The latest report from your
Fund's management team
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Government
Income Fund
MAY 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
-------------------------------
TRUSTEES
Edward J. Boudreau, Jr.
Stephen L. Brown
James F. Carlin
William H. Cunningham*
Ronald R. Dion*
Harold R. Hiser, Jr.
Anne C. Hodsdon
Charles L. Ladner
Leo E. Linbeck, Jr.
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
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
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:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
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[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
- --------------------------------------------------------------------------------
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
These modifications and replacements are nearly done, and the tests of all our
systems are on schedule for completion by the end of July. The rest of 1999 will
be spent testing with our business partners and continuing to participate in
industry testing. We have also established additional contingency plans beyond
our regular ones to prepare for any challenges that the Year 2000 might present.
In the end, John Hancock will spend approximately $90-$95 million to ensure we
make a successful transition to the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Barry H. Evans, CFA, and Dawn Baillie, Portfolio Managers
John Hancock
Government Income Fund
Tide turns in `99, as mortgage bonds outpace U.S. Treasuries
------------------------------------------------------------
Last summer bond investors staged a massive flight to quality as Asia's
financial crisis rolled across the globe, touching off upsets as far away as
Eastern Europe and Latin America. The shift away from higher-risk assets toward
higher-quality securities triggered a worldwide liquidity crunch, forcing the
Federal Reserve to cut short-term interest rates three times during the autumn.
As interest rates declined, Treasury bonds rallied, with yields on the 30-year
falling as low as 4.71% in early October. By contrast, mortgage bonds and other
U.S. government agency bonds that offer a slight yield advantage over Treasuries
fared poorly.
By year end, however, investors had moved back into higher-risk assets.
U.S. economic growth and consumer spending were strong and global markets were
stabilizing. Bonds did well until late January when a stronger-than-expected
fourth-quarter gross domestic product number sparked renewed inflation concerns.
Federal Reserve Chairman Alan Greenspan also testified that the interest-rate
cuts made last fall may have been too much. Bond prices - which move in the
opposite direction to yields - headed south in response, and yields on the
30-year Treasury jumped from 5.10% in January to 5.70% in March. As economic
growth remained strong and inflation worries mounted, 30-year Treasury yields
continued to climb, reaching as high as 5.92% in mid-May before closing the
month at 5.83%. With Treasury prices tumbling, other government bonds with a
yield advantage to Treasuries took the lead. The Lehman Brothers Mortgage-Backed
Securities Fixed-Rate Index finished the year ended May 31, 1999 with a -0.89%
return, compared to the Lehman
- --------------------------------------------------------------------------------
[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock Government
Income Fund. Caption below reads "Portfolio managers (l-r): Barry Evans and Dawn
Baillie."]
- --------------------------------------------------------------------------------
"We repositioned the Fund throughout the period to keep pace with changing
market conditions."
3
<PAGE>
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John Hancock Funds - Government Income Fund
"Owning bonds with a yield advantage over Treasuries helped the Fund in the past
six months..."
- --------------------------------------------------------------------------------
[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into four sections (from top to left): U.S. Government Agencies
71%, Short-Term Investments & Other 2%, Foreign Governments 5% and U.S.
Treasuries 22%. A note below the chart reads "As a percentage of net assets on
May 31, 1999."]
- --------------------------------------------------------------------------------
Brothers Treasury Index's -2.30% return for the same period.
Performance review
John Hancock Government Income Fund benefited from its high Treasury stake last
year, as well as its sensitivity to falling interest rates. A shift toward other
government bonds with a yield advantage over Treasuries going into the new year
also boosted performance and helped offset the impact of rising interest rates
in February and March. The Fund's Class A and Class B shares closed the year
ended May 31, 1999 with total returns of 3.64% and 2.92%, respectively, at net
asset value. By comparison, the average general U.S. government income fund
returned 3.02% over the same period, according to Lipper, Inc.1 Class C shares,
which were launched on April 1, 1999, returned -0.65% at net asset value from
inception through May 31, 1999. Keep in mind that your net asset value return
will be different from the Fund's performance if you were not invested in the
Fund for the entire period and did not reinvest all distributions. For
longer-term performance information, please see pages six and seven.
Fund repositioning
We repositioned the Fund throughout the period to keep pace with changing market
conditions. Last summer, we trimmed our holdings in mortgage securities, foreign
government bonds and U.S. government agencies. With the proceeds, we bought
Treasuries, raising our stake to 51% of net assets by October. Our focus was
mostly on long-term Treasuries with maturities of 10 or 30 years. This helped
lengthen the Fund's duration - or sensitivity to changes in interest rates -
from 5.4 years to 5.7 years. 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 dropped last fall, the Fund's longer duration meant greater price gains.
In November, with mortgage spreads - the difference in yield between
mortgages and Treasuries - near their widest levels in a decade, we began
rebuilding our mortgage stake and paring back Treasuries. We also trimmed
duration to 5.4 years about average for our peer group. Throughout December and
into January, we continued to add mortgage bonds, buying mostly GNMAs with
current coupons (or stated interest rates) of 6% and 6.5%. We also kept our 10%
stake in collateralized mortgage obligations (CMOs) - bonds that separate the
cash flows of mortgage pools into various classes with different maturities.
Spring changes
Anticipating that economic growth would moderate, we maintained our 5.4-year
duration throughout January and February. Economic growth instead remained
strong, sending yields higher and hurting the Fund's relative performance.
Beginning in March, we gradually began cutting back duration to 5.2 years -
slightly
4
<PAGE>
================================================================================
John Hancock Funds - Government Income Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended May 31, 1999." The chart is
scaled in increments of 1% with -1% at the bottom and 4% at the top. The first
bar represents the 3.64% total return for John Hancock Government Income Fund
Class A. The second bar represents the 2.92% total return for John Hancock
Government Income Fund Class B. The third bar represents the -0.65%* total
return for John Hancock Government Income Fund Class C. The fourth bar
represents the 3.02% total return for Average general U.S. government income
fund. A note below the chart reads "Total returns for John Hancock Government
Income Fund are at net asset value with all distributions reinvested. The
average general U.S. government income fund is tracked by Lipper, Inc. 1 See the
following two pages for historical performance information. *From inception
April 1, 1999 through May 31, 1999."]
- --------------------------------------------------------------------------------
shorter than average. We ended May with 58% of the Fund's net assets in mortgage
bonds - up about 35 percentage points from six months earlier - and just 22% in
Treasuries.
Focus on income
Owning bonds with a yield advantage over Treasuries helped the Fund in the past
six months and we expect it to do the same in the coming six months. Our plan is
to continue increasing the Fund's stake in both mortgage bonds and callable
agencies, while pruning our investment in Treasuries. This should help the Fund
earn income in an environment where it looks like there will be little
opportunity for price gains from falling interest rates. Thanks to a more stable
global economy, deflation has disappeared. This doesn't necessarily mean that
inflation will rise, but it does mean investors will be watching closely for
increases in wage costs or commodity prices that might signal higher prices for
consumers.
We'll particularly track paper and steel prices. If they go up, it will
show increased capacity usage across the globe. This could signal too many
companies bidding against each other for pools of labor and raw materials -
another term for inflation. By contrast, weakening commodity prices would
suggest that the global economy was not rebounding, forcing us to reverse course
and sell some of our non-Treasury bonds. We also expect to maintain our
duration. The bond market is expecting the Fed to raise interest rates,
especially in light of recent strong economic growth. We believe that any rate
hike will be a non-event since bond yields have already risen in anticipation of
such a move. But as year-end slowdown fears accelerate and we approach the year
2000, we may want to lengthen duration by adding Treasuries. In the meantime, we
believe the yield advantage offered by mortgage and other agency bonds should
help the Fund weather whatever volatility is ahead.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
1Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"We believe that any rate hike will be a non-event since bond yields have
already risen in anticipation..."
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). Class C
shares became effective April 1, 1999, and do not have a cumulative total return
or an average annual total return as of March 31, 1999.
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
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CLASS A
- --------------------------------------------------------------------------------
For the period ended March 31, 1999
SINCE
ONE INCEPTION
YEAR (9/30/94)
------- --------
Cumulative Total Returns 1.10% 35.78%
Average Annual Total Returns 1.10% 7.04%
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CLASS B
- --------------------------------------------------------------------------------
For the period ended March 31, 1999
ONE FIVE TEN
YEAR YEARS YEARS
------- ------- -------
Cumulative Total Returns 0.10% 33.41% 100.66%
Average Annual Total Returns 0.10% 5.93% 7.21%
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YIELDS
- --------------------------------------------------------------------------------
As of May 31, 1999
SEC 30-DAY
YIELD
-------
Government Income Fund: Class A 5.03%
Government Income Fund: Class B 4.63%
Government Income Fund: Class C 4.53%
Notes to Performance
1) Effective December 4, 1998, the Adviser agreed to limit the Fund's
management fee to 0.50% of the Fund's daily net assets. Without the
limitation of expenses, the average annual total return for the
one-year period and since inception would have been 1.06% and 7.03% for
Class A shares. The average annual total return for the one-year
period, five-year period and ten-year period would have been 0.06%,
5.92% and 7.21% for Class B shares.
6
<PAGE>
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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 Government Bond Index - an unmanaged
index of fixed-income securities that are similar, but not identical, to the
bonds in the Fund's portfolio.
Class C Shares
Assuming all distributions were reinvested for the period indicated, a $10,000
investment in the Fund's Class C shares at inception on April 1, 1999, would be
worth $9,935 without sales charge and $9,836 with maximum sales charge as of May
31, 1999. For comparison, the same $10,000 investment in the Lehman Brothers
Government Bond Index would be worth $9,934. Past performance is not indicative
of future results.
- --------------------------------------------------------------------------------
Line chart with the heading John Hancock 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 Lehman
Brothers Government Bond Index and is equal to $14,388 as of May 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock Government Income Fund on September 30, 1994, before sales
charge, and is equal to $14,125 as of May 31, 1999. The third line represents
the value of the same hypothetical investment made in the John Hancock
Government Income Fund, after sales charge, and is equal to $13,485 as of May
31, 1999.
Line chart with the heading John Hancock 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 Lehman
Brothers Government Bond Index and is equal to $22,279 as of May 31, 1999. The
second line represents the value of the hypothetical $10,000 investment made in
the John Hancock Government Income Fund on May 31, 1989, before sales charge,
and is equal to $19,260 as of May 31, 1999.
* No contingent deferred sales charge applicable.
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7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Statement of Assets and Liabilities
May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments at value - Note C:
U.S. government and agencies securities (cost - $742,890,159)............................................... $727,493,242
Foreign government bonds (cost - $36,516,660) .............................................................. 35,760,334
Multi-family mortgage-backed bonds (cost - $8,859,971) ..................................................... 8,856,174
Warrants (cost - $11,499) .................................................................................. 9,450
Joint repurchase agreement (cost - $50,680,000) ............................................................ 50,680,000
Corporate savings account .................................................................................. 35,502
----------------
822,834,702
Receivable for investments sold ............................................................................. 9,803,683
Receivable for variation margin - Note A .................................................................... 8,438
Receivable for shares sold .................................................................................. 142,658
Interest receivable ......................................................................................... 7,589,563
Other assets ................................................................................................ 234,292
----------------
Total Assets ......................................................................... 840,613,336
--------------------------------------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased .............................................................................. 283,463
Payable for investments purchased ........................................................................... 56,937,405
Dividend payable ............................................................................................ 358,240
Payable to John Hancock Advisers, Inc. and affiliates - Note B .............................................. 187,578
Accounts payable and accrued expenses ....................................................................... 728,886
----------------
Total Liabilities .................................................................... 58,495,572
--------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in ............................................................................................. 921,534,434
Accumulated net realized loss on investments ................................................................ (123,111,221)
Net unrealized depreciation of investments and financial futures contracts .................................. (16,152,509)
Distributions in excess of net investment income ............................................................ (152,940)
----------------
Net Assets ........................................................................... $782,117,764
========================================================================================================
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 - $584,766,411/64,834,064 ........................................................................... $9.02
===============================================================================================================================
Class B - $197,342,242/21,879,676 ........................................................................... $9.02
===============================================================================================================================
Class C* - $9,111/1,010 ..................................................................................... $9.02
===============================================================================================================================
Maximum Offering Price Per Share**
Class A - ($9.02 x 104.71%) ................................................................................. $9.45
===============================================================================================================================
</TABLE>
* Class C shares commenced operations on April 1, 1999.
** On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1999. You'll also
find the net asset value and the maximum offering price per share as of that
date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Statement of Operations
Year ended May 31, 1999
- --------------------------------------------------------------------------------
Investment Income:
Interest ...................................................... $46,095,887
------------
Expenses:
Investment management fee - Note B ........................... 3,890,545
Distribution and service fee - Note B
Class A ..................................................... 1,182,598
Class B ..................................................... 1,635,350
Class C ..................................................... 10
Transfer agent fee - Note B .................................. 1,191,795
Custodian fee ................................................ 145,873
Accounting and legal services fee - Note B ................... 94,365
Registration and filing fees ................................. 49,332
Trustees' fees ............................................... 46,508
Auditing fee ................................................. 37,846
Printing ..................................................... 33,010
Legal fees ................................................... 8,492
Miscellaneous ................................................ 1,694
------------
Total Expenses ............................. 8,317,418
------------------------------------------------------------
Less Expense Reduction - Note B ............ (329,178)
------------------------------------------------------------
Net Expenses ............................... 7,988,240
------------------------------------------------------------
Net Investment Income ...................... 38,107,647
------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized gain on investments sold ......................... 5,787,530
Net realized gain on financial futures contracts .............. 2,595,085
Change in net unrealized appreciation/depreciation
of investments ............................................... (37,413,294)
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................... 24,174
-----------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ................ (29,006,505)
----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .................. $9,101,142
==========================================================
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1998 1999
---------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income........................................................................ $32,587,661 $38,107,647
Net realized gain on investments sold and financial futures contracts ....................... 1,684,188 8,382,615
Change in net unrealized appreciation/depreciation of investments and financial futures contracts 16,293,385 (37,389,120)
------------ -------------
Net Increase in Net Assets Resulting from Operations ........................................ 50,565,234 9,101,142
------------ -------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($0.6201 and $0.5690 per share, respectively) .................................... (23,933,295) (28,770,636)
Class B - ($0.5522 and $0.5039 per share, respectively) .................................... (8,694,560) (9,336,959)
Class C** - (none and $0.0701 per share, respectively) ..................................... -- (51)
------------ -------------
Total Distributions to Shareholders ........................................................ (32,627,855) (38,107,646)
------------ -------------
From Fund Share Transactions - Net:* ......................................................... (73,683,952) 353,722,184
------------ -------------
Net Assets:
Beginning of period ......................................................................... 513,148,657 457,402,084
------------ -------------
End of period (including distributions in excess of net investment
income of $95,659 and $152,940, respectively) ............................................... $457,402,084 $782,117,764
============ =============
</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 two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------------------------
1998 1999
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ....................................... 3,514,206 $32,316,797 16,324,398 $152,646,102
Shares issued in reorganization - Note E .......... -- -- 30,190,113 277,826,391
Shares reinvested ................................. 1,297,997 11,906,095 1,838,139 17,064,295
------------ ------------- ------------ --------------
4,812,203 44,222,892 48,352,650 447,536,788
Less shares repurchased ........................... (8,394,226) (77,025,351) (20,239,768) (188,850,730)
------------ ------------- ------------ --------------
Net increase(decrease) ............................ (3,582,023) ($32,802,459) 28,112,882 $258,686,058
============ ============= ============ ==============
CLASS B
Shares sold ....................................... 1,846,293 $16,924,452 9,971,790 $93,744,153
Shares issued in reorganization - Note E .......... -- -- 9,178,316 83,469,754
Shares reinvested ................................. 505,095 4,632,894 497,010 4,618,186
------------ ------------- ------------ --------------
2,351,388 21,557,346 19,647,116 181,832,093
Less shares repurchased ........................... (6,793,426) (62,438,839) (10,509,513) (98,025,258)
------------ ------------- ------------ --------------
Net increase(decrease) ............................ (4,442,038) ($40,881,493) 9,137,603 $83,806,835
============ ============= ============ ==============
CLASS C
Shares sold ....................................... -- $-- 1,005 $9,235
Shares reinvested ................................. -- -- 5 47
------------ ------------- ------------ --------------
Net increase ...................................... -- $-- 1,010 $9,282
============ ============= ============ ==============
</TABLE>
**Class C Shares commenced operations on April 1, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<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>
FOR THE PERIOD
SEPTEMBER 30, 1994 PERIOD FROM
(COMMENCEMENT OF YEAR ENDED OCTOBER 31, NOVEMBER 1, 1996 YEAR ENDED MAY 31,
OPERATIONS) TO ---------------------- TO ------------------
OCTOBER 31, 1994 1995(1) 1996 MAY 31, 1997(7) 1998 1999
----------------- --------- -------- ----------------- ------- -------
<S> <C> <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 $9.25
---------- ---------- ---------- ---------- ---------- -------
Net Investment Income ............................. 0.06 0.72 0.65(5) 0.37(5) 0.62(5) 0.57(5)
Net Realized and Unrealized Gain (Loss) on
Investments, Options and Financial Futures Contracts (0.10) 0.57 (0.25) (0.14) 0.32 (0.23)
---------- ---------- ---------- ---------- ---------- -------
Total from Investment Operations ................. (0.04) 1.29 0.40 0.23 0.94 0.34
---------- ---------- ---------- ---------- ---------- -------
Less Distributions:
Dividends from Net Investment Income .............. (0.06) (0.72) (0.65) (0.37) (0.62) (0.57)
---------- ---------- ---------- ---------- ---------- -------
Net Asset Value, End of Period .................... $8.75 $9.32 $9.07 $8.93 $9.25 $9.02
========== ========== ========== ========== ========== =======
Total Investment Return at Net Asset Value (2,3) .. (0.45%)(4) 15.32% 4.49% 2.57%(4) 10.82% 3.64%
Total Adjusted Investment Return at
Net Asset Value (3,9) ............................ (0.46%)(4) 15.28% -- -- -- 3.59%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .......... $223 $470,569 $396,323 $359,758 $339,572 $584,766
Ratio of Expenses to Average Net Assets (2) ....... 0.12%(4) 1.19% 1.17% 1.13%(6) 1.10% 1.05%
Ratio of Adjusted Expenses to Average Net Assets .. -- -- -- -- -- 1.10%
Ratio of Net Investment Income to Average Net Assets (2) 0.71%(4) 7.38% 7.10% 7.06%(6) 6.79% 6.08%
Ratio of Adjusted Net Investment Income to
Average Net Assets ............................... -- -- -- -- -- 6.03%
Fee Reduction Per Share (5) ....................... -- -- -- -- -- $0.00(10)
Portfolio Turnover Rate ........................... 92% 102%(8) 106% 129% 106% 161%(8)
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: the net investment income, net realized
and unrealized gains (losses), dividends and total investment return of the
Fund. It shows how the Fund's net asset value for a share has changed since the
end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, PERIOD FROM YEAR ENDED MAY 31,
------------------------------------- NOVEMBER 1, 1996 --------------------
1994 1995(1) 1996 TO MAY 31, 1997(7) 1998 1999
---------- ---------- ---------- ----------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ............... $10.05 $8.75 $9.32 $9.08 $8.93 $9.25
---------- ---------- ---------- ---------- ---------- --------
Net Investment Income .............................. 0.65 0.65 0.58(5) 0.33(5) 0.55(5) 0.50(5)
Net Realized and Unrealized Gain (Loss) on
Investments, Options and Financial Futures Contracts (1.28) 0.57 (0.24) (0.15) 0.32 (0.23)
---------- ---------- ---------- ---------- ---------- --------
Total from Investment Operations .................. (0.63) 1.22 0.34 0.18 0.87 0.27
---------- ---------- ---------- ---------- ---------- --------
Less Distributions:
Dividends from Net Investment Income ............... (0.65) (0.65) (0.58) (0.33) (0.55) (0.50)
Distributions from Net Realized Gain on Investments
Sold and Financial Futures Contracts .............. (0.02) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- --------
Total Distributions ............................... (0.67) (0.65) (0.58) (0.33) (0.55) (0.50)
---------- ---------- ---------- ---------- ---------- --------
Net Asset Value, End of Period ..................... $8.75 $9.32 $9.08 $8.93 $9.25 $9.02
========== ========== ========== ========== ========== ========
Total Investment Return at Net Asset Value (2,3) ... (6.42%) 14.49% 3.84% 2.02%(4) 10.01% 2.92%
Total Adjusted Investment Return at
Net Asset Value (3,9) ............................. (6.43%) 14.47% -- -- -- 2.87%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........... $241,061 $226,954 $178,124 $153,390 $117,830 $197,342
Ratio of Expenses to Average Net Assets (2) ........ 1.93% 1.89% 1.90% 1.86%(6) 1.85% 1.74%
Ratio of Adjusted Expenses to Average Net Assets ... -- -- -- -- -- 1.79%
Ratio of Net Investment Income to Average Net Assets (2) 6.98% 7.26% 6.37% 6.32%(6) 6.05% 5.39%
Ratio of Adjusted Net Investment Income to
Average Net Assets ............................... -- -- -- -- -- 5.34%
Fee Reduction Per Share (5) ........................ -- -- -- -- -- $0.00(10)
Portfolio Turnover Rate ............................ 92% 102%(8) 106% 129% 106% 161%(8)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
PERIOD FROM
APRIL 1, 1999
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31, 1999
------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period .............................. $9.15
-------
Net Investment Income(5) .......................................... 0.07
Net Realized and Unrealized Loss on
Investments, Options and Financial Futures Contracts ............. (0.13)
-------
Total from Investment Operations ................................. (0.06)
-------
Less Distributions:
Dividends from Net Investment Income .............................. (0.07)
-------
Net Asset Value, End of Period .................................... $9.02
=======
Total Investment Return at Net Asset Value (3) .................... (0.65%)(4)
Total Adjusted Investment Return at Net Asset Value (3,9) ......... (0.66%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .......................... $9
Ratio of Expenses to Average Net Assets ........................... 1.80%(6)
Ratio of Adjusted Expenses to Average Net Assets .................. 1.85%(6)
Ratio of Net Investment Income to Average Net Assets .............. 5.33%(6)
Ratio of Adjusted Net Investment Income to Average Net Assets ..... 5.28%(6)
Fee Reduction Per Share (5) ....................................... $0.00(10)
Portfolio Turnover Rate ........................................... 161%(8)
(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 periods ended October 31, 1994 and 1995, respectively, and 0.01% and
0.02% for Class B for the years ended October 31, 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 year end changed from October 31 to May
31.
(8) Portfolio turnover excludes merger activity.
(9) An estimated total return calculation that does not take into consideration
management fee reductions and other expense subsidies by the Adviser during
the period shown.
(10) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
Schedule of Investments
May 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Government Income Fund on May 31, 1999. It's divided into five main categories:
U.S. government and agencies securities, foreign government bonds, multi-family
mortgage-backed bonds, warrants 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. (21.65%)
United States Treasury,
Bond........................................ 15.750% 11-15-01 $14,340 $17,660,570
Bond ....................................... 12.750 11-15-10 14,000 19,057,500
Bond ....................................... 12.000 08-15-13 20,100 28,526,322
Bond ....................................... 9.250 02-15-16 14,450 19,137,147
Bond ....................................... 8.125 08-15-19 47,800 58,741,898
Bond ....................................... 5.250 02-15-29 9,500 8,729,645
Note ....................................... 5.250 05-31-01 17,500 17,448,025
-----------
169,301,107
-----------
Government - U.S. Agencies (71.37%)
Federal Home Loan Bank,
Bond Ser EU-03 ............................. 6.561 01-30-03 2,500 2,498,425
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf ....................... 10.500 02-01-03 1,294 1,325,446
30 Yr Pass Thru Ctf ....................... 9.500 08-01-16 6,727 7,139,801
CMO REMIC 1094-K .......................... 7.000 06-15-21 1,461 1,473,618
CMO REMIC 1142-H .......................... 7.950 12-15-20 1,861 1,865,545
CMO REMIC 1603-K .......................... 6.500 10-15-23 5,000 4,854,650
CMO REMIC 1608-L .......................... 6.500 09-15-23 12,000 11,745,000
CMO REMIC 1617-PM ......................... 6.500 11-15-23 10,000 9,825,000
CMO REMIC 1634-PN ......................... 4.500 12-15-23 10,575 8,602,022
CMO REMIC 1667-PE ......................... 6.000 03-15-08 11,750 11,731,553
CMO REMIC 1727-I .......................... 6.500 05-15-24 5,000 4,876,550
CMO REMIC 34-C ............................ 9.000 11-15-19 479 478,669
Deb ....................................... 8.190 10-06-04 14,000 14,133,420
Deb ....................................... 6.700 03-03-08 1,000 980,310
Federal Judiciary Office Building,
Bond ...................................... Zero 02-15-01 250 227,188
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf ....................... 9.050 04-10-00 2,000 2,060,940
10 Yr Pass Thru Ctf ........................ 8.900 06-12-00 5,000 5,172,650
10 Yr Pass Thru Ctf Ser SM-2004-K .......... 8.400 10-25-04 11,600 11,739,548
15 Yr Pass Thru Ctf ........................ 9.000 02-01-10 3,159 3,288,345
15 Yr Pass Thru Ctf ........................ 6.500 05-01-13 13,637 13,577,098
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Federal National Mortgage Assn. (continued),
15 Yr Pass Thru Ctf ........................ 6.000% 09-01-13 to $52,624 $51,340,735
12-01-13
30 Yr Pass Thru Ctf ........................ 8.500 09-01-24 to 5,471 5,740,447
10-01-24
CMO REMIC 1994-60-PJ ....................... 7.000 04-25-24 6,100 6,109,516
CMO REMIC 1994-75-K ........................ 7.000 04-25-24 3,100 3,114,508
CMO REMIC 1996-28-PK ....................... 6.500 07-25-25 7,589 7,359,192
CMO REMIC G-8-E ............................ 9.000 04-25-21 3,175 3,356,679
CMO REMIC 1990-51-H ........................ 7.500 05-25-20 121 123,196
CMO REMIC 1990-58-J ........................ 7.000 05-25-20 3,700 3,726,566
CMO REMIC 1990-94-D ........................ 6.500 08-25-20 802 800,130
CMO REMIC 1991-56-M ........................ 6.750 06-25-21 2,606 2,603,157
CMO REMIC 1993-225-TK ...................... 6.500 12-25-23 5,032 4,925,070
Medium Term Note ........................... 11.875 05-19-00 6,800 7,210,108
Note ....................................... 5.250 01-15-09 13,000 12,077,780
Financing Corp.,
Bond ....................................... 10.700 10-06-17 2,000 2,900,940
Bond ....................................... 9.400 02-08-18 4,000 5,260,640
Bond ....................................... 10.350 08-03-18 12,500 17,783,250
Bond ....................................... 9.650 11-02-18 1,600 2,158,256
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage ............. 6.375# 03-20-23 6,895 7,037,713
30 Yr Adjustable Rate Mortgage ............. 6.125# 10-20-22 to 8,959 9,155,723
10-20-23
30 Yr Pass Thru Ctf ........................ 6.000 11-15-28 to 88,663 84,046,659
03-15-29
30 Yr Pass Thru Ctf ........................ 6.500 02-15-27 to 80,534 78,596,322
10-15-28
30 Yr Pass Thru Ctf + ...................... 7.000 01-15-28 to 47,073 47,077,665
06-01-28
30 Yr Pass Thru Ctf ........................ 7.500 06-15-23 to 18,705 19,155,689
02-15-26
30 Yr Pass Thru Ctf ........................ 8.000 09-15-23 to 7,830 8,156,526
01-15-25
30 Yr Pass Thru Ctf ........................ 9.000 08-15-16 to 4,724 5,060,246
12-15-17
30 Yr Pass Thru Ctf ........................ 11.000 01-15-14 to 4,264 4,724,607
12-15-15
Small Business Administration,
Pass Thru Ctf Ser 97-B ..................... 7.100 02-01-17 4,567 4,627,399
Pass Thru Ctf Ser 97-D ..................... 7.500 04-01-17 4,584 4,718,724
Pass Thru Ctf Ser 97-E ..................... 7.300 05-01-17 5,799 5,926,266
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Tennessee Valley Authority,
Note Ser D ................................. 8.250% 04-15-42 $22,824 $25,722,648
------------
558,192,135
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $742,890,159) (93.02%) 727,493,242
-------- ------------
FOREIGN GOVERNMENT BONDS
U.S. Dollar-Denominated Foreign Government Bonds (4.57%)
Argentina, Republic of,
Global Bond Ser XW ......................... 11.000 12-04-05 3,000 2,692,500
Hydro-Quebec,
Deb Ser HK ................................. 9.375 04-15-30 9,440 12,076,214
Gtd Bond ................................... 9.400 02-01-21 7,000 8,824,620
International Bank for
Reconstruction and Development, Deb ....... 8.625 10-15-16 10,000 12,167,000
----------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $36,516,660) (4.57%) 35,760,334
------- ----------
MULTI-FAMILY MORTGAGE-BACKED BONDS (1.13%)
DLJ Mortgage Acceptance Corp.,
CMO REMIC 1993-M10-A2 ...................... 7.200 07-15-03 4,188 4,230,315
CMO REMIC 1993-MF7-A1 ...................... 7.400 06-18-03 4,469 4,625,859
----------
TOTAL MULTI-FAMILY MORTGAGE-BACKED BONDS
(Cost $8,859,971) (1.13%) 8,856,174
------- ----------
NUMBER OF
WARRANTS
------------
WARRANTS
Government - Foreign (0.00%)
Argentina, Republic of (Argentina) (Expires 12-03-99) 3,000 2,700
Argentina, Republic of (Argentina) (Expires 02-25-00) 7,500 6,750
----------
TOTAL WARRANTS
(Cost $11,499) (0.00%) 9,450
--------- ----------
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Government Income Fund
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (6.48%)
Investment in a joint repurchase agreement transaction with
ABN AMRO, Inc. - Dated 05-28-99, due 06-01-99 (Secured by U.S.
Treasury Bonds, 5.500% thru 12.000%, due 11-15-03 thru 08-15-28
and U.S. Treasury Notes, 6.500% and 7.785%, due 11-15-04 and
10-15-06) - Note A........................................................... 4.790% $50,680 $50,680,000
-----------
Corporate Savings Account (0.00%)
Investor's Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.00% .......................................................... 35,502
-----------
TOTAL SHORT-TERM INVESTMENTS (6.48%) 50,715,502
-------- -----------
TOTAL INVESTMENTS (105.20%) 822,834,702
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (5.20%) (40,716,938)
-------- -----------
TOTAL NET ASSETS (100.00%) $782,117,764
======== ============
</TABLE>
+ A portion of these securities having an aggregate value of
$30,004,800 or 3.84% of the Fund's net assets, have been purchased on a
when-issued basis. The purchase price and the interest rate of such
securities are fixed at trade date, although the Fund does not earn any
interest on such securities until settlement date. The Fund has
instructed its Custodian Bank to segregate assets with a current value
at least equal to the amount of its when-issued commitments.
Accordingly, the market value of $31,500,036 of U.S. Treasury Bond,
8.125%, due 08-15-19, has been segregated to cover the when-issued
commitments.
# Represents rate in effect on May 31, 1999.
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.
18
<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
Government Fund. Prior to April 1, 1999, the John Hancock Intermediate
Government Fund was known as 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, Class B and Class C shares. The Trustees
authorized the issuance of Class C shares, effective April 1, 1999. 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 qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $117,919,246 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 - $76,987,244, May 31, 2003 - $30,606,535, May 31, 2004 -
$5,561,263 and May 31, 2005 - $4,764,204. Availablity of a certain amount of
loss carryforwards which were acquired on September 15, 1995 and December 4,
1998 in mergers, may be limited in a given year. Additionally, net capital
losses of $4,784,474 attributable to security transactions incurred after
October 31, 1998 are treated as arising on the first day (June 1, 1999) of the
Fund's next taxable year.
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
19
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - Government Income Fund
calculated in the same manner, at the same time and will be in the same amount,
except for the effect of expenses that may be applied differently to each class.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative size of the 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. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowings. In
addition, a commitment fee is charged based on the average daily unused portion
of the line of credit and is allocated among the participating funds. The Fund
had no borrowing activity for the year ended May 31, 1999.
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, 1999, open positions in financial futures contracts were as
follows:
UNREALIZED
APPRECIATION/
EXPIRATION OPEN CONTRACTS POSITION (DEPRECIATION)
- ---------- -------------- -------- --------------
SEPT 99 180 TREASURY NOTE SHORT ($12,510)
SEPT 99 100 TREASURY NOTE SHORT 21,175
SEPT 99 30 TREASURY BOND LONG (2,085)
---------
$6,580
=========
At May 31, 1999, the Fund has deposited in a segregated account
$540,000 par value of U.S. Treasury Bond, 15.750%, 11-15-01, and $120,000 par
value of U.S. Treasury Bond, 12.750%, 11-15-10, to cover margin requirements on
open financial futures contracts.
20
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - Government Income Fund
OPTIONS Listed options are valued at the last quoted sales price on the exchange
on which they are primarily traded. Over-the-counter options are valued at the
mean between the last asked and bid prices. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund will be included in
the Statement of Assets and Liabilities as an asset and corresponding liability.
The amount of the liability will be subsequently marked to market to reflect the
current market value of the written option.
The Fund may use option contracts to manage its exposure to the bond
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and writing calls will tend to
decrease the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset a contract
with a counterparty on a timely basis ("liquidity risk"). Exchange-traded
options have minimal credit risk as the exchanges act as counterparties to each
transaction, and only present liquidity risk in highly unusual market
conditions. To minimize credit and liquidity risks in over-the-counter option
contracts, the Fund will continuously monitor the creditworthiness of all its
counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
At May 31, 1999, there were no open option transactions.
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. Effective
December 4, 1998, the Adviser agreed to limit the Fund's management fee to 0.50%
of the the Fund's daily net assets. Accordingly, the reduction in the management
fee amounted to $329,178 for the year ended May 31, 1999. The Adviser may
terminate this limitation in the future.
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, 1999, net sales charges received with regard to sales of Class A shares
amounted to $479,812. Out of this amount, $38,078 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$301,426 was paid as sales commissions to unrelated broker-dealers and $140,308
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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, 1999,
contingent deferred sales charges paid to JH Funds amounted to $436,560.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% of the lesser of the current market value
at the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in whole or
in part to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of Class C shares. For the year
ended May 31, 1999, there were no contingent deferred sales charges.
In addition, to reimburse JH Funds for the services it provides as
21
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
John Hancock Funds - Government Income Fund
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses, at an annual rate not to exceed
0.25% of Class A average daily net assets and 1.00% of Class B and Class C
average daily net assets, to reimburse JH Funds for its distribution and service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal 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., Mr. Stephen L. Brown, 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. The investment had no impact on the operations
of the Fund.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of securities, other than
short-term obligations, during the year ended May 31, 1999, aggregated
$998,799,271 and $1,304,949,020, respectively.
The cost of investments (excluding the corporate savings account) owned
at May 31, 1999 for federal income tax purposes was $839,168,292. Gross
unrealized appreciation and depreciation of investments aggregated $11,130,106
and $27,499,198, respectively, resulting in net unrealized depreciation of
$16,369,092.
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1999, the Fund has reclassified amounts to reflect
an increase in accumulated net realized loss on investments of $111,982,537, an
increase in distributions in excess of net investment income of $57,282 and an
increase in capital paid-in of $112,039,819. This represents the amount
necessary to report these balances on a tax basis, excluding certain temporary
differences, as of May 31, 1999. 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. The
calculations of net investment income in the financial highlights excludes these
adjustments.
NOTE E -
REORGANIZATION
On November 11, 1998, the shareholders of John Hancock Sovereign U.S. Government
Income Fund (JHSGIF) approved a plan of reorganization between JHSGIF and the
Fund, providing for the transfer of substantially all of the assets and
liabilities of JHSGIF to the Fund in exchange solely for Class A and Class B
shares of the Fund. The acquisition of JHSGIF was accounted for as a tax free
exchange of 30,190,113 Class A shares and 9,178,316 Class B shares of the Fund,
which amounted to $285,764,515 and $86,877,349 for Class A and B shares,
respectively, including $11,220,009 of unrealized appreciation, after the close
of business at December 4, 1998. The aggregate net assets of JHSGIF and the Fund
were $372,641,864 and $500,562,839, respectively, immediately before the
acquisition.
22
<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 -
John Hancock Government Income Fund
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, 1999, 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, 1999, 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, 1999, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for each of the
indicated periods, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
July 7, 1999
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,
1999.
None of the dividends qualify for the dividends received deduction
available to corporations.
Shareholders will receive a 1999 U.S. Treasury Department Form 1099-DIV
in January of 2000. This will reflect the total of all distributions which are
taxable for the calendar year 1999.
23
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS ---------------
A Global Investment Management Firm Bulk Rate
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 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.
[LOGO] Printed on Recycled Paper 5600A 5/99
7/99
<PAGE>
The latest report from your
Fund's management team
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Intermediate
Government
Fund
(formerly Intermediate Maturity Government Fund)
MAY 31, 1999
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
----------------------------------
DIRECTORS
Edward J. Boudreau, Jr.
Stephen L. Brown
James F. Carlin
William H. Cunningham*
Ronald R.Dion*
Harold R. Hiser, Jr.
Anne C. Hodsdon
Charles L. Ladner
Leo E. Linbeck, Jr.
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
Anne C. Hodsdon
President, Chief Operating Officer
and Chief Investment Officer
Osbert M. Hood
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
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:
The Year 2000 is fast approaching and people around the world are getting ready
to celebrate this historic transition to a new millennium. At John Hancock
Funds, we share the excitement, but we aren't popping the champagne corks just
yet. Rather, we are staying on the course that we set more than two years ago to
ensure that the transition to a new millennium is a smooth one for our
shareholders.
As many already know, the Year 2000 has created more than the prospect of New
Year's festivities of epic proportions. It has also presented the world with a
challenge: making sure that older computers, and any equipment powered by
computer chips, can properly read and process the date "00" as 2000, not 1900.
Much has been written about how the world will weather the change. Some view it
as a non-event, while others see the potential for disruptions. How much
disruption, and for how long, depends on whom you talk to.
- --------------------------------------------------------------------------------
[A 1" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
- --------------------------------------------------------------------------------
As a company, we recognize that the Year 2000 ("Y2K") phenomenon is an important
issue to be dealt with and we have made it a top priority. Two years ago, John
Hancock Funds put a full-time team of experts on the case and established a
company-wide program to evaluate all computer applications and to modify or
replace those that needed changing.
These modifications and replacements are nearly done, and the tests of all our
systems are on schedule for completion by the end of July. The rest of 1999 will
be spent testing with our business partners and continuing to participate in
industry testing. We have also established additional contingency plans beyond
our regular ones to prepare for any challenges that the Year 2000 might present.
In the end, John Hancock will spend approximately $90-$95 million to ensure we
make a successful transition to the Year 2000.
Throughout 1999, each of our quarterly "Fundamentals" newsletters is featuring
articles with more detailed information on Y2K matters of importance to our
shareholders. I encourage you to read them, or contact one of our Customer
Service Representatives at 1-800-225-5291 for another copy. For your own peace
of mind, we also recommend that you save your 1999 statements, especially those
you receive between October and December, so that you are able to check them
against the first one you receive in 2000. It's a measure of prudence, not
panic. Good record keeping is part of good planning.
No one knows how the dawning of the new millennium will unfold. Although we
cannot make any ironclad assurances, we are confident that the steps we have
taken will provide shareholders with as smooth a transition as possible. Once
that occurs, we will happily raise our glasses to toast the New Year, future
prosperity and our hopes to serve you well into the 2000's.
Sincerely,
/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Barry H. Evans, CFA, and Dawn Baillie, Portfolio Managers
John Hancock
Intermediate
Government Fund
Treasury rally comes to an end, as inflation fears resurface
------------------------------------------------------------
On April 1, 1999, John Hancock Intermediate Maturity Government Fund's name was
shortened to John Hancock Intermediate Government Fund. The Fund's investment
objectives remain the same.
Bond investors saw both the best and worst of times during the past year. Last
summer, as Asia's financial crisis rocked markets worldwide, investors jumped
out of higher-risk assets into higher-quality securities like U.S. government
bonds. This massive shift triggered a worldwide liquidity crisis, which the
Federal Reserve ended by lowering short-term interest rates during the fall. As
yields tumbled to near-record lows, Treasuries - which are especially sensitive
to changes in interest rates - did extremely well. But fears that homeowners
would pay off their mortgages early to refinance at lower rates caused mortgage
bonds to post their worst performance in a decade. Treasuries continued to do
well until the end of January, when a robust fourth-quarter gross domestic
product number set off inflation scares. This, along with Chairman Alan
Greenspan's testimony that the Fed's interest cuts may have been too much, sent
Treasuries into a tailspin. In February, the Lehman Brothers Treasury Index
posted its worst single-month performance since 1981. Added inflation concerns
- --------------------------------------------------------------------------------
[A 3 1/2" x 2 1/2" photo at bottom right side of page of John Hancock
Intermediate Government Fund. Caption below reads "Portfolio Managers Barry
Evans and Dawn Baillie."]
- --------------------------------------------------------------------------------
"The Fund benefited from adjustments we made throughout the year as market
conditions changed."
3
<PAGE>
================================================================================
John Hancock Fund - Intermediate Government Fund
"Both agencies and mortgage bonds did well during the spring, boosting
performance."
- --------------------------------------------------------------------------------
[Pie chart at top left hand column with heading "Portfolio Diversification." The
chart is divided into three sections (from top to left): Short-Term Investments
& Other 6%, U.S. Treasuries 31% and U.S. Agencies 63 %. A note below the chart
reads "As a percentage of net assets on May 31, 1999."]
- --------------------------------------------------------------------------------
during the spring sent yields on the 10-year Treasury up from 4.61% in January
to a high of 5.66% in mid-May - not far from where they had been a year earlier.
During this time, mortgage bonds outpaced Treasuries. For the year ended May 31,
1999, the Lehman Brothers Mortgage-Backed Securities Fixed-Rate Index returned
- -- 0.89%, ahead of the -- 2.30% return of the Lehman Brothers Treasury Index.
Fund performance
Amidst this volatility, John Hancock Intermediate Government Fund did well. The
Fund's Class A and Class B shares had total returns of 4.33% and 3.57%,
respectively, at net asset value for the year ended May 31, 1999. The Fund
outpaced the average intermediate-term government fund, which returned 3.44%,
according to Lipper, Inc.1 The Fund's Class C shares, which were launched on
April 1, 1999, returned -0.38% at net asset value from inception through May 31,
1999. Keep in mind that your net asset value return will differ from the Fund's
performance if you were not invested in the Fund for the entire period and did
not reinvest all distributions. For longer-term performance information, please
see pages six and seven.
Staying nimble
The Fund benefited from adjustments we made throughout the year as market
conditions changed. With the expectation that interest rates might come down
last summer, we lengthened duration. Duration measures how sensitive a bond's
price is to interest-rate changes. The longer a bond's duration, the more its
price will rise as interest rates fall - or fall as interest rates rise. We
began extending the Fund's 4.4-year duration in August, eventually reaching 4.7
years in September. To lengthen duration, we added long-term Treasuries, which
rose to more than 45% of the Fund's net assets in October. At the same time, we
trimmed our investment in mortgage bonds to about 25% of net assets. This
combination helped the Fund as Treasuries rallied and mortgage bonds tumbled.
Later in October, we locked in gains by cutting duration back to 3.8 years. But
the prospect of another rate cut before year end prompted us to move duration
back out to 4.2 years in November, where it stayed through January. In November,
we also added bonds with a yield advantage over Treasuries, boosting our stake
in mortgage bonds to 37% and our investment in short-term U.S. government agency
bonds to 19%.
Spring changes
Rising yields in February and March prompted us to shorten duration to 4.0
years. This helped the Fund, although an even shorter duration would have been
better. By the end of May, however, we had reversed course and brought duration
back up to 4.15 years - slightly longer than our peer group average - as we
positioned the Fund for the possibility of an economic slowdown later in the
year. Our stake in U.S. government agencies also grew, reaching 24% of net
assets by the end
4
<PAGE>
================================================================================
John Hancock Fund - Intermediate Government Fund
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended May 31, 1999." The chart is
scaled in increments of 1% with -1% at the bottom and 5% at the top. The first
bar represents the 4.33% total return for John Hancock Intermediate Government
Fund Class A. The second bar represents the 3.57% total return for John Hancock
Intermediate Government Fund Class B. The third bar represents the -0.38%* total
return for John Hancock Intermediate Government Fund Class C and the fourth bar
represents the 3.44% total return for Average intermediate-term government fund.
A note below the chart reads "Total returns for John Hancock Intermediate Fund
are at net asset value with all distributions reinvested. The average
intermediate-term government fund is tracked by Lipper, Inc. 1 See the following
two pages for historical performance information. * From inception April 1, 1999
to May 31, 1999."]
- --------------------------------------------------------------------------------
of the period. Both agency and mortgage bonds did well during the spring,
boosting performance.
Guarded optimism
In May, the Federal Reserve indicated that it was more likely to raise interest
rates than lower them, in an effort to dampen the economy and keep inflation in
check. This news immediately sent bond prices lower and yields higher. But
whether the Fed does in fact raise rates significantly depends on consumer
demand, which is measured by indicators like the unemployment rate, retail sales
and consumer confidence levels. So far, economic numbers have been mixed, with
no clear indication that inflation is a problem. A tame employment cost index
number - a measure of wage inflation - more than offset a higher-than-expected
consumer price index figure in May. And commodity prices that jumped in the
spring later stabilized or came down. If this pattern continues, yields will
most likely move up and down with the release of new economic data, but stay
within a fairly tight range.
As we get closer to year end, however, we expect the bond market's
prospects to improve. To start, the bond market typically does better in the
second half of the year compared to the first. Asia is no longer in a crisis,
which means that domestic factors alone should drive the market. We also expect
potential problems surrounding year 2000 systems conversions to boost demand for
U.S. government bonds, at a time when the U.S. Treasury is reducing supply.
Fund strategy
Given this outlook, our strategy will be to keep our duration slightly longer
than average so we can benefit from any drop in interest rates. We also plan to
add to our stake in mortgage bonds as a hedge against further interest-rate
volatility. We'll keep focused on earning income until we see consistent
economic data that would suggest a change in outlook that could help bond prices
as well. We believe this strategy will help us gain ground amidst an uncertain
economic environment, while also positioning us to participate in any upturns as
we near year end.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
1Figures from Lipper, Inc. include reinvested dividends and do not take into
account sales charges. Actual load-adjusted performance is lower.
"As we get closer to year end, however, we expect the bond market's prospects to
improve."
5
<PAGE>
================================================================================
John Hancock Fund - Intermediate Government 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 Intermediate Government Fund. Total return
measures the change in value of an investment from the beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 3%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 3% and declining to 0% over four years). Class C shares became
effective April 1, 1999, and do not have a cumulative total return or an average
annual total return as of March 31, 1999.
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, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
------- ------- --------
Cumulative Total Returns 2.84% 30.42% 44.67%
Average Annual Total Returns(1) 2.84% 5.45% 5.23%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended March 31, 1999
SINCE
ONE FIVE INCEPTION
YEAR YEARS (12/31/91)
------- ------- --------
Cumulative Total Returns 2.24% 29.94% 42.00%
Average Annual Total Returns(1) 2.24% 5.38% 4.96%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of May 31, 1999
SEC 30-DAY
YIELD
-------
Intermediate Government Fund: Class A 4.94%
Intermediate Government Fund: Class B 4.42%
Intermediate Government Fund: Class C 4.42%
Notes to Performance
(1) Prior to December 5, 1997, the Adviser had agreed to limit the
Fund's expenses, including management fee, to 0.75% and 1.50% of the
average net assets attributable to the Class A and Class B shares,
respectively. Without the reduction of expenses, the average annual
total returns for the five-year and since inception periods would have
been 5.07% and 4.82%, respectively, for Class A shares and 5.00% and
4.55%, respectively, for Class B shares.
6
<PAGE>
================================================================================
John Hancock Fund - Intermediate Government Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Intermediate Government Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Lipper Intermediate U.S. Government Index and Lehman
Brothers Government Bond Index. The Lipper Intermediate U.S. Government Index is
an equally weighted unmanaged index that measures the performance of funds with
at least 65% of their assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with dollar-weighted average
maturities of five to ten years. The Lehman Government Bond Index is an
unmanaged index that measures the performance of U.S.Treasury bonds and U.S.
government agency bonds.
Class C Shares
Assuming all distributions were reinvested for the period indicated, a $10,000
investment in the Fund's Class C shares at inception on April 1, 1999, would be
worth $9,962 without sales charge and $9,863 with maximum sales charge as of May
31, 1999. For comparison, the same $10,000 investment in the Lehman Brothers
Government Bond Index and the Lipper Intermediate U.S. Government Index would be
worth $9,935 and $9,934, respectively. Past performance is not indicative of
future results.
- --------------------------------------------------------------------------------
Line chart with the heading John Hancock Intermediate Government Fund Class A,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are four lines. The first line represents the Lehman
Brothers Government Bond Index and is equal to $16,439 as of May 31, 1999. The
second line represents the Lipper Intermediate U.S. Government Index and is
equal to $15,264 as of May 31, 1999. The third line represents the value of the
hypothetical $10,000 investment made in the John Hancock Intermediate Government
Fund on December 31, 1991, before sales charge, and is equal to $14,855 as of
May 31, 1999. The fourth line represents the same hypothetical investment made
in the John Hancock Intermediate Government Fund, after sales charge, and is
equal to $14,409 as of May 31, 1999.
Line chart with the heading John Hancock Intermediate Government Fund Class B*,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines. The first line represents the Lehman
Brothers Government Bond Index and is equal to $16,439 as of May 31, 1999. The
second line represents the Lipper Intermediate U.S. Government Index and is
equal to $15,264 as of May 31, 1999. The third line represents the value of the
hypothetical $10,000 investment made in the John Hancock Intermediate Government
Fund on December 31, 1991, before sales charge, and is equal to $14,127 as of
May 31, 1999.
*No contingent deferred sales charge applicable.
- --------------------------------------------------------------------------------
7
<PAGE>
===============================FINANCIAL STATEMENTS=============================
John Hancock Funds - Intermediate Government Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1999. 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, 1999
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
U.S. government and agencies securities
(cost - $205,009,827) ..................................... $200,005,954
Foreign government bonds (cost - $3,810,000) ............... 3,650,100
Joint repurchase agreement (cost - $8,116,000) ............. 8,116,000
Corporate savings account .................................. 240
--------------
211,772,294
Receivable for shares sold .................................. 354,803
Interest receivable ......................................... 2,510,136
Other assets ................................................ 30,325
--------------
Total Assets ................ 214,667,558
--------------------------------------------
Liabilities:
Payable for investments purchased ........................... 1,341,320
Payable for shares repurchased .............................. 153,456
Dividend payable ............................................ 27,616
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 144,833
Accounts payable and accrued expenses ....................... 53,192
--------------
Total Liabilities ........... 1,720,417
--------------------------------------------
Net Assets:
Capital paid-in ............................................. 233,868,515
Accumulated net realized loss on investments
and financial futures contracts ............................ (15,770,413)
Net unrealized depreciation of investments .................. (5,163,773)
Undistributed net investment income ......................... 12,812
--------------
Net Assets .................. $212,947,141
============================================
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 - $168,826,028/17,679,933 ........................... $9.55
============================================================================
Class B - $44,093,103/4,617,553 ............................. $9.55
============================================================================
Class C * - $28,010/2,933 ................................... $9.55
============================================================================
Maximum Offering Price Per Share**
Class A - ($9.55 x 103.09%) ................................. $9.85
============================================================================
* Class C shares commenced operations on April 1, 1999.
** 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, 1999
- --------------------------------------------------------------------------------
Investment Income:
Interest .................................................... $14,774,809
-----------
Expenses:
Investment management fee - Note B .......................... 836,987
Distribution and service fee - Note B
Class A .................................................... 423,024
Class B .................................................... 398,491
Class C .................................................... 20
Transfer agent fee - Note B ................................. 527,643
Registration and filing fees ................................ 80,537
Custodian fee ............................................... 52,113
Auditing fee ................................................ 39,346
Printing .................................................... 31,947
Accounting and legal services fee - Note B .................. 30,636
Trustees' fees .............................................. 14,130
Miscellaneous ............................................... 6,556
Legal fees .................................................. 2,766
-----------
Total Expenses .............. 2,444,196
--------------------------------------------
Net Investment Income ....... 12,330,613
--------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized gain on investments sold ....................... 1,272,577
Net realized gain on financial futures contracts ............ 125,305
Change in net unrealized appreciation/depreciation
of investments ............................................. (6,139,754)
-----------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts . (4,741,872)
--------------------------------------------
Net Increase in Net Assets
Resulting from Operations ... $7,588,741
============================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
===============================FINANCIAL STATEMENTS=============================
John Hancock Funds - Intermediate Government Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1998 1999
----------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................................................ $6,527,017 $12,330,613
Net realized gain on investments sold and financial futures contracts ............................ 1,939,903 1,397,882
Change in net unrealized appreciation/depreciation of investments ................................ (317,027) (6,139,754)
------------ -------------
Net Increase in Net Assets Resulting from Operations ............................................ 8,149,893 7,588,741
------------ -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6222 and $0.5912 per share, respectively) ......................................... (5,879,115) (10,208,310)
Class B - ($0.5497 and $0.5185 per share, respectively) ......................................... (647,299) (2,122,195)
Class C - (none and $0.0726 per share, respectively) ............................................ -- (108)
------------ -------------
Total Distributions to Shareholders ............................................................. (6,526,414) (12,330,613)
------------ -------------
From Fund Share Transactions - Net:* .............................................................. 151,641,791 35,217,860
------------ -------------
Net Assets:
Beginning of period .............................................................................. 29,205,883 182,471,153
------------ -------------
End of period (including undistributed net investment income of
$14,620 and $12,812, respectively) .............................................................. $182,471,153 $212,947,141
============ =============
</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 two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
===============================FINANCIAL STATEMENTS=============================
John Hancock Funds - Intermediate Government Fund
Statement of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------------------
1998 1999
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ........................................................... 3,794,449 $36,863,657 7,939,500 $78,080,716
Shares issued in reorganization - Note D .............................. 15,475,727 149,668,850 -- --
Shares issued to shareholders in reinvestment of distributions ........ 457,237 4,435,608 843,752 8,280,862
------------ ------------- ------------ -------------
19,727,413 190,968,115 8,783,252 86,361,578
Less shares repurchased ............................................... (5,318,845) (51,730,310) (7,917,166) (77,701,525)
------------ ------------- ------------ -------------
Net increase .......................................................... 14,408,568 $139,237,805 866,086 $8,660,053
============ ============= ============ =============
CLASS B
Shares sold ........................................................... 2,201,425 $21,367,420 7,209,397 $71,316,897
Shares issued in reorganization - Note D .............................. 996,713 9,639,411 -- --
Shares issued to shareholders in reinvestment of distributions ........ 37,530 363,774 83,053 813,137
------------ ------------- ------------ -------------
3,235,668 31,370,605 7,292,450 72,130,034
Less shares repurchased ............................................... (1,950,374) (18,966,619) (4,642,116) (45,600,492)
------------ ------------- ------------ -------------
Net increase .......................................................... 1,285,294 $12,403,986 2,650,334 $26,529,542
============ ============= ============ =============
CLASS C **
Shares sold ........................................................... -- -- 2,922 $28,161
Shares issued to shareholders in reinvestment of distributions ........ -- -- 11 104
------------ ------------- ------------ -------------
Net increase .......................................................... -- -- 2,933 $28,265
============ ============= ============ =============
** Class C shares commenced operations on April 1, 1999.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - Intermediate Government Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD FROM YEAR ENDED MAY 31,
---------------------------- APRIL 1, 1997 TO -------------------
1995(1) 1996 1997 MAY 31, 1997(8) 1998 1999
-------- --------- -------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $9.89 $9.79 $9.69 $9.37 $9.46 $9.72
-------- -------- -------- -------- ------- -------
Net Investment Income ......................................... 0.49 0.62 0.67 0.11(7) 0.62(7) 0.59(7)
Net Realized and Unrealized Gain (Loss) on Investments ........ (0.11) (0.08) (0.25) 0.09 0.26 (0.17)
-------- -------- -------- -------- ------- -------
Total from Investment Operations ...................... 0.38 0.54 0.42 0.20 0.88 0.42
-------- -------- -------- -------- ------- -------
Less Distributions:
Dividends from Net Investment Income ......................... (0.48) (0.64) (0.66) (0.11) (0.62) (0.59)
Distributions from Net Realized Gain on Investments Sold ..... -- -- (0.08) -- -- --
-------- -------- -------- -------- ------- -------
Total Distributions ......................................... (0.48) (0.64) (0.74) (0.11) (0.62) (0.59)
-------- -------- -------- -------- ------- -------
Net Asset Value, End of Period ................................ $9.79 $9.69 $9.37 $9.46 $9.72 $9.55
======== ======== ========= ======== ======= =======
Total Investment Return at Net Asset Value (2) ................ 3.98% 5.60% 4.56% 2.13%(10) 9.56% 4.33%
Total Adjusted Investment Return at Net Asset Value (2,3) ..... 3.43% 4.83% 4.19% 1.93%(10) 9.49% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $12,950 $29,024 $22,043 $22,755 $163,358 $168,826
Ratio of Expenses to Average Net Assets (4) ................... 0.80% 0.75% 0.75% 0.75%(9) 1.09% 1.03%
Ratio of Adjusted Expenses to Average Net Assets (4,5) ........ 1.35% 1.45% 1.12% 1.92%(9) 1.16% --
Ratio of Net Investment Income to Average Net Assets .......... 4.91% 6.49% 6.99% 7.07%(9) 6.43% 6.03%
Ratio of Adjusted Net Investment Income to Average Net Assets (5) 4.36% 5.79% 6.62% 5.90%(9) 6.36% --
Fee Reduction Per Share (7) ................................... $0.05 $0.07 $0.04 $0.02 $0.01 --
Portfolio Turnover Rate ....................................... 341% 423%(6) 427% 77% 250%(6) 267%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: the net investment income, net realized
and unrealized gains (losses), dividends and total investment return of the
Fund. It shows how the Fund's net asset value for a share has changed since the
end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - Intermediate Government Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD FROM YEAR ENDED MAY 31,
---------------------------- APRIL 1, 1997 TO -------------------
1995(1) 1996 1997 MAY 31, 1997(8) 1998 1999
-------- --------- -------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $9.89 $9.79 $9.69 $9.37 $9.46 $9.72
-------- -------- -------- -------- -------- --------
Net Investment Income ......................................... 0.43 0.57 0.60 0.10(7) 0.55(7) 0.52(7)
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts .............................. (0.11) (0.10) (0.24) 0.09 0.26 (0.17)
-------- -------- -------- -------- -------- --------
Total from Investment Operations ............................ 0.32 0.47 0.36 0.19 0.81 0.35
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ......................... (0.42) (0.57) (0.60) (0.10) (0.55) (0.52)
Distributions from Net Realized Gain on Investments Sold ..... -- -- (0.08) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ......................................... (0.42) (0.57) (0.68) (0.10) (0.55) (0.52)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ................................ $9.79 $9.69 $9.37 $9.46 $9.72 $9.55
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (2) ................ 3.33% 4.92% 3.84% 2.01%(10) 8.74% 3.57%
Total Adjusted Investment Return at Net Asset Value (2,3) ..... 2.78% 4.15% 3.47% 1.81%(10) 8.67% --
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $9,506 $8,532 $6,779 $6,451 $19,113 $44,093
Ratio of Expenses to Average Net Assets (4) ................... 1.45% 1.40% 1.43% 1.50%(9) 1.84% 1.77%
Ratio of Adjusted Expenses to Average Net Assets (4,5) ........ 2.00% 2.10% 1.80% 2.67%(9) 1.91% --
Ratio of Net Investment Income to Average Net Assets .......... 4.26% 5.80% 6.30% 6.04%(9) 5.66% 5.30%
Ratio of Adjusted Net Investment Income to
Average Net Assets (5) ........................................ 3.71% 5.10% 5.93% 4.87%(9) 5.59% --
Fee Reduction Per Share (7) ................................... $0.05 $0.07 $0.04 $0.02 $0.01 --
Portfolio Turnover Rate ....................................... 341% 423%(6) 427% 77% 250%(6) 267%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - Intermediate Government Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 1, 1999
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31, 1999
------------
<S> <C>
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period................................................................ $9.66
-----------
Net Investment Income (7) .......................................................................... 0.07
Net Realized and Unrealized Loss on Investments and Financial Futures Contracts .................... (0.11)
-----------
Total from Investment Operations ................................................................. (0.04)
-----------
Less Distributions:
Dividends from Net Investment Income .............................................................. (0.07)
-----------
Net Asset Value, End of Period ..................................................................... $9.55
===========
Total Investment Return at Net Asset Value (2) ..................................................... (0.38%) (10)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........................................................... $28
Ratio of Expenses to Average Net Assets ............................................................ 1.77% (9)
Ratio of Net Investment Income to Average Net Assets ............................................... 5.30% (9)
Portfolio Turnover Rate ............................................................................ 267%
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into consideration
fee reductions by the Adviser during the periods shown.
(4) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
Fund plus expenses incurred indirectly from the Adjustable U.S. Government
Fund (the "Portfolio"), the mutual fund in which the Fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended
March 31, 1996 include the expenses of the Portfolio through
September 22, 1995.
(5) Unreimbursed, without fee reduction.
(6) Portfolio turnover rate excludes merger activity.
(7) Based on average of shares outstanding at the end of each month.
(8) Effective May 31, 1997, the fiscal year end changed from March 31 to May 31.
(9) Annualized.
(10) Not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - Intermediate Government Fund
Schedule of Investments
May 31, 1999
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Intermediate Government Fund on May 31, 1999. It's divided into three main
categories: U.S. government and agencies securities, foreign government 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. (31.35%)
United States Treasury,
Bond ..................................... 11.875% 11-15-03 $9,000 $11,129,040
Bond ..................................... 10.750 08-15-05 16,500 20,697,105
Bond ..................................... 12.000 08-15-13 8,160 11,580,835
Bond ..................................... 8.125 08-15-19 19,000 23,349,290
------------
66,756,270
------------
Government - U.S. Agencies (62.57%)
Federal Home Loan Bank,
Bond ..................................... 5.763 08-20-01 1,000 996,870
Note ..................................... 5.375 03-02-01 3,000 2,982,660
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf ...................... 8.500 06-01-06 to 3,382 3,527,344
07-01-07
30 Yr Adjustable Rate Mortgage ........... 7.500# 05-01-17 50 50,907
30 Yr Adjustable Rate Mortgage ........... 7.375# 10-01-18 56 56,894
Deb ...................................... 5.880 02-10-03 2,000 1,974,000
Deb ...................................... 6.000 11-18-03 2,000 1,974,000
Deb ...................................... 8.000 06-21-06 1,000 1,003,280
Note ..................................... 5.000 02-15-01 10,000 9,900,000
Med Term Note Ser B ...................... 7.500 04-24-07 1,495 1,516,020
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf ...................... 6.000 07-01-13 to 18,091 17,650,103
11-01-13
15 Yr Pass Thru Ctf ...................... 6.500 04-01-13 to 24,085 23,979,503
05-01-13
30 Yr Adjustable Rate Mortgage ........... 6.541# 03-01-14 to 42 42,447
06-01-14
30 Yr Adjustable Rate Mortgage ........... 7.625# 03-01-22 87 89,059
30 Yr Adjustable Rate Mortgage ........... 6.380# 03-01-27 40 39,742
Deb ...................................... 8.500 02-01-05 1,490 1,519,338
Deb Ser SM-07-B .......................... 7.550 03-27-07 2,025 2,038,608
Note ..................................... 4.750 11-14-03 11,500 10,959,155
Note ..................................... 5.250 01-15-09 9,000 8,361,540
Med Term Note Ser B ...................... 6.610 03-16-09 3,000 2,932,500
Note Ser 04-J ............................ 8.250 10-12-04 13,000 13,134,030
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
============================FINANCIAL STATEMENTS================================
John Hancock Funds - Intermediate Government Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage ........... 6.125%# 10-20-23 $760 $776,401
30 Yr Pass Thru Ctf ...................... 6.500 10-15-28 1,994 1,944,838
30 Yr Pass Thru Ctf ...................... 7.000 11-15-27 to 24,416 24,415,744
04-15-28
30 Yr Pass Thru Ctf ...................... 12.000 02-15-14 23 25,769
Small Business Administration,
Deb Ser 90-10D ........................... 8.700 12-01-00 1,308,330 1,358,932
-----------
133,249,684
-----------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $205,009,827) (93.92%) 200,005,954
-------- -----------
FOREIGN GOVERNMENT BONDS
U.S Dollar-Denominated Foreign Government Bonds (1.72%)
International Bank for Reconstruction and Development,
30 Yr Bond................................ 8.625 10-15-16 3,000 3,650,100
-----------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $3,810,000) (1.72%) 3,650,100
-------- -----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.81%)
Investment in a joint repurchase agreement transaction with
ABN AMRO, Inc. - Dated 05-28-99, due 06-01-99 (Secured by U.S.
Treasury Bonds, 5.500% thru 12.000%, due 11-15-03 thru 08-15-28,
and U.S. Treasury Notes, 6.500% and 7.785%, due 11-15-04 and
10-15-06) - Note A ....................... 4.790 8,116 8,116,000
----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.00%....................... 240
----------
TOTAL SHORT-TERM INVESTMENTS (3.81%) 8,116,240
-------- ----------
TOTAL INVESTMENTS (99.45%) 211,772,294
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.55%) 1,174,847
-------- -----------
TOTAL NET ASSETS (100.00%) $212,947,141
======== ============
# Represents rate in effect on May 31, 1999.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Intermediate Government Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Bond Trust (the "Trust") is a diversified, open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust consists of three series: John Hancock Intermediate Government Fund (the
"Fund"), John Hancock Government Income Fund and John Hancock High Yield Bond
Fund. Prior to April 1, 1999, the Fund was known as 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
achieve a high level of current income consistent with preservation of capital
and maintenance of liquidity.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A, Class B and Class C shares. The Trustees
authorized the issuance of Class C shares effective April 1, 1999. 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. Shareholders of a class
which bears distribution and service expenses under the terms of a distribution
plan have exclusive voting rights to that distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement transaction. Aggregate
cash balances are invested in one or more repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
FEDERAL INCOME TAX The Fund qualifies as a "regulated investment company" by
complying with the applicable provisions of the Internal Revenue Code and will
not be subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $14,013,467 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 gain distribution will be made. The Fund's carryforwards expire as
follows: May 31, 2001 - $9,365,539, May 31, 2002 - $427,159, May 31, 2003 -
$1,950,205, May 31, 2004 - $1,741,681 and May 31, 2005 - $528,883. Availability
of a certain amount of loss carryforwards which were acquired on September 22,
1995 and December 5, 1997 in mergers, may be limited in a given year.
Additionally, net capital losses of $1,578,737 attributable to security
transactions incurred after October 31, 1998 are treated as arising on the first
day (June 1, 1999) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund, if any,
with respect to each class of shares will be calculated in the same manner, at
the same time and will be in
16
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Intermediate Government Fund
the same amount, except for the effect of expenses that may be applied
differently to each class.
EXPENSES The majority of the expenses of the Trust 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 funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. Effective March 12, 1999,
the Fund entered into a syndicated line of credit agreement with various banks,
and the agreements previously in effect were terminated. This agreement enables
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks, which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing. In
addition, a commitment fee is charged based on the average daily unused portion
of the lines of credit and is allocated among the participating funds. The Fund
had no borrowing activity for the year ended May 31, 1999.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure to
the underlying instrument or hedge other Fund instruments. At the time the Fund
enters into a financial futures contract, it will be required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
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, 1999, there were no open financial futures contracts.
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 0.40% of the Fund's average daily net asset value.
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, 1999, net sales charges received with regard to sales of Class A shares
amounted to $309,179. Out of this amount, $25,132 was retained and used for
printing prospectuses, advertising, sales literature
17
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Intermediate Government Fund
and other purposes, $176,693 was paid as sales commissions to unrelated
broker-dealers and $107,354 was paid as sales commissions to sales personnel of
Signator Investors, Inc. ("Signator Investors"), a related broker-dealer,
formerly known as John Hancock Distributors, Inc. The Adviser's indirect parent,
John Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Signator Investors.
Class B shares which are redeemed within four years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 3.00% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the year ended May 31, 1999,
contingent deferred sales charges amounted to $141,875.
Class C shares which are redeemed within one year of purchase will be
subject to a CDSC at a rate of 1.00% of the lesser of the current market value
at the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in whole or
in part to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of Class C shares. For the year
ended May 31, 1999, there were no contingent deferred sales charges paid to JH
Funds.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses, at an annual rate not to exceed
0.25% of Class A average daily net assets and 1.00% of Class B and Class C
average daily net assets, to reimburse JH Funds for its distribution and service
costs. Up to a maximum of 0.25% of such payments may be service fees as defined
by the amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a portion of
the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal 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., Mr. Stephen L. Brown, 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. The investment had no
impact on the operations of the Fund.
NOTE C -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of securities, other than
short-term obligations, during the year ended May 31, 1999, aggregated
$564,226,202 and $530,389,617, respectively.
The cost of investments owned at May 31, 1999 (excluding the corporate
savings account) for federal income tax purposes was $217,101,974. Gross
unrealized appreciation and depreciation of investments aggregated $82,083 and
$5,412,003, respectively, resulting in net unrealized depreciation of
$5,329,920.
18
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=========================NOTES TO FINANCIAL STATEMENTS==========================
John Hancock Funds - Intermediate Government Fund
NOTE D -
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1999, the Fund has reclassified amounts to reflect
a decrease in accumulated net realized loss on investments of $5,162, a decrease
in undistributed net investment income of $1,808 and a decrease in capital
paid-in of $3,354. This represents the amount necessary to report these balances
on a tax basis, excluding certain temporary differences, as of May 31, 1999.
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. The calculation of net investment income in the
financial highlights excludes these adjustments.
NOTE E -
REORGANIZATION
On November 12, 1997, the shareholders of the John Hancock Limited-Term
Government Fund ("Limited-Term Government Fund") approved a plan of
reorganization between Limited-Term Government Fund and the Fund providing for
the transfer of substantially all of the assets and liabilities of Limited-Term
Government Fund to the Fund in exchange solely for Class A and Class B shares of
the Fund. The acquisition was accounted for as a tax free exchange of 15,475,727
Class A shares and 996,713 Class B shares of John Hancock Intermediate
Government Fund for the net assets of Limited-Term Government Fund, which
amounted to $149,668,850 and $9,639,411 for Class A and B shares, respectively,
including $1,284,544 of unrealized appreciation, after the close of business on
December 5, 1997.
19
<PAGE>
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John Hancock Funds - Intermediate Government Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond Trust
John Hancock Intermediate Government Fund
We have audited the accompanying statement of assets and liabilities of the John
Hancock Intermediate Government Fund (formerly the John Hancock Intermediate
Maturity Government Fund) (one of the portfolios constituting the John Hancock
Bond Trust) (the "Fund"), including the schedule of investments, as of May 31,
1999, 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, 1999, by correspondence with the custodian and brokers, or other appropriate
auditing procedures where replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the John Hancock Intermediate Government Fund of the John Hancock
Bond Trust at May 31, 1999, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for each
of the indicated periods, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Boston, Massachusetts
July 7, 1999
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,
1999.
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 1999 U.S. Treasury Department Form
1099-DIV in January 2000. This will reflect the tax character of all
distributions for calendar year 1999.
20
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======================================NOTES=====================================
John Hancock Funds - Intermediate Government Fund
21
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Intermediate Government Fund
22
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Intermediate Government Fund
23
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================================================================================
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