson 2,697 72,100
John W. Pratt 2,697 72,350
Edward J. Spellman++ 2,784 73,950
------- -----------
Total $ 32,708 $ 870,600
(1) Compensation is for the fiscal year ended May 31, 1997
(2) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1996. As of
this date, there were sixty-seven funds in the John Hancock Fund Complex, with
each of these Independent Trustees serving on thirty-two funds.
+ On December 31, 1996, the value of the aggregate deferred compensation
from all funds in the John Hancock Fund Complex for Mr. Chapman was
$63,164, for Mr. Cosgrove was $131,317 and for Mr. Glavin was $109,059
under the John Hancock Deferred Compensation Plan for Independent
Trustees.
+ Became Trustees of the Trust on June 26, 1996.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of February 2, 1998, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the Fund's outstanding shares. As of that
date, no person owned of record or beneficially as much as 5% of the outstanding
shares of the Fund.
The Trustees and officers of the Fund may at times be the record holders of in
excess of 5% of shares of the Fund by virtue of holding shares in "street name."
24
<PAGE>
As of September 5, 1997 the officers and trustees of the Trust as a group owned
less than 1% of the outstanding shares of each class of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,400,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries high ratings from Standard & Poor's and A.M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based upon the following annual rates: 0.50% of the Fund's
first $500 million of average daily net assets, and 0.45% of average daily net
assets in excess of that amount.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
25
<PAGE>
same time, transactions in such securities will be made insofar as feasible, for
the respective funds or clients in a manner deemed equitable to all of them. To
the extent that transactions on behalf of more than one client of the Adviser or
its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable to the Fund or its
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of the obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement, and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by a vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
For the fiscal years ended October 31, 1995 and 1996 and for the period from
November 1,1996 to May 31, 1997, the Fund paid the Adviser fees in the amount of
$2,514,147, $2,346,755, and $1,218,973, respectively.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended October 31, 1996, the Fund paid
the Adviser $28,344 under this agreement. For the period from November 1, 1996
to May 31, 1997, the Fund paid the Adviser $45,712.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
26
<PAGE>
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use their best efforts to sell
shares of each class on behalf of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with the John Hancock Funds. John Hancock Funds accepts orders
for the purchase of the shares of the Fund that are continually offered at net
asset value next determined, plus an applicable sales charge, if any. In
connection with the sale of Class A or Class B shares, John Hancock Funds and
Selling Brokers receive compensation from a sales charge imposed, in the case of
Class A shares at the time of sale. In the case of Class B shares the broker
receives compensation immediately but John Hancock Funds is compensated on a
deferred basis. John Hancock Funds may pay extra compensation to financial
services firms selling large amounts of fund shares. This compensation would be
calculated as a percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended March 31, 1996 was $379,649 and for the period from November
1, 1996 to May 31, 1997 was $162,187. Of such amounts, $41,439 and $18,811 were
retained by John Hancock Funds in 1996 and for the period from November 1, 1996
to May 31, 1997. The remainder of the underwriting commissions were reallowed to
dealers.
The Fund's Trustees adopted Distribution Plans with respect to Class A and Class
B shares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act
of 1940. Under the Plans the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% and 1.00%, respectively, of the Fund's
average daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. The distribution fees will be used to
reimburse the John Hancock Funds for their distribution expenses, including but
not limited to: (i) initial and ongoing sales compensation to Selling Brokers
and others (including affiliates of the John Hancock Funds) engaged in the sale
of Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event the John
Hancock Funds is not fully reimbursed for payments or expenses they incur under
the Class A Plan, these expenses will not be carried beyond twelve months from
the date they were incurred. Unreimbursed expenses under the Class B Plan will
be carried forward together with interest on the balance of these unreimbursed
expenses. The Fund does not treat unreimbursed expenses under the Class B Plan
as a liability of the Fund, because the Trustees may terminate the Class B Plan
at any time. For the fiscal year ended May 31, 1997 an aggregate of $5,738,472
of distribution expenses or 5.53% of the average net assets of the Class B
shares of the Fund, was not reimbursed or recovered by the John Hancock Funds
through the receipt of deferred sales charges or 12b-1 fees in prior periods.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on these Plans.
27
<PAGE>
Pursuant to the Plans, at least quarterly, the John Hancock Funds provides the
Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by a vote of a majority of the Independent Trustees, (b) by a vote
of a majority of the Fund's outstanding shares of the applicable class in each
case upon 60 days' written notice to the John Hancock Funds, and (c)
automatically in the event of assignment. The Plans further provide that they
may not be amended to increase the maximum amount of the fees for the services
described therein without the approval of a majority of the outstanding shares
of the class of the Fund which has voting rights with respect to the Plan. Each
Plan provides that no material amendment to the Plans will be effective unless
it is approved by a majority vote of the Trustees and the Independent Trustees
of the Fund. The holders of Class A and Class B shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
In adopting the Plans, the Trustees concluded that, in their judgment, there is
a reasonable likelihood that the Plans will benefit the holders of the
applicable class of shares of the Fund.
Amounts paid to the John Hancock Funds by any class of shares of the Fund will
not be used to pay the expenses incurred with respect to any other class of
shares of the Fund; provided, however, that expenses attributable to the Fund as
a whole will be allocated, to the extent permitted by law, according to a
formula based upon gross sales dollars and/or average daily net assets of each
such class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended May 31, 1997, the Fund paid John Hancock Funds the
following amounts of expenses in connection with their services for the Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and Interest
Mailing of Expense of Carrying
Prospectus to Compensation John or Other
New to Selling Hancock Finance
Advertising Shareholder Brokers Funds Charges
----------- ----------- ------- ----- -------
<S> <C> <C> <C> <C>
Class A Shares $33,390 $3,596 $435,539 $78,007 ----
Class B Shares $33,371 $3,222 $317,026 $82,521 $162,739
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
28
<PAGE>
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned categories for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of a Fund's NAV.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net asset by the number of its shares outstanding.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive a Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund, the
investor is entitled to accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, owned by
the investor, or if John Hancock Signature Services, Inc. ("Signature Services")
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
oA Trustee/Director or officer of the Fund; a Director or officer
of the Adviser and its affiliates or Selling Brokers; employees or
sales representatives of any of the foregoing; retired officers,
employees or Directors of any of the foregoing; a member of the
immediate family (spouse, children, grandchildren, grandparents,
mother, father, sister, brother, mother-in-law, father-in-law,
daughter-in-law, son-in-law, niece, nephew and domestic partner) of any
29
<PAGE>
of the foregoing; or any fund, pension, profit sharing or other benefit
plan for the individuals described above.
oA broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement with John
Hancock Funds providing specifically for the use of Fund shares in
fee-based investment products or services made available to their
clients.
oA former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan and
transfers any or all of his or her plan distributions directly to the
Fund.
oA member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
oRetirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees
at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
Service Agreement. See your Merrill Lynch financial consultant for
further information.
oRetirement plans investing through the PruArray Program sponsored by
Prudential Securities.
oExisting full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed retirement plans with at least 100 eligible employees at the
inception of the Fund account. Each of these investors may purchase
Class A shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
- --------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
30
<PAGE>
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
b shares if class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
pursuant to a Letter of Intention (the "LOI"), which should be read carefully
prior to its execution by an investor. The Fund offers two options regarding the
specified period for making investments under the LOI. All investors have the
option of making their investments over a specified period of thirteen (13)
months. Investors who are using the Fund as a funding medium for a retirement
plan, however, may opt to make the necessary investments called for by the LOI
over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Such an investment (including accumulations and combinations
but not including reinvested dividends) must aggregate $50,000 or more invested
during the specified period from the date of the LOI or from a date within
ninety (90) days prior thereto, upon written request to Signature Services. The
sales charge applicable to all amounts invested under the LOI is computed as if
the aggregate amount intended to be invested had been invested immediately. If
such aggregate amount is not actually invested, the difference in the sales
charge actually paid and the sales charge payable had the LOI not been in effect
is due from the investor. However, for the purchases actually made within the
specified period (either 13 or 48 months) the sales charge applicable will not
be higher than that which would have been applied (including accumulations and
combinations) had the LOI been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charges as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so the Fund will receive the full
amount of the purchase payment.
31
<PAGE>
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including all shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
Proceeds from the CDSC are paid to the Distributors and are used in whole or in
part by the Distributors to defray their expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
32
<PAGE>
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstance defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemption of Class B shares where the proceeds are used to purchase a
John Hancock Declaration Variable Annuity.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan or
redemptions for fees charged by planners or advisors for advisory
services, as long as your annual redemptions do not exceed 12% of your
account value, including reinvested dividends, at the time you
established your periodic withdrawal plan and 12% of the value of
subsequent investments (less redemptions) in that account at the time
you notify Signature Services. (Please note, this waiver does not apply
to periodic withdrawal plan redemptions of Class A shares that are
subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
33
<PAGE>
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement under section 401(a)
of the Code (such as 401(k), Money Purchase Pension Plan and
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
CDSC Waiver Matrix for Class B
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12 % of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72+) or 12% (72+) or 12% (72+) or (72+) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- -------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90- day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of the
Fund for shares of the same class in any other John Hancock fund offering that
class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may changed or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
35
<PAGE>
Class B shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on such purchases of Class A shares and the
CDSC imposed on redemptions of Class B shares and because redemptions are
taxable events. Therefore, a shareholder should not purchase Class A and Class B
shares at the same time a Systematic Withdrawal Plan is in effect. The Fund
reserves the right to modify or discontinue the Systematic Withdrawal Plan of
any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained in
the Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS".
36
<PAGE>
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years. or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized the creation of two series. The
Trustees have also authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that classes of the Fund. Holders of
Class A and Class B shares have certain exclusive voting rights on matters
relating to their respective distribution plans. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to the Class A and Class B shares will be
borne exclusively by that class (ii) Class B shares will pay higher distribution
and service fees than Class A shares and (iii) each of Class A and Class B
shares will bear any other class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to the multiple-class structures. Similarly, the net asset value per
share may vary depending on whether Class A or Class B shares are purchased. No
interest will be paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act of 1940 or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares, and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
37
<PAGE>
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. Use of
information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Each series of the Trust including the Fund, is treated as a separate entity for
tax purposes. The Fund has qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to continue to so qualify for each taxable year. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its taxable income
(including net realized capital gains) which is distributed to shareholders in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) As a result of federal
tax legislation enacted on August 5, 1997, gain recognized after May 6, 1997
from the sale of a capital asset is taxable to individual (noncorporate)
investors at different maximum federal income tax rates, depending generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer, and the dates the asset was acquired and/or sold. The Treasury
Department has issued guidance under the Act that enables the Fund to pass
through to its shareholders the benefits of the capital gains rates enacted in
the Act. Shareholders should consult their own tax advisers on the correct
38
<PAGE>
application of these new rules. Some distributions may be paid in January but
may be taxable to shareholders as if they had been received on December 31 of
the previous year. The tax treatment described above will apply without regard
to whether distributions are received in cash or reinvested in additional shares
of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income and losses and may affect the amount, timing
and character of distributions to shareholders.
The amount of net realized capital gains, if any, in any given year will vary
depending upon the Adviser's current investment strategy and whether the Adviser
believes it to be in the best interest of the Fund to dispose of portfolio
securities or enter into options or futures transactions that will generate
capital gains. At the time of an investor's purchase of Fund shares, a portion
of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions on
those shares from such appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. A sales charge paid in purchasing Class A
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent Class A shares of the Fund or another John Hancock Fund
are subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various periods, including the treatment of
losses on sales of shares held for six months or less that are recharacterized
as long-term capital losses, as described above.
39
<PAGE>
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as capital gain
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its own net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund, as noted above, and would not be distributed as such to
shareholders. The capital loss carryforwards for the Fund are as follows:
$48,876,888 of capital loss carryforwards which will expire May 31, 1998 --
$282,637, May 31, 2002-- $16,549,431, May 31, 2003 -- $26,193,155, May 31, 2004
- --$3,597,046 and May 31, 2005 --$2,254,619.
The Fund's dividends and distributions will not qualify for the corporate
dividends-received deduction.
A Fund is required to accrue income on any debt securities that have more than a
de minims amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts may also
require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
40
<PAGE>
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Additionally, the Fund may be required to recognize gain, but not loss, if an
option or other transaction is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio. Also, certain of the Fund's losses
on its transactions involving options, futures or forward contracts and/or
offsetting or successor portfolio positions may be deferred rather than being
taken into account currently in calculating the Fund's taxable income or gains.
Certain of these transactions may also cause the Fund to dispose of investments
sooner than would otherwise have occurred. These transactions may therefore
affect the amount, timing and character of the Fund's distributions to
shareholders. The Fund will take into account the special tax rules (including
consideration of available elections) applicable to options, futures and forward
contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
41
<PAGE>
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30 day period ending November 30, 1997, the yield on Class A and Class B
shares of the Fund was 5.10% and 4.63%, respectively. The average total return
of Class A shares of the Fund for the 1 year, 5 years and period from January 3,
1992 (inception of the Fund) to November 30, 1997 were 1.88%, 5.73% and 5.57%,
respectively.
The average total return of Class B shares of the 1 year, 5 year and 10 year
periods ended November 30, 1997 were 1.06%, 5.88% and 8.07%, respectively and
reflects the applicable CDSC.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
a - b
____ 6
Yield = 2 ( [ cd ) + 1 ] - 1 )
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of shares of the Fund outstanding
during the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAVE where applicable).
The Fund's total return is computed by finding the average annual compounded
rate of return over the 1-year, 5-year, and 10-year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula:
42
<PAGE>
n ________
T = \ / ERV / P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV= ending redeemable value of a hypothetical $1,000 investment
made at designated periods or fraction thereof.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC applied at the end of the period, respectively. This
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period. The "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the period stated by the maximum offering price or net asset
value at the end of the period. Excluding the Fund's sales charge from the
distribution rate produces a higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Fund's sales charge on
Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield and
total return and/or yield will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on fixed income mutual funds in the United
States. Ibbotson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, may also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
43
<PAGE>
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. Ion other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and other policies that the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Fund's officers will be primarily responsible for
the allocation of the Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the period ended October 31, 1996 and
1995 and for the period from November 1, 1996 to May 31, 1997, the Fund paid
negotiated brokerage commissions of $169,518, $107,825, and $ 97,937,
respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
44
<PAGE>
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. For the period ended November 1, 1996 to May 31,
1997, the Fund did not pay commissions as compensation to any brokers for
research services such as industry, economic and company reviews and evaluations
of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. a broker-dealer ("Distributors"
or Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. For the
period ended October 31, 1995 and 1996 and for the period from November 1, 1996
to May 1, 1997, the Fund did not execute any portfolio transactions with the
Affiliated Broker.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser or the Affiliated Brokers. Because the Adviser,
which is affiliated with the Affiliated Brokers, has, as an investment adviser
to the Fund, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way , Suite 1000, Boston,
MA 02217-1000 a wholly- owned indirect subsidiary of the Life Company is the
transfer and dividend paying agent for the Fund. The Fund pays an annual fee of
$20.00 for each Class A shareholder account and $22.50 for each Class B
shareholder account, plus certain out-of-pocket expenses. These expenses are
aggregated and charged to the Fund and allocated to each class on the basis of
their relative net asset value.
45
<PAGE>
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Trust and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts, 02110. Price Waterhouse LLP audits and renders an
opinion on the Fund's annual financial statements and reviews the Fund's annual
Federal income tax return.
46
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS*
Moody's Bond Ratings
Bonds. "Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Bonds which are rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of grater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in 'Aaa'
securities . "Bonds which are rated 'A' possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
"Bonds which are rated 'Baa' are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
"Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
- --------------
*As described by the rating companies themselves.
A-1
<PAGE>
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Standard & Poor's Bond Ratings
"AAA. Debt rated 'AAA' has the highest rating by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA. Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A. Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB. Debt rated 'BBB' is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Debt rated "BB," or "B," is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and pay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major risk exposures to adverse conditions.
Unrated. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
A-2
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's Commercial Paper Ratings
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
A-3
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
John Hancock Government Income Fund
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
MAY 31, 1998
Pro forma information is intended to provide shareholders of the John Hancock
Government Income Fund and John Hancock Sovereign U.S. Government Income
Fund with information about the impact of the proposed merger by
indicating how the merger might have affected information had the merger been
consummated as of May 31, 1997.
The pro forma combined statements of assets and liabilities and results of
operations as of May 31, 1998, have been prepared to reflect the merger of JHGI
and JHSUGIF after giving effect to pro forma adjustments described in the notes
listed below.
(a) Acquisition by John Hancock Government Income Fund of all the assets
of John Hancock Sovereign U.S. Government Income Fund and issuance of
John Hancock Government Income Fund Class A and Class B shares in
exchange for all of the outstanding Class A and Class B shares,
respectively, of John Hancock Sovereign U.S. Government Income Fund.
(b) The investment advisory fee was adjusted to reflect the application of
the fee structure which will be in effect for John Hancock Government
Income Fund: 0.650% of the fund's first $200 million average daily net
asset value; 0.625% of the fund's next $300 million average daily net
asset value; and 0.600% of the fund's average daily net asset value
over $500 million.
(c) The 12b-1 fee was adjusted to reflect the application of the fee
structure which will be in effect for the John Hancock Government
Income Fund: 0.25% of Class A average daily net assets and 1.00% of
Class B average daily net assets.
(d) The transfer agent fee for the Class A and Class B shares is the total
of the respective individual fund's transfer agent fees. The main
criteria in determining the transfer agent fees for a specific class
is the number of shareholder accounts.
(e) The actual expenses incurred by the John Hancock Government Income
Fund and John Hancock Sovereign U. S. Government Income Fund for
various expenses included on a pro forma basis were reduced to reflect
the estimated savings arising from the merger.
(f) Represents the Adviser's voluntary agreement to limit management fees
to an annual rate of 0.50% of John Hancock Government Income Fund's
average daily net assets.
1
<PAGE>
John Hancock Government Income Fund
Pro-forma combined statement of assets and liabilities
For the year ended May 31,1998
<TABLE>
<CAPTION>
John Hancock
John Hancock Sovereign US
Government Government Pro
Income Income Forma
Fund Fund Adjustments Combined
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Assets
Investments at value $450,392,642 $363,524,575 $ - $813,917,217
Cash 0 0 - 0
Receivable for shares sold 0 35,231 - 35,231
Interest receivable 5,716,511 4,300,750 - 10,017,261
Receivable for investments sold 2,000,000 735,978 - 2,735,978
Receivable for variation margin 9,594 51,500 - 61,094
Other Assets 169,881 41,657 - 211,538
-------------- ------------- -------------- ---------------
Total assets 458,288,628 368,689,691 - 826,978,319
-------------- ------------- -------------- ---------------
Liabilities
Payable for shares repurchased 142,886 161,977 - 304,863
Dividend payable 187,921 186,508 - 374,429
Payable to John Hancock Advisers
and affiliates 417,195 328,588 - 745,783
Accounts payable and accrued expenses 138,542 81,270 - 219,812
-------------- ------------- -------------- ---------------
Total liabilities 886,544 758,343 - 1,644,887
-------------- ------------- -------------- ---------------
Net assets:
Capital paid-in $466,992,440 $403,389,085 - $870,381,525
Accumulated net realized loss
on investments and financial
futures contracts (19,511,299) (46,760,484) - (66,271,783)
Net unrealized appreciation of investments
and financial futures contracts 10,016,602 11,498,920 - 21,515,522
Distributions in excess of net investment income (95,659) (196,173) - (291,832)
-------------- ------------- -------------- ---------------
Net assets $457,402,084 $367,931,348 - $825,333,432
============== ============= ============== ===============
Net assets:
Government Income
Class A $339,572,173 $ - $285,335,758 (a) $624,907,931
Class B 117,829,911 - 82,595,590 (a) 200,425,501
Sovereign U.S. Government Income
Class A - 285,335,758 (285,335,758) (a) 0
Class B - 82,595,590 (82,595,590) (a) 0
-------------- ------------- -------------- ---------------
$457,402,084 367,931,348 $0 $825,333,432
============== ============= ============== ===============
Shares outstanding:
Government Income
Class A 36,721,182 - 30,847,109 (a) 67,568,291
Class B 12,742,073 - 900,568 (a) 13,642,641
Sovereign U.S. Government Income
Class A - 28,777,805 (28,777,805) (a) 0
Class B - 8,330,255 (8,330,255) (a) 0
-------------- ------------- -------------- ---------------
Net asset value per share:
Government Income
Class A $9.25 - - $9.25
Class B $9.25 - - $9.25
Sovereign U.S. Government Income
Class A - $9.92 ($9.92) (a) $0.00
Class B - $9.92 ($9.92) (a) $0.00
============== ============= ============== ===============
</TABLE>
<PAGE>
John Hancock Government Income Fund
Proforma combined statement of operations
For the year ended May 31,1998
<TABLE>
<CAPTION>
John Hancock John Hancock
Government Sovereign US
Income Government
Fund Income Fund Pro
Year ended Year ended Forma
May 31, 1998 May 31, 1998 Adjustments Combined
-------------------- -------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Investment Income
Interest $39,112,329 $29,512,114 - $68,624,443
Dividends 6,205 6,205
-------------------- -------------------- --------------- ---------------
Total 39,118,534 29,512,114 - 68,630,648
-------------------- -------------------- --------------- ---------------
Expenses
Investment managment fee 3,155,183 1,941,310 375,323 (b) 5,471,816
Distribution and service fee
Class A 882,463 894,247 (153,488)(c) 1,623,222
Class B 1,428,604 893,948 12,589 (c) 2,335,141
Transfer agent fee (d) 720,458 1,004,778 - 1,725,236
Custodian fee 113,125 104,730 (48,005)(e) 169,850
Registration and filing fees 29,962 31,567 (15,382)(e) 46,147
Financial services fee 88,284 68,972 - 157,256
Auditing & Legal fees 45,601 54,831 (36,000)(e) 64,432
Printing 22,478 24,052 (11,239)(e) 35,291
Directors' fee 43,338 23,453 - 66,791
Miscellaneous 1,377 4,288 (500)(e) 5,165
-------------------- -------------------- --------------- ---------------
Total expenses 6,530,873 5,046,176 123,298 11,700,347
Reimbursement of expenses 0 0 (1,057,802)(f) (1,057,802)
-------------------- -------------------- --------------- ---------------
Net Expenses 6,530,873 5,046,176 (934,504) 10,642,545
-------------------- -------------------- --------------- ---------------
Net investment income 32,587,661 24,465,938 934,504 57,988,103
-------------------- -------------------- --------------- ---------------
Realized and Unrealized
Gain (Loss) on Investments
and Financial Futures Contracts
Net realized gain (loss) on
investments sold 2,984,658 3,396,877 0 6,381,535
Net realized loss on financial futures
contracts (1,300,470) (460,691) 0 (1,761,161)
Change in net unrealized appreciation
(depreciation) of investments 16,089,104 11,299,891 0 27,388,995
Change in net unrealized
appreciation (depreciation) of
financial futures contracts 204,281 73,531 0 277,812
-------------------- -------------------- --------------- ---------------
Net Realized and Unrealized
Gain (Loss) on Investments and
Financial Futures Contracts 17,977,573 14,309,608 - 32,287,181
-------------------- -------------------- --------------- ---------------
Net Increase in Net Assets
Resulting from Operations $50,565,234 $38,775,546 $934,504 $90,275,284
==================== ==================== =============== ===============
</TABLE>
See Notes to Pro-Forma Combined Financial Statements
<PAGE>
Schedule of Investments
May 31, 1998
- -------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Government Income Fund and the Sovereign U.S. Government Fund combined on May
31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
------------------------------------------------------------------------------
INTEREST MATURITY PAR VALUE
ISSUER, DESCRIPTION RATE DATE (000'S OMITTED) MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S.
United States Treasury,
Bond 15.750% 11/15/01 $14,340 $18,875,025
Bond 10.750 2/15/03 to 08/15/05 27,000 33,061,440
Bond 12.000 8/15/13 24,200 35,664,750
Bond 11.875 11/15/03 5,000 6,439,850
Bond 12.750 11/15/10 14,000 19,860,260
Bond
Bond 8.125 8/15/19 31,000 39,234,220
Bond 6.125 11/15/27 16,000 16,717,440
Note
Note 8.500 2/15/00 4,500 4,711,635
Note
Note
-------------------
174,564,620
-------------------
Government - U.S. Agencies
Federal Farm Credit Bank,
Note 7.200 9/10/01 2,500 2,509,875
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf
CMO Remic 34-C
CMO Remic 1094-K 7.000 6/15/21 2,300 2,341,676
CMO Remic 1142-H
CMO Remic 1603-K
CMO Remic 1608-L 6.500 9/15/23 7,000 7,035,000
CMO Remic 1617-PM
CMO Remic 1634-PN 4.500 12/15/23 10,575 8,658,281
CMO Remic 1667-PE 6.000 3/15/08 11,750 11,779,375
CMO Remic 1727-I
Deb
Note 7.256 9/17/01 8,200 8,242,312
Note 8.400 11/30/01 2,500 2,534,375
Note
Federal Judiciary Office Building,
Bond Zero 2/15/01 250 214,727
Federal National Mortgage Assn.,
10Yr Pass Thru Ctf
10Yr Pass Thru Ctf
15Yr Pass Thru Ctf
15Yr Pass Thru Ctf
15Yr Pass Thru Ctf
30Yr Pass Thru Ctf 8.500 9/1/24 to 10/1/24 9,422 9,855,051
30Yr Pass Thru Ctf
CMO Remic 1989-78-G
CMO Remic 1991-76-M
CMO Remic 1994-60-PJ
CMO Remic 1994-75-K
CMO Remic 1996-28-PK
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SOVEREIGN U.S. GOVERNMENT FUND
-------------------------------------------------------------------------
INTEREST MATURITY PAR VALUE
ISSUER, DESCRIPTION RATE DATE (000'S OMITTED) MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S.
United States Treasury,
Bond 15.750% 11/15/01 $18,000 $23,692,500
Bond 10.750 08/15/05 17,085 22,151,728
Bond 12.000 8/15/03 23,900 35,222,625
Bond
Bond 12.750 11/15/10 6,000 8,511,540
Bond 9.250 2/15/16 24,450 33,469,850
Bond 8.125 8/15/19 1,015 1,284,604
Bond 6.125 11/15/27 12,250 12,799,290
Note 9.125 5/15/99 1,500 1,548,990
Note 8.500 2/15/00 1,450 1,518,194
Note 6.625 7/31/01 1,000 1,029,530
Note 6.125 12/31/01 7,000 7,112,630
-------------------
148,341,481
-------------------
Government - U.S. Agencies
Federal Farm Credit Bank,
Note
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 10.500 2/1/03 2,831 2,924,537
30 Yr Pass Thru Ctf 9.500 8/1/16 10,215 10,952,779
CMO Remic 34-C 9.000 11/15/19 3,149 3,199,832
CMO Remic 1094-K
CMO Remic 1142-H 7.950 12/15/20 10,000 10,143,700
CMO Remic 1603-K 6.500 10/15/23 5,000 4,996,850
CMO Remic 1608-L 6.500 9/15/23 5,000 5,025,000
CMO Remic 1617-PM 6.500 11/15/23 10,000 10,081,200
CMO Remic 1634-PN
CMO Remic 1667-PE
CMO Remic 1727-I 6.500 5/15/24 5,000 5,006,250
Deb 6.875 11/22/06 5,000 5,114,050
Note
Note
Note 5.750 4/15/08 3,000 2,947,200
Federal Judiciary Office Building,
Bond
Federal National Mortgage Assn.,
10Yr Pass Thru Ctf 9.050 4/10/00 2,000 2,114,380
10Yr Pass Thru Ctf 8.900 6/12/00 5,000 5,304,700
15Yr Pass Thru Ctf 9.000 2/1/10 4,976 5,188,123
15Yr Pass Thru Ctf 7.500 7/1/11 3,674 3,790,267
15Yr Pass Thru Ctf 6.500 5/1/13 14,850 14,933,457
30Yr Pass Thru Ctf
30Yr Pass Thru Ctf 7.000 2/1/28 to 03/1/28 29,376 29,789,918
CMO Remic 1989-78-G 9.050 12/25/18 2,397 2,407,925
CMO Remic 1991-76-M 9.000 7/25/06 174 174,169
CMO Remic 1994-60-PJ 7.000 4/25/24 6,100 6,317,282
CMO Remic 1994-75-K 7.000 4/25/24 3,100 3,218,172
CMO Remic 1996-28-PK 6.500 7/25/25 7,589 7,563,193
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
COMBINED
PAR VALUE
ISSUER, DESCRIPTION (000'S OMITTED) MARKET VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (39.12%)
United States Treasury,
Bond $32,340 $42,567,525
Bond 44,085 55,213,168
Bond 48,100 70,887,375
Bond 5,000 6,439,850
Bond 20,000 28,371,800
Bond 24,450 33,469,850
Bond 32,015 40,518,824
Bond 28,250 29,516,730
Note 1,500 1,548,990
Note 5,950 6,229,829
Note 1,000 1,029,530
Note 7,000 7,112,630
-------------------
322,906,101
-------------------
Government - U.S. Agencies (52.22%)
Federal Farm Credit Bank,
Note 2,500 2,509,875
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 2,831 2,924,537
30 Yr Pass Thru Ctf 10,215 10,952,779
CMO Remic 34-C 3,149 3,199,832
CMO Remic 1094-K 2,300 2,341,676
CMO Remic 1142-H 10,000 10,143,700
CMO Remic 1603-K 5,000 4,996,850
CMO Remic 1608-L 12,000 12,060,000
CMO Remic 1617-PM 10,000 10,081,200
CMO Remic 1634-PN 10,575 8,658,281
CMO Remic 1667-PE 11,750 11,779,375
CMO Remic 1727-I 5,000 5,006,250
Deb 5,000 5,114,050
Note 8,200 8,242,312
Note 2,500 2,534,375
Note 3,000 2,947,200
Federal Judiciary Office Building,
Bond 250 214,727
Federal National Mortgage Assn.,
10Yr Pass Thru Ctf 2,000 2,114,380
10Yr Pass Thru Ctf 5,000 5,304,700
15Yr Pass Thru Ctf 4,976 5,188,123
15Yr Pass Thru Ctf 3,674 3,790,267
15Yr Pass Thru Ctf 14,850 14,933,457
30Yr Pass Thru Ctf 9,422 9,855,051
30Yr Pass Thru Ctf 29,376 29,789,918
CMO Remic 1989-78-G 2,397 2,407,925
CMO Remic 1991-76-M 174 174,169
CMO Remic 1994-60-PJ 6,100 6,317,282
CMO Remic 1994-75-K 3,100 3,218,172
CMO Remic 1996-28-PK 7,589 7,563,193
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
------------------------------------------------------------------------------
INTEREST MATURITY PAR VALUE
ISSUER, DESCRIPTION RATE DATE (000'S OMITTED) MARKET VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CMO Remic G-8-E
CMO Remic X-225-TK
CMO Remic Ctf 1990-51-H 7.500 5/25/20 189 194,157
CMO Remic 1990-58-J 7.000 5/25/20 3,700 3,769,375
CMO Remic 1990-94-D 6.500 8/25/20 1,363 1,370,724
CMO Remic 1991-56-M 6.750 6/25/21 4,000 4,045,000
Medium Term Note 11.875 5/19/00 6,800 7,573,500
Medium Term Note
Note 9.400 8/10/98 6,540 6,588,004
Note 9.550 3/10/99 7,450 7,662,996
10 Yr Pass Thru Ctf Ser SM-2004-K 8.400 10/25/04 11,600 12,004,144
Financing Corp.,
Bond 9.400 2/8/18 4,000 5,476,240
Bond 9.650 11/2/18 1,600 2,240,496
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage
30 Yr Pass Thru Ctf 11.000 01-15-14 to 12-15-15 6,250 7,048,924
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf 6.875 3/20/23 9,203 9,447,943
30 Yr Pass Thru Ctf 7.500 05-15-23 to 12-15-25 63,648 65,658,842
30 Yr Pass Thru Ctf 8.000 9/15/23 5,029 5,252,097
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf 7.000 1-15-28 to 05-15-28 19,935 20,246,551
Small Business Administration
Pass Thru Ctf Ser 97-B
Pass Thru Ctf Ser 97-D
Pass Thru Ctf Ser 97-E 7.300 5/1/17 3,836 4,049,831
-------------------
215,799,496
-------------------
TOTAL U.S.GOVERNMENT AND
AGENCIES SECURITIES
(Cost $734,370,503) 390,364,116
-------------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar - Denominated Foreign
Government Bonds
Argentina, Republic of,
Deb 6.625# 3/31/05 2,850 2,558,046
Global Bond 9.750 9/19/27 2,389 2,220,686
Brazil, Republic of,
Deb Ser A 6.875# 1/1/01 5,005 4,822,968
Hydro-Quebec Corp.,
Deb Ser HK 9.375 4/15/30 5,440 7,340,410
Gtd Bond 9.400 2/1/21 10,000 13,187,200
Landeskreditbank Baden - Wuerttemberg,
Sub Note 7.625 2/1/23 11,650 13,334,823
United Mexican States,
Bond 11.375 9/15/16 3,000 3,431,250
Bond 11.500 5/15/26 3,000 3,508,125
TOTAL FOREIGN GOVERNMENT BONDS -------------------
(Cost $48,512,640) 50,403,508
-------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SOVEREIGN U.S. GOVERNMENT FUND
-------------------------------------------------------------------------
INTEREST MATURITY PAR VALUE
ISSUER, DESCRIPTION RATE DATE (000'S OMITTED) MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CMO Remic G-8-E 9.000% 4/25/21 $5,001 $5,381,030
CMO Remic X-225-TK 6.500 12/25/23 5,032 5,079,150
CMO Remic Ctf 1990-51-H
CMO Remic 1990-58-J
CMO Remic 1990-94-D
CMO Remic 1991-56-M
Medium Term Note
Medium Term Note 9.500 7/1/17 5,000 6,901,950
Note
Note
10 Yr Pass Thru Ctf Ser SM-2004-K
Financing Corp.,
Bond
Bond
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage 7.000# 10-20-22 to 10-20-23 12,412 12,771,882
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf 9.000 08-15-16 to 12-15-17 6,910 7,474,364
30 Yr Pass Thru Ctf 7.500 1/15/23 to 02/15/26 16,260 16,783,032
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf
30 Yr Pass Thru Ctf 8.000 1/15/25 6,491 6,776,650
30 Yr Pass Thru Ctf
Small Business Administration
Pass Thru Ctf Ser 97-B 7.100 2/1/17 4,871 5,090,734
Pass Thru Ctf Ser 97-D 7.500 4/1/17 4,851 5,170,371
Pass Thru Ctf Ser 97-E 7.300 5/1/17 2,398 2,531,145
-------------------
215,153,292
-------------------
TOTAL U.S.GOVERNMENT AND
AGENCIES SECURITIES
(Cost $734,370,503) 363,494,773
-------------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar - Denominated Foreign
Government Bonds
Argentina, Republic of,
Deb
Global Bond
Brazil, Republic of,
Deb Ser A
Hydro-Quebec Corp.,
Deb Ser HK
Gtd Bond
Landeskreditbank Baden - Wuerttemberg,
Sub Note
United Mexican States,
Bond
Bond
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $48,512,640)
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
COMBINED
PAR VALUE
ISSUER, DESCRIPTION (000'S OMITTED) MARKET VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
CMO Remic G-8-E $5,001 $5,381,030
CMO Remic X-225-TK 5,032 5,079,150
CMO Remic Ctf 1990-51-H 189 194,157
CMO Remic 1990-58-J 3,700 3,769,375
CMO Remic 1990-94-D 1,363 1,370,724
CMO Remic 1991-56-M 4,000 4,045,000
Medium Term Note 6,800 7,573,500
Medium Term Note 5,000 6,901,950
Note 6,540 6,588,004
Note 7,450 7,662,996
10 Yr Pass Thru Ctf Ser SM-2004-K 11,600 12,004,144
Financing Corp.,
Bond 4,000 5,476,240
Bond 1,600 2,240,496
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage 12,412 12,771,882
30 Yr Pass Thru Ctf 6,250 7,048,924
30 Yr Pass Thru Ctf 6,910 7,474,364
30 Yr Pass Thru Ctf 16,260 16,783,032
30 Yr Pass Thru Ctf 9,203 9,447,943
30 Yr Pass Thru Ctf 63,648 65,658,842
30 Yr Pass Thru Ctf 5,029 5,252,097
30 Yr Pass Thru Ctf 6,491 6,776,650
30 Yr Pass Thru Ctf 19,935 20,246,551
Small Business Administration
Pass Thru Ctf Ser 97-B 4,871 5,090,734
Pass Thru Ctf Ser 97-D 4,851 5,170,371
Pass Thru Ctf Ser 97-E 6,234 6,580,976
-------------------
430,952,788
-------------------
TOTAL U.S.GOVERNMENT AND
AGENCIES SECURITIES
(Cost $734,370,503) 753,858,889
-------------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar - Denominated Foreign
Government Bonds (6.11%)
Argentina, Republic of,
Deb 2,850 2,558,046
Global Bond 2,389 2,220,686
Brazil, Republic of,
Deb Ser A 5,005 4,822,968
Hydro-Quebec Corp.,
Deb Ser HK 5,440 7,340,410
Gtd Bond 10,000 13,187,200
Landeskreditbank Baden - Wuerttemberg,
Sub Note 11,650 13,334,823
United Mexican States,
Bond 3,000 3,431,250
Bond 3,000 3,508,125
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $48,512,640) -------------------
50,403,508
-------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
---------------------------------------------------------------------------
INTEREST MATURITY PAR VALUE
ISSUER, DESCRIPTION RATE DATE (000'S OMITTED) MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MULTI-FAMILY MORTGAGE-BACKED BONDS
DLJ Mortgage Acceptance Corp.,
CMO REMIC 1993-MF7-A1 7.400% 6/18/03 $4,590 $4,790,793
CMO REMIC 1993-M10-A2 7.200 7/15/03 4,356 4,503,225
TOTAL MULTI-FAMILY MORTGAGE-BACKED BONDS
(Cost $9,155,734) ------------------
9,294,018
------------------
TOTAL LONG-TERM BONDS
(Cost $792,038,877) 450,061,642
------------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement
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) 5.570 331 331,000
------------------
Corporate Savings Account
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95%
TOTAL SHORT-TERM INVESTMENTS 331,000
------------------
TOTAL INVESTMENTS 450,392,642
------------------
OTHER ASSETS AND LIABILITIES, NET 7,009,442
==================
TOTAL NET ASSETS $ 457,402,084
==================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SOVEREIGN U.S. GOVERNMENT FUND
----------------------------------------------------------------------------
INTEREST MATURITY PAR VALUE
ISSUER, DESCRIPTION RATE DATE (000'S OMITTED) MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MULTI-FAMILY MORTGAGE-BACKED BONDS
DLJ Mortgage Acceptance Corp.,
CMO REMIC 1993-MF7-A1
CMO REMIC 1993-M10-A2
TOTAL MULTI-FAMILY MORTGAGE-BACKED BONDS
(Cost $9,155,734)
TOTAL LONG-TERM BONDS
(Cost $792,038,877) 363,494,773
-------------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement
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) 5.570 23 23,000
-------------------
Corporate Savings Account
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% 6,802
-------------------
TOTAL SHORT-TERM INVESTMENTS 29,802
-------------------
TOTAL INVESTMENTS 363,524,575
-------------------
OTHER ASSETS AND LIABILITIES, NET 4,406,773
===================
TOTAL NET ASSETS $ 367,931,348
===================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
COMBINED
PAR VALUE
ISSUER, DESCRIPTION (000'S OMITTED) MARKET VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MULTI-FAMILY MORTGAGE-BACKED BONDS (1.13%)
DLJ Mortgage Acceptance Corp.,
CMO REMIC 1993-MF7-A1 $4,590 $4,790,793
CMO REMIC 1993-M10-A2 4,356 4,503,225
TOTAL MULTI-FAMILY MORTGAGE-BACKED BONDS
(Cost $9,155,734) -------------------
9,294,018
-------------------
TOTAL LONG-TERM BONDS
(Cost $792,038,877) 813,556,415
-------------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.04%)
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) 354 354,000
-------------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% 6,802
-------------------
TOTAL SHORT-TERM INVESTMENTS 360,802
-------------------
TOTAL INVESTMENTS 813,917,217
-------------------
OTHER ASSETS AND LIABILITIES, NET 11,416,215
===================
TOTAL NET ASSETS $ 825,333,432
===================
</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.
NET ASSETS $825,833,432
<PAGE>
<PAGE>
ANNUAL Report
{PHOTO OMMITTED]
Sovereign
U.S. Government
Income Fund
MAY 31, 1998
<PAGE>
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*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 ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, Massachusetts 02110
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 Sovereign
U.S. Government Income Fund
U.S. bond market rally ends, holding pattern begins
U.S. bonds marched to two different tunes this past year. Throughout the summer
and fall of 1997, low inflation, weaker commodity prices and a shrinking deficit
pushed bond prices higher. Asia's currency and credit problems, which seemed
destined to slow U.S. economic growth, further fueled the bond market's rally.
As interest rates tumbled, U.S. Treasuries did especially well. Yields on the
10-year Treasury fell to 5.74% by year end, down from 6.66% on May 31, 1997.
Contrary to expectations, the U.S. economy began showing signs of growing
strength by mid-January. At the same time, prices were falling worldwide as the
effects of Asia's problems reverberated in markets across the globe. The
combination of these two opposing forces N a strong economy and global deflation
N kept the bond market from moving much in either direction for the rest of the
winter and spring. Yields on the 10-year Treasury bounced around between 5.4%
and 5.8% throughout this time. With little opportunity for price gains, "spread"
securities with a yield advantage over Treasuries N including both mortgage
bonds and U.S. government agencies N became more attractive.
Fortunately, John Hancock Sovereign U.S. Government Income Fund was able to keep
pace with the market's changes. For the year ended May 31, 1998, the Fund's
"U.S. bonds marched to two different tunes this past year."
- --------------------------------------------------------------------------------
[[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 - Sovereign U.S. Government Income Fund
- --------------------------------------------------------------------------------
["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; U.S.
Government Agencies 58%; U.S. Treasuries 40%; Short-Term Investments & Other 2%.
Footnote below states "As a percentage of net assets on May 31, 1998."]
- --------------------------------------------------------------------------------
Class A and Class B shares had total returns of 10.68% and 9.93%, 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 had a total return of 10.46%, according to
Lipper Analytical Services, Inc.1 During the same period, the Lehman Brothers
Government Bond Index returned 11.23%. For longer-term performance information,
please see pages six and seven.
Swapping Treasuries for mortgage bonds. As
interest rates were falling, the Fund benefited from its sizeable stake in U.S.
Treasuries. By November, Treasuries represented 47% of the Fund's net assets N
up from 18% six months earlier. After interest rates leveled off in mid-January,
however, we decided to sell Treasuries and buy mortgage bonds, whose prices had
lagged Treasuries. By May, we had cut our Treasury stake back to 40% of net
assets.
Mortgage bonds offer a yield advantage over Treasuries because they
carry additional risks. With mortgage bonds, investors take on prepayment risk N
or the risk that homeowners will prepay their mortgages before they're due so
they can refinance at lower rates. When interest rates are falling and
prepayments are picking up, prices on mortgage bonds usually increase at a
slower rate than Treasuries. By February, we were beginning to see good buying
opportunities. We focused on 30-year GNMA bonds with 7% coupons (or stated
interest rates), as well as 15-year FNMA bonds with 6.5% coupons. Our strategy
was to buy mortgage
"As interest rates were falling, the Fund benefited from its sizeable stake in
U.S. Treasuries."
bonds whose coupons were below those where most of the prepayments were
occurring and above those where most of the new mortgage bonds were being
issued. This protected the Fund somewhat from prepayments at existing interest
rate levels, while giving us the advantage of added income. As the spring
progressed and prepayments began to ease off, mortgage bonds did better than
Treasuries.
At the same time, we held on to our 19% stake in collateralized
mortgage obligations (CMOs). These are special mortgage securities that take the
cash flows from mortgage pools and separate them into different classes with
varied maturities and prepayment risks. Our longer-term CMOs, which did not
carry much prepayment risk, helped generate added income for the Fund.
Unfortunately, our shorter-term CMOs weakened as prepayments picked up. The Fund
ended the period with a 58% stake in mortgages, up from 45% six months earlier.
We also kept our duration steady at 5.4 years. 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 N or fall as interest rates
rise. A longer-than-average duration worked well for much of the period when
4
<PAGE>
John Hancock Funds - Sovereign U.S. 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 10.68% total return for John Hancock Sovereign U.S.
Government Income Fund: Class A. The second represents the 9.93% total return
for John Hancock Sovereign U.S. 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 " Total returns for John Hancock Sovereign U.S.
Government Income Fund are at net asset value with all distributions reinvested.
The average general U.S. government income fund is tracked by Lipper Analytical
Services, Inc. See the following two pages for historical performance
information."]
- --------------------------------------------------------------------------------
interest rates were falling. With hindsight, we might have benefited from a
shorter duration in January, once rates stabilized. Since we expected the
economy to moderate and rates to fall further, however, we decided to sit tight.
Cautious optimism ahead For the foreseeable future, we plan to keep the Fund's
duration long. Once we see definite signs that the economy is slowing, we'll
lengthen duration further to take advantage of a possible decline in interest
rates. There are several reasons to expect U.S. economic growth to moderate
sometime before year end. The warm winter weather that pushed consumer spending
to unsustainable levels in the first quarter has passed. Also during the first
quarter, we saw a huge build-up in inventory, which will most likely slow
industrial production going forward. Finally, as Asia's problems deepen, we
expect U.S. exports to the region to slow and hurt gross domestic product.
Weaker trends in one or more of these
"There are several reasons to expect U.S. economic growth to moderate..."
areas could signal the beginning of an economic slowdown. We'll also be keeping
a close eye on corporate earnings, which have begun growing at a slower pace.
Even in this uncertain environment, the U.S. bond market remains attractive for
several reasons. Real interest rates N rates after inflation N are still at
historically high levels. The longer inflation remains low, the more likely it
is that real interest rates will come down, sending bond prices up. In addition,
Treasury issuance has slowed thanks to a shrinking deficit. A diminished supply
could help boost prices. On a broader scale, a stable democracy, strong economic
growth, low inflation and bond yields that are higher than some other Western
industrialized nations also make the U.S. bond market attractive. All that
remains is for an economic slowdown to lead to falling interest rates, which
would in turn re-ignite the stalled 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.
1Figures 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 - Sovereign U.S. 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 Sovereign U.S. 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%. 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 Five Inception
Year Years (1/3/92)
---- ----- --------
Cumulative Total Returns 6.43% 26.60% 40.88%
Average Annual Total Returns 6.43% 4.83% 5.65%
CLASS B
For the period ended March 31, 1998
One Five TEN
Year Years Years
---- ----- -----
Cumulative Total Returns 5.69% 27.32% 110.29%
Average Annual Total Returns 5.69% 4.95% 7.72%
YIELDS
As of May 31, 1998
SEC 30-DAY
YIELD
-----
John Hancock Sovereign U.S. Government Income Fund:
Class A 4.93%
John Hancock Sovereign U.S. Government Income Fund:
Class B 4.47%
6
<PAGE>
John Hancock Funds - Sovereign U.S. 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
Sovereign U.S. 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 Government Bond Index N 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.
- --------------------------------------------------------------------------------
Sovereign U.S. Government Fund
Class A shares
Line chart with the heading Sovereign U.S. Government 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 Government Bond Index and is equal to $14,969 as of May 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign U.S. Government Fund on January 3, 1992, before
sales charge, and is equal to $14,925 as of May 31, 1998. The third line
represents the Sovereign U.S. Government Fund, after sales charge, and is equal
to $14,292 as of May 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sovereign U.S. Government Fund
Class B shares
Line chart with the heading Sovereign U.S. Government 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 Government Bond Index and is equal to $21,896 as of May 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign U.S. Government Fund, before sales charge, on
May 31, 1988, and is equal to $21,859 as of May 31, 1998.
- --------------------------------------------------------------------------------
*No contingent deferred sales charge applicable.
7
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. 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:
United States government and agencies securities
(cost -D $352,003,843) ............................ $363,494,773
Joint repurchase agreement (cost - $23,000)........ 23,000
Corporate savings account ......................... 6,802
------------
363,524,575
Receivable for investments sold ................... 735,978
Receivable for shares sold ........................ 35,231
Interest receivable ............................... 4,300,750
Receivable for variation margin -D Note A ......... 51,500
Other assets ...................................... 41,657
------------
Total Assets .................. 368,689,691
-------------------------------------------------
Liabilities:
Payable for shares repurchased .................... 161,977
Dividend payable .................................. 186,508
Payable to John Hancock Advisers, Inc.
and affiliates- Note B ............................ 328,588
Accounts payable and accrued expenses ............. 81,270
------------
Total Liabilities ............. 758,343
-------------------------------------------------
Net Assets:
Capital paid-in ................................... 403,389,085
Accumulated net realized loss on investments and
financial future contracts ........................ (46,760,484)
Net unrealized appreciation of investments and
financial future contracts ........................ 11,498,920
Distributions in excess of net investment income... (196,173)
------------
Net Assets .................... $367,931,348
=================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding -D unlimited number of shares
authorized with no par value)
Class A -D $285,335,758/28,777,805 ................ $9.92
=====================================================================
Class B-D $82,595,590/8,330,255 ................... $9.92
=====================================================================
Maximum Offering Price Per Share*
Class A -D ($9.92 x 104.71%) ...................... $10.39
=====================================================================
* 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 periods stated.
Statement of Operations
Year ended May 31, 1998
- -----------------------------------------------
Investment Income:
Interest .......................................... $29,512,114
------------
Expenses:
Investment management fee- Note B ................. 1,941,310
Distribution and service fee- Note B
Class A ......................................... 894,247
Class B ........................................... 893,948
Transfer agent fee- Note B ........................ 1,004,778
Custodian fee ..................................... 104,730
Financial services fee- Note B .................... 68,972
Auditing fee ...................................... 51,000
Registration and filing fees ...................... 31,567
Printing .......................................... 24,052
Trustees' fees .................................... 23,453
Miscellaneous ..................................... 4,288
Legal fees ........................................ 3,831
------------
Total Expenses ................ 5,046,176
-------------------------------------------------
Net Investment Income ......... 24,465,938
-------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Future Contracts:
Net realized gain on investments sold .......... 3,396,877
Net realized loss on financial futures contracts (460,691)
Change in net unrealized appreciation/depreciation
of investments ................................. 11,299,891
Change in net unrealized appreciation/depreciation
of financial futures contracts ................. 73,531
------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ... 14,309,608
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ..... $38,775,546
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Changes in Net Asset
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 YEAR ENDED
OCTOBER 31, 1996 TO MAY 31, 1997(1) MAY 31, 1998
---------------- ------------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................. $30,058,671 $15,884,675 $24,465,938
Net realized gain (loss) on investments sold and
financial futures contracts ........................... (2,404,490) (870,868) 2,936,186
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts ........... (10,781,489) (7,225,543) 11,373,422
----------- ----------- -----------
Net Increase in Net Assets Resulting from Operations.. 16,872,692 7,788,264 38,775,546
----------- ----------- -----------
Distributions to Shareholders:
Dividends from net investment income
Class A-($0.6445, $0.3584 and $0.6364 per share,
respectively) ........................................ (22,888,998) (11,731,116) (19,290,057)
Class B- ($0.5788, $0.3201 and $0.5689 per share,
respectively) ........................................ (7,168,399) (3,452,330) (5,223,588)
Distributions from capital paid-in
Class A-D (none, $0.0148 and none per share,
respectively) ........................................ - (483,787) -
Class B-D (none, $0.0143 and none per share,
respectively) ........................................ - (154,046) -
---------- ----------- -----------
Total Distributions to Shareholders ................... (30,057,397) (15,821,279) (24,513,645)
----------- ----------- -----------
From Fund Share Transactions- Net:* ................... (46,215,732) (35,417,657) (45,269,176)
----------- ----------- -----------
Net Assets:
Beginning of period ................................... 501,789,732 442,389,295 398,938,623
----------- ----------- -----------
End of period (including distributions in excess of net
investment income of $80,915, $152,625 and $196,173,
respectively) ......................................... $442,389,295 $398,938,623 $367,931,348
=========== =========== ===========
* Analysis of Fund Share Transactions:
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 YEAR ENDED
OCTOBER 31, 1996 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 ....................... 2,701,311 $26,773,125 710,972 $6,795,126 1,581,221 $15,573,019
Shares issued to shareholders in
reinvestment of distributions ..... 1,861,397 18,201,055 1,011,535 9,744,947 1,562,529 15,369,047
---------- ----------- --------- ----------- ---------- -----------
4,562,708 44,974,180 1,722,507 16,540,073 3,143,750 30,942,066
Less shares repurchased ........... (7,742,610) (76,053,085) (3,949,720) (38,081,860) (6,008,099) (59,106,595)
---------- ----------- --------- ----------- ---------- -----------
Net decrease ...................... (3,179,902) ($31,078,905) (2,227,213) ($21,541,787) (2,864,349) ($28,164,529)
========== =========== ========= =========== ========== ===========
CLASS B
Shares sold ....................... 1,137,893 $11,221,296 412,878 $4,053,805 1,106,741 $10,958,277
Shares issued to shareholders in
reinvestment of distributions ..... 397,229 3,883,010 204,335 1,968,833 285,916 2,811,860
---------- ----------- --------- ----------- ---------- -----------
1,535,122 15,104,306 617,213 6,022,638 1,392,657 13,770,137
Less shares repurchased ........... (3,092,548) (30,241,133) (2,064,737) (19,898,508) (3,137,772) (30,874,784)
---------- ----------- --------- ----------- ---------- -----------
Net decrease ...................... (1,557,426) ($15,136,827) (1,447,524) ($13,875,870) (1,745,115) ($17,104,647)
========== =========== ========= =========== ========== ===========
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May
31.
</TABLE>
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 - Sovereign U.S. 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 as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD FROM
------------------------------ NOVEMBER 1, 1996 YEAR ENDED
1993 1994 1995 1996 TO MAY 31, 1997(5) MAY 31, 1998
---- ---- ---- ---- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........ $10.29 $10.89 $9.24 $10.01 $9.75 $9.56
------- ------- ------ ------ ------ -----
Net Investment Income ....................... 0.68(1) 0.65 0.65 0.64(1) 0.37(1) 0.64(1)
Net Realized and Unrealized Gain (Loss)
on Investments and
Financial Futures Contracts ................. 0.61 (1.34) 0.77 (0.26) (0.19) 0.36
Total from Investment Operations ............ 1.29 (0.69) 1.42 0.38 0.1 1.00
Less Distributions:
Dividends from Net Investment Income ........ (0.68) (0.65) (0.65) (0.64) (0.36) (0.64)
Distributions from Net Realized
Gain on Investments Sold .................... (0.01) (0.31) - - - -
Distributions from Capital Paid-In - - - - (0.01) -
------- ------- ------ ------ ----- -----
Total Distributions ......................... (0.69) (0.96) (0.65) (0.64) (0.37) (0.64)
Net Asset Value, End of Period .............. $10.89 $9.24 $10.01 $9.75 $9.56 $9.92
======= ======= ====== ====== ===== =====
Total Investment Return at Net
Asset Value(2) ............................. 12.89% (6.66%) 15.90% 4.02% 1.92%(3) 10.68%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted).... $375,416 $315,372 $370,966 $330,162 $302,589 $285,336
Ratio of Expenses to Average Net Asset...... 1.30% 1.23% 1.17% 1.15% 1.17%(4) 1.14%
Ratio of Net Investment Income to
Average Net Assets .......................... 6.47% 6.62% 6.76% 6.58% 6.69%(4) 6.48%
Portfolio Turnover Rate 273% 127% 94% 143% 88% 148%
</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), distributions 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.
SEEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Financial Highlights (continued)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD FROM
------------------------------ NOVEMBER 1, 1996 YEAR ENDED
1993 1994 1995 1996 TO MAY 31, 1997(5) MAY 31, 1998
---- ---- ---- ---- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ........ $10.28 $10.88 $9.23 $10.00 $9.74 $9.56
------ ------ ----- ------ ----- -----
Net Investment Income ....................... 0.66(1) 0.61 0.60 0.58(1) 0.33(1) 0.57(1)
------ ------ ----- ------ ----- -----
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts . 0.61 (1.34) 0.77 (0.26) (0.18) 0.36
------ ------ ----- ------ ----- -----
Total from Investment Operations ............ 1.27 (0.73) 1.37 0.32 0.15 0.93
------ ------ ----- ------ ----- -----
Less Distributions:
Dividends from Net Investment Income ........ (0.66) (0.61) (0.60) (0.58) (0.32) (0.57)
Distributions from Net Realized Gain
on Investments Sold ......................... (0.01) (0.31) - - - -
Distributions from Capital Paid-In .......... - - - - (0.01) -
------ ------ ----- ------ ----- -----
Total Distributions ......................... (0.67) (0.92) (0.60) (0.58) (0.33) (0.57)
------ ------ ----- ------ ----- -----
Net Asset Value, End of Period .............. $10.88 $9.23 $10.00 $9.74 $9.56 $9.92
====== ====== ====== ====== ====== ======
Total Investment Return at Net Asset Value(2) 12.66% (7.05%) 15.27% 3.33% 1.61%(3) 9.93%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .... $244,133 $196,899 $130,824 $112,228 $96,349 $82,596
Ratio of Expenses to Average Net Assets ... 1.51% 1.64% 1.72% 1.82% 1.86%(4) 1.83%
Ratio of Net Investment Income to Average
Net Assets .................................. 6.23% 6.19% 6.24% 5.91% 5.99%(4) 5.79%
Portfolio Turnover Rate ..................... 273% 127% 94% 143% 88% 148%
(1) Based on the average of shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(3) Not annualized.
(4) Annualized.
(5) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Sovereign U.S. Government Income 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
RATE DATE OMITTED) VALUE
ISSUER, DESCRIPTION ---- ---- -------- -----
- -------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (40.32%)
United States Treasury,
Bond .................................... 15.750% 11-15-01 $18,000 $23,692,500
Bond .................................... 10.750 08-15-05 17,085 22,151,728
Bond .................................... 12.750 11-15-10 6,000 8,511,540
Bond .................................... 12.000 08-15-13 23,900 35,222,625
Bond .................................... 9.250 02-15-16 24,450 33,469,850
Bond .................................... 8.125 08-15-19 1,015 1,284,604
Bond .................................... 6.125 11-15-27 12,250 12,799,290
Note .................................... 9.125 05-15-99 1,500 1,548,990
Note .................................... 8.500 02-15-00 1,450 1,518,194
Note .................................... 6.625 07-31-01 1,000 1,029,530
Note .................................... 6.125 12-31-01 7,000 7,112,630
-----------
148,341,481
-----------
Government - U.S. Agencies (58.47%)
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf ..................... 10.500 02-01-03 2,831 2,924,537
30 Yr Pass Thru Ctf ..................... 9.500 08-01-16 10,215 10,952,779
CMO REMIC 34-C .......................... 9.000 11-15-19 3,149 3,199,832
CMO REMIC 1142-H ........................ 7.950 12-15-20 10,000 10,143,700
CMO REMIC 1603-K ........................ 6.500 10-15-23 5,000 4,996,850
CMO REMIC 1608-L ........................ 6.500 09-15-23 5,000 5,025,000
CMO REMIC 1617-PM ....................... 6.500 11-15-23 10,000 10,081,200
CMO REMIC 1727-I ........................ 6.500 05-15-24 5,000 5,006,250
Deb ..................................... 6.875 11-22-06 5,000 5,114,050
Note .................................... 5.750 04-15-08 3,000 2,947,200
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf ..................... 9.050 04-10-00 2,000 2,114,380
10 Yr Pass Thru Ctf ..................... 8.900 06-12-00 5,000 5,304,700
15 Yr Pass Thru Ctf ..................... 9.000 02-01-10 4,976 5,188,123
15 Yr Pass Thru Ctf ..................... 7.500 07-01-11 3,674 3,790,267
15 Yr Pass Thru Ctf ..................... 6.500 05-01-13 14,850 14,933,457
30 Yr Pass Thru Ctf ..................... 7.000 02-01-28 to 29,376 29,789,918
03-01-28
CMO REMIC 1989-78-G ....................... 9.050 12-25-18 2,397 2,407,925
CMO REMIC 1991-76-M ....................... 9.000 07-25-06 174 174,169
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
PAR VALUE
INTEREST MATURITY (000s MARKET
RATE DATE OMITTED) VALUE
ISSUER, DESCRIPTION ---- ---- -------- -----
- -------------------
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Federal National Mortgage Assn. (continued),
CMO REMIC 1994-60-PJ .................... 7.000% 04-25-24 $6,100 $6,317,282
CMO REMIC 1994-75-K .................... 7.000 04-25-24 3,100 3,218,172
CMO REMIC 1996-28-PK .................... 6.500 07-25-25 7,589 7,563,193
CMO REMIC G-8-E ......................... 9.000 04-25-21 5,001 5,381,030
CMO REMIC X-225C-TK ..................... 6.500 12-25-23 5,032 5,079,150
Medium Term Note ........................ 9.500 07-01-17 5,000 6,901,950
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage .......... 7.000# 10-20-22 to 12,412 12,771,882
10-20-23
30 Yr Pass Thru Ctf ..................... 7.500 01-15-23 to 16,260 16,783,032
02-15-26
30 Yr Pass Thru Ctf ..................... 8.000 01-15-25 6,491 6,776,650
30 Yr Pass Thru Ctf ..................... 9.000 08-15-16 to 6,910 7,474,364
12-15-17
Small Business Administration,
Pass Thru Ctf Ser 97-B .................. 7.100 02-01-17 4,871 5,090,734
Pass Thru Ctf Ser 97-D .................. 7.500 04-01-17 4,851 5,170,371
Pass Thru Ctf Ser 97-E .................. 7.300 05-01-17 2,398 2,531,145
-----------
215,153,292
-----------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $352,003,843) (98.79%) 363,494,773
-------- -----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.01%)
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 23 23,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ...................... 6,802
-----------
TOTAL SHORT-TERM INVESTMENTS (0.01%) 29,802
-------- -----------
TOTAL INVESTMENTS (98.80%) 363,524,575
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (1.20%) 4,406,773
-------- -----------
TOTAL NET ASSETS (100.00%) $367,931,348
======== ===========
# Represents rate in effect on May 31, 1998.
</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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
NOTE A -D
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management investment
company registered under the Investment Company Act of 1940. The Trust consists
of two series: John Hancock Sovereign U.S. Government Income Fund (the "Fund"),
and John Hancock Strategic Income Fund. The other series of the Trust is
reported in separate financial statements. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-term total
return by investing in securities issued, guaranteed or otherwise backed by the
United States government, its agencies or instrumentalities.
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 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.
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 $44,710,231 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. If such carryforwards are used by the Fund, no
capital gains distribution will be made. The carryforwards expire as follows:
May 31, 2002 N $12,665,411, May 31, 2003 N $26,193,155, May 31, 2004 N
$3,597,046 and May 31, 2005 N $2,254,619. The Fund's tax year end is May 31.
Expired capital loss carryforwards are reclassified to capital paid-in in the
year of expiration. Additionally, net capital losses of $266,692 attributable to
security transactions incurred after October 31, 1997 are treated as arising on
the first day (June 1, 1998) of the Fund's next taxable year.
DIVIDENDS, INTEREST AND DISTRIBUTIONS
Dividend income on investment securities is recorded on the ex-dividend date.
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 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.
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
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
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 relative 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.
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 manner as deemed equitable, taking into consideration,
among other things, the nature and type of expense and the relative sizes of the
funds.
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 FundOs exposure to the underlying
instrument or hedge other Fund instruments. At the time the Fund enters into a
financial futures contract, it will be required to deposit with its custodian a
specified amount of cash or U.S. government securities, known as "initial
margin," equal to a certain percentage of the value of the financial futures
contract being traded. Each day, the futures contract is valued at the official
settlement price on 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," will be 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 there were the following open positions in
financial futures contracts:
UNREALIZED
APPRECIATION/
EXPIRATION OPEN CONTRACTS POSITION (DEPRECIATION)
SEPT 98 169 TREASURY BONDS LONG $3,961
SEPT 98 45 TREASURY BONDS LONG 11,250
SEPT 98 75 TREASURY BONDS LONG (9,961)
---------
$5,250
=========
At May 31, 1998, the Fund had deposited in a segregated account $620,000 par
value of U.S. Treasury Bond, 9.25%, 02-15-16 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
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
call or put option, an amount equal to the premium received by the Fund will be
included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be subsequently marked
to market to reflect the current market value of the written option.
The Fund may use option contracts to manage its exposure to the stock market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's terms
("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk may
involve amounts in excess of those reflected in the Fund's period-end Statement
of Assets and Liabilities. There were no written option transactions for the
year ended May 31, 1998.
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) 0.50% of the first $500,000,000 of the Fund's
average daily net asset value, and (b) 0.45% of the Fund's average daily net
asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser,
acts as a distributor for shares of the Fund. For the year ended May 31, 1998,
net sales charges received on sales of Class A shares of the Fund amounted to
$204,425. Of this amount, $24,018 was retained and used for printing
prospectuses, advertising, sales literature, and other purposes, $40,686 was
paid as sales commissions to unrelated broker-dealers and $139,721 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 for
providing distribution related services to the Fund in connection with the sale
of Class B shares. For the year ended May 31, 1998 the contingent deferred sales
charges received by JH Funds amounted to $201,485.
In addition, to reimburse JH Funds for the services it provides as the
distributor of shares of the Fund, the Fund has adopted Distribution Plans 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 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
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 $2,740.
NOTE C - INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of the U.S.
government and its agencies, other than short-term securities, during the year
ended May 31, 1998 aggregated $574,229,515 and $618,363,551, respectively.
The cost of investments owned at May 31, 1998 (including the joint repurchase
agreement) for federal income tax purposes was $352,651,873. Gross unrealized
appreciation and depreciation of investments aggregated $12,405,064 and
$1,539,164, respectively, resulting in net unrealized appreciation of
$10,865,900.
NOTE D -
RECLASSIFICATIONS OF ACCOUNTS
During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
an increase in accumulated net realized loss on investments of $2,956, a
decrease in distributions in excess of net investment income of $4,159 and a
decrease in capital paid-in of $1,203. 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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Sovereign U.S. Government Income Fund and
the Trustees of John Hancock Strategic Series
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Sovereign U.S.
Government Income Fund (the "Fund") (a portfolio of John Hancock Strategic
Series) at May 31, 1998, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 9, 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. Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV
in January 1999. This will reflect the total of all distributions that are
taxable for calendar year 1998.
18
<PAGE>
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
19
<PAGE>
------------------
[LOGO] JOHN HANCOCK FUNDS BULK RATE
A Global Investment Management Firm U.S. Postage
101 Huntington Avenue, Boston, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
Internet: www.jhancock.com/funds Permit No. 75
------------------
This report is for the information of sharholders of the John Hancock Sovereign
U.S. 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.
[LOGO] Printed on recycled paper 0200A 5/98
7/98
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Government Income Fund (the "Registrant") on Form N-1A
under the Securities Act of 1933 and the Investment company Act of 1940 (File
Nos. 2-66906 and 811-3006), which information is incorporated herein by
reference.
ITEM 16. EXHIBITS:
1. Registrant's Declaration of Trust Filed as Exhibit a to
Registrant's Registration
Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no.30
(file nos. 811-3006 and 2-66906
on May 15, 1995; accession no.
0000950135-95-001202) ("PEA 30")
2 Amended and Restated By-Laws of Filed as Exhibit b to
Registrant. Registrant's Registration
Statement on Form N-1A and
incorporated herein by reference
to post-effective amendment no.
36 (file nos. 811-3006 and
2-66906 on February 28, 1997;
accession no.
0001010521-97-000232) ("PEA 36")
3 Not applicable
4 Form of Agreement and Plan of Filed herewith as Exhibit A to
reorganization between the the Proxy Statement and
Registrant and John Hancock Prospectus included as Part A of
Sovereign US Government Income this Registration Statement.
Fund
5 Not applicable
<PAGE>
6 Investment Management Contract Filed as Exhibit d.1 to PEA 36
between the Registrant and John and incorporated herein by
Hancock Advisers, Inc. reference.
7 Distribution Agreement between Filed as Exhibit e to PEA 30 and
the Registrant and John Hancock incorporated herein by reference.
Funds, Inc. (formerly named John
Hancock Broker Distribution
Services, Inc.)
7.1 Form of Soliciting Dealer Filed as Exhibit e.1 to PEA 30
Agreement between John Hancock and incorporated herein by
Funds, Inc. and Selected Dealers reference.
7.2 Form of Financial Institution Filed as Exhibit e.2 to PEA 30
Sales and Service Agreement and incorporated herein by
reference.
7.3 Amendment to Distribution Filed as Exhibit e.3 to PEA 36
Agreement between Registrant an incorporated herein by
and John Hanock Funds, Inc. reference.
8 Not applicable.
9 Master Custodian Agreement Filed as Exhibit g to PEA 30 and
between John Hancock Mutual Funds incorporated herein by reference.
(including Registrant) and
Investors Bank & Trust Company.
10 Class A and Class B Distribution Filed as Exhibit m.2 to PEA 36
Plans between Registrant and John and incorporated herein by
Hancock Funds, Inc. reference.
11 Opinion as to legality of shares Filed herewith as Exhibit 11
and consent.
12 Form of opinion as to tax matters Filed herewith as Exhibit 12
and consent.
<PAGE>
13 Not applicable
14 Consents of PricewaterhouseCoopers Filed herewith as Exhibit 14
LLP and Ernst & Young LLP regarding
the audited financial statements
of Registrant and John Hancock
Sovereign US Government Income Fund.
15 Not applicable
16 Powers of Attorney Filed as addendum to signature
pages of post-effective amendment
no. 35 (file nos. 811-3006 and
2-66906 on August 28, 1996;
accession no.
0001010521-96-000148) ("PEA 35")
and incorporated herein by
reference.
17 Prospectus of John Hancock Included in Part A as part of the
Sovereign US Government Income combined Prospectus with
Fund dated May 1, 1998 Government Income Fund.
17.1 Statement of Additional Filed herewith as Exhibit B to
Information of John Hancock Part B of this Registration
Sovereign US Government Fund Statement.
dated May 1, 1998
17.2 Statement of Additional Filed herewith as Exhibit A to
Information of John Hancock Part B of this Registration
Government Income Fund Statement.
dated May 1, 1998
ITEM 17
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a propectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of 1933,
as amended (the "1933 Act"), the reoffering prospectus will contain the
information called for by the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 21th day of August, 1998.
JOHN HANCOCK BOND TRUST
By: *
-----------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman
- ----------------------- (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/James B. Little Senior Vice President and Chief August 21, 1998
- ----------------------- Financial Officer (Principal
James B. Little Financial and Accounting Officer)
* Trustee
- -----------------------
James F. Carlin
* Trustee
- -----------------------
William H. Cunningham
* Trustee
- -----------------------
Charles F. Fretz
* Trustee
- -----------------------
Harold R. Hiser, Jr.
* Trustee
- -----------------------
Anne C. Hodsdon
* Trustee
- -----------------------
Charles L. Ladner
* Trustee
- -----------------------
Leo E. Linbeck, Jr.
* Trustee
- -----------------------
Patricia P. McCarter
<PAGE>
Signature Title Date
--------- ----- ----
* Trustee
- -----------------------
Stephen R. Pruchansky
* Trustee
- -----------------------
Richard S. Scipione
* Trustee
- -----------------------
Norman H. Smith
* Trustee
- -----------------------
John P. Toolan
*By: /s/Susan S. Newton August 21, 1998
-------------------
Susan S. Newton,
Attorney-in-Fact under
Powers of Attorney dated
June 25, 1996.
</TABLE>
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
- ----------- -----------
4. Agreement and Plan of Regorganization between the Registrant
and John Hancock Sovereign US Government Income Fund (filed as
EXHIBIT A to Part A of this Registration Statement).
11. Opinion as to legality of shares and consent.
12. Form of opinion as to tax matters and consent.
14. Consent of PricewaterhouseCoopers, LLP and Ernst & Young LLP
regarding the audited financial statements and highlights of
the Registrant and John Hancock Sovereign US Government
Income Fund.
John Hancock Bond Trust
on behalf of John Hancock Government Income Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under the Securities
Act of 1933, as amended (the "Act"), on Form N-14, with respect to the shares of
beneficial interest of John Hancock Government Income Fund (the "Fund"), a
series of John Hancock Bond Trust (the "Trust"), a Massachusetts business trust,
it is the opinion of the undersigned that these shares when issued, will be
legally issued, fully paid and non-assessable.
In connection with this opinion it should be noted that the Trust is an entity
of the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for obligations of the
Trust and indemnifies any shareholder of the Fund, with this indemnification to
be paid solely out of the assets of the Fund. Therefore, the shareholder's risk
is limited to circumstances in which the assets of the Fund are insufficient to
meet the obligations asserted against the Fund's assets.
The undersigned hereby consents to the filing of a copy of this opinion as an
exhibit to the Trust's registration statement on Form N-14 with the Securities
and Exchange Commission.
Sincerely,
/s/ Theresa Apruzzese
Theresa Apruzzese
Senior Attorney and Assistant Secretary
John Hancock Advisers, Inc.
[HALE & DORR LETTERHEAD]
- --------------------------------------------------------------------------------
Washington, DCBoston, MALondon, UK*
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
- --------------------------------------------------------------------------------
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 o fax 617-526-5000
DRAFT: 8/14/98
December 4, 1998
Board of Trustees
John Hancock Strategic Series, on behalf of
John Hancock Sovereign U.S. Government Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Board of Trustees
John Hancock Bond Trust, on behalf of
John Hancock Government Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Boards of Trustees:
You have requested our opinion regarding the federal income tax
consequences described below of the acquisition by John Hancock Government
Income Fund ("Acquiring Fund"), a series of John Hancock Bond Trust ("Trust"),
of all of the assets of John Hancock Sovereign U.S. Government Income Fund
("Acquired Fund"), a series of John Hancock Strategic Series ("Series Trust"),
in exchange solely for (i) the assumption by Acquiring Fund of all of the
liabilities of Acquired Fund and (ii) the issuance of Class A and Class B voting
shares of beneficial interest of Acquiring Fund (the "Acquiring Fund Shares") to
Acquired Fund, followed by the distribution by Acquired Fund, in liquidation of
Acquired Fund, of the Acquiring Fund Shares to the shareholders of Acquired Fund
and the termination of Acquired Fund (the foregoing together constituting the
"reorganization" or the "transaction").
In rendering this opinion, we have examined and relied upon the facts
stated and representations made in (i) the combined prospectus for Acquiring
<PAGE>
Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 2
Fund, Acquired Fund, and certain other John Hancock mutual funds, dated May 1,
1998, (ii) the statement of additional information for Acquiring Fund and
another John Hancock mutual fund, dated May 1, 1998, (iii) the statement of
additional information for Acquired Fund, dated May 1, 1998, (iv) the Notice of
Meeting of Shareholders Scheduled for November 11, 1998 and the accompanying
proxy statement and prospectus relating to the transaction dated September 24,
1998 (the "Proxy Statement"), (v) the Agreement and Plan of Reorganization, made
August 10, 1998, between Acquiring Fund and Acquired Fund (the "Agreement"),
(vi) the representation letters on behalf of Acquiring Fund and Acquired Fund
referred to below and (vii) such other documents as we deemed appropriate.
In our examination of documents, we have assumed the authenticity of
original documents, the accuracy of copies, the genuineness of signatures, and
the legal capacity of signatories. We have assumed that all parties to the
Agreement have acted and will act in accordance with the terms of the Agreement
and all other documents relating to the transaction and that the transaction
will be consummated pursuant to the terms and conditions set forth in the
Agreement without the waiver or modification of any such terms and conditions.
Furthermore, we have assumed that all representations contained in the
Agreement, as well as those representations contained in the representation
letters referred to below are, on the date hereof, true and complete in all
material respects, and that any representation made in any of the documents
referred to herein "to the best of the knowledge and belief" (or similar
qualification) of any person or party is correct without such qualification. We
have not attempted to verify independently such representations, but in the
course of our representation, nothing has come to our attention that would cause
us to question the accuracy thereof.
The conclusions expressed herein represent our judgment regarding the
proper treatment of certain aspects of the transaction affecting Acquiring Fund,
Acquired Fund and the shareholders of Acquired Fund on the basis of our analysis
of the Internal Revenue Code of 1986, as amended (the "Code"), case law,
Treasury regulations and the rulings and other pronouncements of the Internal
Revenue Service (the "Service") which exist at the time this opinion is
rendered. Such authorities are subject to prospective or retroactive change, and
we do not undertake any responsibility to advise you of any such change. Our
opinion represents our best judgment regarding how a court would decide if
presented with the issues addressed herein and is not binding upon the Service
or any court. Moreover, our opinion does not provide any assurance that a
position taken in reliance on such opinion will not be challenged by the Service
and does not constitute any representation or warranty that such position, if so
challenged, will not be rejected by a court.
This opinion addresses only the specific United States federal income
tax consequences of the transaction set forth below, and does not address any
other federal, state, local, or foreign income, estate, gift, transfer, sales,
or other tax consequences that may result from the transaction or any other
transaction.
<PAGE>
Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 3
FACTS
We understand that the facts relating to the transaction are as
described hereinafter.
Acquiring Fund is a series of Trust, a business trust established under
the laws of The Commonwealth of Massachusetts in 1984. Trust is registered as an
open-end investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"). Acquiring Fund was converted from a series of a Maryland
corporation to a series of Trust on August 30, 1996 in a transaction that
qualified as a reorganization described in Section 368(a)(1)(F) of the Code.
Prior to December 22, 1994, Acquiring Fund was known as Transamerica Government
Income Fund. Acquiring Fund and its predecessors have been operating as an
investment company since the inception of business in 1988. Acquiring Fund is
one of three series of Trust. Each series of Trust has assets and liabilities
that are separate from those of each other series and is treated as a separate
corporation and regulated investment company under Section 851(h) of the Code.
The investment objective of Acquiring Fund is to seek to earn a high
level of current income, consistent with preservation of capital. Acquiring Fund
pursues this objective by investing primarily in U.S. Government and agency
securities and seeks stability of share price as a secondary goal. Under normal
circumstances, Acquiring Fund invests at least 80% of its assets in securities
that are issued, or guaranteed as to principal and interest, by the U.S.
Government and its agencies or instrumentalities, as well as repurchase
agreements and forward commitments involving these securities.
Acquired Fund is a series of Series Trust, a business trust established
under the laws of The Commonwealth of Massachusetts in 1986. Series Trust is
registered as an open-end investment company under the 1940 Act. Acquired Fund
was converted from a series of a business trust known as Freedom Investment
Trust to a series of Series Trust on August 30, 1996 in a transaction that
qualified as a reorganization described in Section 368(a)(1)(F) of the Code.
Acquired Fund and its predecessor have been operating as an investment company
since the inception of business in 1986. Acquired Fund is one of two series of
Series Trust. Each series of Series Trust has assets and liabilities that are
separate from those of the other series and is treated as a separate corporation
and regulated investment company under Section 851(h) of the Code.
The investment objective of Acquired Fund is to seek to provide as high
a level of income as is consistent with long-term total return. Acquired Fund
pursues this objective by investing in U.S. Government and U.S. Government
agency securities. Under normal circumstances, Acquired Fund invests at least
65% of its assets in securities that are issued, or guaranteed as to principal
<PAGE>
Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 4
and interest, by the U.S. Government and its agencies or instrumentalities.
Acquired Fund may also invest in investment-grade short-term securities and
engage in derivatives, leverage, and other investment practices.
The steps comprising the reorganization, as set forth in the Agreement,
are as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its assets
(consisting, without limitation, of portfolio securities and instruments,
dividend and interest receivables, cash and other assets). In exchange for the
assets transferred to it, Acquiring Fund will (A) assume all of the liabilities
of Acquired Fund (comprising all of its known and unknown liabilities and
referred to hereinafter as the "Acquired Fund Liabilities") and (B) issue
Acquiring Fund Shares to Acquired Fund that have an aggregate net asset value
equal to the value of the assets transferred to Acquiring Fund by Acquired Fund,
less the value of the Acquired Fund Liabilities assumed by Acquiring Fund.
(ii) Promptly after the transfer of its assets to Acquiring Fund,
Acquired Fund will distribute in liquidation the Acquiring Fund Shares it
receives in the exchange to Acquired Fund shareholders pro rata in exchange for
their surrender of their shares of beneficial interest of Acquired Fund
("Acquired Fund Shares"). In these exchanges, holders of Acquired Fund Shares
designated as Class A ("Class A Acquired Fund Shares") will receive Acquiring
Fund Shares designated as Class A ("Class A Acquiring Fund Shares"), and holders
of Acquired Fund Shares designated as Class B ("Class B Acquired Fund Shares")
will receive Acquiring Fund Shares designated as Class B ("Class B Acquiring
Fund Shares").
(iii) After such exchanges, liquidation and distribution, the existence
of Acquired Fund will be promptly terminated in accordance with Massachusetts
law.
The Agreement and the transactions contemplated thereby were approved
by the Board of Trustees of Trust, on behalf of Acquiring Fund, at a meeting
held on ________________, 1998. Acquiring Fund shareholders are not required and
were not asked to approve the transaction. The Agreement and the transactions
contemplated thereby were approved by the Board of Trustees of Series Trust, on
behalf of Acquired Fund, at a meeting held on ______________, 1998, subject to
the approval of Acquired Fund shareholders. Acquired Fund shareholders approved
the transaction at a meeting held on November 11, 1998.
Massachusetts law does not provide dissenters' rights for Acquired Fund
<PAGE>
Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 5
shareholders in the transaction. Additionally, it is the position of the
Division of Investment Management of the Securities and Exchange Commission that
appraisal rights, in contexts such as the reorganization, are inconsistent with
Rule 22c-1 under the 1940 Act and are therefore preempted and invalidated by
such rule. Consequently, Acquired Fund shareholders will not have dissenters' or
appraisal rights in the transaction.
Our opinions set forth below are subject to the following factual
assumptions being true and correct (including statements relating to future
actions and facts represented to be to the best knowledge of management, whether
or not known). Authorized representatives of Acquiring Fund and Acquired Fund
have represented to us by letters of even date herewith that the following
assumptions are true and correct:
(a) Neither Acquiring Fund nor any person treated as related to
Acquiring Fund under Treasury Regulation Section 1.368-1(e)(3) has any plan or
intention to redeem or otherwise reacquire any of the Acquiring Fund Shares
received by shareholders of Acquired Fund in the transaction except in the
ordinary course of its business in connection with its legal obligation under
Section 22(e) of the 1940 Act (which obligation is not in connection with,
modified in connection with, or in any way related to the transaction) as a
registered open-end investment company to redeem its own shares.
(b) After the transaction, Acquiring Fund will continue the historic
business of Acquired Fund and will use all of the assets acquired from Acquired
Fund, which are Acquired Fund's historic business assets, i.e., assets not
acquired as part of or in contemplation of the transaction, in the ordinary
course of a business.
(c) Acquiring Fund has no plan or intention to sell or otherwise
dispose of any assets of Acquired Fund acquired in the transaction, except for
dispositions made in the ordinary course of its business (i.e., dispositions
resulting from investment decisions made after the reorganization on the basis
of investment considerations independent of the reorganization) or to maintain
its qualification as a regulated investment company under Subchapter M of the
Code.
(d) The shareholders of Acquiring Fund and the shareholders of Acquired
Fund will bear their respective expenses, if any, in connection with the
transaction.
(e) Acquiring Fund and Acquired Fund will each bear its own expenses
incurred in connection with the transaction. Any liabilities of Acquired Fund
attributable to such expenses that remain unpaid on the closing date of the
transaction and are assumed by Acquiring Fund in the transaction are
attributable to Acquired Fund's expenses that are solely and directly related to
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Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 6
the transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(f) There is no indebtedness between Acquiring Fund and Acquired Fund.
(g) Acquired Fund or its predecessor has elected to be treated as a
regulated investment company under Subchapter M of the Code. Each of Acquired
Fund and its predecessor has qualified as a regulated investment company for
each taxable year since inception, and Acquired Fund qualifies as such for its
taxable year ending on the closing date of the transaction.
(h) Acquiring Fund or a predecessor of Acquiring Fund has elected to be
treated as a regulated investment company under Subchapter M of the Code. Each
of Acquiring Fund and its predecessors has qualified as a regulated investment
company for each taxable year since inception, and Acquiring Fund qualifies as
such as of the date of the transaction.
(i) Neither Acquiring Fund nor Acquired Fund is under the jurisdiction
of a court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(j) Acquiring Fund does not own and neither it nor any of its
predecessors has ever owned, directly or indirectly, any shares of Acquired Fund
or its predecessor.
(k) Acquiring Fund will not pay cash in lieu of fractional shares in
connection with the transaction.
(l) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares issued to Acquired Fund in exchange for the assets of
Acquired Fund is approximately equal to the fair market value of the assets of
Acquired Fund received by Acquiring Fund, minus the value of the Acquired Fund
Liabilities assumed by Acquiring Fund. Acquiring Fund will not furnish any
consideration in connection with the acquisition of Acquired Fund's assets other
than the assumption of these Acquired Fund Liabilities and the issuance of these
Acquiring Fund Shares.
(m) Acquired Fund shareholders will not be in control (within the
meaning of Sections 368(a)(2)(H) and 304(c) of the Code, which provide that
control means the ownership of shares possessing at least 50% of the total
combined voting power of all classes of shares that are entitled to vote or at
least 50% of the total value of shares of all classes) of Acquiring Fund after
the transaction.
(n) The principal business purposes of the transaction are to combine
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Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 7
the assets of Acquiring Fund and Acquired Fund in order to capitalize on
economies of scale in expenses, including the costs of accounting, legal,
transfer agency, insurance, custodial, and administrative services, to eliminate
the difficulty experienced by Acquired Fund in attracting assets that results
from competition with Acquiring Fund (which has substantially similar investment
characteristics), to benefit from Acquiring Fund's anticipated better
performance, and to increase diversification.
(o) As of the date of the transaction, the fair market value of the
Class A Acquiring Fund Shares received by each holder of Class A Acquired Fund
Shares is approximately equal to the fair market value of the Class A Acquired
Fund Shares surrendered by such shareholder, and the fair market value of the
Class B Acquiring Fund Shares received by each holder of Class B Acquired Fund
Shares is approximately equal to the fair market value of the Class B Acquired
Fund Shares surrendered by such shareholder. No property other than Acquiring
Fund Shares will be distributed to shareholders of Acquired Fund in exchange for
their Acquired Fund Shares, nor will any such shareholder receive cash or other
property as part of the transaction.
(p) There is no plan or intention on the part of any shareholder of
Acquired Fund that owns beneficially 5% or more of the Acquired Fund Shares and,
to the best knowledge of management of Acquired Fund, there is no plan or
intention on the part of the remaining shareholders of Acquired Fund, in
connection with the transaction, to engage in any transaction with Acquired
Fund, Acquiring Fund, or any person treated as related to Acquired Fund or
Acquiring Fund under the standards made applicable by Treasury Regulation
Section 1.368-1(e)(1)(i) involving the sale, redemption, exchange, transfer,
pledge, or other disposition resulting in a direct or indirect transfer of the
risks of ownership (a "Sale") of any of the Acquired Fund Shares or any of the
Acquiring Fund Shares to be received in the transaction that, considering all
Sales, would reduce the aggregate ownership of the Acquiring Fund Shares by
former Acquired Fund shareholders to a number of shares having a value, as of
the date of the transaction, of less than fifty percent (50%) of the value of
all of the formerly outstanding Acquired Fund Shares as of the same date. All
Sales involving shares of Acquired Fund and Acquiring Fund held by Acquired Fund
shareholders that have occurred or will occur in connection with the transaction
are taken into account for purposes of this representation. No such Sale that is
in connection with the transaction has, to the best knowledge of the management
of Acquired Fund and Acquiring Fund, occurred on or prior to the Closing Date.
(q) Acquired Fund assets transferred to Acquiring Fund comprise at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets held by
Acquired Fund immediately prior to the transaction. For purposes of this
representation, amounts used by Acquired Fund to pay its outstanding
<PAGE>
Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 8
liabilities, including reorganization expenses, and all redemptions and
distributions (except for redemptions in the ordinary course of business upon
demand of a shareholder that Acquired Fund is required to make as an open-end
investment company pursuant to Section 22(e) of the 1940 Act and regular, normal
dividends, which dividends include any final distribution of previously
undistributed investment company taxable income and net capital gain for
Acquired Fund's final taxable year ending on the closing date of the
transaction) made by Acquired Fund immediately preceding the transaction are
taken into account as assets of Acquired Fund held immediately prior to the
transaction.
(r) The Acquired Fund Liabilities assumed by Acquiring Fund plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Acquired Fund in the ordinary course of its business or are expenses of the
transaction.
(s) The fair market value of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(t) Acquired Fund does not pay compensation to any
shareholder-employee.
OPINION
On the basis of and subject to the foregoing and in reliance upon the
representations described above, we are of the opinion that:
(a) The acquisition by Acquiring Fund of all of the assets of Acquired
Fund solely in exchange for the issuance of Acquiring Fund Shares to Acquired
Fund and the assumption of all of the Acquired Fund Liabilities by Acquiring
Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired
Fund, of Acquiring Fund Shares to Acquired Fund shareholders in exchange for
their Acquired Fund Shares and the termination of Acquired Fund, will constitute
a "reorganization" within the meaning of Section 368(a)(1)(C) of the Code.
Acquiring Fund and Acquired Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by Acquired Fund upon (i) the
transfer of all of its assets to Acquiring Fund solely in exchange for the
issuance of Acquiring Fund Shares to Acquired Fund and the assumption of all of
the Acquired Fund Liabilities by Acquiring Fund and (ii) the distribution by
Acquired Fund of such Acquiring Fund Shares to the shareholders of Acquired Fund
(Sections 361(a) and 361(c) of the Code).
<PAGE>
Board of Trustees
John Hancock Strategic Series
John Hancock Bond Trust
December 4, 1998
Page 9
(c) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund solely in exchange for the issuance of
Acquiring Fund Shares to Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by Acquiring Fund (Section 1032(a) of the Code).
(d) The basis of the assets of Acquired Fund acquired by Acquiring Fund
will be, in each instance, the same as the basis of those assets in the hands of
Acquired Fund immediately prior to the transfer (Section 362(b) of the Code).
(e) The tax holding period of the assets of Acquired Fund in the hands
of Acquiring Fund will, in each instance, include Acquired Fund's tax holding
period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or loss
upon the exchange of all of their Acquired Fund Shares solely for Acquiring Fund
Shares as part of the transaction (Section 354(a)(1) of the Code).
(g) The basis of the Acquiring Fund Shares received by the Acquired
Fund shareholders in the transaction will be the same as the basis of the
Acquired Fund Shares surrendered in exchange therefor (Section 358(a)(1) of the
Code).
(h) The tax holding period of the Acquiring Fund Shares received by
Acquired Fund shareholders will include, for each shareholder, the tax holding
period for the Acquired Fund Shares surrendered in exchange therefor, provided
that the Acquired Fund Shares were held as capital assets on the date of the
exchange (Section 1223(1) of the Code).
No opinion is expressed or implied regarding the federal income tax
consequences to Acquiring Fund, Acquired Fund or Acquired Fund shareholders of
any conditions existing at the time of, effects resulting from, or other aspects
of the transaction except as expressly set forth above. This opinion may not be
relied upon except with respect to the consequences specifically discussed
herein nor may it be relied upon by persons or entities to whom it is not
addressed, other than with our prior written consent.
Very truly yours,
Hale and Dorr LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Proxy Statement and
Prospectus (the Proxy/Prospectus) constituting part of this Registration
Statement on Form N-14 (the Registration Statement) of John Hancock Bond Trust,
of our report dated July 9, 1998 on the financial statements and financial
highlights included in the May 31, 1998 Annual Report to Shareholders of John
Hancock Sovereign U.S. Government Income Fund.
We consent to the reference to our Firm under the heading "Experts" in the
Proxy/Prospectus and to the references to our Firm under the headings "Financial
Highlights" in the Prospectus for the John Hancock Sovereign U.S. Government
Income Fund, dated May 1, 1998, and "Independent Auditors" in the Statement of
Additional Information for the John Hancock Sovereign U.S. Government Income
Fund, dated May 1, 1998, which are also incorporated by reference into the
Proxy/Prospectus.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Boston Massachusetts
August 20, 1998
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Combined Prospectus/Proxy Statement in the Registration Statement on Form N-14,
dated August 21, 1998, of John Hancock Sovereign U.S. Government Income Fund.
We also consent to the reference to our firm under the caption "Financial
Highlights" in the John Hancock Income Funds Prospectus with respect to the John
Hancock Government Income Fund, dated May 1, 1998, to the reference to our firm
under the caption "Independent Auditors" in the John Hancock Government Income
Fund Class A and Class B Shares Statement of Additional Information, dated May
1, 1998, and to the use of our report for the year ended May 31, 1998, dated
July 10, 1998 with respect to the financial statements and financial highlights
of the John Hancock Government Income Fund, included in the Statement of
Additional Information, included in this Registration Statement on Form N-14,
dated August 21, 1998.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
August 21, 1998
