File Nos. 2-48925 and 811-2402
As filed with the Securities and Exchange Commission on June 16, 1995.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
_____
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
____
Pre-Effective Amendment No. __ /____/
____
Post-Effective Amendment No. ___ /____/
(Check appropriate box or boxes)
JOHN HANCOCK SOVEREIGN BOND FUND
(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
(Address of principal executive office) Zip Code
(617) 375-1700
(Registrant's Telephone Number, including Area Code)
With a copy to:
Thomas H. Drohan Jeffrey N. Carp, Esq.
John Hancock Advisers, Inc. Hale and Dorr
101 Huntington Avenue 60 State Street
Boston, MA 02199 Boston, MA 02109
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: As soon as
practicable after the effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares
have previously been registered pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. This Registration
Statement relates to shares previously registered on Form N-1A
(File No. 811-2402)
It is proposed that this filing will become effective on
July 16, 1995 pursuant to Rule 488 under the Securities Act
of 1933.
<PAGE>
JOHN HANCOCK SOVEREIGN BOND FUND
CROSS-REFERENCE SHEET
Items Required by Form N-14
PART A
Item No. Item Caption Prospectus Caption
1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE
Cover Page of Prospectus OF PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis Information and SUMMARY; RISK FACTORS AND
Risk Factors SPECIAL CONSIDERATIONS
4. Information About the INFORMATION CONCERNING THE
Transaction MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF
REORGANIZATION; CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE: INTRO-
Registrant DUCTION; SUMMARY; BUSINESS OF
SOVEREIGN BOND FUND; BUSINESS OF
INVESTMENT QUALITY BOND FUND
6. Information About the PROSPECTUS COVER PAGE: INTRO-
Company Being Acquired DUCTION; SUMMARY; BUSINESS OF
SOVEREIGN BOND FUND; BUSINESS OF
INVESTMENT QUALITY BOND FUND
7. Voting Information PROSPECTUS COVER PAGE; NOTICE
OF SPECIAL MEETING OF SHARE-
HOLDERS; SUMMARY; INFORMATION
CONCERNING THE MEETING
8. Interest of Certain Persons NONE
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be Under-
writers
<PAGE>
PART B
Caption in Statement of
Item No. Item Caption Additional Information
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION
About the Registrant ABOUT SOVEREIGN BOND FUND
13. Additional Information About ADDITIONAL INFORMATION
the Company Being Acquired ABOUT INVESTMENT QUALITY BOND FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT
INVESTMENT QUALITY BOND FUND;
ADDITIONAL INFORMATION ABOUT
SOVEREIGN BOND FUND; PRO FORMA
COMBINED FINANCIAL STATEMENTS
PART C
Item No. Item Caption
15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
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John Hancock Funds Letterhead
July 21, 1995
Investment Quality Bond Fund
Dear Fellow Shareholder:
As you know, your fund recently became part of the John Hancock family of funds.
This presents an opportunity to combine the money management efforts serving
your investment with those of a similar mutual fund. For this reason, we are
proposing a merger of the Investment Quality Bond Fund into the John Hancock
Sovereign Bond Fund.
Your Board of Trustees believes that this merger is appropriate given that
Sovereign Bond Fund has achieved a superior track record,
while pursuing a similar investment objective.
Please take the time to read the enclosed materials and cast your vote on the
enclosed proxy card. Please vote promptly. It is extremely important, no matter
how many shares you own.
Comparative performance information, investment objectives and policies are
described at length for both funds in the enclosed Proxy Statement. We believe
that this merger will benefit you in two ways:
1. Lower Fund Expenses. Your Trustees firmly believe that combining these two
funds may benefit shareholders by allowing the Fund to capitalize on expected
economies of scale in investment research, operations and other important areas.
By creating a larger combined fund, the merger should lead to reduced expenses
and, ultimately, lower costs for you.
2. Increased Investment Diversification. By combining both funds' assets into a
single portfolio, the Sovereign Bond Fund will be able to achieve greater
diversification.
Your Vote Is Important!
At a special meeting of shareholders to be held on September 8, 1995 at 9:00
a.m., you will be asked to approve the merger of the Investment Quality Bond
Fund into the John Hancock Sovereign Bond Fund. Your Board of Trustees has
unanimously approved the merger.
We urge you to exercise your right as a shareholder and to vote by completing,
signing and returning the enclosed proxy ballot form to us immediately. Your
prompt response will help avoid the necessity for additional mailings at your
Fund's expense. For your convenience, we have provided a postage-paid envelope.
If you have questions, please call your Financial Advisor or a John Hancock
Funds Customer Service Representative at 1-800-225-5291, Monday through Friday
between 8:00 a.m. and 8:00 p.m. Eastern time. Thank you for your prompt
attention to these important matters.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
Enclosure
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JOHN HANCOCK INVESTMENT QUALITY BOND FUND
101 Huntington Avenue
Boston, Massachusetts 02199
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 8, 1995
Notice is hereby given that a Special Meeting of Shareholders
(the "Meeting") of John Hancock Investment Quality Bond Fund
("Investment Quality Bond Fund"), a series of John Hancock Bond
Fund, a Massachusetts business trust, will be held at 101
Huntington Avenue, Boston, Massachusetts 02199 on Friday,
September 8, 1995 at 9:00 a.m., Boston time, and at any
adjournment thereof, for the following purposes:
1. To consider and act upon a proposal to approve an Agreement
and Plan of Reorganization (the "Reorganization Agreement")
between John Hancock Bond Fund, on behalf of Investment
Quality Bond Fund, and John Hancock Sovereign Bond Fund
("Sovereign Bond Fund"), providing for Sovereign Bond Fund's
acquisition of all Investment Quality Bond Fund's assets in
exchange solely for: (a) Sovereign Bond Fund's assumption of
Investment Quality Bond Fund's liabilities and (b) the
issuance of Sovereign Bond Fund Class A and Class B shares to
Investment Quality Bond Fund for distribution to its
shareholders; and
2. To consider and act upon such other matters as may properly
come before the Meeting or any adjournment of the Meeting.
The Board of Trustees has fixed the close of business on July
14, 1995 as the record date for determination of shareholders who
are entitled to notice of and to vote at the Meeting and any
adjournment of the Meeting.
If you cannot attend the Meeting in person, please complete,
date and sign the enclosed proxy and return it to John Hancock
Investor Services Corporation, 101 Huntington Avenue, Boston,
Massachusetts 02199 in the enclosed envelope. It is important
that you exercise your right to vote. THE ENCLOSED PROXY IS BEING
SOLICITED BY THE BOARD OF TRUSTEES OF JOHN HANCOCK BOND FUND.
By order of the Board of Trustees,
THOMAS H. DROHAN, Secretary
Boston, Massachusetts
July 21, 1995
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JOHN HANCOCK INVESTMENT QUALITY BOND FUND
PROXY STATEMENT
----------------------
JOHN HANCOCK SOVEREIGN BOND FUND
PROSPECTUS
----------------------
This Proxy Statement and Prospectus sets forth the information you
should know before voting on the proposed reorganization of John
Hancock Investment Quality Bond Fund ("Investment Quality Bond Fund")
into John Hancock Sovereign Bond Fund ("Sovereign Bond Fund").
Investment Quality Bond Fund is a series of John Hancock Bond Fund, a
Massachusetts business trust (the "Trust"). Sovereign Bond Fund is a
Massachusetts business trust.
This Proxy Statement and Prospectus relates to Class A and Class B
shares of beneficial interest, no par value per share (collectively,
the "Sovereign Bond Fund Shares"), of Sovereign Bond Fund which will be
issued in exchange for all of Investment Quality Bond Fund's assets. In
exchange for these assets, Sovereign Bond Fund will also assume all of
the liabilities of Investment Quality Bond Fund.
The Sovereign Bond Fund Class A Shares issued to Investment
Quality Bond Fund for distribution to Investment Quality Bond Fund's
Class A shareholders will have an aggregate net asset value equal to
the aggregate net asset value of Investment Quality Bond Fund's Class A
shares. The Sovereign Bond Fund Class B Shares issued to Investment
Quality Bond Fund for distribution to Investment Quality Bond Fund's
Class B shareholders will have an aggregate net asset value equal to
the aggregate net asset value of Investment Quality Bond Fund's Class B
shares. The asset values of Investment Quality Bond Fund and Sovereign
Bond Fund will be determined at the close of business (4:00 p.m.
Eastern Time) on the Closing Date (as defined below) for purposes of
the proposed reorganization.
Following the receipt of Sovereign Bond Fund Shares (1) Investment
Quality Bond Fund will be liquidated, (2) the Sovereign Bond Fund
Shares will be distributed to Investment Quality Bond Fund's
shareholders pro rata in exchange for their shares of Investment
Quality Bond Fund and (3) Investment Quality Bond Fund will be
terminated. Consequently, Class A Investment Quality Bond Fund
shareholders will become Class A shareholders of Sovereign
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Bond Fund, and Class B Investment Quality Bond Fund shareholders will
become Class B shareholders of Sovereign Bond Fund. These transactions
are collectively referred to in this Proxy Statement and Prospectus as
the "Reorganization."
The Reorganization is being structured as a tax-free
reorganization so that, in the opinion of tax counsel, no gain or loss
will be recognized by Sovereign Bond Fund, Investment Quality Bond Fund
or the shareholders of Investment Quality Bond Fund. The terms and
conditions of the Reorganization are more fully described in this Proxy
Statement and Prospectus, and in the Form of Agreement and Plan of
Reorganization that is attached as Exhibit A.
Sovereign Bond Fund is a diversified open-end management
investment company organized as a Massachusetts business trust in 1984.
Sovereign Bond Fund seeks to generate a high level of current income,
consistent with prudent investment risk, through investment in a
diversified portfolio of freely marketable debt securities. Sovereign
Bond Fund pursues its objective by investing primarily in investment
grade debt securities.
The principal place of business of both the Trust and Sovereign
Bond Fund is 101 Huntington Avenue, Boston, Massachusetts 02199. Their
toll-free telephone number is 1-800-225-5291.
Please read this Proxy Statement and Prospectus carefully and
retain it for future reference. This Proxy Statement and Prospectus,
which is accompanied by the Prospectus of Sovereign Bond Fund for Class
A and Class B shares dated May 1, 1995 (Exhibit B), sets forth
information that you should know before approving the Reorganization.
The Prospectus of Investment Quality Bond Fund for Class A and Class B
shares dated May 15, 1995 is incorporated herein by reference and is
available upon oral or written request and at no charge from the Trust.
A Statement of Additional Information dated July 16, 1995 relating
to this Proxy Statement and Prospectus, and containing additional
information about each of Sovereign Bond Fund and Investment Quality
Bond Fund, including historical financial statements, is on file with
the Securities and Exchange Commission ("SEC"). It is available, upon
oral or written request and at no charge, from Sovereign Bond Fund. The
Statement of Additional Information is incorporated by reference into
this Prospectus.
Shares of Sovereign Bond Fund are not deposits or obligations of,
or guaranteed or endorsed by, any bank or other depository institution,
and the shares of Sovereign Bond Fund are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other government agency.
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<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement and Prospectus is July 16, 1995.
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<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION.............................................
SUMMARY..................................................
RISK FACTORS AND SPECIAL CONSIDERATIONS .................
INFORMATION CONCERNING THE MEETING.......................
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION
CAPITALIZATION...........................................
COMPARATIVE PERFORMANCE INFORMATION......................
BUSINESS OF SOVEREIGN BOND FUND..........................
General............................................
Investment Objective and Policies..................
Portfolio Management...............................
Trustees...........................................
Investment Adviser and Distributor.................
Expenses...........................................
Custodian and Transfer Agent.......................
Sovereign Bond Fund Shares.........................
Purchase of Sovereign Bond Fund Shares.............
Redemption of Sovereign Bond Fund Shares...........
Dividends, Distributions and Taxes.................
BUSINESS OF INVESTMENT QUALITY BOND FUND.................
General............................................
Investment Objective and Policies..................
Portfolio Management...............................
Trustees...........................................
Investment Adviser and Distributor.................
Expenses...........................................
Custodian and Transfer Agent.......................
Investment Quality Bond Fund Shares................
Purchase of Investment Quality Bond Fund Shares....
Redemption of Investment Quality Bond Fund Shares..
Dividends, Distributions and Taxes.................
EXPERTS..................................................
AVAILABLE INFORMATION....................................
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EXHIBITS
A - Form of Agreement and Plan of Reorganization by and between
John Hancock Bond Fund, on behalf of John Hancock Investment
Quality Bond Fund, and John Hancock Sovereign Bond Fund
(attached hereto).
B - Prospectus of John Hancock Sovereign Bond Fund for Class A
and Class B shares, dated May 1, 1995 (attached hereto).
C - Annual Report to Shareholders of John Hancock Sovereign
Bond Fund, dated December 31, 1994 (included herewith).
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PROXY STATEMENT AND PROSPECTUS
FOR SPECIAL MEETING OF SHAREHOLDERS OF
JOHN HANCOCK INVESTMENT QUALITY BOND FUND
TO BE HELD ON SEPTEMBER 8, 1995
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection
with the solicitation of proxies by the Board of Trustees of the Trust
(the "Board of Trustees"). The proxies will be voted at the Special
Meeting of Shareholders (the "Meeting") of Investment Quality Bond Fund
to be held at 101 Huntington Avenue, Boston, Massachusetts 02199 on
Friday, September 8, 1995 at 9:00 a.m., Boston time, and at any
adjournment or adjournments of the Meeting. The purposes of the Meeting
are set forth in the accompanying Notice of Special Meeting of
Shareholders.
This Proxy Statement and Prospectus incorporates by reference the
prospectus of Investment Quality Bond Fund for Class A and Class B
shares, dated May 15, 1995 (the "Investment Quality Bond Fund
Prospectus"), and includes the prospectus of Sovereign Bond Fund for
Class A and Class B shares, dated May 1, 1995 (the "Sovereign Bond Fund
Prospectus"). The Annual Report to Shareholders of Sovereign Bond Fund,
dated December 31, 1994, is included with this Proxy Statement and
Prospectus. These materials will be mailed to shareholders of
Investment Quality Bond Fund on or after July 21, 1995. Investment
Quality Bond Fund's Annual Report to Shareholders was previously sent
to shareholders on or about May 31, 1995.
As of June 30, 1995, ______ shares of beneficial interest of
Investment Quality Bond Fund were outstanding.
All properly executed proxies received by management prior to the
Meeting, unless revoked, will be voted at the Meeting according to the
instructions on the proxies. If no instructions are given, shares of
Investment Quality Bond Fund represented by proxies will be voted FOR
the proposal (the "Proposal") to approve the Agreement and Plan of
Reorganization (the "Agreement") between the Trust, on behalf of
Investment Quality Bond Fund, and Sovereign Bond Fund.
The Trust's Board of Trustees knows of no business that will be
presented for consideration at the Meeting other than that mentioned in
the immediately preceding paragraph. If other business is properly
brought before the Meeting, proxies will be voted according to the best
judgment of the persons named as proxies.
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In addition to the mailing of these proxy materials, proxies may
be personally solicited by Trustees, officers and employees of
Investment Quality Bond Fund; by personnel of Investment Quality Bond
Fund's investment adviser, John Hancock Advisers, Inc., Investment
Quality Bond Fund's transfer agent, John Hancock Investor Services
Corporation ("Investor Services"); by broker-dealer firms or by a
professional solicitation organization, in person or by telephone.
Investment Quality Bond Fund and Sovereign Bond Fund (each, a "Fund"
and collectively, the "Funds") will each bear its own fees and expenses
in connection with the Reorganization discussed in this Proxy Statement
and Prospectus.
The information concerning Sovereign Bond Fund in this Proxy
Statement and Prospectus has been supplied by Sovereign Bond Fund. The
information regarding Investment Quality Bond Fund in this Proxy
Statement and Prospectus has been supplied by the Trust.
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement and Prospectus. The summary is
qualified by reference to the more complete information contained in
this Proxy Statement and Prospectus, and in the Exhibits attached and
included with this document. Please read this entire Proxy Statement
and Prospectus carefully.
Reasons for the Proposed Reorganization
The Trust's Board of Trustees has determined that the proposed
Reorganization is in the best interests of Investment Quality Bond Fund
and its shareholders. In making this determination, the Trustees
considered several relevant factors, including (1) the fact that the
investment objectives and policies of Investment Quality Bond Fund and
Sovereign Bond Fund are generally similar, (2) the likelihood that the
Reorganization will result in improved economies of scale and a
corresponding decrease in the expenses currently borne by Investment
Quality Bond Fund's shareholders, and (3) the fact that combining the
Funds' assets into a single portfolio will enable Sovereign Bond Fund
to achieve greater diversification than either Fund is now able to
achieve. The Trust's Board of Trustees believes that the Sovereign Bond
Fund Shares received in the Reorganization will provide existing
Investment Quality Bond Fund shareholders with substantially the same
investment advantages that they currently enjoy at a comparable level
of risk. For a more detailed discussion of the reasons for the proposed
Reorganization, see "Proposal to Approve the Agreement and Plan of
Reorganization--Reasons For The Proposed Reorganization."
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The Funds' Expenses
Both Funds and their shareholders are subject to various fees and
expenses. The two tables set forth below show the operating expenses of
Class A and Class B shares of the Funds. These expenses are based on
fees and expenses incurred during the Funds' most recently completed
fiscal years.
Investment Quality Bond Fund
Annual Fund Operating Expenses Class A Class B
(as a percentage of net assets) Shares Shares
Management Fee........................ 0.62% 0.62%
12b-1 fee............................. 0.25% 1.00%
Other expenses........................ 0.45% 0.45%
----- -----
Total Fund Operating Expenses......... 1.32% 2.07%
Sovereign Bond Fund
Annual Fund Operating Expenses Class A Class B
(as a percentage of net assets) Shares Shares
Management Fee........................ 0.50% 0.50%
12b-1 fee............................. 0.30% 1.00%
Other expenses........................ 0.46% 0.28%
----- -----
Total Fund Operating Expenses......... 1.26% 1.78%
The table set forth below shows the pro forma operating expenses
of Class A and Class B shares of Sovereign Bond Fund, which assume that
the Reorganization took place on December 31, 1994.
Sovereign Bond Fund (Pro Forma)
Annual Fund Operating Expenses Class A Class B
(as a percentage of net assets) Shares Shares
Management Fee........................ 0.50% 0.50%
12b-1 fee............................. 0.30% 1.00%
Other expenses........................ 0.45% 0.27%
----- -----
Total Fund Operating Expenses......... 1.25% 1.77%
If the proposed Reorganization is consummated, the actual total
operating expenses of Class A and Class B shares of Sovereign Bond Fund
may vary from the pro forma operating expenses indicated above.
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The Funds' Investment Adviser
John Hancock Advisers, Inc. (the "Adviser") acts as
investment adviser to both Funds.
Business of John Hancock Investment Quality Bond Fund
Investment Quality Bond Fund is a diversified series of the Trust,
an open-end management investment company organized as a Massachusetts
business trust in 1984. As of December 31 1994, Investment Quality Bond
Fund's net assets were approximately $87,906,893.
All investment decisions for Investment Quality Bond Fund are
made by Mr. James Ho, the Fund's portfolio manager. Mr. Ho is
also the portfolio manager of Sovereign Bond Fund. Mr. Ho will
continue to make all investment decisions for Investment Quality
Bond Fund until the Reorganization.
Business of John Hancock Sovereign Bond Fund
Sovereign Bond Fund is a diversified, open-end management
investment company organized as a Massachusetts business trust.
Sovereign Bond Fund's predecessor was organized in 1973. As of December
31, 1994, Sovereign Bond Fund's net assets were approximately
$1,368,027,206.
All investment decisions for Sovereign Bond Fund are made by
Mr. James Ho, the Fund's portfolio manager. Mr. Ho will continue
to make all investment decisions for Sovereign Bond Fund after the
Reorganization.
Comparison of the Investment Objectives and Policies of John
Hancock Investment Quality Bond Fund and John Hancock Sovereign
Bond Fund
Investment Quality Bond Fund. The investment objective of
Investment Quality Bond Fund is to earn a high level of income,
consistent with prudent risk and safety of principal, primarily through
investing in a diversified portfolio of investment quality fixed income
securities. Investment Quality Bond Fund pursues this objective by
normally investing at least 65% of its total assets in investment
quality fixed income securities. Investment Quality Bond Fund may
invest in mortgage-related derivatives, including collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities
("SMBSs"). Investment Quality Bond Fund may also enter into repurchase
agreements and reverse
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repurchase agreements and may invest in lower rated securities, foreign
securities, and asset-backed securities, enter into mortgage dollar
rolls and engage in hedging transactions in various derivative
instruments.
Sovereign Bond Fund. The investment objective of Sovereign Bond
Fund is to generate a high level of current income, consistent with
prudent investment risk, through investment in a diversified portfolio
of freely marketable debt securities. Under normal market conditions,
at least 65% of Sovereign Bond Fund's total assets will be invested in
bonds and/or debentures. In addition, at least 75% of Sovereign Bond
Fund's investments in debt securities (other than commercial paper)
will be represented by (1) securities rated within the four highest
rating categories of Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), (2) U.S. Government
securities, (3) debt securities of banks and (4) debt securities of
other issuers which, although not rated as a matter of policy by either
Moody's or S&P, are considered by the Adviser to have investment
quality comparable to securities receiving ratings within the four
highest categories. Sovereign Bond Fund may also invest in
mortgage-related derivatives, including CMOs and SMBSs, and may lend
securities, enter into repurchase agreements and engage in hedging and
nonhedging transactions in various derivative instruments.
Both Funds' investment objectives are designated as fundamental
policies and therefore cannot be changed without shareholder approval.
In considering whether to approve the Reorganization, you should
consider the differences between the two Funds' investment objectives
and policies. For a discussion of the risks associated with an
investment in the Funds, see "Risk Factors and Special Considerations."
Investment Quality Bond Sovereign Bond Fund
Fund
Investment Objective is to earn a Objective is to
Objective high level of income, generate a high level
consistent with prudent of current income,
risk and safety of consistent with prudent
principal, primarily investment risk,
through investing in a through investment in a
diversified portfolio of diversified portfolio
investment quality fixed of freely marketable
income securities. debt securities.
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<PAGE>
Primary Normally at least 65% of Under normal market
Investments Investment Quality Bond conditions, at least
Fund's assets in the 65% of Sovereign Bond
following "investment Fund's assets in bonds
quality" fixed income and debentures. At
securities: (1) U.S. least 75% of Sovereign
dollar denominated debt Bond Fund's debt
securities of foreign and investments (other than
U.S. issuers rated within commercial paper) will
the 3 highest rating be (1) securities rated
categories by Moody's or within the top 4 rating
S&P, (2) U.S. Government categories by Moody's
securities, (3) high or S&P, (2) unrated
quality money market debt securities
instruments, including determined by the
short-term U.S. Government Adviser to be of
securities, investment comparable quality, and
grade certificates of (3) U.S. Government
deposit and bankers' securities. All debt
acceptances and commercial investments will be
paper rated at least A-1 U.S. dollar denominated
by S&P or P-1 by Moody's, securities of U.S. and
and (4) unrated debt foreign issuers,
securities determined by subject to a 25% limit
the Adviser to be of on investments in
comparable quality. foreign securities.
Other Up to 35% of Investment Up to 25% of Sovereign
Investments Quality Bond Fund's total Bond Fund's assets may
assets may be held in cash be invested in fixed
or invested in (1) income securities rated
publicly offered fixed below the top 4 rating
income securities which categories or
are rated below determined by the
"investment quality", (2) Adviser to be of
non-dollar denominated comparable below
"investment quality" investment grade
foreign fixed income quality. Sovereign
securities, (3) private Bond Fund may invest in
placement fixed income illiquid and restricted
securities not exceeding securities, subject to
20% of the Fund's assets, a 15% limit on illiquid
(4) taxable municipal securities. Sovereign
securities and convertible Bond Fund may also lend
fixed income securities, portfolio securities
in each case rated in the and enter into
4 highest rating repurchased agreements.
categories applicable to
such securities, and
(5) money market
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<PAGE>
instruments that do not
meet the credit quality
standards described above,
not exceeding 5% of the
Fund's assets. Not more
than 34% of Investment
Quality Bond Funds may be
invested in securities
rated below the top 4
rating categories.
Investment Quality Bond
Fund may invest up to 10%
of its assets in illiquid
securities, and up to 5%
of its assets in
restricted securities.
Investment Quality Bond
Fund may lend portfolio
securities and enter into
repurchase and reverse
repurchase agreements.
Permitted Mortgage-related Futures contracts and
Transactions derivatives, asset-backed options on futures
in Derivative securities, mortgage contracts traded on a
Instruments dollar rolls, forward U.S. exchange.
currency contracts, put
and call options on debt
securities, interest rate
futures contracts and
options on such futures.
Diversification Investment Quality Bond Sovereign Bond Fund is
and Industry Fund is diversified and diversified and does
Concentration does not concentrate more not concentrate more
than 25% of its assets in than 25% of its assets
any one industry. in any one industry.
Form of Organization
Investment Quality Bond Fund is one of six separate series of the
Trust, a Massachusetts business trust. Sovereign Bond Fund is a
Massachusetts business trust. Both Funds have authorized and
outstanding Class A and Class B shares.
Each share of a Fund represents an equal proportionate interest in
the assets belonging to that Fund. The liabilities attributable to
Investment Quality Bond Fund are not charged against the assets of any
other series of the Trust. Shares of
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Investment Quality Bond Fund and each other series of the Trust are
voted separately with respect to matters pertaining to the Fund or any
such series, but all shares vote together for the election of the
Trust's Trustees and the ratification of the Trust's independent
accountants.
The shares of each class of Investment Quality Bond Fund and
Sovereign Bond Fund represent an interest in the same portfolio of
investments of that Fund. Except as stated below, each class of each
Fund has equal rights as to voting, redemption, dividends and
liquidation. Each class bears different distribution and transfer agent
fees, and may bear other expenses properly attributable to the
particular class. Class A and Class B shareholders of each Fund have
exclusive voting rights with regard to the Rule 12b-1 distribution plan
covering their class of shares.
Class A shares of each Fund are offered with a front-end sales
charge. They are also subject to a Rule 12b-1 fee. The Rule 12b-1 fee
for Class A shares of Investment Quality Bond Fund is 0.25% of the
average daily net assets attributable to Class A shares, of which up to
0.25% of these average daily net assets is for service expenses and the
remainder is for distribution services. The Rule 12b-1 fee for Class A
shares of Sovereign Bond Fund is 0.30% of the average daily net assets
attributable to Class A shares, of which up to 0.25% of these average
daily net assets is for service expenses and the remainder is for
distribution services.
Class B shares of each Fund are offered with a contingent deferred
sales charge ("CDSC") payable upon redemption of these shares. They are
also subject to a Rule 12b-1 fee. The Rule 12b-1 fee for Class B shares
of both Funds is 1.00% of the average daily net assets attributable to
Class B shares, of which up to 0.25% of these average daily net assets
is for service expenses and the remainder is for distribution services.
As part of the Reorganization, Class A shares of Sovereign Bond
Fund will be issued to Investment Quality Bond Fund and then
distributed by it to Investment Quality Bond Fund's Class A
shareholders. Similarly, Class B shares of Sovereign Bond Fund will be
issued to Investment Quality Bond Fund and then distributed by it to
Investment Quality Bond Fund's Class B shareholders.
Sales Charges and Distribution and Service Fees
Class A Shares. Both Funds impose an initial sales charge on Class
A shares at rates ranging from 4.50% to 0.00% of the offering price
depending on the size of the purchase, the size of the purchaser's
existing investment, if any, at the time of the
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purchase, and the participation of the shareholder in special purchase
plans or arrangements to purchase additional shares. A CDSC of up to
1.00% is imposed on certain Class A shares purchased without an initial
sales charge and redeemed within one year of purchase. An initial sales
charge does not apply to Class A shares acquired through the
reinvestment of dividends from net investment income or capital gain
distributions.
Class A shares of Sovereign Bond Fund acquired by Investment
Quality Bond Fund's Class A shareholders pursuant to the Reorganization
will not be subject to any initial sales charge or CDSC. However, the
CDSC imposed upon certain redemptions within one year of purchase
(referred to above) will continue to apply to the Class A shares of
Sovereign Bond Fund issued in the Reorganization. The holding period
for determining the application of this CDSC will be calculated from
the date the Investment Quality Bond Fund Class A shares were issued.
Class B Shares. Sovereign Bond Fund and Investment Quality Bond
Fund do not impose an initial sales charge on Class B shares. However,
Class B shares redeemed within six years of purchase will be subject to
a CDSC at the rates set forth below. This CDSC will be assessed on an
amount equal to the lesser of the current market value or the original
purchase cost of the Class B shares being redeemed. Accordingly, Class
B shareholders will not be assessed a CDSC on increases in account
value above the initial purchase price, including shares derived from
reinvested dividends. The amount of the CDSC, if any, will vary
depending on the number of years from the time the Class B shares were
purchased until the time they are redeemed, as follows:
The Contingent Deferred Sales
Year in Which Class B Shares Charge As a Percentage of
Redeemed Following Purchase Dollar Amount Subject to CDSC
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and
thereafter None
Class B shares of Sovereign Bond Fund acquired by Investment
Quality Bond Fund's Class B shareholders pursuant to the Reorganization
will not be subject to any CDSC at the time of the Reorganization, but
will remain subject to any CDSC applicable upon redemption of these
shares. For purposes of computing the CDSC payable upon redemption of
Class B shares of Sovereign Bond
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Fund acquired pursuant to the Reorganization and the schedule for
automatic conversion of Class B shares into Class A shares, the holding
period of the Investment Quality Bond Fund Class B shares will be added
to that of the Sovereign Bond Fund Class B shares acquired in the
Reorganization.
Distribution and Service Fees. Both Funds have adopted
distribution plans pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). Under these
plans, each Fund may pay fees to John Hancock Funds, Inc. ("John
Hancock Funds") to reimburse distribution and service expenses incurred
in connection with Class A shares. These fees are payable at an annual
rate of up to 0.25% and 0.30%, respectively, of the average daily net
assets attributable to the Class A shares of Investment Quality Bond
Fund and Sovereign Bond Fund. Of the fee payable by each Fund, up to
0.25% of net assets may be for service expenses and the remainder will
be for distribution services.
In addition, under the plans, each Fund may pay fees to John
Hancock Funds to reimburse it for distribution and service expenses
incurred in connection with Class B shares. These fees are payable at
an annual rate of 1.00% of each Fund's average daily net assets
attributable to its Class B shares. Of this fee, up to 0.25% of net
assets may be for service expenses and the remainder will be for
distribution services. With respect to Class B shares only, if John
Hancock Funds is not fully reimbursed for payments made or expenses
incurred in any fiscal year, it is entitled to carry forward these
expenses to subsequent fiscal years for submission to the applicable
Fund for payment, subject always to the maximum annual distribution fee
for Class B shares described above.
The Board of Trustees of Sovereign Bond Fund has determined that,
if the Reorganization is consummated, unreimbursed distribution and
shareholder service expenses originally incurred in connection with
Investment Quality Bond Fund's shares will be reimbursable under
Sovereign Bond Fund's Rule 12b-1 Plan. As of December 31, 1994, the
unreimbursed distribution and shareholder service expenses for Class A
shares of Sovereign Bond Fund and Investment Quality Bond Fund were
$1,073,364 and $0, respectively. The unreimbursed distribution and
shareholder service expenses for Class B shares of Sovereign Bond Fund
and Investment Quality Bond Fund were $1,752,030 and $264,130,
respectively. See "Unreimbursed Distribution and Shareholder Expenses"
below.
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Purchases and Exchanges
Shares of Sovereign Bond Fund may be purchased through certain
broker-dealers and through John Hancock Funds at the public offering
price, which is based on the next determined net asset value per share,
plus any applicable sales charge. The minimum initial investment in
Sovereign Bond Fund is $1,000 ($250 for group investments and
retirement plans). In anticipation of the Reorganization, as of the
Record Date, Investment Quality Bond Fund has stopped offering its
shares to all investors other than existing shareholders.
Shareholders of both Funds may exchange their shares at net asset
value for shares of the same class, if applicable, of certain other
funds managed by the Adviser. Shares of any fund acquired in this
manner that are subject to a CDSC will incur the CDSC, if still
applicable, upon redemption. The exchange privilege is available only
in those states where exchanges can be made legally.
Distribution Procedures
It is the policy of both Funds to pay dividends monthly from net
investment income. Each Fund also distributes annually all of its other
taxable income, including both net realized short-term and long-term
capital gains, if any. Investment Quality Bond Fund will make,
immediately prior to the Closing Date (as defined below), a
distribution of all of its net income and net realized capital gains,
if any, not previously distributed.
Reinvestment Options
Unless an election is made to receive cash, the shareholders of
both Funds automatically reinvest all of their respective dividends and
capital gain distributions in additional shares of the same class of
the same Fund. These reinvestments are made at the net asset value per
share and are not subject to any sales charge.
Redemption Procedures
Shares of both Funds may be redeemed on any business day at a
price equal to the net asset value of the shares next determined after
receipt of a redemption request in good order, less any applicable
CDSC. Alternatively, shareholders of both Funds may sell their shares
through securities dealers, who may charge a fee. Redemptions and
repurchases of Class B shares and certain Class A shares of Investment
Quality Bond Fund and Sovereign Bond Fund are subject to the applicable
CDSC, if any. Class A and
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Class B shares of Investment Quality Bond Fund may be redeemed up to
and including the Closing Date (as defined below).
Reorganization
Effect of the Reorganization. Pursuant to the terms of the
Agreement, the proposed Reorganization will consist of the acquisition
by Sovereign Bond Fund of all the assets of Investment Quality Bond
Fund in exchange solely for (i) the assumption by Sovereign Bond Fund
of all the liabilities of Investment Quality Bond Fund and (ii) the
issuance of Sovereign Bond Fund shares equal to the value of these
assets, less the amount of these liabilities (the "Sovereign Bond Fund
Shares"), to Investment Quality Bond Fund. As part of the liquidation
process, Investment Quality Bond Fund will immediately distribute to
its shareholders these Sovereign Bond Fund Shares in exchange for their
shares of Investment Quality Bond Fund. Consequently, Class A
shareholders of Investment Quality Bond Fund will become Class A
shareholders of Sovereign Bond Fund and Class B shareholders of
Investment Quality Bond Fund will become Class B shareholders of
Sovereign Bond Fund. After completion of the Reorganization, the
existence of Investment Quality Bond Fund will be terminated.
The Reorganization will become effective as of 5:00 p.m. on the
closing date, scheduled for September 15, 1995, or another date on or
before December 31, 1995 as authorized representatives of the Funds may
agree (the "Closing Date"). The Sovereign Bond Fund Class A Shares
issued to Investment Quality Bond Fund for distribution to Investment
Quality Bond Fund's Class A shareholders will have an aggregate net
asset value equal to the aggregate net asset value of Investment
Quality Bond Fund's Class A shares. Similarly, the Sovereign Bond Fund
Class B Shares issued to Investment Quality Bond Fund for distribution
to Investment Quality Bond Fund's Class B shareholders will have an
aggregate net asset value equal to the aggregate net asset value of
Investment Quality Bond Fund's Class B shares. For purposes of the
Reorganization, the Funds' respective asset values will be determined
as of the close of business (4:00 p.m. Eastern Time) on the Closing
Date.
The Trust's Board of Trustees, including the Trustees not
affiliated with either Fund, unanimously approved the Reorganization,
and determined that it is in the best interests of Investment Quality
Bond Fund and that the interests of Investment Quality Bond Fund's
shareholders will not be diluted as a result of the Reorganization.
Similarly, Sovereign Bond Fund's Board of Trustees, including the
Trustees not affiliated with either Fund, unanimously approved the
Reorganization, and determined that it is in the best interests of
Sovereign Bond Fund and that the interests of Sovereign Bond Fund's
shareholders will not be
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diluted as a result of the Reorganization. For a discussion of
the factors considered by the Trust's Board of Trustees, see
"Proposal to Approve the Agreement and Plan of Reorganization--
Reasons for the Proposed Reorganization."
Tax Considerations
The consummation of the Reorganization is subject to the receipt
of an opinion of Hale and Dorr, counsel to the Funds, satisfactory to
the Trust and Sovereign Bond Fund and substantially to the effect that:
(a) the acquisition by Sovereign Bond Fund of all of Investment
Quality Bond Fund's assets solely in exchange for the issuance of
Sovereign Bond Fund Shares to Investment Quality Bond Fund and the
assumption of all of Investment Quality Bond Fund's liabilities by
Sovereign Bond Fund, followed by the distribution by Investment Quality
Bond Fund, in liquidation of Investment Quality Bond Fund, of Sovereign
Bond Fund shares to the shareholders of Investment Quality Bond Fund in
exchange for their shares of beneficial interest of Investment Quality
Bond Fund and the termination of Investment Quality Bond Fund, will
constitute a "reorganization" within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and
Investment Quality Bond Fund and Sovereign Bond Fund will each be "a
party to a reorganization" within the meaning of Section 368(b) of the
Code;
(b) no gain or loss will be recognized by Investment Quality Bond
Fund upon (i) the transfer of all of its assets to Sovereign Bond Fund
(in the exchange described above) and (ii) the distribution by
Investment Quality Bond Fund of Sovereign Bond Fund Shares to
Investment Quality Bond Fund's shareholders;
(c) no gain or loss will be recognized by Sovereign Bond Fund upon
the receipt of Investment Quality Bond Fund's assets in the exchange
described above;
(d) the basis of the assets of Investment Quality Bond Fund
acquired by Sovereign Bond Fund will be, in each instance, the same as
the basis of those assets in the hands of Investment Quality Bond Fund
immediately prior to the transfer;
(e) the tax holding period of the assets of Investment Quality
Bond Fund in the hands of Sovereign Bond Fund will, in each instance,
include Investment Quality Bond Fund's tax holding period for those
assets;
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(f) the shareholders of Investment Quality Bond Fund will not
recognize gain or loss upon the exchange of all of their Investment
Quality Bond Fund shares for Sovereign Bond Fund Shares as part of the
Reorganization;
(g) the basis of the Sovereign Bond Fund Shares received by
Investment Quality Bond Fund shareholders in the Reorganization will be
the same as the basis of the Investment Quality Bond Fund shares
surrendered in exchange therefor; and
(h) the tax holding period of the Sovereign Bond Fund Shares
received by Investment Quality Bond Fund shareholders will include, for
each shareholder, the tax holding period for the Investment Quality
Bond Fund shares surrendered in exchange therefor, provided the
Investment Quality Bond Fund shares were held as capital assets on the
date of the exchange.
The Meeting
Time, Place and Date. The Meeting will be held on Friday,
September 8, 1995, at 101 Huntington Avenue, Boston, Massachusetts
02199, at 9:00 a.m. Boston time.
Record Date. The Record Date for determining shareholders
entitled to notice of and to vote at the Meeting is July 14, 1995.
Vote Required for Approval. Approval of the Agreement by the
shareholders of Investment Quality Bond Fund requires the affirmative
vote of a majority of the shares of Investment Quality Bond Fund
represented in person or by proxy and entitled to vote at a meeting of
shareholders at which a quorum is present. The Reorganization does not
require the approval of Sovereign Bond Fund's shareholders. See
"Proposal to Approve the Agreement and Plan of Reorganization--Voting
Rights and Required Vote."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please see the Sovereign Bond Fund Prospectus and the Investment
Quality Bond Fund Prospectus for a more complete description of each
Fund's investment objectives and policies, as well as their risk
factors.
In deciding whether to approve the Reorganization, you should
consider the similarities and differences between the investment
objectives and policies and risk factors of the Funds.
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Given the similarity of their investment objectives and policies,
the Funds are subject to substantially identical investment risks. The
value of the securities held by both Funds, and therefore both Funds'
per share net asset values, will fluctuate with interest rate changes.
Generally, a rise in interest rates will result in a decrease in the
Funds' net asset values, while a decline will result in an increase in
the Funds' net asset values.
INFORMATION CONCERNING THE MEETING
Solicitation, Revocation And Use Of Proxies
The presence (in person or by proxy) of a majority of Investment
Quality Bond Fund's outstanding shares that are entitled to vote at the
Meeting will be a quorum for the transaction of business. An Investment
Quality Bond Fund shareholder executing and returning a proxy has the
power to revoke it at any time before it is exercised, by filing a
written notice of revocation with Investment Quality Bond Fund's
transfer agent, John Hancock Investor Services Corporation, P.O. Box
9116, Boston, Massachusetts 02205-9116, or by returning a duly executed
proxy with a later date before the time of the Meeting. Any shareholder
who has executed a proxy but is present at the Meeting and wishes to
vote in person may revoke his or her proxy by notifying the Secretary
of the Trust (without complying with any formalities) at any time
before it is voted. Presence at the Meeting alone will not serve to
revoke a previously executed and returned proxy.
If a quorum is not present in person or by proxy at the time any
session of the Meeting is called to order, the persons named as proxies
may vote those proxies that have been received to adjourn the Meeting
to a later date. If a quorum is present but there are not sufficient
votes in favor of the Proposal, the persons named as proxies may
propose one or more adjournments of the Meeting to permit further
solicitation of proxies with respect to the Proposal. Any adjournment
will require the affirmative vote of a majority of the shares of
Investment Quality Bond Fund represented in person or by proxy at the
session of the Meeting to be adjourned. If an adjournment of the
Meeting is proposed because there are not sufficient votes in favor of
the Reorganization, even though a quorum is present at the Meeting, the
persons named as proxies will vote those proxies in favor of the
Reorganization in favor of adjournment, and will vote those proxies
against the Reorganization against adjournment.
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<PAGE>
Record Date And Outstanding Shares
Only Investment Quality Bond Fund shareholders of record at the
close of business on July 14, 1995 (the "Record Date") are entitled to
notice of and to vote at the Meeting and any adjournment of the
Meeting. At the close of business on June 30, 1995, _____ shares of
beneficial interest of Investment Quality Bond Fund were outstanding.
Security Ownership of Certain Beneficial Owners and Management of
Investment Quality Bond Fund and Sovereign Bond Fund
To the knowledge of the Trust, as of June 30, 1995, no person
owned of record or beneficially 5% or more of the outstanding Class A
or Class B shares of beneficial interest of Investment Quality Bond
Fund. To the knowledge of Sovereign Bond Fund, as of June 30, 1995, no
person owned of record or beneficially 5% or more of its outstanding
Class A or Class B shares of beneficial interest.
As of June 30, 1995, the Trustees and officers of the Trust, as a
group, owned in the aggregate less than 1% of the outstanding Class A
and Class B shares of beneficial interest of Investment Quality Bond
Fund. As of June 30, 1995, the Trustees and officers of Sovereign Bond
Fund, as a group, owned in the aggregate less than 1% of the
outstanding Class A and Class B shares of beneficial interest of
Sovereign Bond Fund.
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
General
The shareholders of Investment Quality Bond Fund are being asked
to approve the Agreement, a copy which is attached as Exhibit A. The
Reorganization will consist of: (A) the transfer of all of Investment
Quality Bond Fund's assets to Sovereign Bond Fund, in exchange solely
for the issuance of Sovereign Bond Fund Shares to Investment Quality
Bond Fund and the assumption of Investment Quality Bond Fund's
liabilities by Sovereign Bond Fund, (B) the subsequent distribution by
Investment Quality Bond Fund, as part of its liquidation, of the
Sovereign Bond Fund Shares to Investment Quality Bond Fund's
shareholders and (C) the termination of Investment Quality Bond Fund's
existence. The Sovereign Bond Fund Class A Shares issued upon the
consummation of the Reorganization will have an aggregate net asset
value equal to the aggregate value of the assets attributable to
Investment Quality Bond Fund's Class A shares, less liabilities
attributable to Investment Quality Bond Fund's Class A shares.
Similarly, the
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Sovereign Bond Fund Class B Shares issued upon consummation of the
Reorganization will have an aggregate net asset value equal to the
aggregate value of the assets attributable to Investment Quality Bond
Fund's Class B shares, less the liabilities attributable to Investment
Quality Bond Fund's Class B shares. As noted above, the asset values of
Investment Quality Bond Fund and Sovereign Bond Fund will be determined
at the close of business (4:00 p.m. Eastern Time) on the Closing Date
for purposes of the Reorganization. See "Description of Agreement"
below.
Pursuant to the Agreement, Investment Quality Bond Fund will
liquidate and distribute the Sovereign Bond Fund Shares received, as
described above, pro rata to the shareholders of record of each class
determined as of the close of regular trading on the New York Stock
Exchange on the Closing Date. The result of the transfer of assets will
be that Sovereign Bond Fund will add to its portfolio the net assets of
Investment Quality Bond Fund. Class A shareholders of Investment
Quality Bond Fund will become Class A shareholders of Sovereign Bond
Fund, and Class B shareholders of Investment Quality Bond Fund will
become Class B shareholders of Sovereign Bond Fund.
The Agreement and the Reorganization were unanimously approved by
the Trust's Board of Trustees on behalf of Investment Quality Bond Fund
at a meeting held on May 16, 1995. The Agreement and the Reorganization
were unanimously approved by the Board of Trustees of Sovereign Bond
Fund at a meeting held on May 1, 1995.
Reasons For The Proposed Reorganization
The Trust's Board of Trustees believes that the proposed
Reorganization will be advantageous to the shareholders of Investment
Quality Bond Fund in several respects. The Board of Trustees considered
the following matters, among others, in approving the Proposal.
First, the Board of Trustees believes that it is not advantageous
to operate and market Investment Quality Bond Fund separately from
Sovereign Bond Fund because their investment objectives and policies
are substantially identical. For a complete description of Sovereign
Bond Fund's investment objectives and policies, see the Sovereign Bond
Fund Prospectus attached as Exhibit B.
Second, the Board of Trustees considered the fact that Investment
Quality Bond Fund is substantially smaller than Sovereign Bond Fund.
The Board of Trustees determined that the existence of a larger
competing fund within the same fund complex and with substantially
identical investment characteristics is likely to
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impede the marketing and asset growth of Investment Quality Bond
Fund.
Third, the Board of Trustees considered that shareholders may be
better served by a fund offering greater diversification. To the extent
that the Funds' assets are combined into a single portfolio and a
larger asset base is created as a result of the Reorganization, greater
diversification of Sovereign Bond Fund's investment portfolio can be
achieved than is currently possible in either Fund. Greater
diversification is expected to be beneficial to shareholders of both
Funds, because it may reduce the negative effect which the adverse
performance of any one security may have on the performance of the
entire portfolio.
Fourth, the Board of Trustees believes that the Sovereign Bond
Fund Shares received in the Reorganization will provide existing
Investment Quality Bond Fund shareholders with substantially the same
investment advantages that they currently enjoy at a comparable level
of risk. The Board of Trustees also considered the performance history
of each Fund.
Fifth, a combined fund offers economies of scale that should have
a positive effect on the expenses currently borne by Investment Quality
Bond Fund and hence, indirectly, its shareholders. Both Funds incur
substantial overhead costs for accounting, legal, transfer agency
services, insurance, and custodial and administrative services. The
Board of Trustees expects that the Reorganization will result in a
decrease in the expenses currently borne by Investment Quality Bond
Fund's shareholders. See expense information in "Summary--the Funds'
Expenses."
In determining that the Reorganization is in the best interests of
Investment Quality Bond Fund and the interests of its shareholders, the
Board of Trustees considered the fact that the Adviser will receive
certain benefits from the Reorganization. The Reorganization will
result in a consolidated portfolio management effort and may result in
time savings to the Adviser by reducing the number of reports and
regulatory filings that it needs to prepare.
Capital Loss Carryovers
As of December 31, 1994, Investment Quality Bond Fund had capital
loss carryovers, as determined for federal income tax purposes, in the
aggregate amount of approximately $17,734,441, of which $3,512,860
expires on December 31, 1996, $1,409,609 expires on December 31, 1997,
$1,909,995 expires on December 31, 1998, $755,945 expires on December
31, 2000, and $10,146,032 expires on December 31, 2002. If the
Reorganization does not occur,
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Investment Quality Bond Fund may use these capital loss carryovers to
offset its net capital gain, which would reduce the amount of net
capital gain Investment Quality Bond Fund would be required to
distribute to its shareholders in order to avoid fund-level income
and/or excise taxes on undistributed capital gain.
If the Reorganization is consummated, Sovereign Bond Fund will
succeed to and take into account Investment Quality Bond Fund's capital
loss carryovers and will be able to use such carryovers, along with any
carryovers it may have, to offset its net capital gain, subject to
certain limitations under the Code that may be applicable because of
the Reorganization and certain other changes in the past or future
share ownership of Sovereign Bond Fund. These limitations could result
in the expiration of all or portions of such carryovers before they are
fully used. However, Investment Quality Bond Fund did not, as of
December 31, 1994, have net unrealized gains that, when realized, its
capital loss carryovers could be used to offset, and accordingly all or
substantial portions of Investment Quality Bond Fund's capital loss
carryovers may also expire unused if the Reorganization is not
consummated.
Unreimbursed Distribution and Shareholder Service Expenses
The Board of Trustees has determined that, if the Reorganization
is consummated, distribution and shareholder service expenses incurred
in connection with shares of Investment Quality Bond Fund, and not
reimbursed under Investment Quality Bond Fund's Rule 12b-1 Plans or
through CDSCs, will be reimbursable expenses under Sovereign Bond
Fund's Rule 12b-1 Plans (the "assumption"). However, the maximum
aggregate amounts payable during any fiscal year under Sovereign Bond
Fund's Rule 12b-1 Plan (0.30% of average daily net assets attributable
to Class A shares and 1.00% of average daily net assets attributable to
Class B shares) will not be affected by the assumption.
With respect to Sovereign Bond Fund's Class A and Class B shares,
the percentage of net assets on a pro forma combined basis that the
unreimbursed expenses represent will decrease as a result of the
Reorganization and the assumption. As of December 31, 1994, the
unreimbursed distribution and shareholder service expenses of Sovereign
Bond Fund attributable to Class A and Class B shares were $1,073,364
(.081% of Sovereign Bond Fund's net assets attributable to Class A
shares) and $1,752,030 (4.34% of Sovereign Bond Fund's net assets
attributable to Class B shares), respectively. As of the same date, the
unreimbursed distribution and shareholder service expenses of
Investment Quality Bond Fund attributable to Class A and Class B shares
were $0 attributable to Class A
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shares and $264,130 (3.83% of Investment Quality Bond Fund's net assets
attributable to Class B shares), respectively.
After the Reorganization, on a pro forma combined basis, the
unreimbursed distribution and shareholder service expenses of Sovereign
Bond Fund attributable to Class A and Class B shares will be
$1,073,364 (.076% of Sovereign Bond Fund's pro forma net assets
attributable to Class A shares) and $2,016,160 (4.27% of Sovereign Bond
Fund's pro forma net assets attributable to Class B shares),
respectively.
The assumption will have no immediate effect upon the payments
made under Sovereign Bond Fund's Rule 12b-1 Plans. While John Hancock
Funds hopes to recover unreimbursed distribution and shareholder
service expenses over an extended period of time, Sovereign Bond Fund
is not obligated to assure that these amounts are recouped by John
Hancock Funds.
Unreimbursed distribution and shareholder service expenses do not
currently appear as an expense or liability in the financial statements
of either Fund, nor will they appear in the financial statements of
Sovereign Bond Fund after the Reorganization until paid or accrued.
Even in the event of termination or noncontinuance of Sovereign Bond
Fund's Rule 12b-1 Plans, Sovereign Bond Fund is not legally committed,
and is not required to commit, to the payment of any unreimbursed
distribution and shareholder service expenses. For this reason,
unreimbursed expenses do not enter into the calculation of a Fund's net
asset value or the formula for calculating Rule 12b-1 payments. The
staff of the SEC has not approved or disapproved the treatment of the
unreimbursed distribution and shareholder service expenses described in
this Proxy Statement.
Board's Evaluation and Recommendation
On the basis of the factors described above and other factors, the
Trust's Board of Trustees, including a majority of the Trustees who are
not "interested persons" (as defined in the Investment Company Act) of
the Funds, determined that the Reorganization is in the best interests
of Investment Quality Bond Fund and that the interests of Investment
Quality Bond Fund's shareholders will not be diluted as a result of the
Reorganization. On the same basis, the Board of Trustees of Sovereign
Bond Fund, including a majority of the Trustees who are not "interested
persons" (as defined in the Investment Company Act) of the Funds,
determined that the Reorganization is in the best interests of
Sovereign Bond Fund and that the interests of Sovereign Bond Fund's
shareholders will not be diluted as a result of the Reorganization.
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THE TRUSTEES OF INVESTMENT QUALITY BOND FUND RECOMMEND THAT
SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE AGREEMENT AND
PLAN OF REORGANIZATION
Description of Agreement
The following description of the Agreement is a summary, does not
purport to be complete, and is subject in all respects to the
provisions of the Agreement, and is qualified in its entirety by
reference to the Agreement. A copy of the Agreement is attached to this
Proxy Statement and Prospectus as Exhibit A and should be read in its
entirety. Paragraph references are to appropriate provisions of the
Agreement.
Method of Carrying Out Reorganization. If Investment Quality Bond
Fund shareholders approve the Agreement, the Reorganization will be
consummated promptly after the various conditions to the obligations of
each of the parties are satisfied (see Agreement, paragraphs 6 through
8). The Reorganization will be completed on the Closing Date (as
defined above).
On the Closing Date, Investment Quality Bond Fund will transfer
all of its assets to Sovereign Bond Fund in exchange for Sovereign Bond
Fund Shares with an aggregate net asset value equal to the value of the
assets delivered, less the liabilities of Investment Quality Bond Fund
assumed, as of the close of business on the Closing Date (see
Agreement, paragraphs 1 and 2).
The value of Investment Quality Bond Fund's assets and Sovereign
Bond Fund's net asset values per Class A share and per Class B share
will be determined according to the valuation procedures set forth in
Sovereign Bond Fund's Declaration of Trust, By-laws and Prospectus (see
"Share Price" in the Sovereign Bond Fund Prospectus). No initial sales
charge or CDSC will be imposed upon delivery of the Sovereign Bond Fund
Shares in exchange for the assets of Investment Quality Bond Fund.
Surrender of Share Certificates. Investment Quality Bond Fund
shareholders whose Class A or Class B shares are represented by one or
more share certificates should, prior to the Closing Date, either
surrender their certificates to Investment Quality Bond Fund or deliver
to Investment Quality Bond Fund an affidavit with respect to lost
certificates, in such form and accompanied by such surety bonds as
Investment Quality Bond Fund may require (collectively, an
"Affidavit"). On the Closing Date, all certificates which have not been
surrendered will be deemed to be cancelled, will no longer evidence
ownership of Investment Quality Bond Fund's shares and will evidence
ownership of Sovereign Bond Fund Shares. Shareholders may not redeem or
transfer Sovereign Bond Fund Shares received in the Reorganization
until they have
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surrendered their Investment Quality Bond Fund share certificates or
delivered an Affidavit relating to them. Unless a shareholder
specifically requests a share certificate, Sovereign Bond Fund will not
issue share certificates in the Reorganization.
Conditions Precedent to Closing. The obligation of Investment
Quality Bond Fund to consummate the Reorganization is subject to the
satisfaction of certain conditions precedent, including the performance
by Sovereign Bond Fund of all acts and undertakings required under the
Agreement and the receipt of all consents, orders and permits necessary
to consummate the Reorganization (see Agreement, paragraphs 6 through
8).
The obligation of Sovereign Bond Fund to consummate the
Reorganization is subject to the satisfaction of certain conditions
precedent, including the performance by the Trust and Investment
Quality Bond Fund of all acts and undertakings to be performed under
the Agreement, the receipt of certain documents and financial
statements from Investment Quality Bond Fund and the receipt of all
consents, orders and permits necessary to consummate the Reorganization
(see Agreement, paragraphs 6 through 8).
The obligations of both parties are subject to the receipt of
approval and authorization of the Agreement by the vote of not less
than a majority of the outstanding shares of beneficial interest of
Investment Quality Bond Fund entitled to vote (as described in the
section captioned "Voting Rights and Required Vote"), and the receipt
of a favorable opinion of Hale and Dorr as to the federal income tax
consequences of the Reorganization (see Agreement, paragraph 8.6).
Termination of Agreement. The Agreement may be terminated, whether
or not approval of Investment Quality Bond Fund's shareholders has been
obtained, by mutual agreement of the parties. In addition, either party
may terminate its obligations under the Agreement at or prior to the
Closing Date, because of a material breach by the other party of any
representations, warranties or agreements contained in the Agreement,
or if a condition precedent in the Agreement has not been met.
Expenses of the Reorganization. Sovereign Bond Fund and Investment
Quality Bond Fund will each be responsible for its own expenses
incurred in connection with entering into and carrying out the
provisions of the Reorganization Agreement, whether or not the
Reorganization is consummated.
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<PAGE>
Tax Considerations
The consummation of the Reorganization is subject to the receipt
of a favorable opinion of Hale and Dorr, counsel to the Funds,
satisfactory to the Trust and Sovereign Bond Fund and substantially to
the effect that:
(i) The acquisition by Sovereign Bond Fund of all of the
assets of Investment Quality Bond Fund solely in exchange for the
issuance of Sovereign Bond Fund Shares to Investment Quality Bond Fund
and the assumption of all of Investment Quality Bond Fund's liabilities
by Sovereign Bond Fund, followed by the distribution by Investment
Quality Bond Fund, in liquidation of Investment Quality Bond Fund, of
Sovereign Bond Fund Shares to the shareholders of Investment Quality
Bond Fund in exchange for their shares of beneficial interest of
Investment Quality Bond Fund and the termination of Investment Quality
Bond Fund, will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Investment Quality Bond Fund and
Sovereign Bond Fund will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by Investment
Quality Bond Fund upon (a) the transfer of all of its assets to
Sovereign Bond Fund solely in exchange for the issuance of Sovereign
Bond Fund Shares to Investment Quality Bond Fund, and the assumption of
all of Investment Quality Bond Fund's liabilities by Sovereign Bond
Fund; and (b) the distribution by Investment Quality Bond Fund of these
Sovereign Bond Fund Shares to the shareholders of Investment Quality
Bond Fund;
(iii) no gain or loss will be recognized by Sovereign Bond
Fund upon the receipt of Investment Quality Bond Fund's assets solely
in exchange for the issuance of Sovereign Bond Fund Shares to
Investment Quality Bond Fund and the assumption of all of Investment
Quality Bond Fund's liabilities by Sovereign Bond Fund;
(iv) the basis of the assets of Investment Quality Bond
Fund acquired by Sovereign Bond Fund will be, in each instance, the
same as the basis of those assets in the hands of Investment Quality
Bond Fund immediately prior to the transfer;
(v) the tax holding period of the assets of Investment
Quality Bond Fund in the hands of Sovereign Bond Fund will, in each
instance, include Investment Quality Bond Fund's tax holding period for
those assets;
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<PAGE>
(vi) the shareholders of Investment Quality Bond Fund
will not recognize gain or loss upon the exchange of all their
Investment Quality Bond Fund shares solely for Sovereign Bond Fund
Shares as part of the Reorganization;
(vii) the basis of the Sovereign Bond Fund Shares received
by the Investment Quality Bond Fund shareholders in the Reorganization
will be the same as the basis of the Investment Quality Bond Fund
shares surrendered in exchange therefor; and
(viii) the tax holding period of the Sovereign Bond Fund
Shares received by the Investment Quality Bond Fund shareholders will
include, for each shareholder, the tax holding period for the
Investment Quality Bond Fund shares surrendered therefor in exchange,
provided the Investment Quality Bond Fund shares were held as capital
assets on the date of the exchange.
Voting Rights And Required Vote
Each Investment Quality Bond Fund share is entitled to one
vote. Class A and Class B shareholders of Investment Quality Bond Fund
vote together with respect to the Proposal. Approval of the Proposal
requires the affirmative vote of a majority of the shares of Investment
Quality Bond Fund represented in person or by proxy and entitled to
vote at a meeting of shareholders at which a quorum is present.
Shares of beneficial interest of Investment Quality Bond Fund
represented in person or by proxy (including shares which abstain or do
not vote with respect to the Proposal) will be counted for purposes of
determining whether a quorum is present at the meeting. Accordingly, an
abstention from voting has the same effect as a vote against the
Proposal. However, if a broker or nominee holding shares in "street
name" indicates on the proxy card that it does not have discretionary
authority to vote on the Proposal, those shares will not be considered
as present and entitled to vote with respect to the Proposal.
Accordingly, a "broker non-vote" has no effect on the voting in
determining whether the Proposal has been adopted, provided that the
holders of more than 50% of the outstanding shares (excluding the
"broker nonvotes") are present or represented.
If the requisite approval of shareholders is not obtained,
Investment Quality Bond Fund will continue to engage in business as a
series of a registered open-end, management investment company and
-24-
<PAGE>
the Trust's Board of Trustees will consider what further action may be
appropriate.
CAPITALIZATION
The following table sets forth the capitalization of each Fund
as of December 31, 1994, and the pro forma combined capitalization of
both Funds as if the Reorganization had occurred on that date. The
table reflects pro forma exchange ratios of approximately 0.57933 Class
A Sovereign Bond Fund Shares being issued for each Class A share of
Investment Quality Bond Fund and approximately 0.57939 Class B
Sovereign Bond Fund Shares being issued for each Class B share of
Investment Quality Bond Fund. If the Reorganization is consummated, the
actual exchange ratios on the Closing Date may vary from the exchange
ratios indicated due to changes in the market value of the portfolio
securities of both Sovereign Bond Fund and Investment Quality Bond Fund
between December 31, 1994 and the Closing Date, changes in the amount
of undistributed net investment income and net realized capital gains
of Sovereign Bond Fund and Investment Quality Bond Fund during that
period resulting from income and distributions, and changes in the
accrued liabilities of Sovereign Bond Fund and Investment Quality Bond
Fund during the same period.
December 31, 1994
Investment
Quality Bond Sovereign Bond Pro Forma
Fund Fund Combined
Net Assets ................. $87,906,893 $1,366,356,991* $1,454,263,884
Net Asset Value Per Share:
Class A................... $8.05 $13 90 $13.90
Class B................... $8.05 $13.90 $13.90
Shares Outstanding:
Class A................... 10,060,420 95,399,448 101,227,726(1)
Class B................... 855,477 2,898,886 3,394,540(1)
(1) If the Reorganization had taken place on December 31, 1994,
Investment Quality Bond Fund would have received 5,828,278
Class A shares and 495,654 Class B shares of Sovereign Bond
Fund which would have been available for distribution to
shareholders of the applicable class of Investment Quality Bond
Fund. No assurance can be given as to the number of Class A
Shares or Class B shares of Sovereign Bond Fund that will be
received by Investment Quality
-25-
<PAGE>
Bond Fund on the Closing Date. The foregoing is merely an
example of what Investment Quality Bond Fund would have
received and distributed had the Reorganization been
consummated on December 31, 1994 and should not be relied upon
to reflect the amount that will actually be received on the
Closing Date.
* Excludes net assets of Class C shares of Sovereign Bond Fund,
which were outstanding on December 31, 1994.
COMPARATIVE PERFORMANCE INFORMATION
Total Return
The average annual total return at public offering price on
Investment Quality Bond Fund's Class A shares for the one-year,
five-year and ten-year periods ended December 31, 1994 was (10.21)%,
5.72% and 8.18%, respectively. The average annual total return on
Investment Quality Bond Fund's Class B shares for the one-year period
ended December 31, 1994 was (11.40)%. The average annual total return
on Investment Quality Bond Fund's Class B shares for the period from
June 30, 1993 (commencement of operations) through December 31, 1994
was (5.47)%. Total returns on Class B shares reflect the applicable
contingent sales charge.
The average annual total return at public offering price on
Sovereign Bond Fund's Class A shares for the one-year, five-year and
ten-year periods ended December 31, 1994 was (7.12)%, 6.90% and 9.28%,
respectively. The average annual total return on Sovereign Bond Fund's
Class B shares for the one-year period ended December 31, 1994 was
(7.97)%. The average annual total return on Sovereign Bond Fund's Class
B shares for the period from November 23, 1993 (commencement of
operations) through December 31, 1994 was (8.12)%. Total returns on
Class B shares reflect the applicable contingent deferred sales charge.
The average annual total return of each class of the Funds is
determined by multiplying a hypothetical initial investment of $1,000
in a class by the average annual compound rate of return (including
capital appreciation/depreciation, and dividends and distributions paid
and reinvested) attributable to that class for the stated period and
annualizing the result.
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<PAGE>
The table below indicates the total return (capital changes
plus reinvestment of all dividends and distributions) on a hypothetical
investment of $1,000 in each class of each Fund covering the indicated
periods ending December 31, 1994. The data below represent historical
performance which should not be considered indicative of future
performance of either Fund. Each Fund's performance and net asset value
will fluctuate such that shares, when redeemed, may be worth more or
less than their original cost.
-27-
<PAGE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK INVESTMENT QUALITY BOND FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Value of
Investment on
Dec. 31, 1994 Total Return Total Return
Investment Amount of Including Including Sales Charge Excluding Sales Charge
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares:
10 years ended
December 31, 1994 ................. 12/31/84 $1,000 $2,194 119.43% 8.18% 130.49% 8.71%
5 years ended
December 31, 1994 ................. 12/31/89 $1,000 $1,321 32.08% 5.72% 38.72% 6.76%
1 year ended
December 31, 1994 ................. 12/31/93 $1,000 $ 898 (10.21)% (10.21)% (5.73)% (5.73)%
Class B Shares:
From Inception
(June 30, 1993) to
December 31, 1994 ................. 6/30/93 $1,000 $ 919 (8.10)% (5.47)% (4.10)% (2.75)%
1 year ended
December 31, 1994 ................. 12/31/93 $1,000 $ 886 (11.40)% (11.40)% (6.40)% (6.40)%
</TABLE>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK SOVEREIGN BOND FUND
(UNAUDITED)
<TABLE>
<CAPTION>
Value of
Investment on
Dec. 31, 1994 Total Return Total Return
Investment Amount of Including Including Sales Charge Excluding Sales Charge
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares:
10 years ended
December 31, 1994 ................. 12/31/84 $1,000 $2,429 142.85% 9.28% 154.35% 9.79%
5 years ended
December 31, 1994 ................. 12/31/89 $1,000 $1,396 39.59% 6.90% 46.21% 7.89%
1 year ended
December 31, 1994 ................. 12/31/93 $1,000 $ 929 (7.12)% (7.12)% (2.75)% (2.75)%
Class B Shares:
1 year ended
December 31, 1994 ................. 12/31/93 $1,000 $ 920 (7.97)% (7.97)% (3.13)% (3.13)%
From Inception
(November 23, 1993) to
December 31, 1994 ................. 11/23/93 $1,000 $ 911 (8.90)% (8.12)% (5.12)% (4.65)%
</TABLE>
-28-
<PAGE>
BUSINESS OF SOVEREIGN BOND FUND
General
For a discussion of the organization and operation of Sovereign
Bond Fund, see "Investment Objectives and Policies" and "Organization
and Management of the Fund" in the Sovereign Bond Fund Prospectus.
Investment Objective And Policies
For a discussion of Sovereign Bond Fund's investment objectives
and policies, see "Investment Objectives and Policies" in the Sovereign
Bond Fund Prospectus.
Portfolio Management
Day-to-day management of Sovereign Bond Fund is carried out by
James Ho with the assistance of a co-manager and a team of credit
analysts. Mr. Ho is a Senior Vice President of the Adviser and directs
all taxable fixed-income investment management for the Adviser. Mr. Ho
has been associated with the Adviser since 1985. He will continue to
act as portfolio manager of Sovereign Bond Fund after the
Reorganization.
Trustees
For a discussion of the responsibilities of Sovereign Bond
Fund's Board of Trustees, see "Organization and Management of the Fund"
in the Sovereign Bond Fund Prospectus.
Investment Adviser And Distributor
For a discussion regarding Sovereign Bond Fund's investment
adviser and distributor, see "Organization and Management of the Fund,"
"How to Buy Shares" and "Share Price" in the Sovereign Bond Fund
Prospectus.
Expenses
For a discussion of Sovereign Bond Fund's expenses, see
"Expense Information" and "The Fund's Expenses" in the Sovereign
Bond Fund Prospectus.
Custodian And Transfer Agent
Sovereign Bond Fund's custodian is Investors Bank & Trust
Company. Sovereign Bond Fund's transfer agent is Investor Services.
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<PAGE>
Sovereign Bond Fund Shares
For a discussion of the Sovereign Bond Fund Shares, see
"Organization and Management of the Fund" in the Sovereign Bond Fund
Prospectus.
Purchase Of Sovereign Bond Fund Shares
For a discussion of how Class A and Class B shares of Sovereign
Bond Fund may be purchased or exchanged, see "How to Buy Shares,"
"Alternative Purchase Arrangements" and "Additional Services and
Programs" in the Sovereign Bond Fund Prospectus.
Redemption Of Sovereign Bond Fund Shares
For a discussion of how Class A and Class B shares of Sovereign
Bond Fund may be redeemed, see "How to Redeem Shares" in the Sovereign
Bond Fund Prospectus. Former shareholders of Investment Quality Bond
Fund whose shares are represented by share certificates will be
required to surrender their certificates for cancellation or deliver an
affidavit of loss accompanied by an adequate surety bond to Investor
Services in order to redeem Sovereign Bond Fund Shares received in the
Reorganization.
Dividends, Distributions And Taxes
For a discussion of Sovereign Bond Fund's policy with respect
to dividends, distributions and taxes, see "Dividends and Taxes" in the
Sovereign Bond Fund Prospectus.
BUSINESS OF INVESTMENT QUALITY BOND FUND
General
For a discussion of the organization and operation of
Investment Quality Bond Fund, see "Investment Objective and Policies"
and "Organization and Management of the Fund" in the Investment Quality
Bond Fund Prospectus.
Investment Objective And Policies
For a discussion of Investment Quality Bond Fund's investment
objectives and policies, see "Investment Objective and Policies" in the
Investment Quality Bond Fund Prospectus.
-30-
<PAGE>
Portfolio Management
All investment decisions for Investment Quality Bond Fund
are made by Mr. James Ho. For a description of Mr. Ho's business
experience, see "Business of Sovereign Bond Fund--Portfolio
Management" above.
Trustees
For a discussion of the responsibilities of the Board of
Trustees, see "Organization and Management of the Fund" in the
Investment Quality Bond Fund Prospectus.
Investment Adviser And Distributor
For a discussion regarding Investment Quality Bond Fund's
investment adviser and distributor, see "Organization and Management of
the Fund," "How to Buy Shares" and "Share Price" in the Investment
Quality Bond Fund Prospectus.
Expenses
For a discussion of the Investment Quality Bond Fund's
expenses, see "Expense Information" and "The Fund's Expenses" in the
Investment Quality Bond Fund Prospectus.
Custodian And Transfer Agent
Investment Quality Bond Fund's custodian is Investors Bank &
Trust Company. Investment Quality Bond Fund's transfer agent is
Investor Services.
Investment Quality Bond Fund Shares
For a discussion of Investment Quality Bond Fund's shares of
beneficial interest, see "Organization and Management of the Fund" in
the Investment Quality Bond Fund Prospectus.
Purchase Of Investment Quality Bond Fund Shares
For a discussion of how shares of Investment Quality Bond Fund
may be purchased or exchanged, see "How to Buy Shares," "Alternative
Purchase Arrangements" and "Additional Services and Programs" in the
Investment Quality Bond Fund Prospectus. In anticipation of the
Reorganization, Investment Quality Bond Fund has stopped offering its
shares to all investors other than existing shareholders.
-31-
<PAGE>
Redemption Of Investment Quality Bond Fund Shares
For a discussion of how Class A and Class B shares of
Investment Quality Bond Fund may be redeemed (other than in the
Reorganization), see "How to Redeem Shares" in the Investment Quality
Bond Fund Prospectus. Investment Quality Bond Fund shareholders whose
shares are represented by share certificates will be required to
surrender their certificates for cancellation or deliver an affidavit
of loss accompanied by an adequate surety bond to Investor Services in
order to redeem Sovereign Bond Fund Shares received in the
Reorganization.
Dividends, Distributions And Taxes
For a discussion of the Investment Quality Bond Fund's policy
with respect to dividends, distributions and taxes, see "Distributions
and Taxes" in the Investment Quality Bond Fund Prospectus.
EXPERTS
The respective financial statements and the respective
financial highlights of Sovereign Bond Fund and Investment Quality Bond
Fund as of December 31, 1994 and March 31, 1995, respectively, and for
the respective fiscal years then ended, incorporated by reference into
this Proxy Statement and Prospectus, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their respective reports
thereon appearing in the Statement of Additional Information, and are
included in reliance upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and the Investment Company Act, and in
accordance therewith files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other
information filed by Sovereign Bond Fund and the Trust, on behalf of
Investment Quality Bond Fund, can be inspected and copied (at
prescribed rates) at the public reference facilities of the SEC at 450
Fifth Street, N.W., Washington, D.C., and at the following regional
offices: Chicago (500 West Madison Street, Suite 1400, Chicago,
Illinois); and New York (7 World Trade Center, Suite 1300, New York,
New York). Copies of such material can also be obtained by mail from
the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
-32-
<PAGE>
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement")
is made this __ day of __________, 1995, by and between John
Hancock Sovereign Bond Fund (the "Acquiring Fund"), a
Massachusetts business trust, and John Hancock Investment Quality
Bond Fund (the "Acquired Fund"), a series of John Hancock Bond
Fund (the "Trust"), a Massachusetts business trust. The principal
place of business of the Acquiring Fund and the Trust is
101 Huntington Avenue, Boston, Massachusetts 02199. The Acquiring
Fund and the Acquired Fund are sometimes referred to collectively
herein as the "Funds" and individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of
"reorganization," as such term is used in Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization will consist of the transfer of all of the assets
of the Acquired Fund to the Acquiring Fund in exchange solely for
the issuance of Class A and Class B shares of beneficial interest
of the Acquiring Fund (the "Acquiring Fund Shares") to the
Acquired Fund and the assumption by the Acquiring Fund of all of
the liabilities of the Acquired Fund, followed by the distribution
by the Acquired Fund, on or promptly after the Closing Date
hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Acquired Fund in liquidation and termination
of the Acquired Fund as provided herein, all upon the terms and
conditions set forth in this Agreement.
In consideration of the premises of the covenants and
agreements hereinafter set forth, the parties hereto covenant and
agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR
ASSUMPTION OF LIABILITIES AND ISSUANCE OF ACQUIRING FUND
SHARES; LIQUIDATION OF THE ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets
(consisting, without limitation, of portfolio securities and
instruments, dividends and interest receivables, cash and other
assets), as set forth in the statement of assets and liabilities
referred to in Paragraph 7.2 hereof (the "Statement of Assets and
Liabilities"), to the Acquiring Fund free and clear of all liens
and encumbrances, except as otherwise provided herein, in exchange
for (i) the assumption by the Acquiring Fund of the known and
unknown liabilities of the Acquired Fund, including the
liabilities set forth in the Statement of Assets and Liabilities
(the "Acquired Fund Liabilities"), which shall be assigned and
transferred to the Acquiring Fund by the Acquired Fund and assumed
<PAGE>
by the Acquiring Fund, and (ii) delivery by the Acquiring Fund to
the Acquired Fund, for distribution pro rata by the Acquired Fund
to its Class A and Class B shareholders in proportion to their
respective ownership of Class A and/or Class B shares of
beneficial interest of the Acquired Fund, as of the close of
business on the closing date (the "Closing Date"), of a number of
the Acquiring Fund Shares having an aggregate net asset value
equal to the value of the assets, less such liabilities (herein
referred to as the "net value of the assets"), of the Acquired
Fund so transferred, assumed, assigned and delivered, all
determined as provided in Paragraph 2.1 hereof and as of a date
and time as specified therein. Such transactions shall take place
at the closing provided for in Paragraph 3.1 hereof (the
"Closing"). All computations shall be provided by Investors Bank
& Trust Company (the "Custodian"), as custodian and pricing agent
for the Acquiring Fund and the Acquired Fund, and shall be
recomputed by Ernst & Young LLP, the independent accountants of
the Acquiring Fund. The determination of the Custodian, as
recomputed by said accountants, shall, absent manifest error, be
conclusive and binding on all parties in interest.
1.2 The Acquired Fund has provided the Acquiring Fund with a
list of the current securities holdings of the Acquired Fund as of
the date of execution of this Agreement. The Acquired Fund
reserves the right to sell any of these securities (except to the
extent sales may be limited by representations made in connection
with issuance of the tax opinion provided for in Paragraph 8.6
hereof) but will not, without the prior approval of the Acquiring
Fund, acquire any additional securities other than securities of
the type in which the Acquiring Fund is permitted to invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear
its own expenses in connection with the transactions contemplated
by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently
practicable (the "Liquidation Date"), the Acquired Fund will
liquidate and distribute pro rata to shareholders of record of the
applicable class (the "Acquired Fund shareholders"), determined as
of the close of regular trading on the New York Stock Exchange on
the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation
and distribution will be accomplished by the transfer of the
Acquiring Fund Shares then credited to the account of the Acquired
Fund on the books of the Acquiring Fund, to open accounts on the
share records of the Acquiring Fund in the names of the Acquired
Fund shareholders and representing the respective pro rata number
and class of Acquiring Fund Shares due such shareholders.
Acquired Fund shareholders who own Class A shares of the Acquired
2
<PAGE>
Fund will receive Class A Acquiring Fund Shares, and Acquired Fund
shareholders who own Class B shares of the Acquired Fund will
receive Class B Acquiring Fund Shares. The Acquiring Fund shall
not issue certificates representing Acquiring Fund Shares in
connection with such exchange.
1.5 The Acquired Fund shareholders holding certificates
representing their ownership of shares of beneficial interest of
the Acquired Fund shall surrender such certificates or deliver an
affidavit with respect to lost certificates in such form and
accompanied by such surety bonds as the Acquired Fund may require
(collectively, an "Affidavit"), to John Hancock Investor Services
Corporation prior to the Closing Date. Any Acquired Fund share
certificate which remains outstanding on the Closing Date shall be
deemed to be cancelled, shall no longer evidence ownership of
shares of beneficial interest of the Acquired Fund and shall
evidence ownership of Acquiring Fund Shares. Unless and until any
such certificate shall be so surrendered or an Affidavit relating
thereto shall be delivered, dividends and other distributions
payable by the Acquiring Fund subsequent to the Liquidation Date
with respect to Acquiring Fund Shares shall be paid to the holder
of such certificate(s), but such shareholders may not redeem or
transfer Acquiring Fund Shares received in the Reorganization.
The Acquiring Fund will not issue share certificates in the
Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring
Fund Shares in a name other than the registered holder of the
Acquiring Fund Shares on the books of the Acquired Fund as of that
time shall, as a condition of such issuance and transfer, be paid
by the person to whom such Acquiring Fund Shares are to be issued
and transferred.
1.7 The existence of the Acquired Fund shall be terminated
as promptly as practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Trust with respect
to the Acquired Fund, including, but not limited to, the
responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commissions, and any federal,
state or local tax authorities or any other relevant regulatory
authority, is and shall remain the responsibility of the Trust.
2. VALUATION
2.1 The net asset values of the Class A and Class B
Acquiring Fund Shares and the net values of the assets of the
Acquired Fund attributable to its Class A and Class B shares to be
3
<PAGE>
transferred shall in each case be determined as of the close of
business (4:00 p.m. Boston time) on the Closing Date. The net
asset values of the Class A and Class B Acquiring Fund Shares
shall be computed by the Custodian in the manner set forth in the
Acquiring Fund's Declaration of Trust, as amended and restated, or
By-laws and the Acquiring Fund's then-current prospectus and
statement of additional information and shall be computed in each
case to not fewer than four decimal places. The net values of the
assets of the Acquired Fund attributable to its Class A and Class
B shares to be transferred shall be computed by the Custodian by
calculating the value of the assets of each class transferred by
the Acquired Fund and by subtracting therefrom the amount of the
liabilities of each respective class assigned and transferred to
and assumed by the Acquiring Fund on the Closing Date, said assets
and liabilities to be valued in the manner set forth in the
Acquired Fund's then-current prospectus and statement of
additional information and shall be computed in each case to not
fewer than four decimal places.
2.2 The number of shares of each class of Acquiring Fund
Shares to be issued (including fractional shares, if any) in
exchange for the Acquired Fund's assets shall be determined by
dividing the value of the Acquired Fund's assets attributable to a
class, less the liabilities attributable to that class assumed by
the Acquiring Fund, by the Acquiring Fund's net asset value per
share of the same class, all as determined in accordance with
Paragraph 2.1 hereof.
2.3 All computations of value shall be made by the Custodian
in accordance with its regular practice as pricing agent for the
Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be September 8, 1995 or such
other date on or before December 31, 1995, as the parties may
agree in writing. The Closing shall be held as of 5:00 p.m. at
the offices of the Acquiring Fund and the Trust, 101 Huntington
Avenue, Boston, Massachusetts 02199, or at such other time and/or
place as the parties may agree in writing.
3.2 Portfolio securities that are not held in book-entry
form in the name of the Custodian as record holder for the
Acquired Fund shall be presented by the Acquired Fund to the
Custodian for examination no later than five business days
preceding the Closing Date. Portfolio securities which are not
held in book-entry form shall be delivered by the Acquired Fund to
the Custodian for the account of the Acquiring Fund on the Closing
Date, duly endorsed in proper form for transfer, in such condition
4
<PAGE>
as to constitute good delivery thereof in accordance with the
custom of brokers, and shall be accompanied by all necessary
federal and state stock transfer stamps or a check for the
appropriate purchase price thereof. Portfolio securities held of
record by the Custodian in book-entry form on behalf of the
Acquired Fund shall be delivered to the Acquiring Fund by the
Custodian by recording the transfer of beneficial ownership
thereof on its records. The cash delivered shall be in the form
of currency or by the Custodian crediting the Acquiring Fund's
account maintained with the Custodian with immediately available
funds.
3.3 In the event that on the Closing Date (a) the New York
Stock Exchange shall be closed to trading or trading thereon shall
be restricted or (b) trading or the reporting of trading on said
Exchange or elsewhere shall be disrupted so that accurate
appraisal of the value of the net assets of the Acquiring Fund or
the Acquired Fund is impracticable, the Closing Date shall be
postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been
restored; provided that if trading shall not be fully resumed and
reporting restored on or before December 31, 1995, this Agreement
may be terminated by the Acquiring Fund or by the Acquired Fund
upon the giving of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of
the names, addresses, federal taxpayer identification numbers and
backup withholding and nonresident alien withholding status of the
Acquired Fund shareholders and the number of outstanding shares of
each class of beneficial interest of the Acquired Fund owned by
each such shareholder, all as of the close of business on the
Closing Date, certified by its Treasurer, Secretary or other
authorized officer (the "Shareholder List"). The Acquiring Fund
shall issue and deliver to the Acquired Fund a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing
Date, or provide evidence satisfactory to the Acquired Fund that
such Acquiring Fund Shares have been credited to the Acquired
Fund's account on the books of the Acquiring Fund. At the
Closing, each party shall deliver to the other such bills of sale,
checks, assignments, stock certificates, receipts or other
documents as such other party or its counsel may reasonably
request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust on behalf of the Acquired Fund represents,
warrants and covenants to the Acquiring Fund as follows:
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(a) The Trust is a business trust duly organized,
validly existing and in good standing under the laws of The
Commonwealth of Massachusetts and has the power to own all of
its properties and assets and, subject to approval by the
shareholders of the Acquired Fund, to carry out the
transactions contemplated by this Agreement. Neither the
Trust nor the Acquired Fund is required to qualify to do
business in any jurisdiction in which it is not so qualified
or where failure to qualify would not subject it to any
material liability or disability. The Trust has all
necessary federal, state and local authorizations to own all
of its properties and assets and to carry on its business as
now being conducted;
(b) The Trust is a registered investment company
classified as a management company and its registration with
the Commission as an investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), is in full
force and effect. The Acquired Fund is a diversified series
of the Trust;
(c) The Trust and the Acquired Fund are not, and the
execution, delivery and performance of their obligations
under this Agreement will not result, in violation of any
provision of the Trust's Declaration of Trust, as amended and
restated, or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the
Trust or the Acquired Fund is a party or by which it is
bound;
(d) Except as otherwise disclosed in writing and
accepted by the Acquiring Fund, no material litigation or
administrative proceeding or investigation of or before any
court or governmental body is currently pending or threatened
against the Trust or the Acquired Fund or any of the Acquired
Fund's properties or assets. The Trust knows of no facts
which might form the basis for the institution of such
proceedings, and neither the Trust nor the Acquired Fund is a
party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially
and adversely affects the Acquired Fund's business or its
ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or
other commitments (other than this Agreement or agreements
for the purchase of securities entered into in the ordinary
course of business and consistent with its obligations under
this Agreement) which will not be terminated without
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<PAGE>
liability to the Acquired Fund at or prior to the Closing
Date;
(f) The statement of assets and liabilities, including
the schedule of investments, of the Acquired Fund as of
March 31, 1995, the related statement of operations for the
year then ended, and the statement of changes in net assets
for the years ended March 31, 1995 and 1994 (audited by Ernst
& Young LLP) (copies of which have been furnished to the
Acquiring Fund) present fairly in all material respects the
financial condition of the Acquired Fund as of March 31,
1995, and the results of its operations and changes in net
assets for the respective stated periods in accordance with
generally accepted accounting principles consistently
applied, and there were no actual or contingent liabilities
of the Acquired Fund as of March 31, 1995 not disclosed
therein;
(g) Since March 31, 1995, there has not been any
material adverse change in the Acquired Fund's financial
condition, assets, liabilities, or business other than
changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more
than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by the
Acquiring Fund;
(h) At the date hereof and by the Closing Date, all
federal, state and other tax returns and reports, including
information returns and payee statements, of the Acquired
Fund required by law to have been filed or furnished by such
dates shall have been filed or furnished, and all federal,
state and other taxes, interest and penalties shall have been
paid so far as due, or provision shall have been made for the
payment thereof, and to the best of the Acquired Fund's
knowledge no such return is currently under audit and no
assessment has been asserted with respect to such returns or
reports;
(i) The Acquired Fund has elected to be treated as a
regulated investment company for federal income tax purposes,
has qualified as such for each taxable year of its operation
and will qualify as such as of the Closing Date with respect
to its final taxable year ending on the Closing Date;
(j) The authorized capital of the Trust consists of an
unlimited number of shares of beneficial interest, $0.01 par
value per share. All issued and outstanding shares of
beneficial interest of the Acquired Fund are, and at the
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Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Trust. All
of the issued and outstanding shares of beneficial interest
of the Acquired Fund will, at the time of Closing, be held by
the persons and in the amounts and classes set forth in the
Shareholder List submitted to the Acquiring Fund pursuant to
Paragraph 3.4 hereof. The Acquired Fund does not have
outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares of beneficial
interest, nor is there outstanding any security convertible
into any of its shares of beneficial interest;
(k) At the Closing Date, the Acquired Fund will have
good and marketable title to the assets to be transferred to
the Acquiring Fund pursuant to Paragraph 1.1 hereof, and full
right, power and authority to sell, assign, transfer and
deliver such assets hereunder, and upon delivery and payment
for such assets, the Acquiring Fund will acquire good and
marketable title thereto subject to no restrictions on the
full transfer thereof, including such restrictions as might
arise under the Securities Act of 1933, as amended (the "1933
Act");
(l) The execution, delivery and performance of this
Agreement have been duly authorized by all necessary action
on the part of the Trust on behalf of the Acquired Fund, and
this Agreement constitutes a valid and binding obligation of
the Trust and the Acquired Fund enforceable in accordance
with its terms, subject to the approval of the Acquired
Fund's shareholders;
(m) The information to be furnished by the Acquired
Fund to the Acquiring Fund for use in applications for
orders, registration statements, proxy materials and other
documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and
complete and shall comply in all material respects with
federal securities and other laws and regulations thereunder
applicable thereto;
(n) The proxy statement of the Acquired Fund
(the "Proxy Statement") to be included in the Registration
Statement referred to in Paragraph 5.7 hereof (other than
written information furnished by the Acquiring Fund for
inclusion therein, as covered by the Acquiring Fund's
warranty in Paragraph 4.2(m) hereof), on the effective date
of the Registration Statement, on the date of the meeting of
the Acquired Fund shareholders and on the Closing Date, shall
not contain any untrue statement of a material fact or omit
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to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which such statements were made, not
misleading;
(o) No consent, approval, authorization or order of any
court or governmental authority is required for the
consummation by the Acquired Fund of the transactions
contemplated by this Agreement;
(p) All of the issued and outstanding shares of
beneficial interest of the Acquired Fund have been offered
for sale and sold in conformity with all applicable federal
and state securities laws;
(q) The prospectus of the Acquired Fund, dated May 15,
1995 (the "Acquired Fund Prospectus"), previously furnished
to the Acquiring Fund, does not contain any untrue statements
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were
made, not misleading.
4.2 The Acquiring Fund represents, warrants and covenants to
the Acquired Fund as follows:
(a) The Acquiring Fund is a business trust duly
organized, validly existing and in good standing under The
laws of the Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry out the
Agreement. The Acquiring Fund is not required to qualify to
do business in any jurisdiction in which it is not so
qualified or where failure to qualify would not subject it to
any material liability or disability. The Acquiring Fund has
all necessary federal, state and local authorizations to own
all of its properties and assets and to carry on its business
as now being conducted;
(b) The Acquiring Fund is a registered investment
company classified as a management company and its
registration with the Commission as an investment company
under the 1940 Act is in full force and effect. The
Acquiring Fund is a diversified investment company under the
1940 Act;
(c) The prospectus (the "Acquiring Fund Prospectus")
and statement of additional information for Class A and
Class B shares of the Acquiring Fund, each dated May 1, 1995,
and any amendments or supplements thereto on or prior to the
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<PAGE>
Closing Date, and the Registration Statement on Form N-14 to
be filed in connection with this Agreement (the "Registration
Statement") (other than written information furnished by the
Acquired Fund for inclusion therein, as covered by the
Acquired Fund's warranty in Paragraph 4.1(m) hereof) will
conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder, the Acquiring
Fund Prospectus does not include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading and the Registration Statement will not
include any untrue statement of material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(d) At the Closing Date, the Acquiring Fund will have
good and marketable title to the assets of the Acquiring
Fund;
(e) The Acquiring Fund is not, and the execution,
delivery and performance its obligations under this Agreement
will not result, in violation of any provisions of the
Acquiring Fund's Declaration of Trust, as amended and
restated, or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the
Acquiring Fund is a party or by which the Acquiring Fund is
bound;
(f) Except as otherwise disclosed in writing and
accepted by the Acquired Fund, no material litigation or
administrative proceeding or investigation of or before any
court or governmental body is currently pending or threatened
against the Acquiring Fund or any of the Acquiring Fund's
properties or assets. The Acquiring Fund knows of no facts
which might form the basis for the institution of such
proceedings, and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of
any court or governmental body which materially and adversely
affects the Acquiring Fund's business or its ability to
consummate the transactions herein contemplated;
(g) The statement of assets and liabilities of the
Acquiring Fund, as of June 30, 1995, and the related
statement of operations for the period then ended and the
schedule of investments (unaudited) (copies of which have
been furnished to the Acquired Fund), present fairly in all
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<PAGE>
material respects the financial position of the Acquiring
Fund as of June 30, 1995 and the results of its operations
for the period then ended in accordance with generally
accepted accounting principles consistently applied and there
are no known actual or contingent liabilities of the
Acquiring Fund as of the respective dates thereof not
disclosed herein;
(h) Since June 30, 1995, there has not been any
material adverse change in the Acquiring Fund's financial
condition, assets, liabilities or business other than changes
occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing
more than one year from the date such indebtedness was
incurred;
(i) The Acquiring Fund has elected to be treated as a
regulated investment company for federal income tax purposes,
has qualified as such for each taxable year of its operation
and will qualify as such as of the Closing Date;
(j) The authorized capital of the Acquiring Fund
consists of an unlimited number of shares of beneficial
interest, no par value per share. All issued and outstanding
shares of beneficial interest of the Acquiring Fund are, and
at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Acquiring
Fund. The Acquiring Fund does not have outstanding any
options, warrants or other rights to subscribe for or
purchase any of its shares of beneficial interest, nor is
there outstanding any security convertible into any of its
shares of beneficial interest;
(k) The execution, delivery and performance of this
Agreement have been duly authorized by all necessary action
on the part of the Acquiring Fund, and this Agreement
constitutes a valid and binding obligation of the Acquiring
Fund enforceable in accordance with its terms;
(l) The Acquiring Fund Shares to be issued and
delivered to the Acquired Fund pursuant to the terms of this
Agreement, when so issued and delivered, will be duly and
validly issued shares of beneficial interest of the Acquiring
Fund and will be fully paid and nonassessable by the
Acquiring Fund;
(m) The information to be furnished by the Acquiring
Fund for use in applications for orders, registration
statements, proxy materials and other documents which may be
11
<PAGE>
necessary in connection with the transactions contemplated
hereby shall be accurate and complete and shall comply in all
material respects with federal securities and other laws and
regulations applicable thereto; and
(n) No consent, approval, authorization or order of any
court or governmental authority is required for the
consummation by the Acquiring Fund of the transactions
contemplated by the Agreement, except for the registration of
the Acquiring Fund Shares under the 1933 Act, the 1940 Act
and under state securities laws.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary,
the Acquiring Fund and the Trust on behalf of the Acquired Fund
will operate their respective businesses in the ordinary course
between the date hereof and the Closing Date, it being understood
that such ordinary course of business will include customary
dividends and distributions and any other distributions necessary
or desirable to avoid federal income or excise taxes.
5.2 The Trust will call a meeting of the Acquired Fund
shareholders to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund
Shares to be issued hereunder are not being acquired by the
Acquired Fund for the purpose of making any distribution thereof
other than in accordance with the terms of this Agreement.
5.4 The Trust on behalf of the Acquired Fund will provide
such information within its possession or reasonably obtainable as
the Acquiring Fund requests concerning the beneficial ownership of
the Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the
Acquiring Fund and the Acquired Fund each shall take, or cause to
be taken, all action, and do or cause to be done, all things
reasonably necessary, proper or advisable to consummate the
transactions contemplated by this Agreement.
5.6 The Trust on behalf of the Acquired Fund shall furnish
to the Acquiring Fund on the Closing Date the Statement of Assets
and Liabilities of the Acquired Fund as of the Closing Date, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified
by the Trust's Treasurer or Assistant Treasurer. As promptly as
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<PAGE>
practicable but in any case within 60 days after the Closing Date,
the Acquired Fund shall furnish to the Acquiring Fund, in such
form as is reasonably satisfactory to the Acquiring Fund, a
statement of the earnings and profits of the Acquired Fund for
federal income tax purposes and of any capital loss carryovers and
other items that will be carried over to the Acquiring Fund as a
result of Section 381 of the Code, and which statement will be
certified by the President of the Acquired Fund.
5.7 The Acquiring Fund will prepare and file with the
Commission the Registration Statement in compliance with the 1933
Act and the 1940 Act in connection with the issuance of the
Acquiring Fund Shares as contemplated herein.
5.8 The Trust on behalf of the Acquired Fund will prepare a
Proxy Statement, to be included in the Registration Statement in
compliance with the 1933 Act, the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the 1940 Act and the rules and
regulations thereunder (collectively, the "Acts") in connection
with the special meeting of shareholders of the Acquired Fund to
consider approval of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF
THE ACQUIRED FUND
The obligations of the Trust on behalf of the Acquired Fund
to complete the transactions provided for herein shall be, at its
election, subject to the performance by the Acquiring Fund of all
the obligations to be performed by it hereunder on or before the
Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of
the Closing Date with the same force and effect as if made on and
as of the Closing Date; and
6.2 The Acquiring Fund shall have delivered to the Acquired
Fund a certificate executed in its name by the Acquiring Fund's
President or Vice President and its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Acquired Fund
and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Fund made in this
Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by
this Agreement, and as to such other matters as the Trust on
behalf of the Acquired Fund shall reasonably request.
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<PAGE>
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the
transactions provided for herein shall be, at its election,
subject to the performance by the Trust on behalf of the Acquired
Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following
further conditions:
7.1 All representations and warranties of the Trust on
behalf of the Acquired Fund contained in this Agreement shall be
true and correct in all material respects as of the date hereof
and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date;
7.2 The Trust on behalf of the Acquired Fund shall have
delivered to the Acquiring Fund the Statement of Assets and
Liabilities of the Acquired Fund, together with a list of its
portfolio securities showing the federal income tax bases and
holding periods of such securities, as of the Closing Date,
certified by the Treasurer or Assistant Treasurer of the Trust;
7.3 The Trust on behalf of the Acquired Fund shall have
delivered to the Acquiring Fund on the Closing Date a certificate
executed in the name of the Acquired Fund by a President or Vice
President and a Treasurer or Assistant Treasurer of the Trust, in
form and substance satisfactory to the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and
warranties of the Trust on behalf of the Acquired Fund in this
Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by
this Agreement, and as to such other matters as the Acquiring Fund
shall reasonably request; and
7.4 At or prior to the Closing Date, the Acquired Fund's
investment adviser, or an affiliate thereof, shall have made all
payments, or applied all credits, to the Acquired Fund required by
any applicable contractual or state-imposed expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST, THE
ACQUIRING FUND AND THE ACQUIRED FUND
The obligations hereunder of the Trust, the Acquiring Fund
and the Acquired Fund are each subject to the further conditions
that on or before the Closing Date:
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<PAGE>
8.1 The Agreement and the transactions contemplated herein
shall have been approved by the requisite vote of the holders of
the outstanding shares of beneficial interest of the Acquired Fund
in accordance with the provisions of the Trust's Declaration of
Trust, as amended and restated, and By-Laws, and certified copies
of the resolutions evidencing such approval by the Acquired Fund's
shareholders shall have been delivered by the Acquired Fund to the
Acquiring Fund;
8.2 On the Closing Date, no action, suit or other proceeding
shall be pending before any court or governmental agency in which
it is sought to restrain or prohibit, or obtain changes or other
relief in connection with, this Agreement or the transactions
contemplated herein;
8.3 All consents of other parties and all other consents,
orders and permits of federal, state and local regulatory
authorities (including those of the Commission and of state Blue
Sky and securities authorities, including "no-action" positions of
such federal or state authorities) deemed necessary by the Trust
or the Acquiring Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order
or permit would not involve a risk of a material adverse effect on
the assets or properties of the Acquiring Fund or the Acquired
Fund, provided that either party hereto may waive any such
conditions for itself;
8.4 The Registration Statement shall have become effective
under the 1933 Act and the 1940 Act and no stop orders suspending
the effectiveness thereof shall have been issued and, to the best
knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its
shareholders all of its investment company taxable income (as
defined in Section 852(b)(2) of the Code) for its taxable year
ending on the Closing Date and all of its net capital gain (as
such term is used in Section 852(b)(3)(C) of the Code), after
reduction by any available capital loss carryforward, for its
taxable year ending on the Closing Date; and
8.6 The parties shall have received an opinion of
Messrs. Hale and Dorr, satisfactory to the Acquiring Fund and the
Trust on behalf of the Acquired Fund, substantially to the effect
that for federal income tax purposes:
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<PAGE>
(a) The acquisition by the Acquiring Fund of all of the
assets of the Acquired Fund solely in exchange for the
issuance of Acquiring Fund Shares to the Acquired Fund and
the assumption of all of the Acquired Fund Liabilities by the
Acquiring Fund, followed by the distribution by the Acquired
Fund, in liquidation of the Acquired Fund, of Acquiring Fund
Shares to the shareholders of the Acquired Fund in exchange
for their shares of beneficial interest of the Acquired Fund
and the termination of the Acquired Fund, will constitute a
reorganization within the meaning of Section 368(a) of the
Code, and the Acquired Fund and the Acquiring Fund will each
be "a party to a reorganization" within the meaning of
Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired
Fund upon (i) the transfer of all of its assets to the
Acquiring Fund solely in exchange for the issuance of
Acquiring Fund Shares to the Acquired Fund and the assumption
of all of the Acquired Fund Liabilities by the Acquiring Fund
and (ii) the distribution by the Acquired Fund of such
Acquiring Fund Shares to the shareholders of the Acquired
Fund;
(c) No gain or loss will be recognized by the Acquiring
Fund upon the receipt of the assets of the Acquired Fund
solely in exchange for the issuance of the Acquiring Fund
Shares to the Acquired Fund and the assumption of all of the
Acquired Fund Liabilities by the Acquiring Fund;
(d) The basis of the assets of the Acquired Fund
acquired by the Acquiring Fund will be, in each instance, the
same as the basis of those assets in the hands of the
Acquired Fund immediately prior to the transfer;
(e) The tax holding period of the assets of the
Acquired Fund in the hands of the Acquiring Fund will, in
each instance, include the Acquired Fund's tax holding period
for those assets;
(f) The shareholders of the Acquired Fund will not
recognize gain or loss upon the exchange of all of their
shares of beneficial interest of the Acquired Fund solely for
Acquiring Fund Shares as part of the transaction;
(g) The basis of the Acquiring Fund Shares received by
the Acquired Fund shareholders in the transaction will be the
same as the basis of the shares of beneficial interest of the
Acquired Fund surrendered in exchange therefor; and
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<PAGE>
(h) The tax holding period of the Acquiring Fund Shares
received by the Acquired Fund shareholders will include, for
each shareholder, the tax holding period for his shares of
beneficial interest of the Acquired Fund surrendered in
exchange therefor, provided that such Acquired Fund shares
were held as capital assets on the date of the exchange.
The Acquiring Fund and the Trust on behalf of the Acquired
Fund agree to make and provide representations which are
reasonably necessary to enable Hale and Dorr to deliver an opinion
substantially as set forth in this Paragraph 8.6. Notwithstanding
anything herein to the contrary, neither the Trust nor the
Acquiring Fund may waive the conditions set forth in this
Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Trust on behalf of the
Acquired Fund represent and warrant to the other that there are no
brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be
liable solely for its own expenses incurred in connection with
entering into and carrying out the provisions of this Agreement
whether or not the transactions contemplated hereby are
consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Trust on behalf of the
Acquired Fund agree that neither party has made any
representation, warranty or covenant not set forth herein or
referred to in Paragraph 4 hereof and that this Agreement
constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained
in this Agreement or in any document delivered pursuant hereto or
in connection herewith shall survive the consummation of the
transactions contemplated hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual
agreement of the Trust and the Acquiring Fund. In addition,
either party may at its option terminate this Agreement at or
prior to the Closing Date:
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(a) because of a material breach by the other of any
representation, warranty, covenant or agreement contained
herein to be performed at or prior to the Closing Date;
(b) because of a condition herein expressed to be
precedent to the obligations of the terminating party which
has not been met and which reasonably appears will not or
cannot be met;
(c) by resolution of the Trust's Board of Trustees if
circumstances should develop that, in the good faith opinion
of such Board, make proceeding with the Agreement not in the
best interest of the Acquired Fund's shareholders; or
(d) by resolution of the Acquiring Fund's Board of
Trustees if circumstances should develop that, in the good
faith opinion of such Board, make proceeding with the
Agreement not in the best interest of the Acquiring Fund's
shareholders.
11.2 In the event of any such termination, there shall be no
liability for damages on the part of the Trust, the Acquiring Fund
or the Acquired Fund, or the Trustees or officers of the Trust or
the Acquiring Fund, but each party shall bear the expenses
incurred by it incidental to the preparation and carrying out of
this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in
such manner as may be mutually agreed upon in writing by the
authorized officers of the Trust and the Acquiring Fund. However,
following the meeting of shareholders of the Acquired Fund held
pursuant to Paragraph 5.2 of this Agreement, no such amendment may
have the effect of changing the provisions regarding the method
for determining the number of Acquiring Fund Shares to be received
by the Acquired Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval;
provided that nothing contained in this Article 12 shall be
construed to prohibit the parties from amending this Agreement to
change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted
by any provisions of this Agreement shall be in writing and shall
be given by prepaid telegraph, telecopy or certified mail
addressed to the Acquiring Fund or to the Trust, each at
101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
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President, and, in either case, with copies to Hale and Dorr,
60 State Street, Boston, Massachusetts 02109, Attention:
Pamela J. Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
14.2 This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors and assigns,
but no assignment or transfer hereof or of any rights or
obligations hereunder shall be made by any party without the prior
written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies
under or by reason of this Agreement.
14.5 All persons dealing with the Trust or the Acquiring
Fund must look solely to the property of the Trust or the
Acquiring Fund, respectively, for the enforcement of any claims
against the Trust or the Acquiring Fund as neither the Trustees,
officers, agents or shareholders of the Trust or the Acquiring
Fund assume any personal liability for obligations entered into on
behalf of the Trust or the Acquiring Fund, respectively. None of
the other series of the Trust shall be responsible for any
obligations assumed by or on behalf of the Acquired Fund under
this Agreement.
19
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed by its President or Vice President
and attested by its Secretary or Assistant Secretary and has
caused its corporate seal to be affixed hereto.
JOHN HANCOCK SOVEREIGN BOND FUND
By:--------------------------------
Name:------------------------------
Title:-----------------------------
JOHN HANCOCK BOND FUND, on behalf of
JOHN HANCOCK INVESTMENT QUALITY BOND
FUND
By:--------------------------------
Name:------------------------------
Title:-----------------------------
20
<PAGE>
EXHIBIT B
John Hancock
Sovereign
Bond Fund
Class A and Class B Shares
Prospectus
May 1, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Expense Information 2
The Fund's Financial Highlights 3
Investment Objective and Policies 5
Organization and Management of the Fund 9
Alternative Purchase Arrangements 10
The Fund's Expenses 11
Dividends and Taxes 12
Performance 13
How to Buy Shares 14
Share Price 15
How to Redeem Shares 20
Additional Services and Programs 22
Institutional Investors 25
Appendix 26
</TABLE>
This Prospectus sets forth information about John Hancock Sovereign Bond Fund
(the "Fund") a diversified fund, that you should know before investing. Please
read and retain it for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Fund's Statement
of Additional Information, dated May 1, 1995, and incorporated by reference in
this Prospectus, free of charge by writing or telephoning: John Hancock
Investor Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291, (1-800-554-6713 TDD).
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
THE FUND MAY INVEST UP TO 35% OF ITS ASSETS IN LOWER RATED BONDS, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN
THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING. SEE "INVESTMENT OBJECTIVE AND POLICIES, P. 5."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
The purpose of the following information is to help you understand the various
fees and expenses that you will bear directly or indirectly, when you purchase
Fund shares. The operating expenses included in the table and hypothetical
example below are based on fees and expenses of the Fund's Class A and Class B
shares for the fiscal year ended December 31, 1994, adjusted to reflect current
fees and expenses. Actual fees and expenses in the future may be greater or
less than those indicated.
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
<S> <C>
Shareholder Transaction
Expenses
Maximum sales charge
imposed on purchases (as
a percentage of offering
price) 4.50% None
Maximum sales charge
imposed on reinvested
dividends None None
Maximum deferred sales
charge None* 5.00%
Redemption fee+ None None
Exchange fee None None
Annual Fund Operating
Expenses (as a
percentage of average
net assets)
Management fee 0.50% 0.50%
12b-1 fee** 0.30% 1.00%
Other expenses 0.38% 0.25%
Total Fund operating
expenses 1.18% 1.75%
</TABLE>
*No sales charge is payable at the time of purchase on investments of $1
million or more, but a contingent deferred sales charge may be imposed on
these investments, as described under the caption "Share Price," in the event
of certain redemption transactions within one year of purchase.
**The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average daily net assets, and the remaining portion will
be used to cover distribution expenses. See "The Fund's Expenses."
+Redemption by wire fee (currently $4.00) not included.
<TABLE>
<CAPTION>
Example: 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
You would pay the following expenses for the
indicated period of years on a hypothetical $1,000
investment, assuming 5% annual return:
Class A Shares $57 $83 $111 $189
Class B Shares
-- Assuming complete redemption at end of period $67 $85 $115 $191
-- Assuming no redemption $17 $55 $ 95 $191
</TABLE>
(This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.)
The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the National Association of Securities Dealers
Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Distribution Contract."
2
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS
The following table of Financial Highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Fund's 1994 Annual Report and is included in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders, that may be obtained free of
charge by writing or telephoning John Hancock Investor Services Corporation
("Investor Services") at the address or telephone number listed on the front
page of this Prospectus.
Selected data for each class of shares outstanding throughout each period
indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 15.53 $ 15.29 $ 15.31 $ 14.33 $ 14.77
Net Investment Income 1.12 1.14 1.20 1.29 1.32
Net Realized & Unrealized Gain (Loss) on Investments
and Financial Futures Contracts (1.55) 0.62 (0.01) 0.98 (0.40)
Total from Investment Operations (0.43) 1.76 1.19 2.27 0.92
Less Distributions:
Dividends from Net Investment Income (1.12) (1.14) (1.21) (1.29) (1.35)
Distributions to Shareholders from Capital Paid-In -- -- -- -- (0.01)
Distributions from Net Realized Gain on Investments
Sold and Financial Futures Contracts (0.08) (0.38) -- -- --
Total Distributions (1.20) (1.52) (1.21) (1.29) (1.36)
Net Asset Value, End of Period $ 13.90 $ 15.53 $ 15.29 $ 15.31 $ 14.33
Total Investment Return at Net Asset Value (2.75%) 11.80% 8.08% 16.59% 6.71%
Ratios and Supplemental Data
Net Assets, End of period (000,000's omitted) $ 1,326 $ 1,506 $ 1,386 $ 1,250 $ 1,103
Ratio of Expenses to Average Net Assets 1.26% 1.41% 1.44% 1.27% 1.31%
Ratio of Net Investment Income to Average Net Assets 7.74% 7.18% 7.89% 8.81% 9.18%
Portfolio Turnover Rate 85 % 107 % 87 % 90 % 92 %
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 14.51 $ 14.53 $ 15.89 $ 15.85 $ 14.36
Net Investment Income 1.43 1.44 1.40 1.55 1.62
Net Realized & Unrealized Gain (Loss) on Investments
and Financial Futures Contracts 0.27 (0.06) (1.17) 0.52 1.40
Total from Investment Operations 1.70 1.38 0.23 2.07 3.02
Less Distributions:
Dividends from Net Investment Income (1.44) (1.40) (1.53) (1.53) (1.53)
Distributions to Shareholders from Capital Paid-In -- -- -- -- --
Distributions from Net Realized Gain on Investments
Sold and Financial Futures Contracts -- -- (0.06) (0.50) --
Total Distributions (1.44) (1.40) (1.59) (2.03) (1.53)
Net Asset Value, End of Period $ 14.77 $ 14.51 $ 14.53 $ 15.89 $ 15.85
Total Investment Return at Net Asset Value 12.13% 9.82% 1.58% 13.67% 22.35%
Ratios and Supplemental Data
Net Assets, End of period (000,000's omitted) $ 1,110 $ 1,104 $ 1,095 $ 1,152 $ 1,016
Ratio of Expenses to Average Net Assets 0.80% 0.82% 0.82% 0.72% 0.79%
Ratio of Net Investment Income to Average Net Assets 9.68% 9.77% 9.32% 9.65% 10.95%
Portfolio Turnover Rate 64 % 66 % 159 % 163 % 100 %
</TABLE>
3
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CLASS B(a)
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 15.52 $ 15.90(b)
Net Investment Income 1.04 0.11
Net Realized & Unrealized Loss on Investments and Financial Futures
Contracts (1.54) --
Total from Investment Operations (0.50) 0.11
Less Distributions:
Dividends from Net Investment Income (1.04) (0.11)
Distributions from Net Realized Gain on Investments Sold and Financial
Futures Contracts (0.08) (0.38)
Total Distributions (1.12) (0.49)
Net Asset Value, End of Period $ 13.90 $ 15.52
Total Investment Return at Net Asset Value (3.13%) 0.90%
Ratios and Supplemental Data
Net Assets, End of period (000's omitted) $40,299 $4,125
Ratio of Expenses to Average Net Assets 1.78% 1.63%*
Ratio of Net Investment Income to Average Net Assets 7.30% 0.57%*
Portfolio Turnover Rate 85% 107%
</TABLE>
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CLASS C(c)
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 15.52 $ 15.86(b)
Net Investment Income 1.19 0.81
Net Realized & Unrealized Gain (Loss) on Investments and Financial
Futures Contracts (1.54) 0.04
Total from Investment Operations (0.35) 0.85
Less Distributions:
Dividends from Net Investment Income (1.19) (0.81)
Distributions from Net Realized Gain on Investments Sold and Financial
Futures Contracts (0.08) (0.38)
Total Distributions (1.27) (1.19)
Net Asset Value, End of Period $ 13.90 $ 15.52
Total Investment Return at Net Asset Value (2.19%) 5.45%
Ratios and Supplemental Data
Net Assets, End of period (000's omitted) $1,670 $867
Ratio of Expenses to Average Net Assets 0.73% 0.90%*
Ratio of Net Investment Income to Average Net Assets 8.28% 4.90%*
Portfolio Turnover Rate 85% 107%
</TABLE>
* On an annualized basis.
(a) Class B shares commenced operations on November 23, 1993.
(b) Initial price to commence operations.
(c) Class C shares commenced operations on May 7, 1993.
(d) Class C shares were no longer offered for sale after March 31, 1995.
4
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to generate a high level of current income
consistent with prudent investment risk.
The Fund's investment objective is to generate a high level of current income,
consistent with prudent investment risk, through investment in a diversified
portfolio of freely marketable debt securities. The Fund's Adviser seeks high
current income consistent with the moderate level of risk associated with a
portfolio consisting primarily of investment grade debt securities.
Under normal market conditions, at least 65% of the value of the Fund's assets
will be in bonds and/or debentures. In addition, the Fund contemplates that at
least 75% of the value of its total investments in debt securities (other than
commercial paper) will be represented by those securities that have, at the
time of purchase, a rating within the four highest grades as determined by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard &
Poor's Ratings Group ("S&P") (AAA, AA, A, or BBB) and debt securities of banks,
the U.S. Government and its agencies or instrumentalities and other issuers
which, although not rated as a matter of policy by either Moody's or S&P, are
considered by the Fund to have investment quality comparable to securities
receiving ratings within the four highest grades. Debt securities rated Baa or
BBB are considered medium-grade obligations with speculative characteristics
and adverse economic conditions or changing circumstances may weaken their
issuers' capacity to pay interest and repay principal. The Fund will diversify
its investments among a number of industry groups without concentration in any
particular industry. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risks inherent in all
securities. There is no assurance that the Fund will achieve its investment
objective.
Securities of domestic and foreign issuers. The Fund may invest in U.S. dollar-
denominated securities of foreign and United States issuers that are issued in
or outside of the U.S. Foreign companies may not be subject to accounting
standards and government supervision comparable to U.S. companies, and there is
often less publicly available information about their operations. Foreign
markets generally provide less liquidity than U.S. markets (and thus
potentially greater price volatility) and typically provide fewer regulatory
protections for investors. Foreign securities can also be affected by political
or financial instability abroad. It is anticipated that under normal
conditions, the Fund will not invest more than 25% of its total assets in
foreign securities (excluding U.S. dollar-denominated Canadian securities).
Mortgage-Backed and Derivative Securities
Mortgage-backed securities represent participation interests in pools of
adjustable and fixed mortgage loans which are guaranteed by agencies or
instrumentalities of the U.S. Government. Unlike conventional debt obligations,
mortgage-backed securities provide monthly payments derived from the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. The mortgage loans
underlying mortgage-backed securities are generally subject to a greater rate
of principal prepayments in a declining interest rate environment and to a
lesser rate of principal prepayments in an increasing interest rate
environment. Under certain interest and prepayment rate scenarios, the Fund may
fail to recover the full amount of its investment in mortgage-backed securities
5
<PAGE>
notwithstanding any direct or indirect governmental or agency guarantee. Since
faster than expected prepayments must usually be invested in lower yielding
securities, mortgage-backed securities are less effective than conventional
bonds in "locking in" a specified interest rate. In a rising interest rate
environment, a declining prepayment rate may extend the average life of many
mortgage-backed securities. Extending the average life of a mortgage-backed
security increases the risk of depreciation due to future increases in market
interest rates.
The Fund's investments in mortgage-backed securities may include conventional
mortgage passthrough securities and certain classes of multiple class
collateralized mortgage obligations ("CMOs"). In order to reduce the risk of
prepayment for investors, CMOs are issued in multiple classes, each having
different maturities, interest rates, payment schedules and allocations of
principal and interest on the underlying mortgages. Senior CMO classes will
typically have priority over residual CMO classes as to the receipt of
principal and/or interest payments on the underlying mortgages. The CMO classes
in which the Fund may invest include but are not limited to sequential and
parallel pay CMOs, including planned amortization class ("PAC") and target
amortization class ("TAC") securities.
Risks of Mortgage-Backed Securities. Different types of mortgage-backed
securities are subject to different combinations of prepayment, extension,
interest rate and/or other market risks. Conventional mortgage passthrough
securities and sequential pay CMOs are subject to all of these risks, but are
typically not leveraged. PACs, TACs and other senior classes of sequential and
parallel pay CMOs involve less exposure to prepayment, extension and interest
rate risk than other mortgage-backed securities, provided that prepayment rates
remain within expected prepayment ranges or "collars."
The Fund may invest in structured debt obligations indexed to various financial
assets or rates.
Structured Securities. The Fund may invest in structured notes, bonds or
debentures, the value of the principal of and/or interest on which is to be
determined by reference to changes in the value of specific currencies,
interest rates, commodities, indices or other financial indicators (the
"Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference. The
terms of the structured securities may provide that in certain circumstances no
principal is due at maturity and, therefore, may result in the loss of the
Fund's investment. Structured securities may be positively or negatively
indexed, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In
addition, the change in interest rate or the value of the security at maturity
may be a multiple of the change in the value of the Reference. Consequently,
structured securities entail a greater degree of market risk than other types
of debt obligations. Structured securities may also be more volatile, less
liquid and more difficult to accurately price than less complex fixed income
investments.
Futures and Option Contracts. The Fund may engage in transactions in futures
contracts and options on futures contracts for hedging and speculative
purposes. The Fund's ability to hedge successfully will depend on the ability
of John Hancock Advisers, Inc. (the "Adviser") to predict accurately the future
direction of interest rate changes, the degree of correlation between the
futures and securities markets and other market factors. There is no assurance
that a liquid market for futures and options will always exist.
6
<PAGE>
In addition, the Fund could be prevented from opening, or realizing the
benefits of closing out, a futures or options position because of position
limits or limits on daily price fluctuations imposed by an exchange.
All of the Fund's futures contracts and options on futures contracts will be
traded on a U.S. or foreign commodity exchange or board of trade. The Fund will
not engage in a transaction in futures or options on futures for speculative
purposes if, immediately thereafter, the sum of initial margin deposits and
premiums required to establish speculative positions in futures contracts and
options on futures exceeds 5% of the Fund's net assets.
Lower-Rated Securities. The Fund may invest up to 25% of the value of its total
assets in fixed income securities rated below Baa by Moody's, or below BBB by
S&P, or in securities which are unrated. The Fund may invest in securities
rated as low as Ca by Moody's or CC by S&P, which may indicate that the
obligations are highly speculative and in default. Lower rated securities are
generally referred to as junk bonds. See the Appendix attached to this
Prospectus and the Statement of Additional Information, respectively, for the
distribution of securities in the various ratings categories and a description
of the characteristics of the categories. The Fund is not obligated to dispose
of securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings. The Fund may invest in unrated securities
which, in the opinion of the Adviser, offer comparable yields and risks to
those securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income.
In addition, lower ratings reflect a greater possibility of an adverse change
in financial condition affecting the ability of the issuer to make payments of
interest and principal.
The market price and liquidity of lower rated fixed income securities generally
respond to short-term economic, corporate and market developments to a greater
extent than do higher rated securities. In the case of lower-rated securities,
these developments are perceived to have a more direct relationship to the
ability of an issuer of lower rated securities to meet its ongoing debt
obligations.
Reduced volume and liquidity in the high yield bond market, or the reduced
availability of market quotations, will make it more difficult to dispose of
the bonds and value accurately the Fund's assets. The reduced availability of
reliable, objective data may increase the Fund's reliance on management's
judgment in valuing the high yield bonds. To the extent that the Fund invests
in these securities, the achievement of the Fund's objective will depend more
on the Adviser's judgment and analysis than would otherwise be the case. In
addition, the Fund's investments in high yield securities may be susceptible to
adverse publicity and investor perceptions, whether or not the perceptions are
justified by fundamental factors. In the past, economic downturns and increases
in interest rates have caused a higher incidence of default by the issuers of
lower-rated securities and may do so in the future, particularly with respect
to highly leveraged issuers. The market prices of zero coupon and
payment-in-kind bonds are affected to a greater extent by interest rate
changes, and thereby tend to be more volatile than securities that pay interest
periodically and in cash. Increasing
7
<PAGE>
rate note securities are typically refinanced by the issuers within a short
period of time. The Fund accrues income on these securities for tax and
accounting purposes, which is required to be distributed to shareholders.
Because no cash is received while income accrues on these securities, the Fund
may be forced to liquidate other investments to make the distributions.
The Fund may acquire individual securities of any maturity and is not subject
to any limits as to the average maturity of its overall portfolio. The longer
the Fund's average portfolio maturity, the more the value of the portfolio and
the net asset value of the Fund's shares will fluctuate in response to changes
in interest rates. An increase in interest rates will generally reduce the
value of the Fund's portfolio securities and the Fund's shares, while a decline
in interest rates will generally increase their value.
Restricted Securities. The Fund may purchase restricted securities, including
those eligible for resale to "qualified institutional buyers" pursuant to Rule
144A under the Securities Act of 1933 (the "Securities Act"). The Trustees will
monitor the Fund's investments in these securities, focusing on certain
factors, including valuation, liquidity and availability of information.
Purchases of other restricted securities are subject to an investment
restriction limiting all the Fund's illiquid securities to not more than 15% of
its net assets.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities. When the Fund
lends portfolio securities, there is a risk that the borrower may fail to
return the securities. As a result, the Fund may incur a loss or, in the event
of the borrower's bankruptcy, may be delayed in or prevented from liquidating
the collateral. It is a fundamental policy of the Fund not to lend portfolio
securities having a total value exceeding 33-1/3% of its total assets.
Repurchase Agreements, Forward Commitments and When-Issued Securities. The Fund
may enter into repurchase agreements and may purchase securities on a forward
or when-issued basis. In a repurchase agreement, the Fund buys a security
subject to the right and obligation to sell it back at a higher price. These
transactions must be fully collateralized at all times, but involve some credit
risk to the Fund if the other party defaults on its obligation and the Fund is
delayed in or prevented from liquidating the collateral. The Fund will
segregate in a separate account cash or liquid, high grade debt securities
equal in value to its forward commitments and when- issued securities.
Purchasing securities for future delivery or on a when-issued basis may
increase the Fund's overall investment exposure and involves a risk of loss if
the value of the securities declines before the settlement date.
Short-term Trading. Short-term trading means the purchase and subsequent sale
of a security after it has been held for a relatively brief period of time. The
Fund engages in short-term trading in response to changes in interest rates or
other economic trends and developments, or to realize capital gain or improve
income by taking advantage of yield disparities between various fixed-income
securities.
8
<PAGE>
The Fund follows certain policies, which may help to reduce investment risk.
Investment Restrictions. The Fund has adopted certain fundamental investment
restrictions that are detailed in the Statement of Additional Information,
where they are classified as fundamental or nonfundamental. The Fund's
investment objective and those investment restrictions designated as
fundamental may not be changed without shareholder approval. All other
investment policies and restrictions, however, are nonfundamental and can be
changed by a vote of the Trustees without shareholder approval. The Fund's
portfolio turnover rates for recent years are shown in the section "The Fund's
Financial Highlights."
Brokers are chosen based on best price and execution.
When choosing brokerage firms to carry out the Fund's transactions, the Adviser
gives primary consideration to execution at the most favorable price, taking
into account the broker's professional ability and quality of service.
Consideration may also be given to the broker's sale of Fund shares. Pursuant
to procedures established by the Trustees, the Adviser may place securities
transactions with brokers affiliated with the Adviser. These brokers include
Tucker Anthony Incorporated, John Hancock Distributors, Inc. and Sutro &
Company, Inc. which are indirectly owned by John Hancock Mutual Life Insurance
Company, which in turn indirectly owns the Adviser.
ORGANIZATION AND MANAGEMENT OF THE FUND
The Trustees elect officers and retain the investment adviser who is
responsible for the day-to-day operations of the Fund, subject to the Trustees'
policies and supervision.
The Fund is a diversified open-end management investment company organized as a
Maryland corporation in 1973 and reorganized as a Massachusetts business trust
in 1984. The Fund has an unlimited number of authorized shares of beneficial
interest. The Fund's Declaration of Trust permits the Trustees, without
shareholder approval, to create and classify shares of beneficial interest into
separate series of the Fund. As of the date of this Prospectus, the Trustees
have not authorized the creation of any new series of the Fund. Additional
series may be added in the future. The Trust's Declaration of Trust also
permits the Trustees to classify and reclassify any series or portfolio of
shares into one or more classes. Accordingly, the Trustees have authorized the
issuance of three classes of the Fund, designated Class A, Class B and Class C.
The shares of each class represent an interest in the same portfolio of
investments of the Fund and have equal rights as to voting, redemption,
dividends and liquidation. However, each class bears different distribution and
transfer agent fees, and Class A and Class B shareholders have exclusive voting
rights with respect to their distribution plans.
Shareholders have certain rights to remove Trustees. The Fund is not required
and does not intend to hold annual shareholder meetings, although special
meetings may be held for such purposes as electing or removing Trustees,
changing fundamental investment restrictions or approving a management
contract. The Fund, under certain circumstances, will assist in shareholder
communications with other shareholders.
John Hancock Advisers, Inc. advises investment companies having a total asset
value of more than $13 billion.
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the John Hancock Mutual Life Insurance Company, a financial services company.
It provides the Fund, and other investment companies in the John Hancock group
of funds, with investment research and portfolio management services. John
Hancock Funds, Inc. ("John Hancock Funds") distributes shares for all of the
John Hancock funds through selected broker-dealers ("Selling Brokers"). Certain
Fund officers are also officers of the Adviser and John Hancock Funds. Pursuant
to an order granted by the
9
<PAGE>
Securities and Exchange Commission, the Fund has adopted a deferred
compensation plan for its independent Trustees which allows Trustees' fees to
be invested by the Fund in other John Hancock funds.
James Ho is a Senior Vice President and the portfolio manager of the Fund. Mr.
Ho is assisted in the day-to-day management of the Fund's investment portfolio
by a co-manager and a team of credit analysts. Mr. Ho also directs all taxable
fixed-income investment management for the Adviser and has been associated with
the Adviser since 1985.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
An alternative purchase plan allows you to choose the method of purchase that
is best for you.
You can purchase shares of the Fund at a price equal to their net asset value
per share, plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge
Alternative--Class A shares") or on a contingent deferred basis (see
"Contingent Deferred Sales Charge Alternative--Class B shares"). If you do not
specify on your account application the class of shares you are purchasing, it
will be assumed that you are investing in Class A shares.
Investments in Class A shares are subject to an initial sales charge.
Class A Shares. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount of your purchase is $1 million or more.
If you purchase $1 million or more of Class A shares you will not be subject to
an initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.30% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price--Qualifying for a Reduced Sales Charge."
Investments in Class B shares are subject to a contingent deferred sales
charge.
Class B Shares. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
that of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will also result in lower dividends than those paid on
Class A shares.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or John Hancock Mutual Life Insurance Company
that had more than 100 eligible employees at the inception of the Fund account.
10
<PAGE>
Factors to Consider in Choosing an Alternative
You should consider which class of shares would be more beneficial for you.
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider
whether, during the anticipated life of your Fund investment, the CDSC and the
accumulated fees on Class B shares would be less than the initial sales charge
and accumulated fees on Class A shares purchased at the same time; and to what
extent this differential would be offset by the Class A shares' lower expenses.
To help you make this determination, the table under the caption "Expense
Information" on page 2 of this Prospectus gives examples of the charges
applicable to each class of shares. Class A shares will normally be more
beneficial if you qualify for a reduced sales charge. See "Share Price--
Qualifying for a Reduced Sales Charge".
Class A shares are subject to lower distribution and service fees and,
accordingly, pay correspondingly higher dividends per share, to the extent any
dividends are paid. However, because initial sales charges are deducted at the
time of purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all your funds invested initially. However you will be
subject to higher distribution fees and, for a six-year period, a CDSC.
In the case of Class A shares, distribution expenses that John Hancock Funds
incurs in connection with the sale of shares will be paid from the proceeds of
the initial sales charge and the ongoing distribution and service fees. In the
case of Class B shares, expenses will be paid from the proceeds of the ongoing
distribution and service fees, as well as from the CDSC incurred upon
redemption within six years of purchase. The purpose and function of the Class
B shares' CDSC and ongoing distribution and service fees are the same as those
of the Class A shares' initial sales charge and ongoing distribution and
service fees. Sales personnel distributing the Fund's shares may receive
different compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They will also be in the same
amount, except for differences resulting in each class bearing only its own
distribution and service fees, shareholder meeting expenses and incremental
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a fee to the
Adviser which for the 1994 fiscal year, was 0.50% of the Fund's average daily
net asset value.
11
<PAGE>
The Fund pays distribution and service fees for marketing and sales-related
shareholder servicing.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
these Plans, the Fund will pay distribution and service fees at an aggregate
annual rate of 0.30% of the Class A shares' average daily net assets and an
aggregate annual rate of 1.00% of the Class B shares' average daily net assets.
In each case, up to 0.25% is for service expenses and the remaining amount is
for distribution expenses. The distribution fees are used to reimburse John
Hancock Funds for its distribution expenses, including but not limited to: (i)
initial and ongoing sales compensation to Selling Brokers and others (including
affiliates of John Hancock Funds) engaged in the sale of Fund shares; (ii)
marketing, promotional and overhead expenses incurred in connection with the
distribution of Fund shares; and (iii) with respect to Class B shares only,
interest expenses on unreimbursed distribution expenses. The service fees will
be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event John Hancock Funds is not
fully reimbursed for payments it makes or expenses it incurs under the Class A
Plan, these expenses will not be carried beyond one year from the date they
were incurred. These unreimbursed expenses under the Class B Plan will be
carried forward together with interest on the balance of these unreimbursed
expenses. For the fiscal year ended December 31, 1994 an aggregate of
$1,752,030 of distribution expenses, or 7.14% of the average net assets of the
Class B shares of the Fund, was not reimbursed or recovered by the John Hancock
Funds through the receipt of deferred sales charges or 12b-1 fees in prior
periods.
Information on the Fund's total expenses is in the Fund's Financial Highlights
section of this Prospectus.
DIVIDENDS AND TAXES
Dividends. Dividends from the Fund's net investment income are generally
declared daily and distributed monthly. Capital gains, if any, are generally
distributed annually. Dividends are reinvested in additional shares of your
class unless you elect the option to receive them in cash. If you elect the
cash option and the U.S. Postal Service cannot deliver your checks, your
election will be converted to the reinvestment option. Because of the higher
expenses associated with Class B shares, any dividend on these shares will be
lower than on the Class A shares. See "Share Price."
Taxation. Dividends from the Fund's net investment income and net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long- term capital gains are taxable as long-term capital gain. These
dividends are taxable whether received in cash or reinvested in additional
shares. Certain dividends paid in January of a given year, but they may be
taxable as if you received them the previous December. The Fund will send you a
statement by January 31 showing the tax status of the dividends you received
for the prior year.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income and net realized
capital gains that are distributed to its shareholders at least annually. When
you redeem (sell) or exchange shares, you may realize a taxable gain or loss.
12
<PAGE>
On the account application, you must certify that your social security or other
taxpayer identification number is correct and that you are not subject to
backup withholding of Federal income tax. If you do not provide this
information, or are otherwise subject to backup withholding, the Fund may be
required to withhold 31% of your dividends and the proceeds of redemptions and
exchanges.
In addition to Federal taxes, you may be subject to state, local or foreign
taxes with respect to your investment in and distributions from the Fund. In
some states, a portion of the Fund's dividends that represents interest
received by the Fund on direct U.S. government obligations may be exempt from
tax. Non-U.S. shareholders and tax-exempt shareholders are subject to different
tax treatment not described above. You should consult your tax adviser for
specific advice.
PERFORMANCE
The Fund may advertise its yield and total return.
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the
maximum offering price per share on the last day of that period. Yield is
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Fund's yield may not equal the income paid
on Fund shares or the income reported in the Fund's financial statements.
The Fund's total return shows the overall change in value of a hypothetical
investment in the Fund, assuming the reinvestment of all dividends. Cumulative
total return shows the Fund's performance over a period of time. Average annual
total return shows the cumulative return of the Fund shares divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in the Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at a lower sales charge would result in
higher performance figures. Yield and total return for the Class B shares
reflect deduction of the applicable CDSC imposed on a redemption of shares held
for the applicable period. All calculations assume that all dividends are
reinvested at net asset value on the reinvestment dates during the periods.
Yield and total return of Class A and Class B shares will be calculated
separately and, because each class is subject to different expenses, the yield
or total return with respect to that class for the same period may differ. The
relative performance of the Class A and Class B shares will be affected by a
variety of factors, including the higher operating expenses attributable to the
Class B shares, whether the Fund's investment performance is better in the
earlier or later portions of the period measured and the level of net assets of
the classes during the period. The Fund will include the total return of Class
A and Class B shares in any advertisement or promotional materials including
the Fund's performance data. The value of the Fund's shares, when redeemed, may
be more or less than their original cost. Both yield and total return are
historical calculations and are not an indication of future performance. See
"Factors to Consider in Choosing an Alternative."
13
<PAGE>
HOW TO BUY SHARES
Opening an account
The minimum initial investment in Class A and Class B shares is $1,000 ($250
for group investments and retirement plans).
Complete the Account Application attached to this Prospectus. Indicate whether
you are purchasing Class A or Class B shares. If you do not specify which class
of shares you are purchasing, Investor Services will assume you are investing
in Class A shares.
By Check
1. Make your check payable to John Hancock Investor Services Corporation.
("Investor Services").
2. Deliver the completed application and check to your registered
representative or Selling Broker, or mail it directly to Investor Services.
By Wire
1. Obtain an account number by contacting your registered representative or
Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Sovereign Bond Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered representative or
Selling Broker, or mail it directly to Investor Services.
Buying additional Class A and Class B shares
Monthly Automatic
Accumulation
Program (MAAP)
1. Complete the "Automatic Investing" and "Bank Information" sections on the
Account Privileges Application, designating a bank account from which funds
may be drawn.
2. The amount you elect to invest will be automatically withdrawn from your
bank or credit union account.
By Telephone
1. Complete the "Invest-By-Phone" and "Bank Information" sections on the
Account Privileges Application, designating a bank account from which your
funds may be drawn. Note that in order to invest by phone, your account must
be in a bank or credit union that is a member of the Automated Clearing
House system (ACH).
2. After your authorization form has been processed, you may purchase
additional Class A and Class B shares by calling Investor Services toll-free
at 1-800-225-5291.
3. Give the Investor Services representative the name(s) in which your account
is registered, the Fund name, the class of shares you own, your account
number and the amount you wish to invest.
4. Your investment normally will be credited to your account the business day
following your phone request.
14
<PAGE>
By Check
1. Either fill out the detachable stub included on your account statement or
include a note with your investment listing the name of the Fund, the class
of shares you own, your account number and the name(s) in which the account
is registered.
2. Make your check payable to John Hancock Investor Services Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation.
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling Broker.
By Wire
Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Sovereign Bond Fund
(Class A or Class B shares)
Your Account Number
Name(s) under which account is registered
Other Requirements: All purchases must be made in U.S. dollars. Checks written
on foreign banks will delay purchases until U.S. funds are received, and a
collection charge may be imposed. Shares of the Fund are priced at the offering
price based on the net asset value computed after John Hancock Funds receives
notification of the dollar equivalent from the Fund's custodian bank. Wire
purchases normally take two or more hours to complete and, to be accepted the
same day, must be received by 4:00 p.m., New York time. Your bank may charge a
fee to wire funds. Telephone transactions are recorded to verify information.
Certificates are not issued unless a request is made in writing to Investor
Services.
You will receive account statements, which you should keep to help with your
personal recordkeeping.
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
SHARE PRICE
The offering price of your shares is their net asset value plus a sales charge,
if applicable, which will vary with the purchase alternative you choose.
The net asset value per share ("NAV") is the value of one share. The NAV is
calculated by dividing the net assets of each class by the number of
outstanding shares of that class. The NAV of each class can differ. Securities
in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services, or fair value as
determined in good faith according to procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized
cost, which approximates market value. Foreign securities are valued on the
basis of quotations from the primary market in which they are traded. If
quotations are not readily available, or the value has been materially affected
by events occurring after the closing of a foreign market, assets are valued by
a method that the Trustees believe accurately reflects fair value. The NAV is
calculated once daily as of the close of regular trading on the New York Stock
Exchange (generally at 4:00 P.M., New York time) on each day that the Exchange
is open.
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your
15
<PAGE>
investment before the close of regular trading on the New York Stock Exchange,
and transmit it to John Hancock Funds before its close of business, to receive
that day's offering price.
Initial Sales Charge Alternative--Class A Shares. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
Combined
Sales Sales Reallowance Reallowance
Charge Charge and Service to Selling
as a as a Fee as a Brokers as a
Percentage Percentage Percentage of Percentage of
Amount invested of Offering of the Amount Offering Offering
(Including Sales Charge) Price Invested Price(+) Price(*)
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 2.75% 2.83% 2.30% 2.06%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. In addition to the reallowance allowed to all Selling Brokers,
John Hancock Funds will pay the following: round trip airfare to a resort
will be given to each registered representative of a Selling Broker (if
the Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock funds. John Hancock Funds will make these incentive
payments out of its own resources. Other than distribution fees, the Fund
does not bear distribution expenses. A Selling Broker to whom
substantially the entire sales charge is reallowed or who receives these
incentives may be deemed to be an underwriter under the Securities Act of
1933.
(**) No sales charge is payable at the time of purchase of Class A shares of $1
million or more, but a contingent deferred sales charge may be imposed in
the event of certain redemption transactions within one year of purchase.
(***) John Hancock Funds may pay a commission and first year's service fee (as
described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in aggregate, as follows:
1% on sales to $4,999,999, 0.50% on the next $5 million and 0.25% on $10
million and over.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance, in an amount equal to 0.25% of the net
assets invested in the Fund. Thereafter it pays the service fee
periodically in arrears in an amount up to 0.25% of the Fund's average
annual net assets. Selling Brokers receive the fee as compensation for
providing personal and account maintenance services to shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in
additional Class A shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual
rate of up to 0.05% of the daily net assets of the accounts attributable to
these brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying For a Reduced Sales
Charge."
Contingent Deferred Sales Charge--Investments of $1 Million or More in Class A
Shares. Purchases of $1 million or more in Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
12 months after the end of the calendar month in which the purchase was made
(the contingent
16
<PAGE>
deferred sales charge period), a contingent deferred sales charge ("CDSC") will
be imposed. The rate of the CDSC will depend on the amount invested as follows:
<TABLE>
<CAPTION>
Amount Invested CDSC Rate
<S> <C>
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
</TABLE>
Existing full service clients of John Hancock Mutual Life Insurance Company who
were group annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible employees at the
inception of the Fund account may purchase Class A shares with no initial sales
charge. However, if the shares are redeemed within 12 months after the end of
the calendar year in which the purchase was made, a contingent deferred sales
charge will be imposed at the above rate.
The charge will be assessed on an amount equal to the lesser of the current
market value or the original purchase cost of the redeemed Class A shares.
Accordingly, no CDSC will be imposed on increases in account value above the
initial purchase price, including any dividends which have been reinvested in
additional Class A shares.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemption in certain circumstances. See the discussion under "Waiver of
Contingent Deferred Sales Charges."
You may qualify for a reduced sales charge on your investments in Class A
shares.
Qualifying for a Reduced Sales Charge. If you invest more than $100,000 in
Class A shares of the Fund or a combination of funds in the John Hancock funds
(except money market funds), you may qualify for a reduced sales charge on your
investments in Class A shares through a LETTER OF INTENTION. You may also be
able to use the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE to take
advantage of the value of your previous investments in Class A shares of John
Hancock funds when meeting the breakpoints for a reduced sales charge. For the
ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales charge
will be based on the total of:
1. Your current purchase of Class A shares of the Fund;
2. The net asset value (at the close of business on the previous day) of (a)
all Class A shares of the Fund you hold, and (b) all Class A shares of any
other John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
Example:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000 and, subsequently, invest $20,000 in Class A shares of the Fund, the
sales charge on this subsequent investment would be 3.75% and not 4.50%. This
rate is the rate that would otherwise be applicable to investments of less than
$100,000. See "Initial Sales Charge Alternative--Class A Shares."
17
<PAGE>
Class A shares may be available without a sales charge to certain individuals
and organizations.
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
(bullet) A Trustee or officer of the Trust; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers employees or
Directors of any of the foregoing; a member of the immediate family of any of
the foregoing; or any fund, pension, profit sharing or other benefit plan for
the individuals described above.
(bullet) Any state, county, city or any instrumentality, department, authority
or agency of these entities that is prohibited by applicable investment laws
from paying a sales charge or commission when it purchases shares of any
registered investment management company.*
(bullet) A bank, trust company, credit union, savings institution or other type
of depository institution, its trust departments or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
(bullet) A broker, dealer or registered investment adviser that has entered
into an agreement with John Hancock Funds providing specifically for the use of
Fund shares in fee- based investment products made available to their clients.
(bullet) A former participant in an employee benefit plan with John Hancock
funds, when he/she withdraws from his/her plan and transfers any or all of
his/her plan distributions directly to the Fund.
* For investments made under these provisions, John Hancock funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A shares of the Fund may also be purchased without an initial sales
charge in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
Contingent Deferred Sales Charge Alternative--Class B Shares. Class B shares
are offered at net asset value per share without a sales charge, so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates set forth below. This charge will be assessed on an amount equal
to the lesser of the current market value or the original purchase cost of the
shares being redeemed. Accordingly, you will not be assessed a CDSC on
increases in account value above the initial purchase price, including shares
derived from dividend reinvestments.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend reinvestment, and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charges"
below.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and
18
<PAGE>
you have gained 10 additional shares through dividend reinvestment. If you
redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(bullet) Proceeds of 50 shares redeemed at $12 per
share $ 600
(bullet) Minus proceeds of 10 shares not subject to
CDSC because they were acquired through
dividend reinvestment (10 X $12) -120
(bullet) Minus appreciation on remaining shares,
also not subject to CDSC (40 X $2) - 80
(bullet) Amount subject to CDSC $ 400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
all or part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of Class B shares, such as
compensating selected Selling Brokers for selling these shares. The combination
of the CDSC and the distribution and service fees makes it possible for the
Fund to sell Class B shares without deducting a sales charge at the time of the
purchase.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them.
Solely for purposes of determining this holding period, any payments you make
during the month will be aggregated and deemed to have been made on the last
day of the month.
<TABLE>
<CAPTION>
Contingent Deferred Sales
Year In Which Class B Shares Charge As a Percentage of
Redeemed Following Purchase Dollar Amount Subject to CDSC
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested, are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
Under certain circumstances, the CDSC on Class B and certain Class A share
redemptions will be waived.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and Class A shares that are subject to the CDSC
unless indicated otherwise, in the following circumstances:
(bullet) Redemptions of Class B shares made under a Systematic Withdrawal Plan
(see "How to Redeem Shares"), as long as your annual redemptions do not exceed
10% of your account value at the time you established your Systematic
Withdrawal Plan and 10% of the value of your subsequent investments (less
redemptions) in that account at the time you notify Investor Services. This
waiver does not apply to Systematic Withdrawal Plan redemptions of Class A
shares that are subject to a CDSC.
(bullet) Redemptions made to effect distributions from an Individual Retirement
Account either before or after age 59-1/2, as long as the distributions are
based on your life expectancy or the joint-and-last survivor life expectancy of
you and your beneficiary. These distributions must be free from penalty under
the Code.
19
<PAGE>
(bullet) Redemptions made to effect mandatory distributions under the Code
after age 70-1/2 from a tax-deferred retirement plan.
(bullet) Redemptions made to effect distributions to participants or
beneficiaries from certain employer-sponsored retirement plans including those
qualified under Section 401(a) of the Code, custodial accounts under Section
403(b)(7) of the Code and deferred compensation plans under Section 457 of the
Code. The waiver also applies to certain returns of excess contributions made
to these plans. In all cases, the distributions must be free from penalty under
the Code.
(bullet) Redemptions due to death or disability.
(bullet) Redemptions made under the Reinvestment Privilege, as described in
"Additional Services and Programs" of this Prospectus.
(bullet) Redemptions made pursuant to the Fund's right to liquidate your
account if you own fewer than 50 shares.
(bullet) Redemptions made in connection with certain liquidation, merger or
acquisition transactions involving other investment companies or personal
holding companies.
(bullet) Redemptions from certain IRA and retirement plans that purchased
shares prior to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time
you make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
Conversion of Class B Shares. Your Class B shares, and an appropriate portion
of reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur at the end of eight years after the shares were
purchased, and will result in lower annual distribution fees. If you exchanged
Class B shares into this Fund from another John Hancock fund, the calculation
will be based on the time you purchased the shares in the original fund. The
Fund has been advised that the conversion of Class B shares to Class A shares
should not be taxable for Federal income tax purposes, nor should it change
your tax basis or tax holding period for the converted shares.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently
made by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and
what you receive for them, subject to certain tax rules. Under unusual
circumstances, the Fund may suspend redemptions or postpone payment for up to
seven days or longer, as permitted by Federal securities laws.
20
<PAGE>
By Telephone
To assure acceptance of your redemption request, please follow these
procedures.
All Fund shareholders are automatically eligible for the telephone redemption
privilege. Call 1-800-225-5291, from 8:00 A.M. to 4:00 P.M. (New York time),
Monday through Friday, excluding days on which the New York Stock Exchange is
closed. Investor Services employs the following procedures to confirm that
instructions received by telephone are genuine. Your name, the account number,
taxpayer identification number applicable to the account and other relevant
information may be requested. In addition, telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address on the account must
not have changed for the last 30 days. A check will be mailed to the exact
name(s) shown on the account.
If reasonable procedures, such as those described above, are not followed, the
Fund may be liable for any loss due to unauthorized or fraudulent instructions.
In all other cases, neither the Fund nor Investor Services will be liable for
any loss or expense for acting upon telephone instructions made in accordance
with the telephone transaction procedures mentioned above.
Telephone redemption is not available for IRAs or other tax-qualified
retirement plans or shares of the Fund that are in certificated form.
During periods of extreme economic conditions or market changes, telephone
requests may be difficult to implement due to a large volume of calls. During
these times you should consider placing redemption requests in writing or using
EASI-Line. EASI-Line's telephone number which is 1-800-338-8080.
By Wire
If you have a telephone redemption form on file with the Fund, redemption
proceeds of $1,000 or more can be wired on the next business day to your
designated bank account, and a fee (currently $4.00) will be deducted. You may
also use electronic funds transfer to your assigned bank account, and the funds
are usually collectable after two business days. Your bank may or may not
charge for this service. Redemptions of less than $1,000 will be sent by check
or electronic funds transfer.
This feature may be elected by completing the "Telephone Redemption" section on
the Account Privileges Application that is included with this Prospectus.
In Writing
Send a stock power or "letter of instruction" specifying the name of the Fund,
the dollar amount or the number of shares to be redeemed, your name, class of
shares, your account number and the additional requirements listed below that
apply to your particular account.
<TABLE>
<CAPTION>
Type of Registration Requirements
<S> <C>
Individual, Joint Tenants, Sole A letter of instruction signed (with titles where applicable) by
Proprietorship, Custodial (Uniform all persons authorized to sign for the account, exactly as it is
Gifts or Transfer to Minors Act), registered with the signature(s) guaranteed.
General Partners.
Corporation, Association A letter of instruction and a corporate resolution, signed by
person(s) authorized to act on the account, with the
signature(s) guaranteed.
Trusts A letter of instruction signed by the Trustee(s) with the
signature(s) guaranteed. (If the Trustee's name is not
registered on your account, also provide a copy of the trust
document, certified within the last 60 days.)
If you do not fall into any of these registration categories, please call 1-800-225-5291 for further instructions.
</TABLE>
21
<PAGE>
Who may guarantee your signature
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less, John
Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that the institution meets
credit standards established by Investor Services: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or meets certain
net capital requirements; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
Through Your Broker
Your broker may be able to initiate the redemption. Contact your broker for
instructions.
Additional information about redemptions
If you have certificates for your shares, you must submit them with your stock
power or a letter of instruction. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining smaller accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds fewer than 50 shares (except accounts under retirement plans) and to mail
the proceeds to the shareholder, or the transfer agent may impose an annual fee
of $10.00. No account will be involuntarily redeemed or additional fee imposed,
if the value of the account is in excess of the Fund's minimum initial
investment. No CDSC will be imposed on involuntary redemptions of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege
You may exchange shares of the Fund only for shares of the same class of
another John Hancock fund.
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of
investment goals. Contact your registered representative or Selling Broker and
request a prospectus for the John Hancock fund that interests you. Read the
prospectus carefully before exchanging your shares. You can exchange shares of
each class of the Fund only for shares of the same class of another John
Hancock fund. For this purpose, John Hancock funds with only one class of
shares will be treated as Class A whether or not they have been so designated.
Exchanges between funds that are not subject to a CDSC are based on the
respective net asset values. No sales charge or transaction charge is imposed.
Class B shares of the Fund which are subject to a CDSC may be exchanged for
Class B shares of another John Hancock fund without incurring the CDSC; however
these shares will be subject to the CDSC schedule of the shares acquired
(except for exchanges into John Hancock Short-Term Strategic Income Fund, John
Hancock Adjustable U.S. Government Trust and John Hancock Limited-Term
Government Fund will be subject to the initial fund's CDSC). For purposes of
computing the CDSC payable upon redemption of shares acquired in an exchange,
the holding period of the original shares is added to the holding period of the
shares acquired in an exchange. However if you exchange Class B shares
purchased prior to January 1, 1994 for Class B shares of any other John Hancock
fund, you will continue to be subject to the CDSC schedule that was in effect
at your initial purchase date.
22
<PAGE>
You may exchange Class B shares of the fund into shares of a John Hancock money
market fund at net asset value. However, you will continue to be subject to a
CDSC upon redemption.
The Fund reserves the right to require that you keep previously exchanged
shares (and reinvested dividends) in the Fund for 90 days before you are
permitted a new exchange. The Fund may also terminate or alter the terms of the
exchange privilege upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration must be identical in both
the existing and new account. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely.
The Fund may also temporarily or permanently terminate the exchange privilege
for any person who makes seven or more exchanges out of the Fund per calendar
year. Accounts under common control or ownership will be aggregated for this
purpose. Although the Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
By Telephone
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to have the telephone exchange privilege.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
23
<PAGE>
In Writing
1. In a letter request an exchange and list the following: --the name and
class of the Fund whose shares you currently own
--your account number
--the name(s) in which the account is registered
--the name of the Fund in which you wish your exchange to be invested
--the number of shares, all shares or the dollar amount you wish to
exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
Reinvestment Privilege
If you redeem shares of the Fund, you may be able to reinvest all or part of
the proceeds in shares of the Fund or another John Hancock fund without paying
an additional sales charge.
1. You will not be subject to a sales charge on Class A shares that you
reinvest in any John Hancock fund that is otherwise subject to a sales
charge, as long as you reinvest within 120 days from the redemption date. If
you paid a CDSC upon a redemption, you may reinvest at net asset value in
the same class of shares from which you redeemed within 120 days. Your
account will be credited with the amount of the CDSC previously charged, and
the reinvested shares will continue to be subject to a CDSC. For purposes of
computing the CDSC payable upon a subsequent redemption, the holding period
of the shares acquired through reinvestment will include the holding period
of the redeemed shares.
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
3. To reinvest, you must notify Investor Services in writing. Include the
Fund(s) name, account number and class from which your shares were
originally redeemed.
Systematic Withdrawal Plan
You can pay routine bills from your account, or make periodic disbursements
from your retirement account to comply with IRS regulations.
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain the application from your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis, to yourself or any other designated
payee.
4. There is no limit on the number of payees you may authorize, but all
payments must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares because you may be
subject to an
24
<PAGE>
initial sales charge on your purchases of Class A shares or to a CDSC on
your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks, or if deposits to a bank account are returned for any reason.
Monthly Automatic Accumulation Program (MAAP)
You can make automatic investments and simplify your investing.
1. You can authorize an investment to be drawn automatically each month from
your bank for investment in Fund shares, under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
2. You can also authorize automatic investing through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program at any time.
4. There is no charge to you for this program, and there is no cost to the
Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
Group Investment Program
Organized groups of at least four persons may establish accounts.
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate
dollar amount of all participants' investments. To determine how to qualify
for this program, contact your registered representative or call
1-800-225-5291.
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at
any time.
Retirement Plans
1. You may use the Fund to fund various types of retirement plans, including
Individual Retirement Accounts, Keogh Plans (H.R. 10), Pension and Profit
Sharing Plans (including 401(k) Plans), Tax-Sheltered Annuity Retirement
Plans (403(b) or TSA Plans), and 457 Plans.
2. The initial investment minimum or aggregate minimum for any of the above
plans is $250. However, accounts being established as group IRA, SEP,
SARSEP, TSA, 401(k) and 457 Plans will be accepted without an initial
minimum investment.
INSTITUTIONAL INVESTORS
Class C shares of the Fund are available only to the following types of
institutional investors: (i) Benefit plans not affiliated with the Adviser
which have at least $25,000,000 in plan assets, and either have a separate
trustee vested with investment discretion and certain limitations on the
ability of the plan beneficiaries to access their plan investments without
incurring adverse tax consequences or allow their participants to select among
one or more investment options, including the Fund ("participant-directed
plans"); (ii) Banks and insurance companies which are not
25
<PAGE>
affiliated with the Adviser purchasing shares for their own account; (iii)
Investment companies not affiliated with the Adviser; (iv) Tax-exempt
retirement plans of the Adviser and its affiliates, including affiliated
brokers; (v) Unit investment trusts sponsored by John Hancock Funds and certain
other sponsors; and (vi) Existing full- service clients of John Hancock Mutual
Life Insurance Company who were group annuity contract holders as of September
1, 1994. Participant-directed plans include, but are not limited to, 401(k),
TSA and 457 plans.
Class C shares are available to eligible institutional investors at net asset
value without the imposition of a sales charge and are not subject to ongoing
distribution fees imposed under a plan adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The minimum initial investment in Class C
shares is $1,000,000, but this requirement may be waived at the discretion of
the Company's officers. Some individuals who are currently eligible to purchase
Class A or Class B shares may also be participants in plans that are eligible
to purchase Class C shares of the Fund.
John Hancock Funds may pay a one-time payment of up to 0.15% of the amount
invested in Class C shares to a selling broker for its sales of Class C shares.
A person entitled to receive compensation for selling shares of the Fund may
receive different compensation with respect to sales of Class A, Class B or
Class C shares or any additional future class of shares.
Class C shares are also available to existing full-service clients of John
Hancock Mutual Life Insurance Company who were group annuity contract holders
as of September 1, 1994. John Hancock Funds, out of its own resources, may pay
to a Selling Broker an annual service fee of up to 0.20% of the amount invested
in Class C shares by these clients.
The Reinvestment Privilege, Systematic Withdrawal Plan, Monthly Automatic
Accumulation Program, Group Investment Program and Retirement Plans are not
available for Class C shares.
If you are considering a purchase of Class C shares of the Fund, please call
John Hancock Investor Services Corporation at 1-800-437-9312 to obtain
information about eligibility, instructions for purchase by check or wire and
an Institutional Account Application.
APPENDIX
Moody's describes its lower ratings for corporate bonds as follows.
Bonds which are rated Baa are considered as medium grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby are well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
26
<PAGE>
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
S&P describes its lower ratings for corporate bonds as follows:
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated BB, B, CCC, or C is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Quality Distribution
The average weighted quality distribution of the portfolio for the fiscal year
ended December 31, 1994:
<TABLE>
<CAPTION>
Rating Rating
Average % of Assigned % of Assigned % of
Security Ratings Value Portfolio by Adviser Portfolio by Service Portfolio
<S> <C> <C> <C> <C> <C> <C>
AAA $ 506,896,240 36.2% 0 0.0% $ 506,896,240 36.2%
AA 149,154,024 10.6% 0 0.0% 149,154,024 10.6%
A 240,396,674 17.2% 0 0.0% 240,396,674 17.2%
BAA 200,808,990 14.3% 0 0.0% 200,808,990 14.3%
BA 165,446,356 11.8% 0 0.0% 165,446,356 11.8%
B 114,182,848 8.2% 0 0.0% 114,182,848 8.2%
CAA 6,292,420 0.4% 0 0.0% 6,292,420 0.4%
CA 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 0.0%
D 0 0.0% 0 0.0% 0 0.0%
Debt Securities 1,383,177,552 98.7% 0 0.0% $1,383,177,552 98.7%
Equity Securities 0 0.0%
Short-Term Securities 18,727,923 1.3%
Total Portfolio 1,401,905,475 100.0%
Other Assets--Net 25,728,800
Net Assets $1,427,634,275
</TABLE>
27
<PAGE>
John Hancock Sovereign Bond Fund
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
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Transfer Agent
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For: Service Information
Telephone Exchange call 1-800-225-5291
Investment-by-Phone
Telephone Redemption
TDD call 1-800-554-6713
JHD-2100P 5-95
JOHN HANCOCK
SOVEREIGN
BOND FUND
Class A and B Shares
Prospectus
May 1, 1995
A mutual fund seeking to generate a high level of current income consistent
with prudent investment risk through investment in a diversified portfolio of
freely marketable debt securities.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Telephone 1-800-225-5291
[RECYCLE LOGO] Printed on recycled paper using soybean ink
28
<PAGE>
EXHIBIT C
John Hancock Funds
- --------------------------------------------------------------------------------
SOVEREIGN
BOND
FUND
ANNUAL REPORT
December 31, 1994
<PAGE>
TRUSTEES
EDWARD J. BOUDREAU, JR.
Chairman
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
GAIL D. FOSLER*
BAYARD HENRY*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
MICHAEL P. DICARLO
Senior Vice President
JAMES K. HO
Senior Vice President
BARRY H. EVANS
Vice President
JOHN A. MORIN
Vice President
SUSAN S. NEWTON
Vice President, Assistant Secretary and
Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES, CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
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
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
<PAGE>
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
With 1995 upon us, New Year's resolutions abound. Dieting and saving money --
Americans' long-time favorites -- are sure to top the list once again. And once
again, they'll probably be the most difficult to keep. This year, however,
Congress may give savers an additional incentive to stick to their guns.
Both the Republicans and Democrats want to revive Individual Retirement
Accounts (IRAs). In an effort to encourage savings, IRAs were made available to
all working Americans in 1981. Anyone with earned income could contribute up to
$2,000 annually. The contributions were fully tax-deductible, and the earnings
weren't taxed until withdrawal. IRAs became the most successful savings program
in the U.S., drawing in more than $250 billion and 13 million new participants
by 1985.
Sweeping tax reforms in 1986, however, changed all that. As it stands now,
the full deduction only applies to individuals who earn less than $25,000,
married couples who earn less than $40,000 and people without employer-sponsored
retirement plans. The result of this congressional tinkering: the number of IRA
contributors declined dramatically, from 16.2 million in 1985 to 4.2 million in
1992.
Legislators are now taking a closer look at expanding the accessibility of
IRAs once again. Several proposals are on the table: (1) the Republicans'
"Contract with America" includes the American Dream Savings Account, a type of
IRA; (2) President Clinton has proposed expanding eligibility by raising income
limits; and (3) several congressional representatives have introduced
legislation to restore the universal availability of a fully tax-deductible IRA.
We enthusiastically support restoring IRAs to their original luster. Not
only will it provide a tax break to middle-income Americans, but it will go a
long way toward raising the nation's dangerously low personal savings rate,
which is the lowest of any major industrialized country. There's an increasing
awareness that Social Security and pension plans will no longer provide for the
retirement needs of middle-income Americans. Increasing IRA accessibility for
more working individuals and families is one of the most sensible ways to help
Americans take responsibility for their future financial needs. We urge you to
support the expanded IRA by contacting your congressional representative or
senator.
Sincerely,
/s/ Edward J. Bourdreau, Jr.
- ----------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
BY JAMES K. HO, SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
JOHN HANCOCK
SOVEREIGN BOND FUND
Rising Interest Rates Erode Bond Prices; Defensive Posture
And Exposure To High-yield Market Softens Blow
1994 was one of the worst years on record for bond investors. Surprising
economic growth and persistent fears of inflation (despite modest numbers) led
to higher interest rates and lower bond prices. The downward trend began on
February 4, 1994, when the Federal Reserve reversed policy and raised the
benchmark federal funds rate -- what banks charge each other for overnight loans
- -- from 3.00% to 3.25%. Afterwards, there were two more quarter-point increases
in March and April, followed by a half-point increase in May, another half-point
increase in August and a three-quarter-point increase in November. That brought
the rate up to 5.50%, and most analysts are predicting still more increases down
the road.
Because interest rates and bond prices move in opposite directions, bond
prices fell -- more than enough, in most cases, to erase the income from
interest payments. That said, John Hancock Sovereign Bond Fund fared better
than most of its peers. During the year ended December 31, 1994, the Fund's
Class A, Class B and Class C shares had total returns of -2.75%, -3.13%, and
- -2.19%, respectively, at net asset value. During the same period, the average
corporate debt A-rated fund returned -4.64%, according to Lipper Analytical
Services.(1)
[CAPTION]
"1994 WAS ONE OF THE WORST YEARS ON RECORD FOR BOND INVESTORS."
[A 2 1/2" x 2 3/8" photo of the James K. Ho at bottom right. Caption reads:
"James K. Ho, Portfolio Manager."]
3
<PAGE>
John Hancock Funds - Sovereign Bond Fund
[Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into six sections. Going from left to right: High-
Quality Corporate Bonds 38%; Foreign Government Bonds 4%; Mortgage-Backed
Securities 12%; Other 2%; U.S. Treasury Bonds 24%; and High-Yield Corporate
Bonds 20%. A footnote below states. "As a percentage of net assets on December
31, 1994."]
WHY THE FUND DID BETTER THAN ITS PEERS
One reason the Fund did better than its peers was its above-average exposure to
high-yield bonds or junk bonds -- those with credit-quality ratings of BB or
lower. The Fund will never invest too heavily in junk bonds; they totaled less
than 20% of the assets at the end of the period. But that 20% had a significant
positive impact on performance during the past year. Not only do junk bonds pay
more interest than lower-risk, investment-grade bonds, but they generally have
shorter maturities, too. Both factors help make junk bonds less vulnerable to
rising rates. But more importantly, junk bonds tend to outperform most other
bonds in an expanding economy as corporate cash flows improve and companies find
themselves better able to pay down debt.
That was the case in 1994, especially with junk bonds in cyclical, or
economically-sensitive, industries such as paper, steel and transportation.
Examples included Stone Container, a paper company; Northwest Airlines, whose
fortunes improved dramatically after it was able to sign a new collective-
bargaining agreement with its pilots; Weirton Steel; and RJR Nabisco. We dodged
a bullet with Grand Union. We were able to sell our stake at a premium shortly
before the bonds plunged to 80% of their face value. Our success identifying
credit trends once again helped our performance.
A lesser factor contributing to performance was the Fund's 12% stake in
mortgage-backed securities. We began buying them in late 1993 and held onto them
throughout the year. Mortgages outperformed other bonds when interest rates
bottomed out and the pace of home refinancings slowed.
COPING WITH HIGHER RATES
The bulk of the Fund's investments -- both the 38% stake in high-quality
corporate bonds and the 24% stake in Treasuries -- were extremely sensitive to
fluctuations in interest rates. With that portion of the Fund, we tried to find
ways to minimize the damage. One way we did that was reducing the Fund's
duration. Duration measures how much a bond's price will fall in response to a
given increase in rates; when rates are rising, it pays to have a shorter
duration. In late 1993, we shortened from 5.5 years to 4.7 years. Only at the
end of 1994 did we begin to extend again, for reasons we'll explain in the
outlook section.
To achieve that shorter duration, we emphasized bonds at either end of the
maturity scale, balancing long-term bonds with short-term bonds in what's known
as a barbell. A barbell works best
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance ... and what's behind the numbers. The first listing is RJR Nabisco
followed by an up arrow and the phrase "Bonds tendered." The second listing is
E.I.P. Refunding followed by an up arrow and the phrase "Improving credit
quality." The third listing is Flagstar followed by a down arrow and the phrase
"Weak earnings." Footnote below reads: "See "Schedule of Investments."
Investment holdings are subject to change."]
[CAPTION]
"...WE TRIED TO FIND WAYS TO MINIMIZE THE DAMAGE."
4
<PAGE>
John Hancock Funds - Sovereign Bond Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1994." The chart is
scaled in increments of 2% from bottom to top, with 0% at the top and -6% at the
bottom. Within the chart, there are four solid bars. The first represents the
- -2.75% total return for John Hancock Sovereign Bond Fund: Class A. The second
represents the -3.13% total return for John Hancock Sovereign Bond Fund: Class
B. The third represents the -2.19% return for John Hancock Sovereign Bond Fund:
Class C. The fourth represents -4.64% return for the average corporate debt
A-rated fund. The footnote below states: "Total returns for John Hancock
Sovereign Bond Fund are at net asset value with all distributions reinvested.
The average balanced fund is tracked by Lipper Analytical Services. See
following page for historical performance information."]
when the yield curve is flattening -- that is, when interest rates from one end
of the maturity scale to the other are leveling off. That's what happened in
1994. Had we owned more bonds with intermediate maturities, it's likely the
Fund's performance would have suffered.
OUTLOOK SEEMS TO BE IMPROVING
While 1994 was unquestionably a disappointing year, it's worth noting that bond
prices stopped falling around the middle of last summer and have risen slightly
since then. The timing of the turnaround coincides roughly with the Fed's
decision to go with larger, more widely-spaced rate increases instead of the
smaller, one-after-the-other increases that occurred during the early part of
the year. That slight tactical shift seems to have brought greater stability to
the bond market as it helped convince investors that the Fed was serious about
staying ahead of inflation.
As 1994 came to an end, bonds were starting to look attractive again,
especially long-term bonds. When you can earn close to 8% on a 30-year Treasury
and inflation is hovering around 3%, that's a real rate of return of 5%, which
is very good by historical standards. That's one reason we chose to extend the
Fund's duration again, going back out to 5.1 years by the end of the period.
The other reason is that eventually the Fed's actions are likely to have the
intended effect: a slowdown in economic growth. When that happens, having a
longer duration should help the Fund take advantage of flat or falling interest
rates.
As the economy slows down and the yield curve begins to steepen, we'll
think about making other changes to the portfolio. One might be to move away
from the barbell structure and buy more intermediate securities. Another would
almost certainly be to reduce the Fund's stake in junk bonds and other
lower-rated corporate bonds in favor of high-quality corporates and Treasuries.
In 1994, it was those funds that avoided excess interest-rate risk while taking
on credit risk that outperformed their peers. In 1995, however, the best
strategy may be just the opposite: to take on extra interest-rate risk and
minimize credit risk.
- -------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance would be
lower.
[CAPTION]
"AS 1994 CAME TO AN END, BONDS WERE STARTING TO LOOK ATTRACTIVE AGAIN..."
5
<PAGE>
NOTES TO PERFORMANCE INFORMATION
John Hancock Funds - Sovereign Bond Fund
In accordance with the reporting requirements of the Securities and Exchange
Commission, the following data are supplied for the periods ending December 31,
1994 with all distributions reinvested in shares. The average annualized total
returns for Class A shares for the 1-year, 5-year and 10-year periods were
(7.12%), 6.90% and 9.28%, respectively, and reflect payment of the maximum
sales charge of 4.50%. The average annualized total returns for Class B shares
for the 1-year period and since inception on November 23, 1993 for Class B
shares was (7.97%) and (8.12%), respectively, and reflect the applicable
contingent deferred sales charge (maximum contingent sales charge of 5%
declines to 0% over 6 years). The average annualized total returns for Class C
shares for the 1-year period and since inception on May 7, 1993 were (2.19%)
and 1.89%, respectively. Class C shares are sold at net asset value to certain
institutions and retirement plans. SEC yields for the 30-day period ending
December 30, 1994 were 7.43%, 7.26% and 8.40% for Class A, Class B and Class C
shares, respectively. All performance data shown represents past performance
and should not be considered indicative of future performance. Returns and
principal values of Fund investments will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. For
Class A shares different sales charge schedules were in effect prior to
September 28, 1989 and are not reflected in the above performance information.
Performance is affected by a 12b-1 plan, which commenced on January 1, 1990 and
November 23, 1993 for Class A and Class B shares, respectively.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT OVER LIFE OF
THE FUND (OR MOST RECENT TEN YEARS)
[Sovereign Bond Fund
Class A shares
Line chart with the heading Sovereign Bond Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund (or most
recent 10 years). Within the chart are three lines. The first line represents
the value of Lehman Bros. Bond Index and is equal to $27,451 as of December 31,
1994. The second line represents the value of the hypothetical $10,000
investment made in Sovereign Bond Fund on December 31, 1984, before sales
charge, and is equal to $25,434 as of December 31, 1994. The third line
represents the Sovereign Bond Fund after sales charge and is equal to $24,284 as
of December 31, 1994.
Sovereign Bond Fund
Class B shares
Line chart with the heading Sovereign Bond Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund (or most
recent 10 years). Within the chart are three lines. The first line represents
the value of Lehman Bros. Bond Index and is equal to $9,545 as of December 31,
1994. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign Bond Fund on November 23, 1993, before
contingent deferred sales charge, and is equal to $9,490 as of December 31,
1994. The third line represents Sovereign Bond Fund after contingent deferred
sales charge and is equal to $9,110 as of December 31, 1994.
Sovereign Bond Fund
Class C shares
Line chart with the heading Sovereign Bond Fund: Class C, representing the
growth of a hypothetical $10,000 investment over the life of the fund (or most
recent 10 years). Within the chart are two lines. The first line represents
the value of Lehman Bros. Bond Index and is equal to $10,314 as of December 31,
1994. The second line represents the hypothetical $10,000 investment made in
the Sovereign Bond Fund on May 7, 1993, and is equal to $10,179 as of December
31, 1994.
*The Lehman Bros. Bond Index is an unmanaged index that mirrors the investment
objectives and characteristics of the Fund.]
6
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1994. YOU'LL
ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF
THAT DATE.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Publicly traded bonds (cost - $1,416,676,785) ........... $1,319,515,091
Joint repurchase agreement (cost - $20,558,000) ......... 20,558,000
Corporate savings account ............................... 2,836
--------------
1,340,075,927
Receivable for shares sold ................................ 236,997
Interest receivable ....................................... 29,705,652
Receivable for variation margin - Note A .................. 85,000
--------------
Total Assets .......................... 1,370,103,576
----------------------------------------------------------
LIABILITIES:
Dividend payable .......................................... 369,802
Payable for shares repurchased ............................ 552,027
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................. 1,006,626
Accounts payable and accrued expenses ..................... 147,915
--------------
Total Liabilities ..................... 2,076,370
----------------------------------------------------------
NET ASSETS:
Capital paid-in ........................................... 1,484,381,233
Accumulated net realized loss on investments and
financial futures contracts ............................. ( 18,362,958)
Net unrealized depreciation of investments and
financial futures contracts ............................. ( 97,991,069)
--------------
Net Assets ............................ $1,368,027,206
==========================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $1,326,058,253/95,399,448 ....................... $ 13.90
==============================================================================
Class B - $40,298,738/2,898,886 ........................... $ 13.90
==============================================================================
Class C - $1,670,215/120,133 .............................. $ 13.90
==============================================================================
MAXIMUM OFFERING PRICE PER SHARE *
Class A - ($13.90 x 104.71%) .............................. $ 14.55
==============================================================================
</TABLE>
* 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.
<PAGE>
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 December 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest ................................................... $128,113,058
------------
Expenses:
Investment management fee - Note B ....................... 7,116,092
Transfer agent fee - Note B
Class A ................................................ 5,591,531
Class B ................................................ 53,759
Class C ................................................ 1,571
Distribution/service fee - Note B
Class A ................................................ 4,193,648
Class B ................................................ 244,360
Custodian fee ............................................ 254,019
Trustees' fees ........................................... 139,401
Printing ................................................ 118,780
Miscellaneous ............................................ 96,184
Registration and filing fees ............................. 96,149
Legal fees ............................................... 72,705
Auditing fee ............................................. 40,669
------------
Total Expenses ........................... 18,018,868
----------------------------------------------------------
Net Investment Income .................... 110,094,190
----------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FINANCIAL FUTURES CONTRACTS
Net realized loss on investments sold ...................... ( 26,488,476)
Net realized gain on financial futures contracts ........... 8,308,883
Change in net unrealized appreciation/depreciation
of investments ........................................... ( 132,647,726)
Change in net unrealized appreciation/depreciation
of financial futures contracts ........................... (830,156)
------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts .............. ( 151,657,475)
----------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ................ ($ 41,563,285)
==========================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income ............................................................. $ 110,094,190 $ 106,405,932
Net realized gain (loss) on investments sold and financial futures contracts ...... ( 18,179,593) 55,911,784
Change in net unrealized appreciation/depreciation of investments and financial
futures contracts ............................................................... ( 133,477,882) 189,124
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............... ( 41,563,285) 162,506,840
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($1.1202 and $1.1446 per share, respectively) ......................... ( 108,234,785) ( 106,352,974)
Class B** - ($1.0443 and $0.1107 per share, respectively) ....................... ( 1,784,944) ( 12,653)
Class C*** - ($1.1929 and $0.8108 per share, respectively) ...................... ( 74,461) ( 40,305)
Distributions from net realized gain on investments sold and financial futures
contracts
Class A - ($0.0801 and $0.3829 per share, respectively) ......................... ( 7,707,353) ( 36,302,105)
Class B** - ($0.0801 and $0.3829 per share, respectively) ....................... ( 84,479) ( 78,813)
Class C*** - ($0.0801 and $0.3829 per share, respectively) ...................... ( 4,864) ( 20,795)
-------------- --------------
Total Distributions to Shareholders ........................................... ( 117,890,886) ( 142,807,645)
-------------- --------------
FROM FUND SHARE TRANSACTIONS -- NET* ................................................ 16,735,156 104,786,805
-------------- --------------
NET ASSETS:
Beginning of period ............................................................... 1,510,746,221 1,386,260,221
-------------- --------------
End of period ..................................................................... $1,368,027,206 $1,510,746,221
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
STATEMENT OF CHANGES IN NET ASSETS (continued)
- --------------------------------------------------------------------------------
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1993
----------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................... 7,211,540 $105,031,130 11,249,959 $178,977,439
Shares issued to shareholders in reinvestment of distributions.. 6,285,614 90,586,929 7,140,277 112,978,666
---------- ------------ ---------- ------------
13,497,154 195,618,059 18,390,236 291,956,105
Less shares repurchased ........................................ (15,075,386) ( 218,252,651) (12,075,905) ( 192,270,492)
---------- ------------ ---------- ------------
Net increase (decrease) ...................................... ( 1,578,232) ($ 22,634,592) 6,314,331 $ 99,685,613
========== ============ ========== ============
CLASS B**
Shares sold .................................................... 2,846,673 $ 41,518,783 261,346 $ 4,144,516
Shares issued to shareholders in
reinvestment of distributions ................................ 84,680 1,203,433 4,463 69,594
---------- ------------ ---------- ------------
2,931,353 42,722,216 265,809 4,214,110
Less shares repurchased ........................................ ( 298,214) ( 4,254,708) ( 62) ( 959)
---------- ------------ ---------- ------------
Net increase ................................................. 2,633,139 $ 38,467,508 265,747 $ 4,213,151
========== ============ ========== ============
CLASS C***
Shares sold .................................................... 63,842 $ 895,248 52,653 $ 837,104
Shares issued to shareholders in
reinvestment of distributions ................................ 5,491 78,992 3,852 61,095
---------- ------------ ---------- ------------
69,333 974,240 56,505 898,199
Less shares repurchased ........................................ ( 5,071) ( 72,000) ( 634) ( 10,158)
---------- ------------ ---------- ------------
Net increase ................................................. 64,262 $ 902,240 55,871 $ 888,041
========== ============ ========== ============
</TABLE>
** Class B shares commenced operations on November 23, 1993.
*** Class C shares commenced operations on May 7, 1993.
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
REDEEMED DURING THE PERIOD, ALONG WITH THE CORRESPONDING DOLLAR VALUE FOR THE
LAST TWO PERIODS.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ....................... $ 15.53 $ 15.29 $ 15.31 $ 14.33 $ 14.77
---------- ---------- ---------- ---------- ----------
Net Investment Income ...................................... 1.12 1.14 1.20 1.29 1.32
Net Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts .............................. ( 1.55) 0.62 ( 0.01) 0.98 ( 0.40)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ....................... ( 0.43) 1.76 1.19 2.27 0.92
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income ....................... ( 1.12) ( 1.14) ( 1.21) ( 1.29) ( 1.35)
Distributions from Net Realized Gain on
Investments Sold and Financial Futures Contracts............ ( 0.08) ( 0.38) -- -- --
Distributions to Shareholders from Capital Paid-in.......... -- -- -- -- ( 0.01)
---------- ---------- ---------- ---------- ----------
Total Distributions .................................... ( 1.20) ( 1.52) ( 1.21) ( 1.29) ( 1.36)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ............................. $ 13.90 $ 15.53 $ 15.29 $ 15.31 $ 14.33
========== ========== ========== ========== ==========
Total Investment Return at Net Asset Value ................. ( 2.75%) 11.80% 8.08% 16.59% 6.71%
RATIO AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) .................. $1,326,058 $1,505,754 $1,386,260 $1,249,980 $1,103,391
Ratio of Expenses to Average Net Assets..................... 1.26% 1.41% 1.44% 1.27% 1.31%
Ratio of Net Investment Income to Average Net Assets ....... 7.74% 7.18% 7.89% 8.81% 9.18%
Portfolio Turnover Rate..................................... 85% 107% 87% 90% 92%
CLASS B (a)
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ....................... $ 15.52 $ 15.90(b)
---------- ----------
Net Investment Income ...................................... 1.04 0.11
Net Realized and Unrealized Loss on
Investments and Financial Futures Contracts .............. ( 1.54) --
---------- ----------
Total from Investment Operations ....................... ( 0.50) 0.11
---------- ----------
Less Distributions:
Dividends from Net Investment Income ....................... ( 1.04) ( 0.11)
Distributions from Net Realized Gain on
Investments Sold and Financial Futures Contracts.......... ( 0.08) ( 0.38)
---------- ----------
Total Distributions .................................... ( 1.12) ( 0.49)
--------- ----------
Net Asset Value, End of Period ............................. $ 13.90 $ 15.52
========= ==========
Total Investment Return at Net Asset Value.................. ( 3.13%) ( 0.90%)
RATIO AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)................... $ 40,299 $ 4,125
Ratio of Expenses to Average Net Assets .................... 1.78% 1.63%*
Ratio of Net Investment Income to Average Net Assets ....... 7.30% 0.57%*
Portfolio Turnover Rate .................................... 85% 107%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
CLASS C (c)
PER SHARE OPERATING PERFOMANCE
Net Asset Value, Beginning of Period......................................................... $ 15.52 $ 15.86(b)
-------- --------
Net Investment Income ....................................................................... 1.19 0.81
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts ........................................................... ( 1.54) 0.04
-------- --------
Total from Investment Operations ........................................................ ( 0.35) 0.85
-------- --------
Less Distributions:
Dividends from Net Investment Income ........................................................ ( 1.19) ( 0.81)
Distributions from Net Realized Gain on Investments Sold
and Financial Futures Contracts ........................................................... ( 0.08) ( 0.38)
-------- --------
Total Distributions ..................................................................... ( 1.27) ( 1.19)
-------- --------
Net Asset Value, End of Period .............................................................. $ 13.90 $ 15.52
======== ========
Total Investment Return at Net Asset Value .................................................. ( 2.19%) 5.45%
RATIO AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).................................................... $ 1,670 $ 867
Ratio of Expenses to Average Net Assets ..................................................... 0.73% 0.90%*
Ratio of Net Investment Income to Average Net Assets ........................................ 8.28% 4.90%*
Portfolio Turnover Rate ..................................................................... 85% 107%
</TABLE>
* On an annualized basis.
(a) Class B shares commenced operations on November 23, 1993.
(b) Initial price to commence operations.
(c) Class C shares commenced operations on May 7, 1993.
THE FINANCIAL HIGHLIGHTS SUMMARIZE THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIODS INDICATED: THE NET INVESTMENT INCOME, GAINS
(LOSSES), DIVIDENDS, AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE
FUND'S NET ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS
PERIOD. ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN
THE FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
SOVEREIGN BOND FUND ON DECEMBER 31, 1994. IT'S DIVIDED INTO TWO MAIN CATEGORIES:
PUBLICLY TRADED BONDS AND SHORT-TERM INVESTMENTS. THE BONDS ARE FURTHER BROKEN
DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S
"CASH" POSITION, ARE LISTED LAST.
SCHEDULE OF INVESTMENTS
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
PUBLICLY TRADED BONDS
BANKS (11.08%)
Abbey National First Capital B.V.,
*Sub Note 10-15-04 ................................................. 8.200% AA- $ 7,000 $ 6,811,420
African Development Bank,
Sub Note 12-15-03 ................................................. 9.750 AA 8,000 8,681,680
Bank of Montreal - Chicago Branch,
Sub Note 11-01-00 ................................................. 9.800 A+ 8,500 8,619,850
Banque Paribas - New York Branch,
*Sub Note 03-01-09 ................................................. 6.875 A- 10,000 8,265,400
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 ............................................. 9.750 AA- 7,500 7,976,100
First Interstate Bancorp.,
Sub Note 05-01-97 ................................................. 12.750 BBB+ 3,250 3,524,170
International Bank for Reconstruction and Development,
*30 Yr Bond 09-01-16 ............................................... 8.250 AAA 5,000 4,950,250
30 Yr Bond 07-15-17 ............................................... 9.250 AAA 15,550 16,945,923
Midland American Capital Corp.,
Gtd Note 11-15-03 ................................................. 12.750 A- 19,932 22,665,674
National Westminster Bank PLC - New York Branch,
Sub Note 05-01-01 ................................................. 9.450 AA- 10,000 10,519,100
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 ............................................. 10.125 A+ 10,630 11,580,535
Scotland International Finance No. 2 B.V.,
*Sub Gtd Note 11-01-06 (R) ......................................... 8.850 A+ 10,250 10,218,020
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 ..................................... 10.360 A- 6,000 6,578,280
Sub Note 11-15-00 ................................................. 11.500 A- 6,400 7,226,752
Toronto Dominion Bank - New York Branch,
*Sub Note 01-15-09 ................................................. 6.450 AA- 10,000 8,180,400
Westdeutsche Landesbank Girozentrale - New York Branch,
Sub Note 06-15-05 ................................................. 6.750 AA+ 10,000 8,854,700
------------
151,598,254
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- ---------- --------- ------
<S> <C> <C> <C> <C>
BROADCASTING (3.88%)
Cablevision Systems Corp.,
Sr Sub Deb 04-01-04 ............................................. 10.750% B $ 8,000 $ 8,000,000
Century Communications Corp.,
Sr Sub Deb 10-15-03 ............................................. 11.875 B+ 10,125 10,555,313
Continental Cablevision, Inc.,
Sr Sub Deb 06-01-07 ............................................. 11.000 BB- 10,375 10,530,625
Jones Intercable, Inc.,
*Sr Sub Deb 07-15-04 ............................................. 11.500 B+ 5,000 5,175,000
Viacom International,
*Sub Deb 07-07-06 ................................................ 8.000 B+ 10,000 8,575,000
TKR Cable I, Inc.,
Sr Deb 10-30-07 ................................................. 10.500 BBB- 10,000 10,227,100
-----------
53,063,038
-----------
CHEMICALS (0.36%)
UCC Investors Holding, Inc.,
Sr Sub Note 05-01-03 ............................................ 11.000 B- 5,000 4,925,000
-----------
COMPUTERS (1.68%)
Unisys Corp.,
Credit Sensitive Note 07-01-97 .................................. 13.500 BB- 21,500 23,005,000
-----------
COSMETICS & TOILETRIES (0.41%)
Johnson & Johnson,
Deb 11-15-23 .................................................... 6.730 AAA 6,750 5,551,875
-----------
DIVERSIFIED OPERATIONS (0.51%)
Litton Industries, Inc.,
Sub Deb 07-01-05 ................................................ 12.625 BBB 6,500 6,946,875
-----------
FINANCE (3.58%)
American Express Co.,
Euronote 12-12-00 ............................................... 11.625 A+ 8,670 9,499,025
Banc One Credit Card Master Trust,
*Class A Asset Backed Cert, Ser 1994-B 12-15-99 .................. 7.550 AAA 10,000 9,853,125
Chrysler Financial Corp.,
Note 11-01-99 ................................................... 12.750 BBB+ 3,000 3,484,080
CIT Group Holdings, Inc. (The),
Medium Term Sr Sub Cap Note 03-15-01 ............................ 9.250 A 5,000 5,187,900
DR Structured Finance Corp.,
*Sec Pass thru Ctf Ser 1993K-1 08-15-18 .......................... 7.430 A 8,000 6,264,960
Great Western Financial Corp.,
Note 02-01-02 ................................................... 8.600 BBB+ 11,000 10,922,120
Merrill Lynch Mortgage Investors, Inc.,
Sr/Sub Pass thru Ctf Ser 1992 B, Class B Sub 04-15-12 ........... 8.500 AA 3,861 3,747,747
-----------
48,958,957
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- ---------- ------
<S> <C> <C> <C> <C>
FOODS (0.52%)
Beatrice Foods, Inc.,
Sr Sub Note Ser B 12-01-01 ...................................... 12.000% B $ 900 $ 886,500
Flagstar Corp.,
Sr Sub Deb 11-01-04 ............................................. 11.250 CCC+ 7,500 6,187,500
------------
7,074,000
------------
GLASS PRODUCTS (0.76%)
Owens-Illinois, Inc.,
Sr Deb 12-01-03 ................................................. 11.000 BB 10,000 10,375,000
------------
GOLD MINING & PROCESSING (1.13%)
Magma Copper Co.,
*Sr Sub Note 12-15-01 ............................................ 12.000 BB+ 14,250 15,390,000
------------
GOVERNMENTAL - FOREIGN (3.71%)
Nova Scotia, Province of,
Deb 04-01-22 .................................................... 8.750 A- 7,500 7,347,300
SF Deb 05-15-13 ................................................. 11.500 A- 8,400 9,340,548
Ontario, Province of,
*Deb 08-31-12 .................................................... 15.250 AA- 6,595 7,971,640
Deb 04-25-13 .................................................... 11.750 AA- 6,000 6,762,060
Quebec, Province de,
Deb 10-01-13 .................................................... 13.000 A+ 11,000 12,950,850
Deb 09-15-14 .................................................... 13.250 A+ 1,000 1,213,180
Saskatchewan, Province of,
Deb 12-15-20 .................................................... 9.375 BBB+ 5,000 5,228,800
------------
50,814,378
------------
GOVERNMENTAL - U.S. (24.15%)
United States Treasury,
Bond 11-15-02 ................................................... 11.625 AAA 8,500 10,332,770
Bond 08-15-05 ................................................... 10.750 AAA 47,775 57,389,719
Bond 08-15-17 ................................................... 8.875 AAA 89,465 97,460,487
Bond 05-15-18 ................................................... 9.125 AAA 47,100 52,619,649
Bond 02-15-23 ................................................... 7.125 AAA 11,700 10,647,000
*Note 04-15-96 ................................................... 9.375 AAA 11,138 11,385,152
*Note 11-15-96 ................................................... 7.250 AAA 19,000 18,851,610
*Note 05-15-98 ................................................... 9.000 AAA 22,000 22,738,980
*Note 11-30-99 ................................................... 7.750 AAA 20,500 20,423,125
Note 05-15-01 ................................................... 8.000 AAA 28,250 28,470,633
------------
330,319,125
------------
GOVERNMENTAL - U.S. AGENCIES (12.26%)
Federal National Mortgage Association,
15 Yr SF Pass thru Ctf 02-01-08 ................................. 7.500 AAA 4,106 3,930,043
*15 Yr SF Pass thru Ctf 01-25-05 ................................. 8.000 AAA 10,000 9,603,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
GOVERNMENTAL - U.S. AGENCIES (continued)
Financing Corp.,
Bond Ser A 02-08-18........................................... 9.400% AAA $ 7,000 $ 7,718,900
Bond Ser B 04-06-18........................................... 9.800 AAA 1,700 1,943,950
Bond Ser D 09-26-19........................................... 8.600 AAA 9,250 9,453,500
Government National Mortgage Association,
30 Yr SF Pass thru Ctf 10-15-23............................... 7.000 AAA 17,989 16,144,740
*30 Yr SF Pass thru Ctf 02-15-24............................... 7.500 AAA 18,817 17,458,195
30 Yr SF Pass thru Ctf 09-15-22 to 05-15-23................... 8.000 AAA 20,505 19,600,959
*30 Yr SF Pass thru Ctf 12-15-22 to 10-15-24................... 8.500 AAA 44,712 43,929,958
*30 Yr SF Pass thru Ctf 11-15-16 to 07-15-21................... 9.000 AAA 25,108 25,352,873
30 Yr SF Pass thru Ctf 11-15-19 to 05-15-21................... 9.500 AAA 7,821 8,069,133
30 Yr SF Pass thru Ctf 06-15-20 to 11-15-20................... 10.000 AAA 3,592 3,774,514
30 Yr SF Pass thru Ctf 01-15-16............................... 10.500 AAA 252 268,906
30 Yr SF Pass thru Ctf 01-15-16............................... 11.000 AAA 390 423,378
------------
167,672,174
------------
INSURANCE (2.24%)
Massachusetts Mutual Life Insurance Co.,
*Surplus Note 11-15-23 (R)..................................... 7.625 AA- 14,500 12,342,545
Metropolitan Life Insurance Co.,
*Surplus Note 11-01-03 (R)..................................... 6.300 AA 9,000 7,548,750
New York Life Insurance Co.,
Surplus Note 12-15-23 (R)..................................... 7.500 AA 13,000 10,752,300
------------
30,643,595
------------
OIL & GAS (3.17%)
Ashland Oil, Inc.,
SF Deb 10-15-17............................................... 11.125 BBB 5,000 5,493,500
Coastal Corp. (The),
Sr Deb 06-15-06............................................... 11.750 BB+ 10,500 11,484,375
Maxus Energy Corp.,
Deb 05-01-13.................................................. 11.250 BB- 428 393,760
*SF Deb 11-15-15............................................... 11.500 BB 2,000 1,840,000
Oryx Energy Co.,
Note 05-01-96................................................. 9.300 BB 5,000 4,958,200
Note 09-15-98................................................. 9.750 BB 8,000 7,776,880
TransTexas Gas Corp.,
Sr Sec Note 09-01-00.......................................... 10.500 BB- 12,000 11,460,000
------------
43,406,715
------------
PAPER (1.26%)
Georgia Pacific Corp.,
Deb 01-15-18.................................................. 9.750 BBB- 7,500 7,576,650
Stone Container Corp.,
*Sr Note 02-01-01.............................................. 9.875 B 5,000 4,700,000
*Sr Note 10-01-04.............................................. 11.500 B 5,000 5,025,000
------------
17,301,650
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S
ISSUER, DESCRIPTION RATE RATING** OMITTED) MARKET VALUE
- ------------------- -------- -------- --------- -------------
<S> <C> <C> <C> <C>
PUBLISHING (2.21%)
News America Holdings Inc.,
Sr Note 10-15-99 .......................... 9.125% BBB- $ 7,500 $ 7,559,625
Sr Note 12-15-01 .......................... 12.000 BBB- 8,700 9,666,222
Time Warner Entertainment Co.,
Note 05-01-12 ............................. 10.150 BBB- 3,200 3,220,288
Time Warner Inc.,
Deb 01-15-13 .............................. 9.125 BBB- 10,850 9,775,199
------------
30,221,334
------------
RETAIL (1.97%)
K mart Corp.,
Lease Ctf 01-01-09 ........................ 13.500 BBB+ 2,000 2,228,060
Pathmark Stores, Inc.,
Sub Note 06-15-02 ......................... 11.625 B 9,100 8,736,000
Sub Note 06-15-02 ........................ 12.625 B 5,000 5,000,000
Safeway Stores, Inc.,
Lease Ctf 01-15-09 ........................ 13.500 BB+ 2,750 3,038,750
S.D. Warren Co.,
*Sr Sub Note 12-15-04 (R) .................. 12.000 B+ 2,500 2,537,500
Thrifty Payless Inc.,
*Sr Note 04-15-03 .......................... 11.750 B 5,500 5,390,000
------------
26,930,310
------------
STEEL (0.88%)
Weirton Steel Corp.,
Sr Note 10-15-99 .......................... 10.875 B 12,250 12,096,875
------------
TELECOMMUNICATIONS (0.69%)
British Telecom Finance Inc.,
*Gtd Deb 02-15-19 .......................... 9.625 AAA 9,000 9,485,730
------------
TOBACCO (0.69%)
RJR Nabisco Capital Corp.,
*Sr Note 04-15-99 .......................... 8.300 BBB- 5,000 4,818,750
RJR Nabisco, Inc.,
*Note 12-01-02 ............................. 8.625 BBB- 5,000 4,637,650
------------
9,456,400
------------
TRANSPORTATION (9.50%)
American Airlines, Inc.,
1991-A Pass thru Trust 01-02-07 ........... 9.710 BBB- 7,597 7,304,728
Sec Equip Ctf Ser B 01-06-05 .............. 14.375 BBB- 12,000 12,760,800
AMR Corp.,
*Deb 05-15-01 .............................. 9.500 BB+ 4,250 4,201,168
Delta Air Lines, Inc.,
*Deb 05-15-21 .............................. 9.750 BB 5,050 4,642,061
Equip Tr Ctf Ser A 06-01-10 ............... 10.000 BB+ 1,750 1,655,850
Equip Tr Ctf Ser B 06-01-10 ............... 10.000 BB+ 2,928 2,744,209
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
TRANSPORTATION (continued)
NWA Inc.,
Note 08-01-96........................................... 8.625% B- $14,165 $ 13,598,400
Railcar Trust No. 1992-1,
Trust Note Ser 92-1 06-01-04............................ 7.750 AAA 17,674 17,226,442
Scandinavian Airlines System,
Bond 07-20-99........................................... 9.125 A3 10,234 10,283,942
Sea-Land Service, Inc.,
Sec Bond Ser A 01-02-11................................. 10.600 BBB 5,000 5,245,550
Sec Bond Ser B 01-02-11................................. 10.600 BBB 7,000 7,343,770
Sec Bond Ser C 01-02-11................................. 10.600 BBB 6,000 6,294,660
Swire Pacific Ltd.,
*Note 09-29-04 (R)....................................... 8.500 A 5,000 4,811,000
United Air Lines, Inc.,
Deb 07-15-21............................................ 10.250 BB 5,000 4,712,000
*Deb Ser A 05-01-04...................................... 10.670 BB 4,275 4,310,953
*Deb Ser B 05-01-14...................................... 11.210 BB 10,460 10,715,433
USAir 1990-A Pass Through Trusts,
Pass thru Ctf Ser 1990-A1 03-19-05...................... 11.200 BB 14,024 12,060,406
------------
129,911,372
------------
UTILITIES (9.82%)
ALLTEL Corp.,
*Deb 04-01-09............................................ 10.375 A+ 5,000 5,329,200
British Columbia Hydro and Power Auth.
(Gtd by Prov of British Columbia),
Bond Ser FN 09-01-13.................................... 12.500 AA+ 6,175 7,158,492
CTC Mansfield Funding Corp.,
Sec Lease Oblig 09-30-16................................ 11.125 B+ 21,685 20,092,670
E.I.P. Refunding Corp.,
Sec Fac Bond 10-01-12................................... 10.250 B+ 9,795 8,717,550
First PV Funding Corp.,
*Lease Oblig Ser 1986 A 01-15-14......................... 10.300 B 7,150 6,792,500
GTE Corp.,
Deb 11-15-17............................................ 10.300 BBB+ 8,750 9,510,638
Hydro-Quebec (Gtd by Province of Quebec),
Deb 02-01-03............................................ 7.375 A+ 4,710 4,393,347
Deb Ser FV 02-01-12..................................... 11.750 A+ 5,000 6,322,050
Deb Ser HS 02-01-21..................................... 9.400 A+ 11,600 12,028,388
Iberdrola International B.V.,
Gtd Note 10-01-02 (R)................................... 7.500 AA- 8,000 7,491,840
Gtd Note 06-01-03 (R)................................... 7.125 AA- 8,654 7,898,592
Long Island Lighting Co.,
*Gen Ref Bond 05-01-21................................... 9.750 BBB- 2,000 1,833,040
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S
ISSUER, DESCRIPTION RATE RATING** OMITTED) MARKET VALUE
- ------------------- -------- -------- --------- ------------
<S> <C> <C> <C> <C>
UTILITIES (CONTINUED)
Midland Funding Corp. I,
Sr Sec Lease Oblig Ser C 07-23-02 .............................. 10.330% BB- $ 7,033 $ 6,646,546
System Energy Resources, Inc.,
*1st Mtg 09-01-96 ............................................... 10.500 BBB- 10,870 11,229,471
*Sec Lease Oblig 01-15-14 ....................................... 8.200 BBB- 3,000 2,589,330
Tenaga Nasional Berhad,
*Note 06-15-04 (R) .............................................. 7.875 A 6,000 5,696,280
Transco Energy Co.,
*Note 07-01-99 .................................................. 11.250 B+ 10,000 10,637,500
--------------
134,367,434
--------------
TOTAL PUBLICLY TRADED BONDS
(Cost $1,416,676,785) (96.46%) 1,319,515,091
------ --------------
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (1.50%)
Investment in a joint repurchase agreement transaction
with Lehman Bros., Inc. Dated 12-30-94, Due 01-03-95
(secured by U.S. Treasury Bonds, 9.25%, due 02-15-16 and
8.125%, due 08-15-21, and U.S. Treasury Notes, 5.500%,
due 02-15-95 and 4.625%, due 08-15-95) Note A .................. 5.850 -- 20,558 20,558,000
--------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 3.00% ............................................. 2,836
--------------
TOTAL SHORT-TERM INVESTMENTS ( 1.50%) 20,560,836
------ --------------
TOTAL INVESTMENTS (97.96%) $1,340,075,927
====== ==============
NOTES TO THE SCHEDULE OF INVESTMENTS
(R) These securites are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $69,296,827 as of December 31, 1994. See Note A
of the Notes to Financial Statements for valuation policy.
* Securities, other than short-term investments, newly added to the portfolio
during the year ended December 31, 1994.
** Credit ratings are unaudited and are rated by Moody's Investor Services or
John Hancock Advisers, Inc. where Standard and Poors ratings are not
available.
The percentage shown for each investment category is the total value as a
percentage of the net assets of the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Sovereign Bond Fund (the "Fund") is a diversified open-end
investment management company, registered under the Investment Company Act of
1940.
The Trustees have authorized the issuance of multiple classes of the Fund,
designated as Class A, Class B and Class C. The shares of each class represent
an interest in the same portfolio of investments of the Fund and have equal
rights to voting, redemption, dividends and liquidation, except that certain
expenses, subject to the approval of the Trustees, may be applied differently to
each class of shares in accordance with current regulations of the Securities
and Exchange Commission and the Internal Revenue Service. Shareholders of a
class which bears distribution/service expenses under the terms of a
distribution plan, have exclusive voting rights regarding such 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 instruments 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,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $11,341,446 of a capital
loss carryforward available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforward is used by the Fund, no
capital gain distributions will be made. The carryforward expires December 31,
2002. Additionally, net capital losses of $3,227,839 attributable to security
transactions occurring after October 31, 1994 are treated as arising on the
first day (January 1, 1995) 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. Dividends paid by the
Fund with respect to each class of shares will be calculated in the same
manner, at the same time and will be in the same amount, except for the effect
of expenses that may be applied differently to each class as explained
previously.
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. Transfer
agent expenses and distribution/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.
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.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates. The
Fund will not engage in transactions in futures contracts for speculation, but
only for hedging or other permissible risk management purposes. The Fund's
ability to hedge successfully will depend on the Adviser's ability to predict
accurately the future direction of interest rate changes and other market
factors. 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". Each day, the futures contract
is valued at the official settlement price of the board of trade or U.S.
commodities exchange. Subsequent payments, known as "variation margin", to and
from the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market", are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures position because of position limits or limits on daily price
fluctuations imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures transactions.
At December 31, 1994, open positions in financial futures contracts are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MARCH, 1995 200 U.S. TREASURY BOND SHORT ($587,500)
MARCH, 1995 180 U.S. TREASURY NOTE SHORT ( 241,875)
--------
($829,375)
========
</TABLE>
At December 31, 1994, the Fund has deposited in a segregated account,
$780,000 par value of U.S. Treasury Bond, 8.875%, 08-15-17 to cover margin
requirements on open financial futures contracts.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly fee to
the Adviser for a continuous investment program equivalent on an annual basis to
the sum of (a) 0.50% of the first $1,500,000,000 of the Fund's average daily net
asset value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next
$500,000,000 and (d) 0.35% of the Fund's average daily net asset value in excess
of $2,500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are 2.5% of the first $30,000,000 of the
Fund's average daily net asset value, 2.0% of the next $70,000,000 and 1.5% of
the remaining 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. Prior to January 1, 1995, JH
Funds was known as John Hancock Broker Distribution Services, Inc. For the
period ended December 31, 1994, JH Funds received net sales charges of
$3,002,073 with regard to sales of Class A shares. Out of this amount, $349,107
was retained and used for printing of prospectuses, advertising, sales
literature and other purposes, and $254,086 was paid as sales commissions and
first year service fees to unrelated broker-dealers and $2,398,880 was paid as
sales commissions and first year service fees to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker
Anthony") and Sutro & Co., Inc. ("Sutro").
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
The Adviser's indirect parent, John Hancock Mutual Life Insurance Company, is
the indirect sole shareholder of Distributors and John Hancock Freedom
Securities Corporation and its subsidiaries, which include Tucker Anthony and
Sutro, all of which are broker-dealers.
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 sale of Class B shares. For the period ended December 31, 1994,
contingent deferred sales charges received by JH Funds amounted to $86,419.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds, for
distribution and service expenses at an annual rate not to exceed 0.30% of the
Class A average daily net assets and 1.00% of the Class B average daily net
assets to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.25% of such payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers, which
became effective July 7, 1993. 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 Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. Prior to January 1, 1995, Investor Services was known as John
Hancock Fund Services. For the period ended December 31, 1994, the Fund paid
Investor Services a monthly transfer agent fee equivalent, on an annual basis,
to 0.40%, 0.22%, and 0.10% (0.40% prior to April 1, 1994) of the average daily
net asset value, attributable to Class A, Class B and Class C shares of the
Fund, respectively, plus out of pocket expenses incurred by Investor Services on
behalf of the Fund for proxy mailings. Effective January 1, 1995, Class A and
Class B shares will pay transfer agent fees based on transaction volume and the
number of shareholder accounts.
Messrs. Edward J. Boudreau, Jr., Francis C. Cleary, Jr., (until December
14, 1994), and 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.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of securities, other than
obligations of the U.S. government and its agencies and short-term securities,
during the period ended December 31, 1994, aggregated $605,559,932 and
$711,784,608, respectively. Purchases and proceeds from sales of obligations of
the U.S. government and its agencies, during the period ended December 31, 1994,
aggregated $649,530,400 and $540,820,353, respectively.
The cost of investments owned at December 31, 1994 (excluding the corporate
savings account) for Federal income tax purposes was $1,441,028,880. Gross
unrealized appreciation and depreciation of investments aggregated $4,974,658
and $105,930,447, respectively, resulting in net unrealized depreciation of
$100,955,789.
21
<PAGE>
John Hancock Funds - Sovereign Bond Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock Sovereign Bond Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Sovereign Bond Fund (the "Fund"), including the schedule of investments,
as of December 31, 1994, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and the 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
December 31, 1994, by correspondence with the custodian. 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
John Hancock Sovereign Bond Fund at December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
[SIGNATURE]
/s/ Ernst & Young LLP
Boston, Massachusetts
February 13, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the taxable distributions of the Fund for its fiscal year ended
December 31, 1994.
Corporate Dividends Received Deduction: None of the 1994 dividends qualify
for the corporate dividends received deduction.
U.S. Government Obligations: Income from these investments may be exempt
from certain state and local taxes. The percentage of assets invested in U.S.
Treasury bonds, bills, and notes was 24.10% at year end. The percentage of
income derived from U.S. Treasury bonds, bills, and notes was 18.69%. The
percentage of assets invested in obligations of other U.S. government agencies
(excluding securities issued by Federal National Mortgage Association and
Government National Mortgage Association) was 1.39% at year end. The percentage
of income derived from these investments was 1.29% For specific information on
exemption provisions in your state, consult your local state tax office or your
tax adviser.
22
<PAGE>
NOTES
John Hancock Funds - Sovereign Bond Fund
23
<PAGE>
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
[A 1/2" by 1/2" John Hancock logo in upper left hand corner of the page. A box
sectioned in quadrants with a triangle in upper left, a circle in upper right, a
cube in lower left and a diamond in lower right. A tag line below reads: "A
Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Sovereign Bond Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with the caption "Printed on
Recycled Paper."]
JH 2100A 12/94
<PAGE>
JOHN HANCOCK INVESTMENT QUALITY BOND FUND
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s)
Edward J. Boudreau, Jr., Thomas H. Drohan and James B. Little,
with full power of substitution in each, to vote all the shares of
beneficial interest of John Hancock Investment Quality Bond Fund
("Investment Quality Bond Fund"), a series of John Hancock Bond
Fund (the "Trust"), which the undersigned is (are) entitled to
vote at the Special Meeting of Shareholders (the "Meeting") of
Investment Quality Bond Fund to be held at 101 Huntington Avenue,
Boston, Massachusetts, on September 8, 1995 at 9:00 a.m., Boston
time, and at any adjournment of the Meeting. All powers may be
exercised by a majority of said proxy holders or substitutes
voting or acting, or, if only one votes and acts, then by that
one. Receipt of the Proxy Statement dated July 16, 1995 is hereby
acknowledged. If not revoked, this proxy shall be voted:
(1) To approve an Agreement and Plan of Reorganization
between the Trust, on behalf of Investment Quality Bond
Fund, and John Hancock Sovereign Bond Fund ("Sovereign
Bond Fund"), providing for Sovereign Bond Fund's
acquisition of all Investment Quality Bond Fund's assets
in exchange solely for Sovereign Bond Fund's assumption
of Investment Quality Bond Fund's liabilities and the
issuance of Sovereign Bond Fund Class A and Class B
shares to Investment Quality Bond Fund for distribution
to its shareholders.
____ ____ ____
FOR :____: AGAINST :____: ABSTAIN :____:
(2) In the discretion of said proxy or proxies, to act upon
such other matters as may properly come before the
Meeting or any adjournment of the Meeting.
<PAGE>
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL (1) IF NO
SPECIFICATION IS MADE ABOVE. AS TO ANY OTHER MATTER, SAID PROXY
OR PROXIES SHALL VOTE IN ACCORDANCE WITH THEIR BEST JUDGMENT.
Date __________________, 1995 ________________________________
Signature(s)
________________________________
NOTE: Signature(s) should agree
with name(s) printed herein. When
signing as attorney, executor,
administrator, trustee or guardian,
please give your full title as
such. If a corporation, please
sign in full corporate name by
president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE
<PAGE>
JOHN HANCOCK SOVEREIGN BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
July 16, 1995
This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the related Prospectus (also dated
July 16, 1995) which covers Class A and Class B shares of beneficial
interest of John Hancock Sovereign Bond Fund ("Sovereign Bond Fund")
to be issued in exchange for all of the net assets of John Hancock
Investment Quality Bond Fund ("Investment Quality Bond Fund"). Please
retain this Statement of Additional Information for future reference.
A copy of the Prospectus can be obtained free of charge by calling
Shareholder Services at 1-800-225-5291 or by written request to
Sovereign Bond Fund at 101 Huntington Avenue, Boston, Massachusetts
02199.
TABLE OF CONTENTS
Page
Introduction................................................... 3
Additional Information about Sovereign Bond Fund............... 3
General Information and History
Investment Objectives and Policies
Management of Sovereign Bond Fund
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of
Sovereign Bond Fund Shares
Underwriters
Calculation of Performance Data
Financial Statements
Additional Information About Investment Quality Bond Fund...... 4
General Information and History
Investment Objective and Policies
Management of Investment Quality Bond Fund
Control Persons and Principal Holders of Shares
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Investment Quality
Bond Fund Shares
Underwriters
Calculation of Performance Data
Financial Statements
<PAGE>
EXHIBITS
A - Statement of Additional Information, dated May 15, 1995 of
Investment Quality Bond Fund.
B - Statement of Additional Information, dated May 1, 1995 of
Sovereign Bond Fund.
C - Pro Forma Combined Financial Statements at December 31, 1994
and for the period then ended of Sovereign Bond Fund and
Investment Quality Bond Fund.
-2-
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to
supplement the information provided in a Proxy Statement and
Prospectus dated July 16, 1995 (the "Proxy Statement and
Prospectus"). The Proxy Statement and Prospectus has been sent to the
shareholders of Investment Quality Bond Fund in connection with the
solicitation by the management of John Hancock Bond Fund (the
"Trust") of proxies to be voted at the Special Meeting of
Shareholders of Investment Quality Bond Fund to be held on September
8, 1995. This Statement of Additional Information includes the
statements of additional information of Investment Quality Bond Fund,
dated May 15, 1995 (the "Investment Quality Bond Fund SAI"), and
Sovereign Bond Fund, dated May 1, 1995 (the "Sovereign Bond Fund
SAI"). The Investment Quality Bond Fund SAI and the Sovereign Bond
Fund SAI are included with this Statement of Additional Information
and are incorporated herein by reference.
ADDITIONAL INFORMATION ABOUT SOVEREIGN BOND FUND
General Information and History
For additional information about Sovereign Bond Fund generally
and its history, see "Organization of the Fund" in the Sovereign Bond
Fund SAI.
Investment Objectives and Policies
For additional information about Sovereign Bond Fund's
investment objectives and policies, see "Investment Objectives and
Policies" and "Investment Restrictions" in the Sovereign Bond Fund
SAI.
Management of Sovereign Bond Fund
For additional information about Sovereign Bond Fund's Board of
Trustees, officers and management personnel, see "Those Responsible
for Management" in the Sovereign Bond Fund SAI.
Investment Advisory and Other Services
For additional information about Sovereign Bond Fund's
investment adviser, custodian and independent accountants, see
"Investment Advisory and Other Services," "Distribution Contract,"
"Transfer Agent Services," "Custody of Portfolio" and "Independent
Auditors" in the Sovereign Bond Fund SAI.
Brokerage Allocation and Other Practices
For additional information about Sovereign Bond Fund's
brokerage allocation practices, see "Brokerage Allocation" in the
Sovereign Bond Fund SAI.
-3-
<PAGE>
Shares of Beneficial Interest
For additional information about the voting rights and other
characteristics of Sovereign Bond Fund's shares of beneficial
interest, see "Description of the Fund's Shares" in the Sovereign
Bond Fund SAI.
Purchase, Redemption and Pricing of Sovereign Bond Fund Shares
For additional information about the determination of net asset
value, see "Net Asset Value" in the Sovereign Bond Fund SAI.
Underwriters
For additional information about Sovereign Bond Fund's
principal underwriter and the distribution contract between the
principal underwriter and Sovereign Bond Fund, see "Distribution
Contract" in the Sovereign Bond Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of
Sovereign Bond Fund, see "Calculation of Performance" in the
Sovereign Bond Fund SAI.
Financial Statements
Audited financial statements of Sovereign Bond Fund as at
December 31, 1994 are set forth in the Sovereign Bond Fund SAI
included herein as Exhibit B.
ADDITIONAL INFORMATION ABOUT INVESTMENT QUALITY BOND FUND
General Information and History
For additional information about Investment Quality Bond Fund
generally and its history, see "Organization of the Fund" in the
Investment Quality Bond Fund SAI.
Investment Objectives and Policies
For additional information about Investment Quality Bond Fund's
investment objectives, policies and restrictions see "Investment
Objectives and Policies" and "Investment Restrictions" in the
Investment Quality Bond Fund SAI.
Management of Investment Quality Bond Fund
For additional information about Investment Quality Bond Fund's
Board of Trustees, officers and management personnel, see "Those
Responsible for Management" in the Investment Quality Bond Fund SAI.
-4-
<PAGE>
Control Persons and Principal Holders of Shares
For additional information about control persons of Investment
Quality Bond Fund and principal holders of shares of Investment
Quality Bond Fund see "Those Responsible for Management" in the
Investment Quality Bond Fund SAI.
Investment Advisory and Other Services
For additional information about Investment Quality Bond Fund's
investment adviser, custodian and independent accountants, see
"Investment Advisory and Other Services," "Distribution Contract,"
"Transfer Agent Services," "Custody of Portfolio" and "Independent
Auditors" in the Investment
Quality Bond Fund SAI.
Brokerage Allocation and Other Practices
For additional information about Investment Quality Bond Fund's
brokerage allocation practices, see "Brokerage Allocation" in the
Investment Quality Bond Fund SAI.
Shares of Beneficial Interest
For additional information about the voting rights and other
characteristics of shares of beneficial interest of Investment
Quality Bond Fund, see "Description of the Fund's Shares" in the
Investment Quality Bond Fund SAI.
Purchase, Redemption and Pricing of Investment Quality Bond Fund
Shares
For additional information about the determination of net asset
value, see "Net Asset Value" in the Investment Quality Bond Fund SAI.
Underwriters
For additional information about Investment Quality Bond Fund's
principal underwriter and the distribution contract between the
principal underwriter and Investment Quality Bond Fund, see
"Distribution Contract" in the Investment Quality Bond Fund SAI.
Calculation of Performance Data
For additional information about the investment performance of
Investment Quality Bond Fund, see "Calculation of Performance" in the
Investment Quality Bond Fund SAI.
-5-
<PAGE>
Financial Statements
Audited financial statements of Investment Quality Bond Fund as
at December 31, 1994 are set forth in the Investment Quality Bond
Fund SAI included herein as Exhibit A. Pro Forma combined financial
statements as at December 31, 1994 and for the period then ended for
Investment Quality Bond Fund as though the Reorganization had
occurred on December 31, 1994 are attached as Exhibit C.
-6-
<PAGE>
EXHIBIT A
JOHN HANCOCK INVESTMENT QUALITY BOND FUND
JOHN HANCOCK ADJUSTABLE U.S. GOVERNMENT TRUST
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 15, 1995
This Statement of Additional Information ("SAI") provides information
about John Hancock Investment Quality Bond Fund ("Quality Bond Fund") and John
Hancock Adjustable U.S. Government Trust ("Adjustable Government Fund")
(individually, a "Fund" and collectively, the "Funds"), each a diversified
series of John Hancock Bond Fund (the "Trust"), in addition to the information
that is contained in each Fund's Prospectus, dated May 15, 1995.
This SAI is not a prospectus. It should be read in conjunction with
each Fund's Prospectus, a copy of which can be obtained free of charge by
writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Cross- Cross-
Referenced Referenced
Statement of to Quality to Adjustable
Additional Bond Fund Government
Information Prospectus Fund Prospectus
Page Page Page
------------ ---------- ---------------
<S> <C> <C> <C>
Organization of the Trust............... 1 7 7
Investment Objective and Policies....... 1 4 4
Certain Investment Practices............ 3 25 25
Investment Restrictions................. 9 4 4
Those Responsible for Management........ 13 7 7
Investment Advisory and Other Services.. 20 7 7
Distribution Contracts.................. 23 7 7
Net Asset Value......................... 26 14 14
Initial Sales Charge on Class A Shares.. 27 12 13
Deferred Sales Charge on Class B Shares. 28 12 13
Special Redemptions..................... 28 22 22
Additional Services and Programs........ 29 22 22
Description of the Funds' Shares........ 30 7 7
Tax Status.............................. 32 10 11
Calculation of Performance.............. 36 11 12
Brokerage Allocation.................... 40 N/A N/A
Transfer Agent Services................. 42 Back Cover Back Cover
Custody of Portfolio.................... 42 Back Cover Back Cover
Independent Auditors.................... 42 Back Cover Back Cover
Appendix A.............................. A-1 N/A N/A
Financial Statements.................... F-1 3 3
</TABLE>
<PAGE>
ORGANIZATION OF THE TRUST
The Trust is an open-end management investment company
organized as a Massachusetts business trust under a Declaration of
Trust dated December 12, 1984. The Trust currently has six series.
Prior to December 22, 1994, Quality Bond Fund was called Transamerica
Quality Bond Fund and Adjustable Government Fund was called
Transamerica Adjustable U.S. Government Trust.
Each Fund is managed by John Hancock Advisers, Inc. (the
"Adviser"), a wholly-owned indirect subsidiary of John Hancock Mutual
Life Insurance Company (the "Life Company"), chartered in 1862 with
national headquarters at John Hancock Place, Boston, Massachusetts.
John Hancock Funds, Inc. ("John Hancock Funds") acts as principal
distributor of the shares of each Fund.
INVESTMENT OBJECTIVE AND POLICIES
QUALITY BOND FUND
The investment objective of Quality Bond Fund is to earn a high
level of current income consistent with prudent risk and safety of
principal. Quality Bond Fund invests primarily in "investment
quality" fixed income securities rated within the three highest
quality ratings assigned by recognized rating services such as
Standard & Poor's Corporation (AAA, AA or A) or Moody's Investors
Service, Inc., (Aaa, Aa or A) and high quality money market
instruments, including commercial paper, certificates of deposit and
bankers' acceptances. In order to hedge against changes in interest
rates, the Fund may also purchase put and call options and engage in
transactions involving interest rate futures contracts and options on
such contracts.
The Fund and the Adviser are of the view that the term
"investment quality," in the Fund's name, denotes an overall
dollar-weighted average portfolio composition of investment grade and
that investing in securities rated less than investment grade (e.g.,
high yield/high risk securities) is appropriate in respect of its
investment objective so long as the dollar-weighted average quality of
its portfolio on a annual basis (notwithstanding unusual
circumstances) remains equal to or more than the lowest investment
grade category.
The ratings given to securities by rating agencies represent
their respective opinions of the qualities of the securities they
undertake to rate and are a generally accepted barometer of risk.
Nonetheless, such ratings are general and not absolute standards of
quality; their limitations include: (1) ratings are based largely on
historical financial data and may not accurately reflect the current
financial outlook of the issuer; (2) frequent occurrence of a lag
between the time a rating is assigned and the time publication of it
is updated; and (3) large differences may be present among the current
financial conditions of issuers within each rating category. For
these reasons, the Adviser does not rely solely on the ratings
assigned by recognized rating agencies in its evaluation and
monitoring of the Fund's investments to assure that the Fund's overall
portfolio is constituted in a manner consistent with the Fund's
investment objective and policies. Additionally, credit quality
limitations applicable to securities do not apply to deposits at the
bank or banks in which cash is maintained by the Fund. Many issuers
of fixed income securities choose not to have their obligations rated.
Although unrated securities eligible for purchase by the Fund must be
determined to be comparable in quality to securities having specified
ratings, the market for unrated securities may not be as broad as for
rated securities since many investors rely on rating agencies for
credit appraisal. In determining which securities to purchase or hold
in the
<PAGE>
Fund's portfolio (including rated or unrated securities) and in
seeking to reduce credit and interest rate risk consistent with the
Fund's investment objective and policies, the Adviser will rely on
information from various sources, including: the rating of the
security; research, analysis and appraisals of brokers and dealers;
the views of the Fund's Trustees and others regarding economic
developments and interest rate trends; and the Adviser's own analysis
of factors it deems relevant as it pertains to achieving the Fund's
investment objective(s).
SPECIAL CONSIDERATIONS. Although Quality Bond Fund's
investment policies provide that up to 35% of its total assets may be
invested in fixed income securities rated lower than the three highest
categories of either Standard & Poor's Corporation ("S&P") or Moody's
Investors Services, Inc. ("Moody's"), the Fund has no present
intention of investing more than 34% of its net assets in securities
rated lower than BBB by S&P or Baa by Moody's ("High Yield/High Risk
Securities"). In addition to the risks described in the Prospectus,
(1) the value of high yield/high risk securities may be more
susceptible to real and perceived adverse economic or industry
conditions; (2) because of the absence of an established secondary
market, these securities may have a relatively low trading market
liquidity; and (3) low liquidity and adverse conditions could make it
difficult at times to sell certain securities or result in prices less
than those used in valuation of such securities held by the Fund.
ADJUSTABLE GOVERNMENT FUND
Adjustable Government Fund seeks, as its primary investment
objective, a high level of current income consistent with low
volatility of principal. Adjustable Government Fund pursues its
investment objective by investing all of its assets in Adjustable U.S.
Government Fund (the "Portfolio"), which in turn invests in a
portfolio consisting primarily of securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities.") Under normal circumstances, at least 65% of
the Portfolio's total assets will be invested in adjustable rate
mortgage securities ("ARMs") and pass-through securities representing
interests in loan pools and having periodic interest rate resets,
which in each case are U.S. Government Securities. Shares of the
Portfolio (which is also a series of the Trust) are offered by a
separate Prospectus and Statement of Additional Information to
institutional investors only.
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES AND
INSTRUMENTALITIES. In addition to U.S. Government Securities which
are adjustable rate mortgage securities and other pass through
securities representing interests in loan pools and having periodic
interest rate resets, Adjustable Government Fund (through the
Portfolio) may invest in a variety of other securities issued or
guaranteed as to principal and interest by the U.S. Government, its
agencies and instrumentalities. U.S. Treasury Bills, notes and bonds
are supported by the full faith and credit of the United States. Other
U.S. Government Securities are supported either by the full faith and
credit of the U.S. Government (such as securities of the Small
Business Administration), the right of the issuer to borrow from the
Treasury (such as securities of the Federal Home Loan Banks), the
discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National
Mortgage Association), or only the credit of the issuer. No assurance
can be given that the U.S. Government will provide financial support
to U.S. Government agencies, authorities or instrumentalities in the
future.
Adjustable Government Fund (through the Portfolio) may also
invest in separately U.S. traded principal and interest components of
securities guaranteed or issued by the U.S. Treasury if
-2-
<PAGE>
such components are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program
("STRIPS").
Other investments of Adjustable Government Fund (and the
Portfolio) are set forth below under "Certain Investment Practices."
CERTAIN INVESTMENT PRACTICES
SINCE ADJUSTABLE GOVERNMENT FUND INVESTS ALL ITS ASSETS IN THE
PORTFOLIO, THE FOLLOWING INVESTMENT POLICY IS APPLICABLE TO BOTH THE
PORTFOLIO AND QUALITY BOND FUND.
LENDING OF PORTFOLIO SECURITIES. In order to generate
additional income, the Quality Bond Fund and the Portfolio may each,
from time to time, lend securities from their portfolios to brokers,
dealers and financial institutions such as banks and trust companies.
Such loans will be secured by collateral consisting of cash or U.S.
Government Securities which will be maintained in an amount equal to
at least 100% of the current market value of the loaned securities.
During the period of each loan, each of the Quality Bond Fund and the
Portfolio will receive the income on both the loaned securities and
the collateral and thereby increase their return. Cash collateral
will be invested in short-term high quality debt securities, which
will increase the current income of the Quality Bond Fund or the
Portfolio. The loans will be terminable by each of the Quality Bond
Fund and the Portfolio at any time and by the borrower on one day's
notice. Each of the Quality Bond Fund and the Portfolio will have the
right to regain record ownership of loaned securities to exercise
beneficial rights such as rights to interest or other distributions or
voting rights on important issues. Each of the Quality Bond Fund and
the Portfolio may pay reasonable fees to persons unaffiliated with the
Quality Bond Fund or the Portfolio for services in arranging such
loans. Lending of portfolio securities involves a risk of failure by
the borrower to return the loaned securities, in which event the
Quality Bond Fund or the Portfolio may incur a loss.
QUALITY BOND FUND
THE FOLLOWING INVESTMENT POLICIES ARE APPLICABLE ONLY TO THE
QUALITY BOND FUND:
LEVERAGE. As described in the Quality Bond Fund's Prospectus,
the Fund may from time to time increase its ownership of fixed income
securities by borrowing money on an unsecured basis to purchase
securities, provided that the aggregate amount of such borrowing, on
the date such borrowing is incurred, does not exceed 20% of the Fund's
total assets and only when (i) the cost of borrowing is below the
yield on securities being purchased at the time of such borrowing or
(ii) the cost of borrowing is equal to or greater than the yield of
securities being purchased at such time, if it is anticipated that
long-term interest rates shortly will decline in order that the Fund
may benefit from possible capital appreciation. Borrowings, for
temporary purposes, will only be made for the purpose set forth in
(ii) above with the prior approval of the Trustees.
The extent of borrowing will depend upon the availability of
funds, as well as the cost of borrowing, compared with the possible
benefits the Fund expects to achieve. Any income derived from the
borrowed funds used for investment purposes by the Fund, in excess of
the cost of borrowing, may cause the Fund's net income to rise more
rapidly than if borrowing were not used. If the income derived from
the borrowed funds is not sufficient to cover the cost of borrowing,
the Fund's net income may decline more rapidly than if borrowings were
not used. Should the Fund benefit from capital appreciation, any
investment gain made with the additional monies in excess of their net
cost to the Fund may cause the Fund's net asset value to rise faster
than would
-3-
<PAGE>
otherwise be the case. However, if the investment performance on the
borrowed monies fails to cover their net cost to the Fund, the
Fund's net asset value may decrease faster than would otherwise be the
case.
FOREIGN SECURITIES. Foreign investments of the Fund, as
discussed in the Prospectus, may include debt securities issued by
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to
promote economic reconstruction or development and international
banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the
World Bank), the European Steel and Coal Community, the Asian
Development Bank, and the Inter-American Development Bank. The
government members or "stockholders" usually make initial capital
contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the
supranational entity is unable to repay its borrowing. Each
supranational entity's lending activities are limited to a percentage
of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. Foreign
securities, like other securities of the Fund, will be held by the
Trust's custodian or by any sub-custodian which may hereafter be
appointed in accordance with applicable requirements of the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules
thereunder.
OPTIONS TRANSACTIONS. The matrix set forth below relates to
the use of certain major strategies involving options to different
interest rate outlooks by the Fund.
INTEREST RATE OUTLOOK
---------------------
DECLINING STABLE RISING
INTEREST INTEREST INTEREST
FUND STRATEGIES RATES RATES RATES
--------------- --------- -------- --------
Covered Call Writing
Out-of-the Money X
At-the-Money X
In-the-Money X
Purchase of Puts X
Secured Put Writing
Out-of-the-Money X
At the-Money X
In-the-Money X
Purchase of Calls X
COVERED CALL WRITING. An investor is engaged in covered call
writing when he sells the right to buy a security that he already owns
for a fee or premium. Because he already owns the security, the call
is collateralized or "covered." The exercise price of the call
options may be below ("in-the-money"), equal to ("at-the-money"), or
above ("out-of-the-money") the current market value of the underlying
securities at the times the options are written.
PURCHASE OF PUT. A right to sell a security at a specified
price for a specific period of time.
SECURED PUT WRITING. An investor is engaged in secured put
writing when he accepts the obligation to purchase a security at the
exercise price for a fee or premium and holds cash equivalents in
reserve to purchase the securities. Because the cash is reserved if
the option is
-4-
<PAGE>
exercised, the put is "secured." As in covered call writing, the
option can be "in," "at" or "out of the money."
PURCHASE OF CALL. A right to buy a security at a specified
price for a specific period of time.
SECURITIES OPTIONS. An option position may be closed out only
on an Exchange which provides a secondary market for an option of the
same series. Although the Fund will write call and put options only
when the Adviser believes that a liquid secondary market will exist on
an Exchange for options of the same series so that the Fund can effect
a closing purchase transaction if it desires to close out its
positions, there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. If a covered
call option writer is unable to effect a closing purchase transaction,
it cannot sell the underlying security until the option expires or the
option is exercised. Accordingly, a covered call option writer may
not be able to sell an underlying security at a time when it might
otherwise be advantageous to do so. A secured put option writer who
is unable to effect a closing purchase transaction would continue to
bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a
secured put writer would be unable to utilize the amount held in cash
or U.S. Government Securities as security for the put option for other
investment purposes until the exercise or expiration of the option.
In connection with the qualification of the Fund as a regulated
investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), other restrictions on the Fund's ability to enter into
certain option transactions may apply from time to time (see "Tax
Status").
Possible reasons for the absence of a liquid secondary market
on an Exchange include the following: (a) insufficient trading
interest in certain options; (b) restrictions on transactions imposed
by an Exchange; (c) trading halts, suspensions or other restrictions
imposed with respect to particular classes or series of options or
underlying securities; (d) inadequacy of the facilities of an Exchange
or a national clearing corporation to handle trading volume; or (e) a
decision by one or more exchanges to discontinue the trading of
options or impose restrictions on types of orders. Although the
Options Clearing Corporation has stated that it believes, based on
forecasts provided by the Exchanges, that its facilities are adequate
to handle the volume of reasonably anticipated options transactions,
and although each Exchange has advised such clearing corporation that
it believes that its facilities will also be adequate to handle
reasonably anticipated volume, there can be no assurance that higher
than anticipated trading activity or order flow or other unforeseen
events might not at times render certain of these facilities
inadequate and thereby result in the institution of special trading
procedures or restrictions which could interfere with the Fund's
ability to effect closing purchase transactions with respect to
options written by it.
The Fund will engage in over-the-counter ("OTC") option
transactions only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. In the event that
any OTC option transaction is not subject to a forward price at which
the Fund has the absolute right to repurchase the OTC option which it
has sold, the value of the OTC option purchased and of the Fund's
assets used to "cover" the OTC option will be considered "illiquid
securities." The "formula" on which the forward price will be based
may vary among contracts with different primary dealers, but it will
be based on a multiple of the premium received by the Fund for writing
the option plus the amount, if any, of the option's intrinsic value,
i.e., current market value of the underlying securities minus the
option's stock price.
-5-
<PAGE>
The Fund's securities options transactions may be subject to
limitations established by each of the Exchanges governing the maximum
number of options in each class which may be held by a single investor
or group of investors acting in concert. Thus, the ability of the
Fund to enter into transactions involving options on debt securities
may be limited by transactions engaged in by the Adviser on behalf of
its other investment advisory clients. An Exchange may order the
liquidation of positions found to be in excess of these limits, and it
may impose certain other sanctions.
INTEREST RATE FUTURES CONTRACTS CHARACTERISTICS. Currently,
futures contracts can be purchased and sold with respect to U.S.
Treasury bonds, U.S. Treasury notes, and GNMA's on the Chicago Board
of Trade and with respect to U.S. Treasury bills on the International
Monetary Market at the Chicago Mercantile Exchange.
In contrast to the purchase or sale of a security, no price is
paid or received by Quality Bond Fund upon the purchase or sale of a
futures contract. Rather, the Fund will initially be required to
deposit with the Trust's broker an amount of cash or U.S. Treasury
bills equal to approximately 5% of the contract amount. This is
called "initial margin." Such initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is
returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied. In
addition, because under current futures industry practice daily
variations in gains and losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund
may be required to make additional payments during the term of the
contract to the broker. Such payments would be required in the event
that the price of an underlying debt security declined during the term
of a debt security futures contract purchased by the Fund or in the
event that the price of an underlying debt security has risen during
the term of a debt security futures contract sold by the Fund. In all
instances involving the purchase of futures contracts or call options
on futures contracts by the Fund, an amount of cash together with such
other securities as may be permitted by applicable regulatory
authorities to be utilized for such purpose, at least equal to the
market value of the futures contracts, will be deposited in a
segregated account with the Fund's Custodian to collateralize the
position. At any time prior to the expiration of a futures contract,
the Fund may elect to close its position by taking an opposite
position which will operate to terminate the Fund's positions in the
futures contract. See "Risks Relating to Transactions in Futures
Contracts" below.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS. There are
several risks in connection with the use of interest rate futures
contracts by the Fund. One risk arises due to the imperfect
correlation between movements in the prices of futures contracts and
movements in the prices of the underlying U.S. Government Securities.
The price of a futures contract may move more than or less than the
price of the securities being hedged. If the price of the futures
moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective. On the other hand,
if the price of the securities being hedged has moved in an
unfavorable direction to the Fund, the Fund would be in a better
position than if it had not hedged at all. If the price of the future
moves more than the price of the security, the Fund will experience
either a gain or loss on the future which will not be completely
offset by movements in the price of the securities which are the
subject of the hedge. In addition to the possibility that there may
be an imperfect correlation between movements in prices of futures
contracts and portfolio securities being hedged, it is also possible
that if the Fund has hedged, the market prices of futures contracts
may be affected by certain factors. If participants in the futures
market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions
in the normal relationship between the debt securities and futures
-6-
<PAGE>
markets could result. Price distortions could also result if
investors in futures contracts opt to make or take delivery of
underlying securities rather than engage in closing transactions due
to the resultant reduction in the liquidity of the futures market. In
addition, due to the fact that, from the point of view of speculators,
the deposit requirements in the futures markets are less onerous than
margin requirements in the cash market, increased participation by
speculators in the futures market could cause temporary price
distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between
movements in the prices of the U.S. Government Securities and
movements in the prices of futures contracts, a correct forecast of
interest rate trends by the Adviser may still not result in a
successful hedging transaction.
FOREIGN CURRENCY TRANSACTIONS. As discussed in Quality Bond
Fund's Prospectus, securities denominated in non-U.S. currencies,
whether issued by a non-U.S. or a U.S. issuer, may be affected
favorably or unfavorably by changes in currency rates and exchange
control regulations, and costs will be incurred in connection with
conversions from one currency into another. Foreign currency exchange
rates are determined by forces of supply and demand on the foreign
exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial
conditions; government intervention; speculation and other factors.
Generally, the foreign currency exchange transactions of the Fund will
be conducted on a spot basis (i.e., cash basis) at the spot rate for
purchasing or selling currency prevailing in the foreign currency
exchange market. The Fund may also enter into forward currency
contracts to purchase or sell foreign currencies (i.e., non-U.S.
currencies) as a hedge against possible variations in foreign exchange
rates. A forward foreign currency exchange contract is an agreement
between the contracting parties to exchange an amount of currency at
some future time at an agreed upon rate. The rate can be higher or
lower than the spot rate between the currencies that are the subject
of the contract. A forward contract generally has no deposit
requirement, and such transactions do not involve commissions. By
entering into a forward contract for the purchase or sale of the
amount of foreign currency invested in a foreign security transaction,
the Fund can hedge against possible variations in the value of the
dollar versus the subject currency either between the date the foreign
security is purchased or sold and the date on which payment is made or
received or during the time the Fund holds the foreign security.
Hedging against a decline in the value of a currency in the foregoing
manner does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline.
Furthermore, such hedging transactions preclude the opportunity for
gain if the value of the hedged currency should rise. The Fund will
not speculate in forward currency contracts. If the Fund enters into
a "position hedging transaction," which is the sale of forward
non-U.S. currency with respect to a portfolio security denominated in
such foreign currency, its custodian bank will place cash or liquid
equity or debt securities in a separate account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of such forward contract. If the value of the securities
placed in the account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the
amount of the Fund's commitments with respect to such contracts. The
Fund will not enter into a forward contract for a term of more than
one year. The Fund will enter into such transactions only to the
extent deemed appropriate by its Adviser.
ADJUSTABLE GOVERNMENT FUND
THE FOLLOWING INVESTMENT POLICIES ARE APPLICABLE ONLY TO THE
PORTFOLIO THROUGH WHICH ADJUSTABLE GOVERNMENT FUND INVESTS ALL ITS
ASSETS.
-7-
<PAGE>
SECURITIES TRANSACTIONS SUBJECT TO DELAYED SETTLEMENT. As
described under "Investments, Techniques and Risk Factors" in the
Prospectus for the Adjustable Government Fund, securities purchased
for which the normal settlement date occurs later than the settlement
date which is normal for U.S. Treasury obligations and the securities
held in the Portfolio are subject to changes in value (both
experiencing appreciation when interest rates decline and depreciation
when interest rates rise) based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in
the level of interest rates. Purchasing securities subject to delayed
settlement can involve a risk that the yields available in the market
when the delivery takes place may actually be higher than those
obtained in the transaction itself. A separate account of the
Portfolio consisting of cash or liquid debt securities equal to the
amount of the delayed settlement commitments will be established at
the Trust's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities
will be valued at market value using the valuation procedures for all
other investments. If the market or fair value of such securities
declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio. On the settlement date
of these delayed settlement securities, the Portfolio will meet its
obligations from then available cash flow, sale of securities held in
the separate account, sale of other securities or, although it would
not normally expect to do so, from sale of the delayed settlement
securities themselves (which may have a value greater or lesser than
the Portfolio's payment obligations). Sale of securities to meet such
obligations will generally result in the realization of capital gains
or losses.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Portfolio
may purchase securities on a when-issued or forward commitment basis.
"When-issued" refers to securities whose terms are available and for
which a market exists, but which have not been issued. The Portfolio
will engage in when-issued transactions with respect to securities
purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is
due, often a month or more after the purchase. In a forward
commitment transaction, the Portfolio contracts to purchase securities
for a fixed price at a future date beyond customary settlement time.
When the Portfolio engages in forward commitment and
when-issued transactions, it relies on the seller to consummate the
transaction. The failure of the issuer or seller to consummate the
transaction may result in the Portfolio losing the opportunity to
obtain a price and yield considered to be advantageous. The purchase
of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date the Portfolio enters into an agreement to purchase
securities on a when-issued or forward commitment basis, the Portfolio
will segregate in a separate account cash or liquid, high grade debt
securities equal in value to the Portfolio's commitment. These assets
will be valued daily at market, and additional cash or securities will
be segregated in a separate account to the extent that the total value
of the assets in the account declines below the amount of the when-
issued commitments. Alternatively, the Portfolio may enter into
offsetting contracts for the forward sale of other securities that it
owns.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements. A repurchase agreement is a contract under which the
Portfolio would acquire a security for a relatively short period
(generally not more than 7 days) subject to the obligation of the
seller to repurchase and the Portfolio to resell such security at a
fixed time and price (representing the
-8-
<PAGE>
Portfolio's cost plus interest). The Portfolio will enter into
repurchase agreements only with member banks of the Federal Reserve
System and with securities dealers. The Adviser will continuously
monitor the creditworthiness of the parties with whom the Portfolio
enters into repurchase agreements. The Portfolio has established a
procedure providing that the securities serving as collateral for each
repurchase agreement must be delivered to the Portfolio's custodian
either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is
fully collateralized at all times. In the event of bankruptcy or
other default by a seller of a repurchase agreement, the Portfolio
could experience delays in liquidating the underlying securities and
could experience losses, including the possible decline in the value
of the underlying securities during the period in which the Portfolio
seeks to enforce its rights thereto, possible subnormal levels of
income and lack of access to income during this period, and the
expense of enforcing its rights.
REVERSE REPURCHASE AGREEMENTS. As briefly described in its
Prospectus, the Portfolio may also enter into reverse repurchase
agreements which involve the sale of securities held in its portfolio
to a bank or securities firm with an agreement that the Portfolio will
buy back the securities at a fixed future date at a fixed price plus
an agreed amount of interest which may be reflected in the repurchase
price. Reverse repurchase agreements are considered to be borrowings
by the Portfolio. The Portfolio will use proceeds obtained from the
sale of securities pursuant to reverse repurchase agreements to
purchase other investments. The use of borrowed funds to make
investments is a practice known as "leverage," which is considered
speculative. Use of reverse repurchase agreements is an investment
technique that is intended to increase income. Thus, the Portfolio
will enter into a reverse repurchase agreement only when the Adviser
determines that the interest income to be earned from the investment
of the proceeds is greater than the interest expense of the
transaction. However there is a risk that interest expense will
nevertheless exceed the income earned. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the
Portfolio with proceeds of the transaction may decline below the
repurchase price of the securities sold by the Portfolio which it is
obligated to repurchase. The Portfolio would also continue to be
subject to the risk of a decline in the market value of the securities
sold under the agreements because it will reacquire those securities
upon effecting their repurchase. To minimize various risks associated
with reverse repurchase agreements, the Portfolio would establish and
maintain with the Portfolio's custodian a separate account consisting
of highly liquid, marketable securities in an amount at least equal to
the repurchase prices of the securities (plus any accrued interest
thereon) under such agreements. In addition, the Portfolio would not
enter into reverse repurchase agreements exceeding in the aggregate 33
1/3% of the value of its total net assets (including for this purpose
other borrowings of the Portfolio). The Portfolio will enter into
reverse repurchase agreements only with selected registered broker/
dealers or with federally insured banks or savings and loan
associations which are approved in advance as being creditworthy by
the Trustees. Under procedures established by the Trustees, the
Adviser will monitor the creditworthiness of the firms involved.
INVESTMENT RESTRICTIONS
Quality Bond Fund, Adjustable Government Fund and the Portfolio
have each adopted the following fundamental investment restrictions.
These restrictions may not be changed without approval by holders of a
"majority of the outstanding shares" of the applicable Fund. A
majority for this purpose means the holders of: (a) more than 50% of
the outstanding shares, or (b) 67% or more of the shares represented
at a meeting where more that 50% of the outstanding shares are
represented, whichever is less. Whenever the Adjustable Government
Fund is requested to vote
-9-
<PAGE>
on a change in a fundamental investment restriction of the Portfolio,
the Adjustable Government Fund will hold a meeting of its
shareholders and will cast a vote as instructed by its shareholders.
THE QUALITY BOND FUND MAY NOT:
1. Invest more than 25% of total assets in the securities of issuers
in any one industry. For purposes of this restriction, gas,
electric, water and telephone utilities will each be treated as
separate industries. This restriction does not apply to
obligations issued or guaranteed by the United States government,
its agencies or instrumentalities.
2. Make short sales of securities or purchase securities on margin,
except for such short-term loans as are necessary for the
clearance of purchases of portfolio securities. Borrowing for
the purpose of purchasing securities within the limitations
described under "Investments, Techniques and Risk Factors" in the
Prospectus to the Quality Bond Fund shall not be prohibited by
this investment restriction.
3. Engage in the underwriting of securities except insofar as the
Fund may be deemed an underwriter under the Securities Act of
1933 in disposing of a portfolio security.
4. Purchase or sell real estate or interests therein (including
limited partnership interests), although the Fund may purchase
securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein.
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the
Fund may invest in securities of companies which invest in or
sponsor such programs.
6. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.
7. Invest for the purpose of exercising control or management of
another company.
8. Invest in securities of any company if, to the knowledge of the
Trust, any officer or director of the Trust or its Adviser owns
more than 1/2 of 1% of the outstanding securities of such
company, and all such officers and directors own in the aggregate
more than 5% of the outstanding securities of such company.
9. Issue senior securities, as defined in the 1940 Act, except that
the Fund may enter into repurchase and reverse repurchase
agreements, lend portfolio securities, and leverage and borrow
as described under "Investments, Techniques and Risk Factors" in
the Prospectus for the Fund.
10. Make loans of money or securities, except by (a) the purchase of
fixed income obligations; (b) investing in repurchase agreements;
or (c) lending its portfolio securities. See "Investments,
Techniques and Risk Factors" in the Prospectus for the Fund.
11. Purchase or sell commodities or commodity futures contracts
except financial futures and options on such futures for
hedging purposes under policies developed by the Trust's Board of
Trustees.
-10-
<PAGE>
12. Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations of, or guaranteed by, the U.S.
government, its agencies or instrumentalities) or purchase more
than 10% of the voting securities or more than 10% of any class
of securities of any one issuer.
13. Invest more than 5% of its total assets in securities of
companies having a record, together with predecessors, of
less than three years continuous operation. This restriction
shall not apply to any obligation of the United States
government, its agencies or instrumentalities.
14. Invest more than 5% of its total assets in restricted securities.
15. Issue senior securities, as defined in the 1940 Act, except that
the Fund may enter into repurchase and reverse repurchase
agreements, lend portfolio securities, and leverage and borrow.
For purposes of this restriction, the Fund will not borrow money
except as provided under the Fund's policies regarding leverage
(up to 20% of the Fund's total assets), and reverse repurchase
agreements (up to 33-1/3% of the Fund's net assets) so long as
total borrowings do not exceed 33-1/3% of the Fund's net assets.
NEITHER THE ADJUSTABLE GOVERNMENT FUND NOR THE PORTFOLIO MAY:
1. borrow money, except that as a temporary measure for
extraordinary or emergency purposes either the Fund or the
Portfolio may borrow from banks in aggregate amounts at any one
time outstanding not exceeding 33 1/3% of the total assets
(including the amount borrowed) of the Fund or the Portfolio,
respectively, valued at market; and neither the Fund nor the
Portfolio may purchase any securities at any time when borrowings
exceed 5% of the total assets of the Fund or the Portfolio,
respectively (taken at market value). This borrowing restriction
does not prohibit the use of reverse repurchase agreements (see
"Reverse Repurchase Agreements"). For purposes of this
investment restriction, forward commitment transactions shall not
constitute borrowings. Interest paid on any borrowings will
reduce the Fund's net investment income;
2. make short sales of securities or purchase any security on
margin, except that the Fund or the Portfolio may obtain such
short-term credit as may be necessary for the clearance of
purchases and sales of securities (this restriction does not
apply to securities purchased on a when-issued basis);
3. underwriter securities issued by other persons, except insofar
as the Fund or the Portfolio may technically be deemed an
underwriter under the Securities Act of 1933 in selling a
security, and except that the Fund may invest all or
substantially all of its assets in another registered
investment company having substantially the same investment
objectives as the Fund;
4. make loans to other persons except (a) through the lending of
securities held by the Fund or the Portfolio, (b) through the
purchase of debt securities in accordance with the
respective investment policies of the Fund and the Portfolio (the
entry into repurchase agreements is not considered a loan for
purposes of this restriction);
5. with respect to 75% of its total assets, purchase the securities
of any one issuer (except securities issued or guaranteed by the
U.S. Government and its agencies or instrumentalities, as
to which there are no percentage limits or restrictions) if
immediately
-11-
<PAGE>
after and as a result of such purchase (a) more than 5% of the
value of its assets would be invested in that issuer, or (b) the
Fund or the Portfolio would hold more than 10% of the outstanding
voting securities of that issuer, except that the Fund may invest
all or substantially all of its assets in another registered
investment company having substantially the same investment
objectives as the Fund;
6. purchase or sell real estate (including limited partnership
interests) other than securities secured by real estate or
interests therein including mortgage-related securities or
interests in oil, gas or mineral leases in the ordinary course of
business (the Fund and the Portfolio each reserves the freedom of
action to hold and to sell real estate acquired as a result of
the ownership of securities);
7. invest more than 25% of its total assets in the securities of
issuers whose principal business activities are in the same
industry (excluding obligations of the U.S. Government, its
agencies and instrumentalities and repurchase agreements) except
that the Fund may invest all or substantially all of its assets
in another registered investment company having substantially the
same objectives as the Fund;
8. issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder;
9. invest in illiquid securities, including repurchase agreements
maturing in more than seven days but excluding securities which
may be resold pursuant to Rule 144A under the Securities Act
of 1933, if, as a result thereof, more than 10% of the net assets
(taken at market value at the time of each investment of the Fund
or the Portfolio, as the case may be) would be invested in such
securities, except that the Fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same investment restrictions as the Fund; or
10. Invest in securities of any company if, to the knowledge of the
Trust, any officer or director of the Trust or its Adviser owns
more than 1/2 of 1% of the outstanding securities of such
company, and all such officers and directors own in the aggregate
more than 5% of the outstanding securities of such company.
The Adjustable Government Fund and the Portfolio have also
adopted the following additional operating restrictions that may be
required by various state laws and administrative positions. These
operating restrictions are not fundamental policies and may be changed
by the Fund without approval of its shareholders and by the Portfolio
without the approval of the Fund or any other investors in the
Portfolio.
Under those operating restrictions, neither the Fund nor the
Portfolio may:
(a) invest in companies for the purpose of exercising control or
management, except that the Fund may invest all or substantially
all of its assets in another registered investment company
having substantially the same investment restrictions as the
Fund;
(b) make investments in the securities of other investment companies,
except that the Fund may invest all or substantially all of its
assets in another registered investment company having
substantially the same investment restrictions as the Fund and
except as otherwise
-12-
<PAGE>
permitted by the 1940 Act or in connection with a merger,
consolidation, or reorganization;
(c) invest in securities of issuers (other than U.S. Government
Securities) having a record of less than three years of
continuous operation (for this purpose, the period of operation
of any issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer) if,
regarding all securities, more than 5% of the total assets (taken
at market value at the time of each investment) of the Fund or
the Portfolio, as the case may be would be invested in such
securities, except that the Fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same investment restrictions as the Fund;
(d) invest in commodities and commodity futures contracts, put or
call options or any combination thereof;
(e) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned by the Fund or
the Portfolio except as may be necessary in connection with
borrowings mentioned in investment restriction no. 1 above; or
(f) purchase warrants of any issuer, except on a limited basis, if,
as a result, more than 2% of the value of its total assets would
be invested in warrants which are not listed on the New York
Stock Exchange and more than 5% of the value of its total assets
would be invested in warrants, whether or not so listed, such
warrants in each case to be valued at the lesser of cost or
market, but assigning no value in each case to warrants acquired
by the Fund in units or attached to debt securities.
Pursuant to an undertaking with a certain state, neither the
Fund nor the Portfolio will invest more than 15% of its respective net
assets in illiquid and restricted securities so long as shares of the
Fund are registered for sale in such state.
__________________________
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by the Trustees who elect
officers who are responsible for the day-to-day operations of each
Fund and who execute policies formulated by the Trustees. Several of
the officers and Trustees of Quality Bond Fund, Adjustable Government
Fund and the Portfolio are also officers and directors of the Adviser
or officers and directors of John Hancock Funds.
Set forth below is the principal occupation or employment of
the Trustees and officers of the Trust during the past five years.
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<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Trustee, Chairman and Chief Executive
101 Huntington Avenue Chairman and Officer, the Adviser and The
Boston, MA 02199 Chief Executive Berkeley Financial Group
Officer(1)(2) ("The Berkeley Group");
Chairman, NM Capital
Management, Inc. ("NM
Capital"); John Hancock
Advisers International Limited
("Advisers International");
John Hancock Funds, Inc.;
John Hancock Investor
Services Corporation
("Investor Services"); and
Sovereign Asset Management
Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Inc., Investor
Services and SAMCorp are
collectively referred to as the
"Affiliated Companies");
Chairman, First Signature
Bank & Trust; Director, John
Hancock Freedom Securities
Corporation, John Hancock
Capital Corporation, New
England/Canada Business
Council; Member, Investment
Company Institute Board of
Governors; Trustee, Museum
of Science; President, the
Adviser (until July 1992);
Trustee or Director of other
investment companies
managed by the Adviser; and
Chairman, John Hancock
Distributors, Inc. (until April,
1994).
James F. Carlin Trustee Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc. (insurance);
Natick, MA 01760 Director, Arbella Mutual
Insurance Company
(insurance), Consolidated
Group Trust (group health
plan), Carlin Insurance
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Agency, Inc. and West
Insurance Agency, Inc.;
Receiver, the City of Chelsea
(until August 1992); and
Trustee or Director of other
investment companies
managed by the Adviser.
William H. Cunningham Trustee Chancellor, University of
601 Colorado Street Texas System and former
O'Henry Hall President of the University of
Austin, TX 78701 Texas, Austin, Texas; Regents
Chair in Higher Education
Leadership; James L. Bayless
Chair for Free Enterprise;
Professor of Marketing and
Dean College of Business
Administration/Graduate
School of Business
(1983-1985); Centennial Chair
in Business Education
Leadership, 1983-1985;
Director, LaQuinta Motor Inns,
Inc. (hotel management
company); Director,
Jefferson-Pilot Corporation
(diversified life insurance
company); Director,
Freeport-McMoran Inc. (oil
and gas company); Director,
Barton Creek Properties, Inc.
(1988-1990) (real estate
development) and LBJ
Foundation Board (education
foundation); and Advisory
Director, Texas Commerce
Bank - Austin.
Charles L. Ladner Trustee(3) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
(public utility holding
company) (until 1992); and
Trustee or Director of other
investment companies
managed by the Adviser.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee Chairman, President, Chief
3810 W. Alabama Executive Officer and
Houston, TX 77027 Director, Linbeck Corporation
(a holding company engaged
in various phases of the
construction industry and
warehousing interests);
Director and Chairman,
Federal Reserve Bank of
Dallas; Chairman of the Board
and Chief Executive Officer,
Linbeck Construction
Corporation; Director,
Panhandle Eastern Corporation
(a diversified energy
company); Director, Daniel
Industries, Inc. (manufacturer
of gas measuring products and
energy related equipment);
Director, GeoQuest
International, Inc. (a
geophysical consulting firm);
and Director, Greater Houston
Partnership.
Patricia P. McCarter Trustee(3) Director and Secretary, the
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer); and Trustee or
Malvern, PA 19355 Director of other investment
companies managed by the
Adviser.
Steven R. Pruchansky Trustee(1)(3) Director and Treasurer, Mast
360 Horse Creek Drive, #208 Holdings, Inc.; Director,
Naples, FL 33942 First Signature Bank & Trust
Company (until August 1991);
General Partner, Mast Realty
Trust; President, Maxwell
Building Corp. (until 1991);
and Trustee or Director of
other investment companies
managed by the Adviser.
Norman H. Smith Trustee(3) Lieutenant General, USMC,
Rt. 1, Box 249 E Deputy Chief of Staff for
Linden, VA 22642 Manpower and Reserve
Affairs, Headquarters Marine
Corps; Commanding General
III Marine Expeditionary
Force/3rd Marine Division
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
(retired 1991); and Trustee or
Director of other investment
companies managed by the
Adviser.
John P. Toolan Trustee(3) Director, The Smith Barney
13 Chadwell Place Muni Bond Funds, The Smith
Morristown, NJ 07960 Barney Tax-Free Money Fund,
Inc., Vantage Money Market
Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment
company) and Smith Barney
Trust Company of Florida;
Chairman, Smith Barney Trust
Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management
Company and Smith, Barney
Advisers, Inc. (investment
advisers) (retired 1991); and
Senior Executive Vice
President, Director and
member of the Executive
Committee, Smith Barney,
Harris Upham & Co.,
Incorporated (investment
bankers) (until 1991); and
Trustee or Director of other
investment companies
managed by the Adviser.
Robert G. Freedman* Vice Chairman President and Chief
101 Huntington Avenue and Chief Investment Officer, the
Boston, MA 02199 Investment Adviser.
Officer(2)
Anne C. Hodsdon* President(2) Executive Vice President, the
101 Huntington Avenue Adviser.
Boston, MA 02199
James B. Little* Senior Vice Senior Vice President, the
101 Huntington Avenue President and Adviser.
Boston, MA 02199 Chief Financial
Officer
Thomas H. Drohan* Senior Vice Senior Vice President and
101 Huntington Avenue President and Secretary, the Adviser.
Boston, MA 02199 Secretary
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
---------------- -------------- -----------------------
<S> <C> <C>
Michael P. DiCarlo* Senior Vice Senior Vice President, the
101 Huntington Avenue President(2) Adviser.
Boston, MA 02199
Edgar Larsen* Senior Vice Senior Vice President, the
101 Huntington Avenue President Adviser.
Boston, MA 02199
B.J. Willingham* Senior Vice Senior Vice President, the
101 Huntington Avenue President Adviser. Formerly, Director
Boston, MA 02199 and Chief Investment Officer
of Transamerica Fund
Management Company.
James J. Stokowski* Vice President Vice President, the Adviser.
101 Huntington Avenue and Treasurer
Boston, MA 02199
Susan S. Newton* Vice President Vice President and Assistant
101 Huntington Avenue and Compliance Secretary, the Adviser.
Boston, MA 02199 Officer
John A. Morin* Vice President. Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
___________________________
</TABLE>
* An "interested person" of the Fund, as such term is defined
in the 1940 Act.
(1) Member of the Executive Committee. Under the Trust's
Declaration of Trust, the Executive Committee may generally exercise
most of the powers of the Board of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Committee on
Administration.
(4) A Member of the Audit, Administration and Compensation
Committees.
All of the officers listed are officers or employees of the
Adviser or affiliated companies. Some of the Trustees and officers may
also be officers and/or directors and/or trustees of one or more of
the other funds for which the Adviser serves as investment adviser.
As of April 28, 1995, there were 10,943,821 shares of Quality
Bond Fund outstanding and officers and trustees of Quality Bond Fund
as a group beneficially owned less than 1% of these outstanding
shares. At such date, no person owned of record or beneficially as
much as 5% of the outstanding shares of Quality Bond Fund.
As of April 28, 1995, there were 2,261,487 shares of Adjustable
Government Fund outstanding and officers and trustees of Adjustable
Government Fund as a group beneficially
-18-
<PAGE>
owned less than 1% of these outstanding shares. At such date, Merrill
Lynch Pierce Fenner & Smith, Inc., Jacksonville, Florida held of
record 213,732 shares representing approximately 9% of the shares
outstanding of Adjustable Government Fund. At such date, no other
person owned of record or beneficially as much as 5% of the
outstanding shares of Adjustable Government Fund.
As of December 22, 1994, the Trustees have established an
Advisory Board which acts to facilitate a smooth transition of
management over a two-year period (between Transamerica Fund
Management Company ("TFMC"), the prior investment adviser of each
Fund, and the Adviser). The members of the Advisory Board are distinct
from the Board of Trustees, do not serve the Funds in any other
capacity and are persons who have no power to determine what
securities are purchased or sold on behalf of a Fund. Each member of
the Advisory Board may be contacted at 101 Huntington Avenue, Boston,
Massachusetts 02199.
Members of the Advisory Board and their respective principal
occupations during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management
services); former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman
from Texas; co-founder, Houston Parents' League; former board
member of various civic and cultural organizations in Houston,
including the Houston Symphony, Museum of Fine Arts and YWCA.
Mrs. Bentsen is presently active in various civic and cultural
activities in the Washington, D.C. area, including membership on
the Area Board for The March of Dimes and is a National Trustee
for the Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and
Chief Executive Officer, TFMC; Director, West Central Advisory
Board, Texas Commerce Bank; Trustee, Memorial Hospital System;
Chairman of the Board of Regents of Baylor University; Member,
Board of Governors, National Association of Securities Dealers,
Inc.; Formerly, Chairman, Investment Company Institute; formerly,
President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company;
Director, Houston Industries and Houston Lighting and Power
Company; Director, TransAmerican Companies (natural gas producer
and transportation); Member, Board of Managers, Harris County
Hospital District; Advisory Director, Commercial State Bank, El
Campo; Advisory Director, First National Bank of Bryan; Advisory
Director, Sterling Bancshares; Former Director and Vice Chairman,
Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
COMPENSATION OF THE BOARD OF TRUSTEES AND ADVISORY BOARD. Each
Trustee who is not an "interested person," as such term is defined in
the 1940 Act ("Independent Trustee"), receives an annual retainer of
$44,000, a meeting fee of $4,000 for each of the four regularly
scheduled meetings held during the year and a fee of $25 per day or
actual travel expenses, whichever is greater. This compensation is
apportioned among the John Hancock funds, including the Funds, on
which such Trustees serve based on the net asset value of such funds.
Advisory Board Members receive from the John Hancock funds an annual
retainer of $40,000 and a meeting fee of $7,000 for each of the two
regularly scheduled meetings to be held in 1995 and the one in 1996.
-19-
<PAGE>
For the fiscal year ended March 31, 1994, the Trust paid Trustees'
fees in the aggregate of $26,337 to all the Trustees then serving
as such.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGEMENT CONTRACT. Quality Bond Fund and the
Portfolio (referred to under this sub-caption individually as a
"Fund," and collectively as, the "Funds") receive their investment
advice from the Adviser. Investors should refer to the applicable
Prospectus for a description of certain information concerning the
investment management contracts. Each of the Trustees and principal
officers affiliated with the Funds who is also an affiliated person of
the Adviser is named above, together with the capacity in which such
person is affiliated with the Funds, the Adviser or TFMC (each Fund's
prior investment adviser).
The Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and has more than $13
billion in assets under management in its capacity as investment
adviser to the Funds and the other mutual funds and publicly traded
investment companies in the John Hancock group of funds having a
combined total of over 1,060,000 shareholders. The Adviser is a
wholly-owned subsidiary of The Berkeley Financial Group, which is in
turn a wholly-owned subsidiary of John Hancock Subsidiaries, Inc.,
which is in turn a wholly-owned subsidiary of the Life Company, one of
the most recognized and respected financial institutions in the
nation. With total assets under management of $80 billion, the Life
Company is one of the ten largest life insurance companies in the
United States and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients
for over 130 years.
The Trust on behalf of each Fund has entered into an investment
management contract with the Adviser. Under the investment management
contracts, the Adviser provides the Funds with (i) a continuous
investment program, consistent with each Fund's stated investment
objective and policies, (ii) supervision of all aspects of each Fund's
operations except those that are delegated to a custodian, transfer
agent or other agent and (iii) such executive, administrative and
clerical personnel, officers and equipment as are necessary for the
conduct of each Fund's business. The Adviser is responsible for the
day-to-day management of the portfolio assets of Quality Bond Fund and
the Portfolio.
No person other than the Adviser and its directors and
employees regularly furnishes advice to the Funds with respect to the
desirability of a Fund investing in, purchasing or selling securities.
The Adviser may from time to time receive statistical or other similar
factual information, and information regarding general economic
factors and trends, from the Life Company and its affiliates.
Under the terms of the investment management contract with the
Trust on behalf of each Fund, the Adviser provides the Fund with
office space, equipment and supplies and other facilities and
personnel required for the business of the Fund. The Adviser pays the
compensation of all officers and employees of the Trust and pays the
expenses of clerical services relating to the administration of the
Funds. All expenses which are not specifically paid by the Adviser
and which are incurred in the operation of a Fund including, but not
limited to, (i) the fees of the Independent Trustees of the Trust,
(ii) the fees of the members of the Fund's Advisory Board (described
above) and (iii) the continuous public offering of the shares of the
Fund are borne by such Fund. Subject to the conditions set forth in a
private letter ruling that the Funds have
-20-
<PAGE>
received from the Internal Revenue Service relating to their
multiple-class structure, class expenses properly allocable to any
Class A or Class B shares will be borne exclusively by such class
of shares.
As provided by the investment management contract, Quality Bond
Fund pays the Adviser an investment management fee, which is accrued
daily and paid monthly in arrears, equal on an annual basis to a
percentage of the Fund's average daily net asset value as follows:
Average Daily Net Assets of Fee
Quality Bond Fund (annual rate)
----------------- -------------
Not exceeding $75 million....................... 0.6250%
$75 million but not exceeding $150 million...... 0.5625%
$150 million and over........................... 0.5000%
As provided by the investment management contract, the
Portfolio pays the Adviser an investment management fee, which is
accrued daily and paid monthly in arrears, equal on an annual basis to
0.40% of the Portfolio's average daily net asset value.
The Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit a Fund's expenses to a
specified percentage of average daily net assets. The Adviser retains
the right to re-impose the advisory fee and recover any other payments
to the extent that, at the end of any fiscal year, such Fund's annual
expenses fall below this limit.
In the event normal operating expenses of a Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state
limit where the Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent
of such excess and the Adviser will make any additional arrangements
necessary to eliminate any remaining excess expenses. Currently, the
most restrictive limit applicable to the Funds is 2.5% of the first
$30,000,000 of the Fund's average daily net asset value, 2% of the
next $70,000,000 and 1.5% of the remaining average daily net asset
value.
Pursuant to the investment management contract, the Adviser is
not liable to a Fund or its shareholders for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
the matters to which the contract relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from its reckless
disregard of the obligations and duties under the applicable contract.
The initial term of each investment management contract expires
on December 22, 1996 and each investment management contract will
continue in effect from year to year thereafter if approved annually
by a vote of a majority of the Independent Trustees of the Trust cast
in person at a meeting called for the purpose of voting on such
approval, and by either a majority of the Trustees or the holders of a
majority of the Fund's outstanding voting securities. Each management
contract may, on 60 days' written notice, be terminated at any time
without the payment of any penalty to the applicable Fund by vote of a
majority of the outstanding voting securities of such Fund, by the
Trustees or by the Adviser. Each management contract terminates
automatically in the event of its assignment.
Securities held by the Funds may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates
provide investment advice. Because of different
-21-
<PAGE>
investment objectives or other factors, a particular security may be
bought for one or more funds or clients when one or more are selling
the same security. If opportunities for purchase or sale of
securities by the Adviser or for other funds or clients for which the
Adviser renders investment advice arise for consideration at or
about the same time, transactions in such securities will be made,
insofar as feasible, for the respective funds or clients in a manner
deemed equitable to all of them. To the extent that transactions on
behalf of more than one client of the Adviser or its respective
affiliates may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on
price.
Under the investment management contracts, the Funds may use
the name "John Hancock" or any name derived from or similar to it only
for so long as the applicable investment management contract or any
extension, renewal or amendment thereof remains in effect. If a
Fund's investment management contract is no longer in effect, the Fund
(to the extent that it lawfully can) will cease to use such name or
any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may
grant the non-exclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not
limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of
any subsidiary or affiliate thereof shall be the investment adviser.
For the fiscal years ended March 31, 1992, 1993 and 1994
advisory fees payable by Quality Bond Fund to TFMC, the Fund's former
investment adviser, amounted to $552,022, $660,259 and $668,868,
respectively.
For the period December 31, 1991 through March 31, 1992 and the
fiscal years ended March 31, 1993 and 1994, advisory fees payable by
the Portfolio to TFMC, the Portfolio's former investment adviser,
amounted to $5,480, $123,662 and $184,072, respectively; however, a
portion of such fees were not imposed pursuant to the voluntary fee
and expense limitation arrangements then in effect (see "The
Portfolio's and the Fund's Expenses" in the Adjustable Government Fund
Prospectus).
Adjustable Government Fund has retained the services of John
Hancock Advisers, Inc. ("John Hancock Advisers") as administrator, but
has not retained its services as an investment adviser since
Adjustable Government Fund seeks to achieve its investment objective
by investing all of its assets in the Portfolio.
ADMINISTRATION AGREEMENT FOR ADJUSTABLE GOVERNMENT FUND.
Pursuant to an administration agreement, dated December 22, 1994, John
Hancock Advisers provides Adjustable Government Fund with general
office facilities and supervises the overall administration of the
Fund including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and
billings of the independent contractors and agents of Adjustable
Government Fund, the preparation and filing of all documents required
for compliance by Adjustable Government Fund with applicable laws and
regulations and arranging for the maintenance of books and records
(other than accounting books and records) of Adjustable Government
Fund. John Hancock Advisers pays all compensation of the Trustees,
officers and employees of Adjustable Government Fund who are
affiliated persons of John Hancock Advisers.
Under the administration agreement, John Hancock Advisers
receives from Adjustable Government Fund, a fee at an annual rate of
0.10% of the Fund's average daily net assets, subject to the expense
limitation provisions described below. For the period December 31,
1991 through
-22-
<PAGE>
March 31, 1992, and for fiscal years ended March 31, 1993 and 1994,
respectively, administration fees paid by Adjustable Government Fund
to TFMC, the Fund's former administrator, amounted to $1,371,
$30,977 and $46,091, respectively; however, all such fees were not
imposed pursuant to the voluntary fee and expense limitation
arrangements then in effect (see "The Portfolio's and the Fund's
Expenses" in the Adjustable Government Fund Prospectus).
Under the administration agreement, neither John Hancock
Advisers nor its personnel is liable for any error of judgment or
mistake of law or for any act or omission in the administration of
Adjustable Government Fund except for willful misfeasance, bad faith
or gross negligence in the performance of its duties or from reckless
disregard of its obligations and duties under the administration
agreement.
ADMINISTRATIVE SERVICES AGREEMENT. Each of Quality Bond Fund,
Adjustable Government Fund and the Portfolio was a party to an
administrative services agreement with TFMC (the "Services
Agreement"), pursuant to which TFMC performed bookkeeping and
accounting services and functions, including preparing and maintaining
various accounting books, records and other documents and keeping such
general ledgers and portfolio accounts as are reasonably necessary for
the operation of Quality Bond Fund, Adjustable Government Fund or the
Portfolio, as the case may be. Other administrative services included
communications in response to shareholder inquiries and certain
printing expenses of various financial reports. In addition, such
staff and office space, facilities and equipment was provided as
necessary to provide the required administrative services. The
Services Agreement was amended in connection with the appointment of
the Adviser as adviser to each Fund and the administrator to
Adjustable Government Fund to permit services under the Agreement to
be provided by the Adviser and its affiliates. The Services Agreement
was terminated during the current fiscal year.
For the fiscal years ended March 31, 1992, 1993 and 1994,
Quality Bond Fund paid to TFMC (pursuant to the Services Agreement)
$81,796, $83,509 and $82,370, respectively, of which $65,298, $66,409
and $67,013, respectively, was paid to TFMC and $16,498, $17,100 and
$15,357, respectively, were paid for certain data processing and
pricing information services.
For the period December 31, 1991 through March 31, 1992, and
for the fiscal years ended March 31, 1993 and 1994, Adjustable
Government Fund paid to TFMC (pursuant to the Services Agreement)
$4,520, $42,650 and $18,021, respectively, of which $4,520, $40,524
and $14,730, respectively, was paid to TFMC and $0, $2,126 and $3,291,
respectively, were paid for certain data processing and pricing
information services.
For the period December 31, 1991 through March 31, 1992, and
for the fiscal years ended March 31, 1993 and 1994, the Portfolio paid
TFMC (pursuant to the Services Agreement) $3,099, $37,033 and $38,012,
respectively, of which $3,099, $26,189 and $26,722, respectively, was
paid to TFMC and $0, $10,844 and $11,290, respectively, were paid for
certain data processing and pricing information services.
DISTRIBUTION CONTRACTS
DISTRIBUTION CONTRACTS. Each Fund's shares are sold on a
continuous basis at the public offering price. John Hancock Funds, a
wholly-owned subsidiary of the Adviser, has the exclusive right,
pursuant to Distribution Contracts dated December 22, 1994 (the
"Distribution Contracts"), to purchase shares from the Funds at net
asset value for resale to the public or to broker-dealers at the
public offering price. Upon notice to all broker-dealers ("Selling
Brokers") with whom it has
-23-
<PAGE>
sales agreements, John Hancock Funds may allow such Selling Brokers up
to the full applicable sales charge during periods specified in such
notice. During these periods, such Selling Brokers may be deemed to
be underwriters as that term is defined in the Securities Act of 1933.
Each Distribution Contract was initially adopted on behalf of the
applicable Fund by the affirmative vote of the Trust's Trustees
including the vote of a majority of Independent Trustees cast in
person at a meeting called for such purpose. Each Distribution
Contract shall continue in effect until December 22, 1994 and from
year to year thereafter if approved by either the vote of the
respective Fund's shareholders or the Trustees, including the vote of
a majority of Independent Trustees of any such party, cast in person
at a meeting called for. Each Distribution Contract may be terminated
at any time, without penalty, by either party upon sixty (60) days'
written notice or by a vote of a majority of the outstanding voting
securities of the applicable Fund and terminates automatically in the
case of an assignment by John Hancock Funds.
Total underwriting commissions for sales of Quality Bond Fund's
Class A shares for the fiscal years ended March 31, 1992, 1993 and
1994 were $673,226, $925,685 and $355,258, respectively. Of such
amounts $82,756, $97,163 and $37,666, respectively, were retained by
Quality Bond Fund's former distributor, Transamerica Fund
Distributors, Inc. and the remainder was reallowed to dealers.
Total underwriting commissions for sales of Adjustable
Government Fund's Class A shares for the period December 31, 1991
through March 31, 1992 and the fiscal years ended March 31, 1993 and
1994 were $44,521, $303,663 and $59,793, respectively. Of such
amounts $0, $37,148 and $7,455, respectively, were retained by
Adjustable Government Fund's former distributor, Transamerica Fund
Distributors, Inc. and the remainder was reallowed to dealers.
DISTRIBUTION PLAN. The Board of Trustees, including the
Independent Trustees of each Fund, approved new distribution plans
pursuant to Rule 12b-1 under the 1940 Act for Class A shares ("Class A
Plan") and Class B shares ("Class B Plan"). Such Plans were approved
by a majority of the outstanding shares of each respective class on
December 16, 1994 and became effective on December 22, 1994.
Under the Class A Plans, the distribution or service fee will
not exceed an annual rate of 0.25% of the average daily net asset
value of the Class A shares of the Funds (determined in accordance
with each Fund's Prospectus as from time to time in effect). Any
expenses under a Fund's Class A Plan not reimbursed within 12 months
of being presented to the Fund for repayment are forfeited and not
carried over to future years. Under a Fund's Class B Plan, the
distribution or service fee to be paid by the Fund will not exceed an
annual rate of 1.00% of the average daily net assets of the Class B
shares of the Fund (determined in accordance with such Fund's
prospectus as from time to time in effect); provided that the portion
of such fee used to cover Service Expenses (described below) shall not
exceed an annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. John Hancock Funds has agreed to
limit the payment of expenses pursuant to Adjustable Government Fund's
Class B Plan to 0.90% of the average daily net assets of the Class B
shares of such Fund. Under a Fund's Class B Plan, the fee covers the
Distribution and Service Expenses (described below) and interest
expenses on unreimbursed distribution expenses. In accordance with
generally accepted accounting principles, neither Fund treats
unreimbursed distribution expenses attributable to Class B shares as a
liability of the Fund and does not reduce the current net assets of
Class B by such amount although the amount may be payable in the
future.
-24-
<PAGE>
Under the Plans, expenditures shall be calculated and accrued
daily and paid monthly or at such other intervals as the Trustees
shall determine. The fee may be spent by John Hancock Funds on
Distribution Expenses or Service Expenses. "Distribution Expenses"
include any activities or expenses primarily intended to result in the
sale of shares of the relevant class of a Fund, including, but not
limited to: (i) initial and ongoing sales compensation payable out of
such fee as such compensation is received by John Hancock Funds or by
Selling Brokers, (ii) direct out-of-pocket expenses incurred in
connection with the distribution of shares, including expenses related
to printing of prospectuses and reports; (iii) preparation, printing
and distribution of sales literature and advertising material; (iv) an
allocation of overhead and other branch office expenses of John
Hancock Funds related to the distribution of Fund shares (v)
distribution expenses that were incurred by a Fund's former
distributor and not recovered through payments under the Class A or
Class B former plans or through receipt of contingent deferred sales
charges; and (vi) in the event that any other investment company (the
"Acquired Fund") sells all or substantially all of its assets to,
merges with or otherwise engages in a combination with a Fund,
distribution expenses originally incurred in connection with the
distribution of the Acquired Fund's shares. Service Expenses under
the Plans include payments made to, or on account of, account
executives of selected broker-dealers (including affiliates of John
Hancock Funds) and others who furnish personal and shareholder account
maintenance services to shareholders of the relevant class of the
Fund.
During the fiscal year ended March 31, 1994, total payments
made by Quality Bond Fund under the former Class A Rule 12b-1 plan to
the former distributor amounted to $264,754, and of such amount
$11,739, $38,795, $18,735, $169,047 and $26,438 represented payments
for (1) the cost of printing and distribution prospectuses and
financial reports to investors, (2) various sales literature, (3)
advertising expenses, (4) distribution and/or administrative services
and (5) service fees, respectively. For the fiscal year ended March
31, 1994, no payments were made by Adjustable Government Fund under
the Class A Plan.
During the fiscal year ended March 31, 1994, total payments
made by Adjustable Government Fund under the former Class B Rule 12b-1
plan to the former distributor amounted to $93,843 all of which
represented distribution fees of which $55,671, $11,134 and $27,038
represented payments for dealer commissions, underwriting fees and
carrying charges, respectively.
During the fiscal year ended March 31, 1994, total payments
made by Quality Bond Fund under the former Class B Rule 12b-1 plan to
the former distributor amounted to $32,558 of which $8,161 represented
service fees and $24,397 represented distribution fees of which
$14,455, $3,614 and $6,328 represented payments for dealer
commissions, underwriting fees and carrying charges, respectively.
For the fiscal year ended March 31, 1994, the former
distributor received $53,744 in contingent deferred sales charges from
redemption of Adjustable Government Fund's Class B shares. For the
fiscal year ended March 31, 1994, the former distributor received
$6,525 in contingent deferred sales charges from redemption of Quality
Bond Fund's Class B shares.
Each Plan provides that it will continue in effect only so long
as its continuance is approved at least annually by a majority of both
the Trustees and the Independent Trustees. Each Plan provides that it
may be terminated (a) at any time by vote of a majority of the
Trustees, a majority of the Independent Trustees, or a majority of the
respective Class' outstanding voting securities or (b) by John Hancock
Funds on 60 days' notice in writing to a Fund. Each Plan further
provides that it may not be amended to increase the maximum amount of
the fees for the services described therein without the approval of a
majority of the outstanding shares of the class
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<PAGE>
of a Fund which has voting rights with respect to the Plan. Each Plan
provides that no material amendment to the Plan will, in any event, be
effective unless it is approved by a majority vote of the Trustees and
the Independent Trustees of the Trust. The holders of Class A shares
and Class B shares have exclusive voting rights with respect to the
Plan applicable to their respective class of shares. By adopting the
Plans, the Board of Trustees has determined that, in its judgment,
there is a reasonable likelihood that each Plan will benefit the
holders of the applicable class of shares of the applicable Fund.
Information regarding the services rendered under the Plans and
the Distribution Contracts and the amounts paid therefore by the
respective Class of each Fund are provided to, and reviewed by, the
Board of Trustees on a quarterly basis. In its quarterly review, the
Board of Trustees considers the continued appropriateness of the Plans
and the Distribution Contracts and the level of compensation provided
therein.
When the Trust seeks an Independent Trustee to fill a vacancy
or as a nominee for election by shareholders, the selection or
nomination of the Independent Trustee is, under resolutions adopted by
the Trustees contemporaneously with their adoption of the Plans,
committed to the discretion of the Committee on Administration of the
Trustees. The members of the Committee on Administration are all
Independent Trustees and identified in this Statement of Additional
Information under the heading "Those Responsible for Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a
Fund's shares, the following procedures are utilized wherever
applicable. The NAV of Adjustable Government Fund will reflect the
value of the Portfolio's portfolio securities.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of
which generally utilize electronic data processing techniques to
determine valuations for normal institutional size trading units of
debt securities without exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of
60 days or less are generally valued at amortized cost, which
approximates market value. If market quotations are not readily
available or if in the opinion of the Adviser any quotation or price is
not representative of true market value, the fair value of the security
may be determined in good faith in accordance with procedures approved
by the Trustees.
In the case of Quality Bond Fund, any assets or liabilities
expressed in terms of foreign currencies are translated into U.S.
dollars by the custodian bank based on London currency exchange
quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of Quality Bond Fund's NAV.
The Funds will not price their securities on the following
national holidays: New Year's Day; Presidents' Day; Good Friday;
Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and
Christmas Day. On any day an international market is closed and the
New York Stock Exchange is open, any foreign securities will be valued
at the prior day's close with the current day's exchange rate. Trading
of foreign securities may take place on Saturdays and U.S. business
holidays on which a Fund's NAV is not calculated. Consequently,
Quality Bond Fund's portfolio
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securities may trade and the NAV of such Fund's redeemable securities
may be significantly affected on days when a shareholder has no
access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
INITIAL SALES CHARGE ON CLASS A SHARES. The sales charges
applicable to purchases of Class A shares of a Fund are described in
each Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Prospectus are
described in detail below. In calculating the sales charge applicable
to current purchases of Class A shares, the investor is entitled to
cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of a Fund, or if Investor
Services is notified by the investor's dealer or the investor at the
time of the purchase, the cost of the Class A shares owned.
COMBINED PURCHASES. In calculating the sales charge applicable
to purchases of Class A shares made at one time, the purchases will be
combined if made by (a) an individual, his or her spouse and their
children under the age of 21 purchasing securities for his or her own
account, (b) a trustee or other fiduciary purchasing for a single
trust, estate or fiduciary account and (c) certain groups of four or
more individuals making use of salary deductions or similar group
methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from
Investor Services or a Selling Broker's representative.
WITHOUT SALES CHARGE. As described in each Fund's Prospectus,
Class A shares of a Fund may be sold without a sales charge to certain
persons described in the Prospectus.
ACCUMULATION PRIVILEGE. Investors (including investors
combining purchases) who are already Class A shareholders may also
obtain the benefit of the reduced sales charge by taking into account
not only the amount then being invested but also the purchase price or
value of the Class A shares already held by such person.
COMBINATION PRIVILEGE. Reduced sales charges (according to the
schedule set forth in each Class A and Class B Prospectus) also are
available to an investor based on the aggregate amount of his
concurrent and prior investments in Class A shares of a Fund and shares
of all other John Hancock funds which carry a sales charge.
LETTER OF INTENTION. The reduced sales loads are also
applicable to investments made over a specified period pursuant to a
Letter of Intention (LOI), which should be read carefully prior to its
execution by an investor. Each Fund offers two options regarding the
specified period for making investments under the LOI. All investors
have the option of making their investments over a period of thirteen
(13) months. Investors who are using the Funds as funding mediums for
a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month period.
These qualified retirement plans include IRA's, SEP, SARSEP, TSA,
401(k) plans, TSA plans and 457 plans. Such an investment (including
accumulations and combinations) must aggregate $50,000 or more invested
during the specified period from the date of the LOI or from a date
within ninety (90) days prior thereto, upon written request to Investor
Services. The sales charge applicable to all amounts invested under
the LOI is computed as if the aggregate amount intended to be invested
had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the
specified period (either 13 or 48 months), the sales charge
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applicable will not be higher than that which would have been applied
(including accumulations and combinations) had the LOI been for
the amount actually invested.
The LOI authorizes Investor Services to hold in escrow
sufficient Class A shares (approximately 5% of the aggregate) to make
up any difference in sales charges on the amount intended to be
invested and the amount actually invested, until such investment is
completed within the specified period, at which time the escrow shares
will be released. If the total investment specified in the LOI is not
completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Investor Services to act as
his attorney-in-fact to redeem any escrow shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment
by an investor to purchase, or by a Fund to sell, any additional shares
and may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS A SHARES
Investments in Class B shares are purchased at net asset value
per share without the imposition of a sales charge so that a Fund will
receive the full amount of the purchase payment.
CONTINGENT DEFERRED SALES CHARGE. Class B shares which are
redeemed within six years for Investment Quality Bond Fund and within
four years for Adjustable Government Fund of date of purchase will be
subject to a contingent deferred sales charge ("CDSC") at the rates set
forth in the relevant Class A and Class B Prospectus as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on
an amount equal to the lesser of the current market value or the
original purchase cost of the Class B shares being redeemed.
Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase prices, including Class B shares derived
from reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the
number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes
of determining the number of years from the time of any payment for the
purchases of shares, all payments during a month will be aggregated and
deemed to have been made on the last day of the month.
Proceeds from the CDSC are paid to John Hancock Funds and are
used in whole or in part by John Hancock Funds to defray its expenses
related to providing distribution-related services to a Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to select Selling Brokers for selling Class B shares. The
combination of the CDSC and the distribution and service fees
facilitates the ability of a Fund to sell the Class B shares without a
sales charge being deducted at the time of the purchase. See the
relevant Class A and Class B Prospectus for additional information
regarding the CDSC.
SPECIAL REDEMPTIONS
Although it would not normally do so, each Fund has the right to pay
the redemption price of shares of the Fund in whole or in part in
portfolio securities as prescribed the Trustees. When the shareholder
sells portfolio securities received in this fashion, he would incur a
brokerage charge. Any such securities would be valued for the purposes
of making such payment at the same value as used in determining net
asset value. Each Fund has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which each Fund is obligated to redeem shares
solely in
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cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE. As described more fully in each Prospectus,
each Fund permits exchanges of shares of any class of the Fund for
shares of the same class in any other John Hancock fund offering that
class.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in each Class
A and Class B Prospectus, each Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent
proceeds arising from the redemption of Fund shares. Since the
redemption price of Fund shares may be more or less than the
shareholder's cost, depending upon the market value of the securities
owned by a Fund at the time of redemption, the distribution of cash
pursuant to this plan may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of
a Systematic Withdrawal Plan concurrently with purchases of additional
Class A or Class B shares of a Fund could be disadvantageous to a
shareholder because of the initial sales charge payable on such
purchases of Class A shares and the CDSC imposed on redemptions of
Class B shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Fund shares at the same time as a
Systematic Withdrawal Plan is in effect. Each Fund reserves the right
to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The
shareholder may terminate the plan at any time by giving proper notice
to Investor Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program
is explained fully in each Fund's Class A and Class B Prospectus and
the Account Privileges Application. The program, as it relates to
automatic investment checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly
Automatic Accumulation Program may be revoked by Investor Services
without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify
the shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by
calling Investor Services or upon written notice to Investor Services
which is received at least five (5) business days prior to the due date
of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Fund
shares may, within 120 days after the date of redemption, reinvest
without payment of a sales charge any part of the redemption proceeds
in shares of the same class of a Fund or another John Hancock mutual
fund, subject to the minimum investment limit in that fund. The
proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of a Fund
or in Class A shares of another John Hancock mutual fund. If a CDSC
was paid upon a redemption, a shareholder may reinvest the proceeds
from that redemption at net asset value in additional shares of the
class from which the redemption was made. The shareholder's account
will be credited with the amount of any CDSC charged upon the prior
redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired
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through reinvestment will, for purposes of computing the CDSC payable
upon a subsequent redemption, include the holding period of the
redeemed shares. A Fund may modify or terminate the reinvestment
privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction
for Federal income tax purposes even if the reinvestment privilege is
exercised, and any gain or loss realized by a shareholder on the
redemption or other disposition of Fund shares will be treated for tax
purposes as described under the caption "Tax Status."
DESCRIPTION OF THE FUNDS' SHARES
Ownership in the Funds is represented by transferable shares of
beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Trust
and, with respect to each series and class, to issue an unlimited
number of full or fractional shares and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests of the series.
Each share of each series or class of the Trust represents an
equal proportionate interest with each other in that series or class,
none having priority or preference over other shares of the same series
or class. The interest of investors in the various series or classes
of the Trust is separate and distinct. All consideration received for
the sales of shares of a particular series or class of the Trust, all
assets in which such consideration is invested and all income, earnings
and profits derived from such investments will be allocated to and
belong to that series or class. As such, each such share is entitled
to dividends and distributions out of the net income belonging to that
series or class as declared by the Board of Trustees. Shares of the
Trust have a par value of $0.01 per share. The assets of each series
are segregated on the Trust's books and are charged with the
liabilities of that series and with a share of the Trust's general
liabilities. The Board of Trustees determines those assets and
liabilities deemed to be general assets or liabilities of the Trust,
and these items are allocated among each series in proportion to the
relative total net assets of each series. In the unlikely event that
the liabilities allocable to a series exceed the assets of that series,
all or a portion of such liabilities may have to be borne by the other
series.
Pursuant to the Declaration of Trust, the Trustees have
established six series of shares, including the Funds, and may
authorize the creation of additional series of shares (the proceeds of
which would be invested in separate, independently managed portfolios)
and additional classes within any series (which would be used to
distinguish among the rights of different categories of shareholders,
as might be required by future regulations or other unforeseen
circumstances). The four other series of Trust are John Hancock
Adjustable U.S. Government Trust, John Hancock Investment Quality Bond
Fund, John Hancock Government Securities Trust and John Hancock
Adjustable U.S. Government Fund. As of the date of this Statement of
Additional Information, the Trustees have authorized the issuance of
two classes of shares of the Funds, designated as Class A and Class B.
Class A and Class B shares of each Fund represent an equal
proportionate interest in the aggregate net asset values attributable
to that class of such Fund. Holders of Class A shares and Class B
shares each have certain exclusive voting rights on matters relating to
the Class A Plan and the Class B Plan, respectively, of the applicable
Fund. The different classes of the Funds may bear different expenses
relating to the cost of holding shareholder meetings necessitated by
the exclusive voting rights of any class of shares.
Dividends paid by the Funds, if any, with respect to each class
of shares will be calculated in the same manner, at the same time and
on the same day and will be in the same amount, except
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that (i) the distribution and service fees relating to Class A and
Class B shares will be borne exclusively by that Class, (ii) Class B
shares will pay higher distribution and service fees than Class A
shares and (iii) each of Class A shares and Class B shares will bear
any class expenses properly allocable to such class of shares,
subject to the conditions set forth in a private letter ruling that the
Funds have received from the Internal Revenue Service relating to their
multiple- class structure. Accordingly, the net asset value per share
may vary depending whether Class A shares or Class B shares are
purchased.
VOTING RIGHTS. Shareholders are entitled to a full vote for
each full share held. The Trustees themselves have the power to alter
the number and the terms of office of Trustees, and they may at any
time lengthen their own terms or make their terms of unlimited duration
(subject to certain removal procedures) and appoint their own
successors, provided that at all times at least a majority of the
Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50% of
the shares voting can, if they choose, elect all Trustees being voted
upon, while the holders of the remaining shares would be unable to
elect any Trustees. Although the Trust need not hold annual meetings
of shareholders, the Trustees may call special meetings of shareholders
for action by shareholder vote as may be required by the 1940 Act or
the Declaration of Trust. Also, a shareholder's meeting must be called
if so requested in writing by the holders of record of 10% or more of
the outstanding shares of the Trust. In addition, the Trustees may be
removed by the action of the holders of record of two-thirds or more of
the outstanding shares.
ADJUSTABLE GOVERNMENT FUND AND THE PORTFOLIO. While
shareholders of the Fund do not have direct voting rights on matters
relating to the Portfolio, shareholders of the Fund do have indirect
voting rights in respect of changes in the fundamental objective and
restrictions of the Portfolio the effect of which "passes through" to
the Portfolio. However, investors in other mutual funds which may in
the future invest in the Portfolio (note: information about such a
fund being a Portfolio shareholder is not required to be disclosed in
the Fund's prospectus) may also have similar voting rights which, when
exercised and representing sufficiently large holdings, may give such
investors "indirect" voting control regarding the operations of the
portfolio. (The Fund is presently the only mutual fund investing in
the portfolio.) Furthermore, changes in the fundamental objectives,
policies or restrictions of the Portfolio effected despite a prior
disapproval by Shareholders of the Fund, will cause the Fund to
withdraw its investment from the Portfolio which can result in
increased costs and expenses.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that
no Trustee, officer, employee or agent of the Trust is liable to the
Trust or any series or to a shareholder, nor is any Trustee, officer,
employee or agent liable to any third persons in connection with the
affairs of the Trust, except as such liability may arise from his or
its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties. It also provides that all third persons shall
look solely to the particular series' property for satisfaction of
claims arising in connection with the affairs of that series. With the
exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of the Trust.
As a Massachusetts business trust, the Trust is not required to
issue share certificates. The Trust shall continue without limitation
of time subject to the provisions in the Declaration of Trust
concerning termination by action of the shareholders.
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Under Massachusetts law, shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally
liable for acts or obligations of the trust. However, the Trust's
Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations and affairs of the Trust. The
Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held
personally liable by reason of being or having been a shareholder.
Liability is therefore limited to circumstances in which the Trust
itself would be unable to meet its obligations, and the possibility of
this occurrence is remote.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax
purposes. Each Fund has qualified and elected to be treated as a
"regulated investment company" under Subchapter M of the Code and
intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions, and the
diversification of its assets, each Fund will not be subject to Federal
income tax on its net income (including net short-term and long-term
capital gains) which is distributed to shareholders at least annually
in accordance with the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum
distribution requirements. Each Fund intends under normal
circumstances to avoid liability for such tax by satisfying such
distribution requirements.
Distributions from a Fund's current or accumulated earnings and
profits ("E&P"), as computed for Federal income tax purposes, will be
taxable as described in the Funds' Prospectuses whether taken in shares
or in cash. Distributions, if any, in excess of E&P will constitute a
return of capital, which will first reduce an investor's tax basis in
Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis
for Federal income tax purposes in each share so received equal to the
amount of cash they would have received had they elected to receive the
distributions in cash, divided by the number of shares received.
Foreign exchange gains and losses realized by Quality Bond Fund
in connection with certain transactions involving foreign
currency-denominated debt securities, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated
in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income
and losses and may affect the amount, timing and character of
distributions to shareholders. Any such transactions that are not
directly related to Quality Bond Fund's investment in stock or
securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, may increase the
amount of gain it is deemed to recognize from the sale of certain
investments held for less than three months, which gain is limited
under the Code to less than 30% of its annual gross income, and could
under future Treasury regulations produce income not among the types of
"qualifying income" from which Quality Bond Fund must derive at least
90% of its annual gross income. If the net foreign exchange loss for a
year treated as ordinary loss under Section 988 were to exceed Quality
Bond Fund's investment company taxable income computed without regard
to such loss after consideration of regulations governing the treatment
of "post-October losses" (i.e., all of Quality Bond Fund's net income
other than any excess of net long-term capital gain over net short-term
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capital loss) the resulting overall ordinary loss for such year would
not be deductible by Quality Bond Fund or its shareholders in future
years.
Quality Bond Fund may be subject to withholding and other taxes
imposed by foreign countries with respect to its investments in foreign
securities. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. Investors may be entitled to claim
U.S. foreign tax credits or deductions with respect to such taxes,
subject to certain provisions and limitations contained in the Code.
Specifically, if more than 50% of the value of Quality Bond Fund's
total assets at the close of any taxable year consists of stock or
securities of foreign corporations, Quality Bond Fund may file an
election with the Internal Revenue Service pursuant to which
shareholders of Quality Bond Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually
received) their pro rata shares of foreign income taxes paid by Quality
Bond Fund even though not actually received by them, and (ii) treat
such respective pro rata portions as foreign income taxes paid by them.
If Quality Bond Fund makes this election, shareholders may then
deduct such pro rata portions of foreign income taxes in computing
their taxable incomes, or, alternatively, use them as foreign tax
credits, subject to applicable limitations, against their U.S. Federal
income taxes. Shareholders who do not itemize deductions for Federal
income tax purposes will not, however, be able to deduct their pro rata
portion of foreign income taxes paid by Quality Bond Fund, although
such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such
foreign taxes may be required to treat a portion of dividends received
from Quality Bond Fund as a separate category of income for purposes of
computing the limitations on the foreign tax credit. Tax-exempt
shareholders will ordinarily not benefit from this election. Each year
that Quality Bond Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's
pro rata share of foreign income taxes paid by Quality Bond Fund and
(ii) the portion of Quality Bond Fund dividends which represents income
from each foreign country. If Quality Bond Fund cannot or does not
make this election, it may deduct such taxes in computing its taxable
income.
For each Fund, the amount of net short-term and long-term
capital gains, if any, in any given year will vary depending upon the
Adviser's current investment strategy and whether the Adviser believes
it to be in the best interest of the Fund to dispose of portfolio
securities or, in the case of Quality Bond Fund, enter into options or
futures transactions that will generate capital gains. At the time of
an investor's purchase of Fund shares, a portion of the purchase price
is often attributable to realized or unrealized appreciation in the
Fund's portfolio. Consequently, subsequent distributions from such
appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption of shares of a Fund (including by exercise of
the exchange privilege) a shareholder may realize a taxable gain or
loss depending upon his basis in his shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term or short-term, depending upon
the shareholder's tax holding period for the shares. A sales charge
paid in purchasing Class A shares of a Fund cannot be taken into
account for purposes of determining gain or loss on the redemption or
exchange of such shares within 90 days after their purchase to the
extent shares of the Fund or another John Hancock Fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment
or exchange privilege. Such disregarded load will result in an
increase in the shareholder's tax basis
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in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange may be disallowed to the extent the shares
disposed of are replaced with other shares of the same Fund within a
period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to the Dividend
Reinvestment Plan. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss. Any loss realized
upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain with
respect to such shares.
Although its present intention is to distribute all net
short-term and long-term capital gains, if any, each Fund reserves the
right to retain and reinvest all or any portion of its "net capital
gain," which is the excess, as computed for Federal income tax
purposes, of net long-term capital gain over net short-term capital
loss in any year. The Funds will not in any event distribute net
long-term capital gains realized in any year to the extent that a
capital loss is carried forward from prior years against such gain. To
the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to
Federal income tax in the hands of a Fund. Each shareholder would be
treated for Federal income tax purposes as if such Fund had distributed
to him on the last day of its taxable year his pro rata share of such
excess, and he had paid his pro rata share of the taxes paid by the
Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as
long-term capital gain income in his return for his taxable year in
which the last day of the Fund's taxable year falls, (b) be entitled
either to a tax credit on his return for, or to a refund of, his pro
rata share of the taxes paid by the Fund, and (c) be entitled to
increase the adjusted tax basis for his shares in the Fund by the
difference between his pro rata share of such excess and his pro rata
share of such taxes.
For Federal income tax purposes, each Fund is permitted to
carryforward a net capital loss in any year to offset its own net
capital gains, if any, during the eight years following the year of the
loss. To the extent subsequent net capital gains are offset by such
losses, they would not result in Federal income tax liability to the
applicable Fund and, as noted above, would not be distributed as such
to shareholders. Adjustable Government Fund has $561,927 of capital
loss carryforwards as of the tax year ended December 31, 1994, of which
$106,891 expires in 2001 and $455,036 in 2002, available to offset
future net capital gains. Quality Bond Fund has $17,734,441, of
capital loss carryforwards as of the tax year ended December 31, 1994,
of which $3,512,860 expires in 1996, $1,409,609 in 1997, $1,909,995 in
1998, $755,945 in 2000 and $10,146,032 in 2002, available to offset
future net capital gains.
The Fund's dividends and capital gain distributions will
generally not qualify for the corporate dividends received deduction.
Each Fund that invests in certain PIKs, zero coupon securities
or certain increasing rate securities (and, in general, any other
securities with original issue discount or with market discount if the
Fund elects to include market discount in income currently) must accrue
income on such investments prior to the receipt of the corresponding
cash payments. However, each Fund must distribute, at least annually,
all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company
under the Code and avoid Federal income and excise taxes. Therefore, a
Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage
itself by borrowing the cash, to satisfy distribution requirements.
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Investment in debt obligations that are at risk of or in default
may present special tax issues for Quality Bond Fund if it holds any
such obligations. Tax rules are not entirely clear about issues such
as when the Fund may cease to accrue interest, original issue discount,
or market discount, when and to what extent deductions may be taken for
bad debts or worthless securities, how payments received on obligations
in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by Quality Bond
Fund if it holds any such obligations in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal
income or excise tax.
The Funds may be required to account for their transactions in
forward rolls in a manner that, under certain circumstances, may limit
the extent of their participation in such transactions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to
accounts maintained as qualified retirement plans. Shareholders should
consult their tax advisers for more information.
Limitations imposed by the Code on regulated investment
companies like the Funds may restrict Quality Bond Fund's ability to
enter into futures, options, and currency forward transactions.
Certain forward foreign currency transactions and futures and
options transactions undertaken by Quality Bond Fund may cause the Fund
to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as
long-term or short-term (or, in the case of certain currency forwards,
as ordinary income or loss) and timing of some capital gains and losses
realized by the Fund. Also, certain of Quality Bond Fund's losses on
its transactions involving forward contracts, futures and options
transactions, and/or offsetting portfolio positions may be deferred
rather than being taken into account currently in calculating the
Fund's taxable income. Certain of the applicable tax rules may be
modified if Quality Bond Fund is eligible and chooses to make one or
more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of
the Fund's distributions to shareholders. The Fund will take into
account the special tax rules (including consideration of available
elections) applicable to forward contracts, options and futures
contracts, in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income
tax law as applicable to U.S. persons (i.e., U.S. citizens or residents
and U.S. domestic corporations, partnerships, trusts or estates)
subject to tax under such law. The discussion does not address special
tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies, and financial institutions.
Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may
also be subject to state and local taxes. Shareholders should consult
their own tax advisers as to the Federal, state or local tax
consequences of ownership of shares of, and receipt of distributions
from, the Funds in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with
which their investment in a Fund is effectively connected will be
subject to U.S. Federal income tax treatment that is different from
that described above. These investors may be subject to nonresident
alien withholding tax at the rate of 30% (or a lower rate under an
applicable tax treaty) on amounts
-35-
<PAGE>
treated as ordinary dividends from a Fund and, unless an effective IRS
Form W-8 or authorized substitute is on file, to 31% backup withholding
on certain other payments from the Fund. Non- U.S. investors should
consult their tax advisers regarding such treatment and the application
of foreign taxes to an investment in any Fund.
The Funds are not subject to Massachusetts corporate excise or
franchise taxes. Provided that a Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay
any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended September 30, 1994, the annualized
yields of Quality Bond Fund for Class A and Class B shares were 6.17%
and 5.70%, and the yield for Adjustable Government Fund's Class A
shares and Class B shares were 4.82% and 4.33%, respectively. At
September 30, 1994, average annual returns for Quality Bond Fund's
Class A shares was 9.07% for the 10 year period beginning September 30,
1984, 6.42% for the five year period beginning September 30, 1989, and
(10.25)% for the one year period beginning September 30, 1993. For
Quality Bond Fund's Class B shares, the average annual return was
(6.31)% since inception and (11.40)% for the one year period ended
September 30, 1994. Average annual return for Adjustable Government
Fund's Class A and Class B shares for the period from December 31, 1991
(inception of the Fund) through September 30, 1994 was 2.70% and 2.66%,
respectively. For the one year period ended September 30, 1994 annual
returns were (2.65%) and (2.82)%, respectively, for Class A and Class B
shares of Adjustable Government Fund.
Each Fund's yield is computed by dividing net investment income
per share determined for a 30-day period by the maximum offering
price per share (which includes the full sales charge) on the last
day of the period, according to the following standard formula:
Yield = 2 [(a-b + 1)6 -1]
---
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV where applicable).
Each Fund's total return is computed by finding the average
annual compounded rate of return over the 1-year, 5-year, and 10-year
periods that would equate the initial amount invested to the ending
redeemable value according to the following formula:
-36-
<PAGE>
P(1+T)n = ERV
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return
n = number of years
ERV= ending redeemable value of a hypothetical $1,000 investment
made at designated periods or fraction thereof.
In the case of Class A shares or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC is applied at the end of the period. This
calculation also assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the
period. The "distribution rate" is determined by annualizing the
result of dividing the declared dividends of a Fund during the period
stated by the maximum offering price or net asset value at the end of
the period.
In addition to average annual total returns, a Fund may quote
unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a
series of redemptions, over any time period. Total returns may be
quoted with or without taking a Fund's maximum sales charge on Class A
shares or the CDSC on Class B shares into account. Excluding a Fund's
sales charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, a
Fund's yield and total return will be compared to indices of mutual
funds and bank deposit vehicles such as Lipper Analytical Services,
Inc.'s "Lipper -- Fixed Income Fund Performance Analysis," a monthly
publication which tracks net assets, total return, and yield on
approximately 1,700 fixed income mutual funds in the United States.
Ibbotson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY Magazine, FORBES,
BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR,
STANGER'S and BARRON'S, etc. will also be utilized. The Fund's
promotional and sales literature may make reference to the Fund's
"beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed.
Performance quotations should not be considered to be representations
of performance of a Fund for any period in the future. The performance
of a Fund is a function of many factors including its earnings,
expenses and number of outstanding shares. Fluctuating market
conditions; purchases, sales and maturities of portfolio securities;
sales and redemptions of shares of beneficial interest; and changes in
operating expenses are all examples of items that can increase or
decrease a Fund's performance.
-37-
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION. A Fund may use comparative
performance information from certain industry research materials and/or
published in various periodicals. The characteristics of the
investments in such comparisons may be different from those investments
of a Fund's portfolio. In addition, the formula used to calculate the
performance statistics of such investments may not be identical to the
formula used by a Fund to calculate its performance figures. From time
to time, advertisements or information for a Fund may include a
discussion of certain attributes or benefits to be derived by an
investment in a Fund. Such advertisements or information may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail in the communication.
The following publications, indexes, averages and investments
which may be used in advertisements or information concerning a Fund
for dissemination to investors or shareholders, include, but are not
limited, to:
a) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Analysis, and Lipper Mutual Fund indices - measure total
return and average current yield for the mutual fund industry.
Ranks individual mutual fund performance over specified time
periods assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
b) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk,
total return, and average rate of return (average annual
compounded growth rate) over specified time periods for the mutual
fund industry.
c) Mutual Fund Source Book and other similar rating publications
by Morningstar, Inc. - independent performance monitor of equity
and fixed income mutual funds. Morningstar ratings (ranging
from one star for lowest and five stars for highest) are based on
analysis of a fund's ratio, i.e., price yield, risk (volatility)
and total return, including all loads and fees, compared with
similar funds for three-, five- and ten-year periods.
d) Financial publications: BARRONS, BUSINESS WEEK, PERSONAL
FINANCE, FINANCIAL WORLD, FORBES, FORTUNE, "The Wall Street
Journal", "New York Times", WEISENBERGER INVESTMENT COMPANIES
SERVICE, INSTITUTIONAL INVESTOR, and MONEY - rate fund performance
over specified time periods and provide other relative performance
or industry information.
e) Consumer Price Index (or Cost of Living Index), published by
the U. S. Bureau of Labor Statistics - a statistical measure
of change, over time, in the price of goods and services in
major expenditure groups.
f) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates - historical measure of yield, price, and total
return for common and small company stock, long-term government
bonds, Treasure bills, and inflation.
g) Savings and Loan Historical Interest Rates - as published in
the U. S. Savings & Loan League Fact Book.
h) Salomon Brothers Broad Bond Index or its component indices -
The Broad Index measures yield, price and total return for
Treasury, Agency, Corporate, and Mortgage bonds.
-38-
<PAGE>
i) Salomon Brothers Composite High Yield Index or its component
indices - The High Yield Index measures yield, price and total
return for Long-Term High-Yield Index, Intermediate-Term
High-Yield index and Long-Term Utility High-Yield Index.
j) Shearson Lehman Brothers Aggregate Bond index or its
component indices (including Municipal Bond Index) - The Aggregate
Bond Index measures yield, price and total return for Treasury,
Agency, Corporate, Mortgage, and Yankee bonds.
k) Standard & Poor's Bond Indices - measure yield and price of
Corporate, Municipal, and government bonds.
l) Other taxable investments, including certificates of deposit
(CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds, and
repurchase agreements.
m) Historical data supplied by the research departments of
Shearson Lehman Hutton, First Boston Corporation, Morgan
Stanley, Salomon Brothers, Merrill Lynch, and Donaldson Lufkin and
Jenrette.
n) Donoghue's Money Fund Report - industry averages for 7-day
annualized and compounded yields of taxable, tax-free and
government money funds.
o) The Value Line Mutual Fund Survey, published by Value Line,
assigns rankings of 1 (best) to 5 (worst) in terms of risk
adjusted performance covering more than 2,000 equity and fixed
income mutual funds.
From time to time, in reports and promotional literature, a
Fund's performance will be compared to other mutual funds and
investment vehicles such as F.C. Towers.
In addition, advertisements and sales materials may from time to
time, contain hypothetical performance examples for purposes of
illustrating reinvestment (or "compounding") of dividends at fixed
rates of return or tax advantages to be derived from deferring payment
of federal (and state) income taxes (at maximum rates) as compared to
taxable investments assuming fixed rates of return. Illustrations may
also include (1) hypothetical investments in various retirement plans,
such as IRAs, made by investors of various ages or (2) comparisons to
retirement plans funded by annuity or bank products.
In assessing such comparisons, an investor should consider the
following factors:
a) It is generally either not possible or not practicable to
invest in an average or index of certain investments.
b) Certificates of deposit issued by banks and other depository
institutions represent an alternative income producing product.
Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of
deposits prior to maturity will normally be subject to a penalty.
Rates offered by banks and other depository institutions are
subject to change at any time specified by the issuing
institution.
-39-
<PAGE>
c) United States Treasury Bills, Notes or Bonds represent
alternative income producing products. Treasury obligations are
issued in selected denominations. Rates of Treasury obligations
are fixed at the time of issuance and payment of principal and
interest is backed by the full faith and credit of the United
States Government. The market value of such instruments will
generally fluctuate inversely with interest rates prior to
maturity and will equal par value at maturity.
Each Fund may from time to time advertise its comparative
performance as measured or refer to results published by various
periodicals including, but not limited to, Lipper Analytical Services,
Inc. BARRON'S, "THE WALL STREET JOURNAL", "NEW York Times",
WEISENBERGER INVESTMENT COMPANIES SERVICE, DONOGHUE'S MONEY FUND
REPORT, STANGER'S INVESTMENT ADVISOR, FINANCIAL PLANNING, MONEY,
FORTUNE, PERSONAL FINANCE, MUNI WEEK, INSTITUTIONAL INVESTOR, BUSINESS
WEEK, FINANCIAL WORLD and FORBES. In addition, the Fund may from time
to time advertise its performance relative to certain indexes and
benchmark investments, including: (a) the Shearson Lehman Municipal
Bond Index, (b) Bond Buyer 25 Review Bond Index, (c) the Consumer Price
Index, and (d) taxable investments such as certificates of deposit,
money market deposit accounts, checking accounts, savings accounts,
money market mutual funds.
The composition of the investments in such indexes and the
characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Fund's portfolio.
These indexes and averages are generally unmanaged and the items
included in the calculations of such indexes and averages may not be
identical to the formulas used by a Fund to calculate its performance
figures.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio
securities for Quality Bond Fund and the Portfolio (referred to
collectively under this caption as the "Funds") are made by the Adviser
pursuant to recommendations made by its investment committee, which
consists of officers and directors of the Adviser and affiliates and
officers and Trustees who are interested persons of the Funds. Orders
for purchases and sales of securities are placed in a manner which, in
the opinion of the Adviser will offer the best price and market for the
execution of each such transaction. Purchases from underwriters of
portfolio securities may include a commission or commissions paid by
the issuer and transactions with dealers serving as market makers
reflect a "spread." Investments in debt securities are generally
traded on a net basis through dealers acting for their own account as
principals and not as brokers; no brokerage commissions are payable on
such transactions.
The Funds' primary policy is to execute all purchases and sales
of portfolio instruments at the most favorable prices consistent with
best execution, considering all of the costs of the transaction
including brokerage commissions. This policy governs the selection of
brokers and dealers and the market in which a transaction is executed.
Consistent with the foregoing primary policy, the Rules of Fair
Practice of the NASD and other policies that the Trustees may
determine, the Adviser may consider sales of shares of the Funds as a
factor in the selection of broker-dealers to execute portfolio
transactions.
To the extent consistent with the foregoing, the Funds will be
governed in the selection of brokers and dealers, and the negotiation
of brokerage commission rates and dealer spreads, by the reliability
and quality of the services, including primarily the availability and
value of research information and to a lesser extent statistical
assistance furnished to the Adviser, and their value
-40-
<PAGE>
and expected contribution to the performance of the Funds. It is not
possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to
the research efforts of the Adviser. The receipt of research
information is not expected to reduce significantly the expenses of the
Adviser. The research information and statistical assistance furnished
by brokers and dealers may benefit the Life Company or other advisory
clients of the Adviser, and conversely, brokerage commissions and
spreads paid by other advisory clients of the Adviser may result in
research information and statistical assistance beneficial to the
Funds. The Funds will not make any commitments to allocate portfolio
transactions upon any prescribed basis. While the Funds' officers will
be primarily responsible for the allocation of the Funds' brokerage
business, their policies and practices in this regard must be
consistent with the foregoing and will at all times be subject to
review by the Trustees. For the fiscal years ended March 31, 1994,
1993 and 1992, brokerage commissions were $272,417, $83,165 and
$70,055, respectively, for Quality Bond Fund.
As permitted by Section 28(e) of the Securities Exchange Act of
1934, the Funds may pay to a broker which provides brokerage and
research services to the Funds an amount of disclosed commission in
excess of the commission which another broker would have charged for
effecting that transaction. This practice is subject to a good faith
determination by the Trustees that the price is reasonable in light of
the services provided and to policies that the Trustees may adopt from
time to time. During the fiscal year ended March 31, 1994, the Funds
did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations
of securities.
The Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker
Anthony") John Hancock Distributors, Inc. ("John Hancock Distributors")
and Sutro & Company, Inc. ("Sutro"), are broker-dealers ("Affiliated
Brokers"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the
Funds may execute portfolio transactions with or through Tucker
Anthony, Sutro or John Hancock Distributors. During the year ended
March 31, 1994, the Funds did not execute any portfolio transactions
with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Funds on
exchange transactions, subject, however, to the general policy of the
Funds set forth above and the procedures adopted by the Trustees
pursuant to the 1940 Act. Commissions paid to an Affiliated Broker
must be at least as favorable as those which the Trustees believe to be
contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if
the Funds would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers, except for
accounts for which the Affiliated Broker acts as a clearing broker for
another brokerage firm, and any customers of the Affiliated Broker not
comparable to the Funds as determined by a majority of the Trustees who
are not interested persons (as defined in the 1940 Act) of the Funds,
the Adviser or the Affiliated Brokers. Because the Adviser, which is
affiliated with the Affiliated Brokers, has, as an investment adviser
to the Funds, the obligation to provide investment management services,
which includes elements of research and related investment skills, such
research and related skills will not be used by the Affiliated Brokers
as a basis for negotiating commissions at a rate higher than that
determined in accordance with the above criteria. The Funds will not
effect principal transactions with Affiliated Brokers. The Funds may,
however, purchase securities from other members of underwriting
syndicates of which Tucker Anthony,
-41-
<PAGE>
Sutro and John Hancock Distributors are members, but only in accordance
with the policy set forth above and procedures adopted and reviewed
periodically by the Trustees.
Quality Bond Fund's turnover rate for the fiscal years ended
March 31, 1993 and 1994 were 191% and 242%, respectively. The turnover
rate for Adjustable Government Fund for the fiscal years ended March
31, 1993 and 1994, were 186% and 244%, respectively. Such rates
reflect the difference between the years' varying market conditions.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116,
Boston, MA 02205-9116, a wholly owned indirect subsidiary of the Life
Company, is the transfer and dividend paying agent for each Fund.
Quality Bond Fund pays Investor Services monthly a transfer agent fee
equal to $20.00 per account for the Class A shares and $22.50 per
account for the Class B shares on an annual basis, plus out-of-pocket
expenses. Adjustable Government Fund pays Investor Services monthly a
transfer agent fee equal to $20.00 per account for the Class A shares
and $22.50 per account for the Class B shares on an annual basis, plus
out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to custodian
agreements between the Trust on behalf of each Fund and Investors Bank
and Trust ("IBT") 24 Federal Street, Boston, Massachusetts. Under the
custodian agreements, IBT performs custody, portfolio and fund
accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts
02116, has been selected as the independent auditors of each Fund. The
financial statements of each Fund included in each Prospectus and this
Statement of Additional Information have been audited by Ernst & Young
LLP for the periods indicated in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
-42-
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON MARCH 31, 1995. YOU'LL ALSO
FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF THAT
DATE.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Publicly traded bonds (cost - $91,463,050)...................... $ 88,014,704
Common stocks (cost - $281,580)................................. 281,580
Joint repurchase agreement (cost - $501,000).................... 501,000
Corporate savings account....................................... 727
------------
88,798,011
Cash............................................................. 2,032
Dividends receivable............................................. 14,416
Receivable for investments sold.................................. 5,633,449
Interest receivable.............................................. 2,148,384
Other assets..................................................... 30,084
------------
Total Assets.............................. 96,626,376
--------------------------------------------------------
LIABILITIES:
Payable for investments purchased................................ 6,288,481
Payable for shares repurchased................................... 173,311
Dividend payable................................................. 251,015
Payable to John Hancock Advisers, Inc.
and affiliates - Note B........................................ 73,070
Accounts payable and accrued expenses............................ 34,210
Payable for variation margin - Note A............................ 8,750
------------
Total Liabilities......................... 6,828,837
--------------------------------------------------------
NET ASSETS:
Capital paid-in.................................................. 112,637,723
Accumulated net realized loss on investments,
options, foreign currency transactions and
financial futures contracts.................................... (19,561,609)
Net unrealized depreciation of investments,
foreign currency transactions and financial
futures contracts.............................................. (3,428,659)
Undistributed net investment income.............................. 150,084
------------
Net Assets................................ $ 89,797,539
========================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with $0.01 per share par value, respectively)
Class A - $82,351,006/10,080,512................................. $ 8.17
===============================================================================
Class B - $7,446,533/911,525..................................... $ 8.17
===============================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($8.17 x 104.99%)...................................... $ 8.58
===============================================================================
</TABLE>
* 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 March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $14,416)........... $ 8,996,310
-----------
Expenses:
Investment management fee - Note B............................. 576,758
Distribution/service fee - Note B
Class A...................................................... 218,117
Class B...................................................... 69,547
Transfer agent fee............................................. 190,797
Interest expense............................................... 115,720
Custodian fee.................................................. 87,250
Registration and filing fees................................... 29,001
Auditing fee................................................... 27,999
Printing....................................................... 27,913
Trustees' fees................................................. 25,662
Miscellaneous.................................................. 21,793
Legal fees..................................................... 12,420
Advisory board fee............................................. 1,765
-----------
Total Expenses............................. 1,404,742
--------------------------------------------------------
Net Investment Income...................... 7,591,568
--------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS,
FINANCIAL FUTURES CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on investments sold............................ (8,074,205)
Net realized loss on options..................................... (83,436)
Net realized gain on financial futures contracts................. 743,196
Net realized loss on foreign currency transactions............... (366,871)
Change in net unrealized appreciation/depreciation
of investments................................................. 1,587,412
Change in net unrealized appreciation/depreciation
on financial futures contracts................................. (394,844)
Change in net unrealized appreciation/depreciation
of foreign currency transactions............................... 55,838
-----------
Net Realized and Unrealized
Loss on Investments, Options,
Financial Futures Contracts and
Foreign Currency Transactions.............. (6,532,910)
--------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations.................. $ 1,058,658
========================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income.......................................................................... $ 7,591,568 $ 8,401,014
Net realized loss on investments sold, options, financial futures contracts and
foreign currency transactions................................................................ (7,781,316) (994,065)
Change in net unrealized appreciation/depreciation of investments,
financial futures contracts and foreign currency transactions................................ 1,248,406 (5,566,381)
------------ ------------
Net Increase in Net Assets Resulting from Operations........................................ 1,058,658 1,840,568
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A - ($0.6600 and $0.7020 per share, respectively)...................................... (6,944,803) (8,139,992)
Class B** - ($0.5904 and $0.4842 per share, respectively).................................... (486,623) (210,407)
------------ ------------
Total Distributions to Shareholders........................................................ (7,431,426) (8,350,399)
------------ ------------
FROM FUND SHARE TRANSACTIONS -- NET* ............................................................ (5,353,781) (3,802,513)
------------ ------------
NET ASSETS:
Beginning of period............................................................................ 101,524,088 111,836,432
------------ ------------
End of period (including undistributed net investment income and distributions in
excess of net investment income of $150,084 and ($10,058) respectively)...................... $ 89,797,539 $101,524,088
============ ============
</TABLE>
<TABLE>
<CAPTION>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
YEAR ENDED MARCH 31,
----------------------------------------------------------
1995 1994
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold........................................................ 877,320 $ 7,260,092 1,326,045 $ 12,356,583
Shares issued to shareholders in reinvestment of distributions..... 479,004 3,954,812 498,008 4,601,879
---------- ------------ ---------- ------------
1,356,324 11,214,904 1,824,053 16,958,462
Less shares repurchased............................................ (2,244,995) (18,518,937) (2,933,145) (27,158,357)
---------- ------------ ---------- ------------
Net decrease...................................................... (888,671) $ (7,304,033) (1,109,092) $(10,199,895)
========== ============ ========== ============
CLASS B **
Shares sold........................................................ 463,584 $ 3,861,116 925,617 $ 8,663,960
Shares issued to shareholders in reinvestment of distributions..... 29,471 243,889 13,573 124,743
---------- ------------ ---------- ------------
493,055 4,105,005 939,190 8,788,703
Less shares repurchased............................................ (261,054) (2,154,753) (259,666) (2,391,321)
---------- ------------ ---------- ------------
Net increase...................................................... 232,001 $ 1,950,252 679,524 $ 6,397,382
========== ============ ========== ============
</TABLE>
** Class B shares commenced operations on June 30, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios and supplemental data are
listed as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1995(b) 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period........................... $ 8.72 $ 9.26 $ 8.93 $ 8.85 $ 8.52
------- ------- -------- ------- -------
Net Investment Income.......................................... 0.66 0.71 0.79 0.80 0.85
Net Realized and Unrealized Gain (Loss) on Investments......... (0.55) (0.55) 0.31 0.11 0.32
------- ------- -------- ------- -------
Total from Investment Operations............................. 0.11 0.16 1.10 0.91 1.17
------- ------- -------- ------- -------
Less Distributions:
Dividends from Net Investment Income........................... (0.66) (0.70) (0.77) (0.83) (0.84)
------- ------- -------- ------- -------
Net Asset Value, End of Period................................. $ 8.17 $ 8.72 $ 9.26 $ 8.93 $ 8.85
======= ======= ======== ======= =======
Total Investment Return at Net Asset Value..................... 1.46% 1.58% 12.77% 10.72% 14.51%
RATIO AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted)...................... $82,351 $95,601 $111,836 $96,516 $84,039
Ratio of Expenses to Average Net Assets (c).................... 1.32% 1.25% 1.24% 1.36% 1.25%
Ratio of Net Investment Income to Average Net Assets........... 8.15% 7.63% 8.47% 8.84% 9.89%
Portfolio Turnover Rate........................................ 202% 242% 191% 316% 134%
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 30, 1993
MARCH 31, TO MARCH 31,
1995(b) 1994
---------- -------------
<S> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ......................... $ 8.72 $ 9.31(d)
------- -------
Net Investment Income ......................................... 0.59 0.49
Net Realized and Unrealized Gain (Loss) on Investments ....... (0.55) (0.60)
------- -------
Total from Investment Operations ........................... 0.04 (0.11)
------- -------
Less Distributions:
Dividends from Net Investment Income ......................... (0.59) (0.48)
------- -------
Net Asset Value, End of Period ............................... $ 8.17 $ 8.72
======= =======
Total Investment Return at Net Asset Value ................... 0.62% (1.51%)(a)
RATIO AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ..................... $ 7,447 $ 5,923
Ratio of Expenses to Average Net Assets (c) ................... 2.07% 1.99%*
Ratio of Net Investment Income to Average Net Assets ......... 7.40% 6.58%*
Portfolio Turnover Rate ....................................... 202% 242%
</TABLE>
* On an annualized basis.
(a) Not annualized.
(b) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(c) Excluding interest expense, which equalled 0.12% for the year ended
March 31, 1995, 0.07% for the year ended March 31, 1993 and 0.34% for the
year ended March 31, 1992.
(d) Initial price to commence operations.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
INVESTMENT QUALITY BOND FUND ON MARCH 31, 1995. IT'S DIVIDED INTO THREE MAIN
CATEGORIES: PUBLICLY TRADED BONDS, COMMON STOCK AND SHORT-TERM INVESTMENTS. THE
BONDS ARE FURTHER BROKEN DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH
REPRESENT THE FUND'S "CASH" POSITION, ARE LISTED LAST.
SCHEDULE OF INVESTMENTS
March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- ---- -------- -------- -----
<S> <C> <C> <C> <C>
PUBLICLY TRADED BONDS
BANKS (2.51%)
Barclays North American Capital Corp.,
*Gtd Cap Note 05-15-21............................................... 9.750% AA- $ 500 $ 554,180
International Bank for Reconstruction and Development,
*30 Yr Bond 07-15-17................................................. 9.250 AAA 1,500 1,698,150
-----------
2,252,330
-----------
BROADCASTING (2.99%)
Cablevision Systems Corp.,
*Sr Sub Deb 04-01-04................................................. 10.750 B 1,000 1,030,000
Continental Cablevision, Inc.,
*Sr Sub Deb 06-01-07................................................. 11.000 BB- 625 662,500
Jones Intercable, Inc.,
*Sr Note 03-15-02.................................................... 9.625 BB 750 742,500
Rogers Cablesystems Ltd.,
*Sr Sec Second Priority Note 03-15-05 (R)............................ 10.000 BB+ 250 250,625
-----------
2,685,625
-----------
CHEMICALS (0.63%)
Cemex SA De C.V.,
Note 09-20-01 (R).................................................... 9.500 BB 1,000 567,850
-----------
COMPUTERS (0.36%)
Unisys Corp.,
*Credit Sensitive Note 07-01-97...................................... 13.500 BB- 300 327,750
-----------
FINANCE (1.97%)
Standard Credit Card Master Trust I,
*Class A Credit Card Part Ctf Ser 1995-2 01-07-00.................... 8.625 AAA 750 756,094
World Book Finance, Inc.,
Note 09-01-96........................................................ 8.125 AAA 1,000 1,012,660
-----------
1,768,754
-----------
GOVERNMENTAL - FOREIGN (10.54%)
Brazil, Republic of,
Note IDU Ser A-L 01-01-01............................................ 7.813 NR 1,960 1,435,700
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- ---- -------- -------- -----
<S> <C> <C> <C> <C>
GOVERNMENTAL - FOREIGN (CONTINUED)
Nova Scotia, Province of,
SF Deb 05-15-13.................................................... 11.500% A- $2,255 $ 2,555,840
Ontario, Province of,
Deb 11-05-11....................................................... 17.000 AA- 3,750 4,510,275
South Africa, Republic of,
*Note 12-15-99...................................................... 9.625 BB 1,000 960,000
-----------
9,461,815
-----------
GOVERNMENTAL - U.S. (19.66%)
United States Treasury,
Bond 05-15-95...................................................... 12.625 AAA 11,980 12,066,136
*Bond 08-15-05...................................................... 10.750 AAA 2,000 2,490,940
Bond 02-15-23...................................................... 7.125 AAA 3,250 3,097,153
-----------
17,654,229
-----------
GOVERNMENTAL - U.S. AGENCIES (26.71%)
Federal Home Loan Mortgage Corp.,
CMO Remic 1218-G 05-15-14.......................................... 4.500 AAA 1,000 858,120
*CMO Remic 1990-51-H 05-15-21....................................... 5.750 AAA 5,500 4,929,375
*CMO Remic 1994-48 E 11-25-08....................................... 6.000 AAA 5,000 4,371,850
Federal National Mortgage Association,
15 Yr SF Pass thru Ctf 05-01-02.................................... 8.000 AAA 4 3,612
*15 Yr SF Pass thru Ctf 01-01-09 to 09-01-24........................ 8.500 AAA 8,615 8,706,608
Government National Mortgage Association,
*30 Yr SF Pass thru Ctf 10-15-23 to 05-15-24........................ 6.500 AAA 5,022 4,536,124
30 Yr SF Pass thru Ctf 02-15-04.................................... 8.000 AAA 3 3,082
30 Yr SF Pass thru Ctf 02-15-13 to 08-15-13........................ 11.500 AAA 229 254,093
30 Yr SF Pass thru Ctf 03-15-13.................................... 12.000 AAA 98 109,853
30 Yr SF Pass thru Ctf 08-15-10 to 12-15-10........................ 12.500 AAA 103 115,676
*30 Yr SF Pass thru Ctf 11-15-10.................................... 13.000 AAA 33 36,329
30 Yr SF Pass thru Ctf 07-15-11.................................... 15.000 AAA 53 60,962
-----------
23,985,684
-----------
INSURANCE (3.19%)
Massachusetts Mutual Life Insurance Co.,
*Surplus Note 11-15-23 (R).......................................... 7.625 AA- 1,250 1,104,512
New York Life Insurance Co.,
*Surplus Note 12-15-23 (R).......................................... 7.500 AA 2,000 1,757,700
-----------
2,862,212
-----------
LEISURE & RECREATION (1.99%)
Walt Disney Co. (The),
Sr Deb 07-15-03.................................................... 7.550 AA- 2,000 1,787,280
-----------
OIL & GAS (3.03%)
Maxus Energy Corp,
*Medium Term Note 07-11-02.......................................... 10.670 BB- 1,000 851,270
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- ---- -------- -------- -----
<S> <C> <C> <C> <C>
OIL & GAS (CONTINUED)
Norsk Hydro, a.s.,
Deb 06-15-23...................................................... 7.750% A- $2,000 $ 1,871,380
-----------
2,722,650
-----------
PAPER (1.15%)
Fort Howard Corp.,
*Sub Deb 11-01-00.................................................. 12.625 B 1,000 1,032,500
-----------
POLLUTION CONTROL (1.13%)
Waste Management, Inc.,
Note 08-15-96..................................................... 7.875 AA- 1,000 1,010,280
-----------
PUBLISHING (1.04%)
Time Warner Inc.,
*Deb 01-15-13...................................................... 9.125 BBB- 1,000 937,860
-----------
RETAIL (1.23%)
Sears Roebuck & Co,
*Deb 11-01-11...................................................... 9.375 BBB 1,000 1,101,310
-----------
STEEL (2.26%)
UCAR Global Enterprises Inc.,
*Sr Sub Note 01-15-05 (R).......................................... 12.000 B 1,000 1,050,000
Weirton Steel Corp.,
*Sr Note 10-15-99.................................................. 10.875 B 1,000 975,000
-----------
2,025,000
-----------
TELECOMMUNICATIONS (1.08%)
Viatel Inc.,
*Sr Discount Note 01-15-05......................................... 15.000 NR 2,000 972,500
-----------
TOBACCO (1.10%)
RJR Nabisco, Inc.,
*Note 12-01-02..................................................... 8.625 BBB- 1,000 983,790
-----------
TRANSPORTATION (1.00%)
Rail Car Trust No.,
*Trust Note 1992-1, 06-01-04....................................... 7.750 AAA 893 900,350
-----------
UTILITIES (14.45%)
British Columbia Hydro and Power Auth.
(Gtd by Province of British Columbia),
Bond Ser FG 04-15-11.............................................. 15.000 AA+ 2,050 2,310,084
Bond Ser FH 07-15-11.............................................. 15.500 AA+ 225 260,586
Bond Ser FJ 11-15-11.............................................. 15.500 AA+ 1,081 1,276,715
BVPS II Funding Corp.,
*Collateralized Lease Bond 06-01-17................................ 8.890 BB+ 500 434,990
Centragas,
*Sr Sec Note 12-10-10 (R).......................................... 10.650 NR 2,000 1,895,000
First PV Funding Corp.,
*Lease Oblig Ser 1986 B 01-15-16................................... 10.150 B 500 490,000
GTE Corp.,
*Deb 11-01-20...................................................... 10.250 BBB+ 875 978,162
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- ---- -------- -------- -----
<S> <C> <C> <C> <C>
UTILITIES (CONTINUED)
Hydro-Quebec (Gtd by Province of Quebec),
Deb Ser HS 02-01-21............................................. 9.400% A+ $1,500 $ 1,624,230
Long Island Lighting Co.,
*Deb 03-15-03.................................................... 7.050 BB+ 1,000 850,570
Louisiana Power & Light Co.,
*Sec Lease Oblig Bond Ser B 01-02-17............................. 10.670 BBB- 500 521,710
Midland Funding Corp. I,
*Sr Sec Lease Oblig Ser C 07-23-02............................... 10.330 BB- 425 421,188
System Energy Resources,
1st Mtg 04-01-98................................................ 6.000 BBB- 2,000 1,911,700
-----------
12,974,935
-----------
TOTAL PUBLICLY TRADED BONDS
(Cost $91,463,050) (98.02%) 88,014,704
------ -----------
COMMON STOCK
TELECOMMUNICATIONS (0.31%)
Viatel, Inc.,
*Common Stock.................................................... 72,200 281,580
TOTAL COMMON STOCK
(Cost $281,580) (0.31%) 281,580
------ -----------
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (0.56%)
Investment in a joint repurchase agreement transaction
with U.B.S. Securities Inc., Dated 03-31-95, Due 04-03-95
(secured by U.S. Treasury Bond, 6.250%, due 08-15-23,
and U.S. Treasury Notes, 5.250% thru 9.125%
due 07-31-98 thru 05-15-01) - Note A............................ 6.125 501 501,000
-----------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 3.00% ............................................. 727
-----------
TOTAL SHORT-TERM INVESTMENTS (0.56%) 501,727
------ -----------
TOTAL INVESTMENTS (98.89%) $88,798,011
====== ===========
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $6,625,687 as of March 31, 1995. See Note A of the
Notes to Financial Statements for valuation policy.
*Securities, other than short-term investments, newly added to the portfolio
during the year ended March 31, 1995.
**Credit ratings are unaudited and are rated by Moody's Investor Services or
John Hancock Advisers, Inc. where Standard and Poors ratings are not
available.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Bond Fund, (the "Trust") is a diversified, open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust consists of five series portfolios: John Hancock Investment Quality Bond
Trust (the "Fund"), John Hancock Government Securities Trust, John Hancock U.S.
Government Trust, John Hancock Intermediate Government Trust and John Hancock
Adjustable Government Trust. The Trustees may authorize the creation of
additional Funds from time to time to satisfy various investment objectives.
Effective December 22, 1994 (see Note B), the Trust and Funds changed names by
replacing the word Transamerica with John Hancock.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemption, dividends, and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under the terms of a distribution plan
have exclusive voting rights regarding such distribution plan. Class A Shares
are subject to an initial sales charge of up to 4.75% and a 12b-1 distribution
plan. Class B Shares are subject to a contingent deferred sales charge and a
separate 12b-1 distribution plan. On June 30, 1993, Class B shares were sold to
commence class activity. Significant accounting policies of the Fund are as
follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc., a wholly-owned subsidiary of The Berkeley Financial Group, may
participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring
that the agreement is fully collateralized at all times.
REVERSE REPURCHASE AGREEMENT Prior to December 22, 1994, the Fund entered into
reverse repurchase agreements which involve the sale of securities held by the
Fund to a bank or securities firm with an agreement that the Fund will buy back
the securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund and the Fund used the
proceeds obtained from the sale of securities to purchase other investments. On
December 22, 1994, the Fund discontinued investing in reverse repurchase
agreements.
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal
to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked-to-market to reflect the current market
value of the written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's exposure
to the underlying instrument and buying puts and
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
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
contracts' terms, or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended March 31,
1995.
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. 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 will be valued at the official settlement price of
the board of trade or U.S. commodities exchange. Subsequent payments, known as
"variation margin", to and from the broker will be 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 will recognize 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
fluctuations imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At March 31, 1995, open positions in financial futures contracts are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITIONS APPRECIATION
- ---------- -------------- --------- ------------
<S> <C> <C> <C>
JUNE 1995 35 U.S. TREASURY NOTE LONG $19,687
=======
</TABLE>
At March 31, 1995, the Fund has deposited in a segregated account
$6,888,500 par value of U.S. Treasury Bond 12.625%, 5/15/95, and $1,000,000 par
value of FHR, 4.500%, 5/15/14 to cover margin requirements on open financial
futures contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward
foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the contracts
are marked-to-market daily at the applicable foreign currency exchange rates.
Any resulting unrealized gains and losses are included in the determination of
the Fund's daily net assets. The Fund records realized gains and losses at the
time the forward foreign currency contract is closed out or offset by a
matching contract. Risks may arise upon entering these contracts from potential
inability of counterparties to meet the terms of the contract and from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar. These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets and
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
Liabilities. The Fund may also purchase and sell forward contracts to
facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intends to take delivery of the foreign currency.
Such contracts normally involve no market risk other than that offset by the
currency amount of the underlying transaction.
At March 31, 1995, there were no open forward foreign currency exchange
contracts.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially expressed in
terms of foreign currencies are translated into U.S.dollars based on London
currency exchange quotations as of 5:00 p.m., London time, on the date of any
determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/loss on investments are
translated at the rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
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.
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 TAXES The Fund's policy is to comply with the requirements of
the Internal Revenue Code that are applicable to regulated investment companies
and to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, at December 31, 1994, the Fund has
approximately $17,700,000 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 distributions will be
made. The carryforwards expire as follows: 1996 -- $3,500,000, 1997 --
$1,400,000, 1998 -- $1,900,000, 2000 -- $800,000 and 2002 -- $10,100,000. The
Fund's tax year end is December 31.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment securities
is recorded on the accrual basis. Foreign income may be subject to foreign
withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund, if any,
with respect to each class of shares will be calculated in the same manner, at
the same time and will be in the same amount, except for effect of expenses that
may be applied differently to each class as explained previously.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Fund.
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/service fees if any, are calculated daily at the class level based
on the appropriated net assets of each class and the specific expense rate(s)
applicable to each class.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
RECLASSIFICATION Certain reclassifications have been made to 1994 amounts to
permit comparisons to 1995 presentations.
NOTE B --
MANAGEMENT FEE, ADMINISTRATIVE
SERVICES AND TRANSACTIONS WITH AFFILIATES
AND OTHERS
On December 22, 1994, John Hancock Advisers, Inc. (the "Adviser"), a wholly
owned subsidiary of The Berkeley Financial Group, became the investment adviser
for the Fund with approval of the Trustees and shareholders of the Fund. The
Fund's former investment manager was Transamerica Fund Management Company
("TFMC").
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment program
equivalent, to 0.6250% of the first $75,000,000 of the Fund's average daily net
asset value, 0.5625% of the next $75,000,000, and 0.5000% of the Fund's average
daily net asset value in excess of $150,000,000. This fee structure is
consistent with the former agreement with TFMC. For the period ended March 31,
1995, the advisory fee earned by the Adviser and TFMC amounted to $144,190 and
$432,568, respectively, resulting in a total fee of $576,758.
The Adviser and TFMC, for their respective periods, provided
administrative services to the Fund pursuant to an administrative service
agreement through January 16, 1995 on which day the agreement was terminated.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are 2.5% of the first $30,000,000 of the
Fund's average daily net asset value, 2.0% of the next $70,000,000 and 1.5% of
the remaining average daily net asset value.
On December 22, 1994 John Hancock Funds, Inc. ("JH Funds"), a
wholly-owned subsidiary of the Adviser, became the principal underwriter of the
Fund. Prior to this date, Transamerica Fund Distributors, Inc. ("TFD") served as
the principal underwriter and distributor of the Fund. For the period ended
March 31, 1995, JH Funds and TFD received net sales charges of $78,495 with
regard to sales of Class A shares. Out of this amount, $8,693 was retained and
used for printing prospectuses, advertising, sales literature and other
purposes, and $69,802 was paid as sales commissions to unrelated broker-dealers.
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, formerly TFD, and are used in whole or in
part to defray its expenses related to providing distribution related services
to the Fund in connection with the sale of Class B shares. For the period ended
March 31, 1995, contingent deferred sales charges amounted to $29,464.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution Plan with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments for distribution
and service expenses which in total will not exceed on an annual basis 0.25% of
the Fund's average daily net assets attributable to Class A shares and 1.00% of
the Fund's average daily net assets attributable to Class B shares, to reimburse
for its distribution/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 which became effective July 7, 1993.
Under the amended Rules of Fair Practice, curtailment of a portion of the Fund's
12b-1 payments could occur under certain circumstances. This fee structure and
plan is similar to the former arrangement with TFD.
The Board of Trustees approved a shareholder servicing agreement between
the Fund and John Hancock Investor Services Corporation ("Investor Services"), a
wholly owned subsidiary of The Berkeley Financial Group, for the period between
December 22, 1994 and
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Investment Quality Bond Fund
May 12, 1995, inclusive under which Investor Services processed telephone
transactions on behalf of the Fund. As of May 15, 1995, the Fund entered into a
full service transfer agent agreement with Investor Services. Prior to this
date The Shareholder Services Group was the transfer agent. The Fund will pay
Investor Services a fee based on transaction volume and number of shareholder
accounts.
A partner with Baker & Botts was an officer of the Trust until December
22, 1994. During the period ended March 31, 1995, legal fees paid to Baker &
Botts amounted to $7,205.
Mr. Edward J. Boudreau, Jr. is a director and officer of the Adviser and
its affiliates as well as Trustee of the Fund. The compensation of unaffiliated
Trustees is borne by the Fund. Effective with the fees paid for 1995, the
unaffiliated Trustees may elect to defer their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The Fund will
make investments into other John Hancock Funds, as applicable, to cover its
liability with regard to the deferred compensation. Investments to cover the
Fund's deferred compensation liability will be recorded on the Fund's books as
other assets. The deferred compensation liability will be marked to market on a
periodic basis and income earned by the investment will be recorded on the
Fund's books.
The Fund has an independent advisory board composed of certain members
of the former Transamerica Board of Trustees who provide advice to the current
Trustees in order to facilitate a smooth management transition for which the
Fund pays the advisory board and its counsel a fee.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term
obligations, during the period ended March 31, 1995 aggregated $184,032,683 and
$187,313,862, respectively.
The cost of investments owned at March 31, 1995 for Federal income tax
purposes was $92,245,630. Gross unrealized appreciation and depreciation of
investments aggregated $478,319, and $3,926,665, respectively, resulting in net
unrealized depreciation of $3,448,346.
18
<PAGE>
John Hancock Funds - Investment Quality Bond Fund
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Bond --
John Hancock Investment Quality Bond Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the John Hancock Investment Quality Bond Fund
(formerly the Transamerica Investment Quality Bond Fund) (the "Fund"), one of
the portfolios constituting John Hancock Bond Fund (formerly the Transamerica
Bond Fund) (the "Trust"), as of March 31, 1995, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. 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 March
31, 1995, 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 Investment Quality Bond Fund portfolio of John
Hancock Bond Fund at March 31, 1995, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Boston, Massachusetts
May 15, 1995
19
<PAGE>
ADDITIONAL INFORMATION
John Hancock Funds - Investment Quality Bond Fund
On December 16, 1994, a special meeting of John Hancock (formerly Transamerica)
Bond Fund (the "Trust") in respect of John Hancock (formerly Transamerica)
Investment Quality Bond Fund (the "Fund") was held involving the election of
trustees and certain other matters concerning the Fund.
Specifically, shareholders first approved a new investment management
agreement between the Trust on behalf of the Fund and John Hancock Advisers,
Inc. on substantially similar terms to the prior investment management
agreement, to take effect on December 22, 1994, the date of the consummation of
the acquisition of Transamerica Fund Management Company by The Berkeley
Financial Group. The shareholder votes tallied were 6,895,192 FOR, 101,276
AGAINST and 351,047 ABSTAINING.
The shareholders next approved new Plans of Distribution for each Class
A and Class B Shares of the Fund, also effective on December 22, 1994 and also
on substantially the same terms as the prior Plans of Distribution. The Class A
Shareholder votes tallied were 6,243,178 FOR, 130,082 AGAINST, 403,690
ABSTAINING. The Class B Shareholder votes tallied were 542,718 FOR, 11,779
AGAINST and 16,068 ABSTAINING.
The shareholders also voted to ratify the selection of Ernst & Young,
LLP as independent auditors for the Fund for the fiscal year ending March 31,
1995, and the votes were 7,091,522 FOR, 46,783 AGAINST and 46,783 ABSTAINING.
Lastly, the following trustees were elected to serve until their
respective successors shall become duly elected and qualified, with the votes
tabulated as indicated:
<TABLE>
<CAPTION>
NAME OF TRUSTEE FOR WITHHOLD
- --------------- --- --------
<S> <C> <C>
Edward J. Boudreau, Jr. ................................ 6,582,352 827,810
James F. Carlin......................................... 6,582,707 827,455
William H. Cunningham................................... 6,583,507 826,655
Charles L. Ladner....................................... 6,581,120 829,041
Leo E. Linbeck, Jr. .................................... 6,582,363 827,799
Patricia P. McCarter.................................... 6,579,957 830,204
Steven R. Pruchansky.................................... 6,580,909 829,252
Norman H. Smith......................................... 6,582,707 827,455
John P. Toolan.......................................... 6,582,707 827,455
</TABLE>
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund during its tax year ended December 31,
1994. All of the dividends paid for the fiscal year are taxable as ordinary
income. None of the 1994 dividends qualify for the dividends received deduction
available to corporations.
Shareholders will be mailed a 1995 U.S. Treasury Department Form
1099-DIV in January 1996. This will reflect the total of all distributions which
are taxable for calendar year 1995.
20
<PAGE>
EXHIBIT B
JOHN HANCOCK
SOVEREIGN BOND FUND
Class A, Class B and Class C Shares
Statement of Additional Information
May 1, 1995
This Statement of Additional Information provides information about John Hancock
Sovereign Bond Fund (the "Fund") in addition to the information that is
contained in the Fund's Class A, Class B, and Class C Prospectuses (the
"Prospectuses") dated May 1, 1995.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Fund's Prospectuses, a copy of which can be obtained
free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Statement of
Additional
Information
Page
ORGANIZATION OF THE FUND 2
INVESTMENT OBJECTIVE AND POLICIES 2
CERTAIN INVESTMENT PRACTICES 3
INVESTMENT RESTRICTIONS 8
THOSE RESPONSIBLE FOR MANAGEMENT 11
INVESTMENT ADVISORY AND OTHER SERVICES 16
DISTRIBUTION CONTRACT 18
NET ASSET VALUE 20
INITIAL SALES CHARGE ON CLASS A SHARES 20
DEFERRED SALES CHARGE ON CLASS B SHARES 22
SPECIAL REDEMPTIONS 23
ADDITIONAL SERVICES AND PROGRAMS 23
DESCRIPTION OF THE FUND'S SHARES 25
TAX STATUS 27
CALCULATION OF PERFORMANCE 30
<PAGE>
BROKERAGE ALLOCATION 32
TRANSFER AGENT SERVICES 33
CUSTODY OF PORTFOLIO 34
INDEPENDENT AUDITORS 34
FINANCIAL STATEMENTS 35
ORGANIZATION OF THE FUND
John Hancock Sovereign Bond Fund (the "Fund") is a diversified open-end
management investment company organized as a Massachusetts business trust under
the laws of The Commonwealth of Massachusetts. The Fund was organized in 1984 by
John Hancock Advisers, Inc. (the "Adviser") as the successor to John Hancock
Bond Fund, Inc., a Maryland corporation organized in 1973 by the Adviser. The
Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Insurance Company"), a Massachusetts life insurance
company chartered in 1862, with national headquarters at John Hancock Place,
Boston, Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to generate a high level of current
income, consistent with prudent investment risk, for distribution to its
shareholders through investment in a diversified portfolio of freely marketable
debt securities. The Fund's investments will be subject to the market
fluctuations and risks inherent in all securities. There is no assurance that
the Fund will achieve its investment objective. See "Investment Objective and
Policies" in the Fund's Prospectuses.
The Fund will invest primarily in debt securities within the four highest
investment ratings and unrated securities considered by the Adviser to be of
comparable investment quality. The Fund will, when feasible, purchase debt
securities which are non-callable.
The Fund may purchase corporate debt securities bearing fixed or fixed and
contingent interest as well as those which carry certain equity features, such
as conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, or participations based on revenues, sales or
profits. The Fund will not exercise any such conversion, exchange or purchase
rights if, at the time, the value of all equity interests so owned would exceed
10% of the Fund's total assets taken at market value.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. Similarly, when such yields increase, the market value of a
portfolio already invested can be expected to decline. The Fund's portfolio may
include debt securities which sell at substantial discounts from par. These
securities are low coupon bonds which, during periods of high interest rates,
because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates.
<PAGE>
The Fund intends to use short-term trading of securities as a means of
managing its portfolio to achieve its investment objective. The Fund, in
reaching a decision to sell one security and purchase another security at
approximately the same time, will take into account a number of factors,
including the quality ratings, interest rates, yields, maturity dates, call
prices, and refunding and sinking fund provisions of the securities under
consideration, as well as historical yield spreads and current economic
information. The success of short-term trading will depend upon the ability of
the Fund to evaluate particular securities, to anticipate relevant market
factors, including trends of interest rates and earnings and variations from
such trends, to obtain relevant information, to evaluate it promptly, and to
take advantage of its evaluations by completing transactions on a favorable
basis. It is expected that the expenses involved in short-term trading, which
would not be incurred by an investment company which does not use this portfolio
technique, will be significantly less than the profits and other benefits which
will accrue to shareholders.
The portfolio turnover rate will depend on a number of factors, including
the fact that the Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code. Accordingly, the Fund intends to limit
its short-term trading so that less than 30% of the Fund's gross annual income
(including all dividend and interest income and gross realized capital gains,
both short and long-term, without being offset for realized capital losses) will
be derived from gross realized gains on the sale or other disposition of
securities held for less than three months. This limitation, which must be met
by all mutual funds in order to obtain such Federal tax treatment, at certain
times may prevent the Fund from realizing capital gains on some securities held
for less than three months.
CERTAIN INVESTMENT PRACTICES
When-Issued Securities. "When-issued" refers to securities whose terms are
available and for which a market exists, but which have not yet been issued. No
payment is made with respect to a when-issued transaction, until delivery is
due, often a month or more after the purchase.
The Fund may engage in when-issued transactions with respect to securities
purchased for its portfolio in order to obtain an advantageous price and yield
at the time of the transactions. When the Fund engages in a when-issued
transaction, it relies on the seller to consummate the transaction. The failure
of the issuer or seller to consummate the transaction may result in the Fund
losing the opportunity to obtain a price and yield considered to be
advantageous. On the date the Fund enters into an agreement to purchase
securities on a when-issued basis, the Fund will segregate in a separate account
cash or liquid, high grade debt securities (i.e., securities rated in one of the
top three ratings categories by Moody's Investors Service, Inc.("Moody's") or
Standard & Poor's Ratings Group ("S&P) equal in value to the when-issued
commitment. These assets will be valued daily at market, and additional cash or
liquid, high grade debt securities will be segregated in a separate account to
the extent that the total value of the assets in the account declines below the
amount of the when-issued commitment.
Repurchase Agreements. A repurchase agreement is a contract under which
the Fund would acquire a security for a relatively short period (usually not
more than 7 days) subject to the
<PAGE>
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with "primary dealers" in U.S. Government securities. The Adviser
will continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements. The Fund has established a procedure
providing that the securities serving as collateral for each repurchase
agreement must be delivered to the Fund's custodian either physically or in
book-entry form and that the collateral must be marked to market daily to ensure
that each repurchase agreement is fully collateralized at all times. In the
event of bankruptcy or other default by a seller of a repurchase agreement, the
Fund could experience delays in liquidating the underlying securities and could
experience losses, including the possible decline in the value of the underlying
securities during the period which the Fund seeks to enforce its rights thereto,
possible subnormal levels of income and lack of access to income during this
period, and the expense of enforcing its rights.
Restricted Securities. The Fund may invest in restricted securities,
including those eligible for resale to certain institutional investors pursuant
to Rule 144A under the Securities Act of 1933 and foreign securities acquired in
accordance with Regulation S under the Securities Act of 1933. The Fund will not
invest more than 15% of its net assets in illiquid investments, which includes
repurchase agreements maturing in more than seven days, OTC options, securities
that are not readily marketable and restricted securities. However, if the Board
of Trustees determines based upon a continuing review of the trading markets for
specific Rule 144A securities, that they are liquid then such securities may be
purchased without regard to the 15% limit. The Board of Trustees may adopt
guidelines and delegate to the Adviser the daily function of determining and
monitoring the liquidity of restricted securities. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Fund's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in the Fund if qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Financial Futures Contracts. The Fund may hedge its portfolio by selling
or purchasing financial futures contracts as an offset against the effects of
changes in interest rates or in security or foreign currency values. Although
other techniques could be used to reduce the Fund's exposure to interest rate
fluctuations, the Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost by using financial futures contracts. The Fund may enter
into financial futures contracts for hedging and speculative purposes to the
extent permitted by regulations of the Commodity Futures Trading Commission
("CFTC").
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial
<PAGE>
paper, bank certificates of deposit and Eurodollar certificates of deposit. It
is expected that if other financial futures contracts are developed and traded
the Fund may engage in transactions in such contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
of trading in financial futures contracts, see the information under the caption
"Tax Status" below.
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," ranging upward from 1.1% of
the value of the financial futures contract being traded. The margin required
for a financial futures contract is set by the board of trade or exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the financial futures contract which is returned to the Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. Each day, the futures contract is valued at the official settlement
price of the board of trade or exchange on which it is traded. 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.
This process is known as "mark to market." Variation margin does not represent a
borrowing or lending by the Fund but is instead settlement between the Fund and
the broker of the amount one would owe the other if the financial futures
contract expired. In computing net asset value, the Fund will mark to market its
open financial futures positions.
Successful hedging depends on a strong correlation between the market for
the underlying securities and the futures contract market for those securities.
There are several factors that will probably prevent this correlation from being
a perfect one, and even a correct forecast of general interest rate trends may
not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
<PAGE>
the underlying debt securities are lower-rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected interest rate trends. The Fund
will bear the risk that the price of the securities being hedged will not move
in complete correlation with the price of the futures contracts used as a
hedging instrument. Although the Adviser believes that the use of financial
futures contracts will benefit the Fund, an incorrect prediction could result in
a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Fund engages in financial futures transactions only
on boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it will be required to
continue to meet margin requirements until the position is closed.
Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period of the option. Upon exercise, the writer of the option
delivers the futures contract to the holder at the exercise price. The Fund
would be required to deposit with its custodian initial and variation margin
with respect to put and call options on futures contracts written by it. Options
on futures contracts involve risks similar to the risks relating to transactions
in financial futures contracts. Also, an option purchased by the Fund may expire
worthless, in which case the Fund would lose the premium it paid for the option.
<PAGE>
Other Considerations. The Fund will engage in futures transactions for
bona fide hedging or speculative purposes to the extent permitted by CFTC
regulations. The Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or which it expects
to purchase. Except as stated below, the Fund's futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts will be
sold to protect against decline in the price of securities that the Fund owns,
or futures contracts will be purchased to protect the Fund against an increase
in the price of securities or the currency in which they are denominated it
intends to purchase. As evidence of this hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing equivalent amounts of related
securities or assets denominated in the related currency in the cash market at
the time when the futures or option position is closed out. However, in
particular cases, when it is economically advantageous for the Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish speculative positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Fund will engage in transactions in futures contracts only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
for maintaining its qualification as a regulated investment company for Federal
income tax purposes.
When the Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, cash and high grade liquid debt
securities will be deposited in a segregated account with the Fund's custodian
in an amount that, together with the amount of initial and variation margin held
in the account of its broker, equals the market value of the futures contract.
Lower Rated High Yield Debt Obligations. The Fund may invest in high
yielding, fixed income securities rated Baa or lower by Moody's or BBB or lower
by S&P. The Fund will not invest in securities rated below Ca by Moody's or CC
by S&P. Ratings are based largely on the historical financial condition of the
issuer. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate.
The values of lower-rated securities generally fluctuate more than those
of high-rated securities. In addition, the lower rating reflects a greater
possibility of an adverse change in financial condition affecting the ability of
the issuer to make payments of interest and principal. The Adviser seeks to
minimize these risks through diversification, investment analysis and attention
to current developments in interest rates and economic conditions. To the extent
the
<PAGE>
Fund invests in securities in the lower rating categories, the achievement
of the Fund's goals is more dependent on the Adviser's ability than would be the
case if the Fund were investing in securities in the higher rated categories.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The following investment restrictions (as well as the Fund's investment
objective) will not be changed without approval of a majority of outstanding
voting securities which, as used in the Prospectuses and this Statement of
Additional Information, means approval of the lesser of (1) the holders of 67%
or more of the shares represented at a meeting if the holders of more than 50%
of the outstanding shares are present in person or by proxy or (2) the holders
of more than 50% of the outstanding shares.
The Fund observes the following fundamental restrictions:
The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2), (6)
and (7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on future contracts, forward commitments,
forward foreign exchange contracts and repurchase agreements entered into in
accordance with the Fund's investment policy, and the pledge, mortgage or
hypothecation of the Fund's assets within the meaning of paragraph (3) below are
not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure for
extraordinary emergency purposes in amounts not to exceed 33 1/3% of the Fund's
total assets (including the amount borrowed) taken at market value. The Fund
will not use leverage to attempt to increase income. The Fund will not purchase
securities while outstanding borrowings exceed 5% of the Fund's total assets.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 33 1/3% of the Fund's total assets
taken at market value.
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate or any interest therein, except that the
Fund may invest in securities of corporate or governmental entities secured by
real estate or marketable interest therein or issued by companies that invest in
real estate or interests therein.
<PAGE>
(6) Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's total
assets taken at market value, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of publicly distributed debt securities,
bank loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments and
options on such futures contracts, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets taken at
market value at the time of each investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
(9) Purchase securities of an issuer, (other than the U.S.
Government, its agencies or instrumentalities) if
(a) Such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities of such issuer, or
(b) Such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
In connection with the lending of portfolio securities under item (6)
above, such loans must at all times be fully collateralized by cash or
securities of the U.S. Government or its agencies or instrumentalities and the
Fund's custodian must take possession of the collateral either physically or in
book entry form. Any cash collateral will consist of short-term high quality
debt instruments. Securities used as collateral must be marked to market daily.
Nonfundamental Investment Restrictions
The following restrictions are designated as nonfundamental and may be
changed by the Board of Trustees without shareholder approval:
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of the Adviser to
save commissions or to average prices among them is not deemed to result in a
securities trading account.
<PAGE>
(b) Purchase securities on margin or make short sales, except margin
deposits in connection with transactions in options, futures contracts, options
on futures contracts and other arbitrage transactions or unless by virtue of its
ownership of other securities, the Fund has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except that the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities and in connection with transactions involving
forward foreign currency exchange transactions.
(c) Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in securities of closed-end investment companies,
(ii) such purchase would result in more than 3% of the total outstanding voting
securities of any one such closed-end investment company being held by the Fund,
or (iii) more than 5% of the Fund's total assets would be invested in any one
such closed-end investment company. The Fund will not invest in the securities
of any open-end investment company.
(d) Purchase securities of any issuer which, together with any
predecessor, has a record of less than three years' continuous operations prior
to the purchase if such purchase would cause investments of the Fund in all such
issuers to exceed 5% of the value of the total assets of the Fund.
(e) Invest for the purpose of exercising control over or management
of any company.
(f) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's total assets would be invested in
warrants which are not listed on the New York Stock Exchange or the American
Stock Exchange or more than 5% of the value of the total assets of the Fund
would be invested in warrants generally, whether or not so listed. For these
purposes, warrants are to be valued at the lesser of cost or market value, but
warrants acquired by the Fund in units with or attached to debt securities shall
be deemed to be without value.
(g) Knowingly purchase or retain securities of an issuer if one or more of
the Trustees or officers of the Fund or directors or officers of the Adviser or
any investment management subsidiary of the Adviser individually owns
beneficially more than 0.5%, and together own beneficially more than 5%, of the
securities of such issuer.
(h) Purchase interests in oil, gas or other mineral leases or exploration
programs; however, this policy will not prohibit the acquisition of securities
of companies engaged in the production or transmission of oil, gas or other
minerals.
(i) Invest more than (i) 10% of its total assets in securities which are
restricted under the Securities Act of 1933 (the "1933 Act") (excluding
restricted securities that are eligible for resale pursuant to Rule 144A under
the 1933 Act) or (ii) 15% of the Fund's total assets in such restricted
securities (including restricted securities eligible for resale pursuant to Rule
144A).
(j) Purchase interests in real estate limited partnerships.
<PAGE>
(k) Purchase any security, including any repurchase agreement
maturing in more than seven days, which is not readily marketable, if more than
15% of the net assets of the Fund, taken at market value, would be invested in
such securities. (The staff of the Securities and Exchange Commission considers
over-the-counter options to be illiquid securities subject to the 15% limit.)
(l) Notwithstanding any investment restriction to the contrary, the Fund
may, in connection with the John Hancock Group of Funds Deferred Compensation
Plan for Independent Trustees/Directors, purchase securities of other investment
companies within the John Hancock Group of Funds provided that, as a result, (i)
no more than 10% of the Fund's assets would be invested in securities of all
other investment companies, (ii) such purchase would not result in more than 3%
of the total outstanding voting securities of any one such investment company
being held by the Fund and (iii) no more that 5% of the Fund's assets would be
invested in any one such investment company.
In order to permit the sale of shares of the Fund in certain states, the
Trustees may, in their sole discretion, adopt restrictions on investment policy
more restrictive than those described above. Should the Trustees determine that
any such more restrictive policy is no longer in the best interest of the Fund
and its shareholders, the Fund may cease offering shares in the state involved
and the Trustees may revoke such restrictive policy. Moreover, if the states
involved shall no longer require any such restrictive policy, the Trustees may,
at their sole discretion, revoke such policy.
If a percentage restriction on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers and directors of the Adviser or officers and directors of
the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
The following table sets forth the principal occupation or employment of
the Trustees and principal officers of the Fund during the past five years:
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With The Fund During the Past Five Years
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
101 Huntington Avenue Officer, the Adviser and The
Boston, Massachusetts Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited; ("Advisers
International"); John Hancock
Funds, Inc., ("John Hancock
Funds"); John Hancock Investor
Services Corporation ("Investor
Services") and Sovereign Asset
Management Corporation
("SAMCorp"); (herein after the
Adviser, the Berkeley Group, NM
Capital, Advisers International,
John Hancock Funds, Investor
Services and SAMCorp are
collectively referred to as the
"Affiliated Companies");
Chairman, First Signature Bank &
Trust; Director, John Hancock
Freedom Securities Corp., John
Hancock Capital Corp., New
England/Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; President, the Adviser
(until July 1992). Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
- --------------
*An "interested person" of the Fund, as such term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act:).
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With The Fund During the Past Five Years
Dennis S. Aronowitz Trustee (4) Professor of Law, Boston
Boston University University School of Law;
Boston, Massachusetts Trustee, Brookline Savings
Bank; Director, Boston
University Center for Banking
Law Studies (until 1990).
Richard P. Chapman, Jr. Trustee (4) President, Brookline Savings
160 Washington Street Bank.
Brookline, Massachusetts
William J. Cosgrove Trustee (4) Vice President, Senior Banker
20 Buttonwood Place and Senior Credit Officer,
Saddle River, New Jersey Citibank, N.A. (retired
September 1991); Executive Vice
President, Citadel Group
Representative, Inc.
Gail D. Fosler Trustee (4) Vice President and Chief
4104 Woodbine Street Economist, The Conference Board
Chevy Chase, MD (non-profit economic and
business research).
Bayard Henry Trustee (4) Corporate Advisor; Director,
121 High Street Fiduciary Trust Company (a
Boston, Massachusetts trust company); Director,
Groundwater Technology, Inc.
(remediation); Samuel Cabot,
Inc.; Advisor, Corning Capital
Corp.
- -------------------
* An "interested person" of the Fund, as such term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With The Fund During the Past Five Years
*Richard S. Scipione Trustee (3) General Counsel, the Life
John Hancock Place Insurance Company; Director,
P.O. Box 111 the Adviser, the Affiliated
Boston, Massachusetts Companies, John Hancock
Distributors, Inc., JH Networking
Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp, NM Capital and John
Hancock Property and Casualty
Insurance and its affiliates
(until November, 1993); Trustee;
The Berkeley Group; Director,
John Hancock Home Mortgages Corp.
and John Hancock Financial
Access, Inc. (until July 1990).
Edward J. Spellman Trustee (4) Partner, KPMG Peat Marwick
259C Commercial Bld. (retired June 1990).
Suite 200
Lauderdale by the Sea, FL
*Robert G. Freedman Vice Chairman and Vice Chairman and Chief
101 Huntington Avenue Chief Investment Investment Officer, the
Boston, Massachusetts Officer (2) Adviser; President, the
Adviser (until December 1994).
*Anne C. Hodsdon President (2) President and Chief Operations
101 Huntington Avenue Officer, the Adviser;
Boston, Massachusetts Executive Vice President, the
Adviser (until December 1994).
*Thomas H. Drohan Senior Vice Senior Vice President and
101 Huntington Avenue President and Secretary, the Adviser.
Boston, Massachusetts Secretary
*James K. Ho Senior Vice Senior Vice President, the
101 Huntington Avenue President (2) Adviser.
Boston, Massachusetts
- ------------------
* An "interested person" of the Fund, as such term is defined in the Investment
Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With The Fund During the Past Five Years
*James B. Little Senior Vice Senior Vice President the
101 Huntington Avenue President and Chief Adviser.
Boston, Massachusetts Financial Officer (2)
*Michael P. DiCarlo Senior Vice Senior Vice President, the
101 Huntington Avenue President (2) Adviser.
Boston, Massachusetts
*John A. Morin Vice President Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
*Susan S. Newton Vice President, Vice President and Assistant
101 Huntington Avenue Assistant Secretary Secretary, the Adviser.
Boston, Massachusetts and Compliance
Officer
*James J. Stokowski Vice President and Vice President, the Adviser.
101 Huntington Avenue Treasurer
Boston, Massachusetts
*Barry H. Evans Vice President Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
- ------------------
* An "interested person" of the Fund, as such term is defined in the Investment
Company Act.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) An Alternate Member of the Executive Committee.
(4) A Member of the Audit and Administration Committees.
<PAGE>
As of the date of this Statement of Additional Information, the officers
and Trustees of the Fund as a group owned less than 1% of the outstanding shares
of the Fund and the knowledge of the registrant, no persons owned of record or
beneficially 5% or more of any class of registrant's outstanding securities.
All of the officers listed are officers or employees of the Adviser or the
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
The following table provides information regarding the compensation paid
by the Fund and the other investment companies in the John Hancock Fund Complex
to the Independent Trustees for their services for each Fund's 1994 fiscal year.
The two non-Independent Trustees, Messrs. Boudreau and Scipione, and each of the
officers of the Funds are interested persons of the Adviser, are compensated by
the Adviser and receive no compensation from the Fund for their services.
Pension or Total
Retirement Compensation
Benefits Estimated From the Fund
Aggregate Accrued as Annual and John
Compensation Part of the Benefits Hancock Fund
Independent From the Fund Fund's Upon Complex to
Trustees Expenses Retirement Trustees (1)
-- -- (Total of
18 Funds)
-- --
Dennis S. Aronowitz $ 22,276 -- -- $ 60,950
Richard P. Chapman 23,019 -- -- 62,950
William J. Cosgrove 22,276 -- -- 60,950
Gail D. Fosler 22,276 -- -- 60,950
Bayard Henry 23,019 -- -- 62,950
Edward J. Spellman 22,276 -- -- 60,950
$135,142 $369,700
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1994.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectuses, the Fund receives its investment advice
from the Adviser. Investors should refer to the Prospectuses for a description
of certain information concerning the investment management contract.
<PAGE>
Each of the Trustees and principal officers of the Fund who is also an
affiliated person of the Adviser is named above, together with the capacity in
which such person is affiliated with the Fund and the Adviser.
As described in the Prospectuses under the caption "Organization and
Management of the Fund," the Fund has entered into an investment management
contract with the Adviser. Under the investment management contract, the Adviser
provides the Fund (i) with a continuous investment program, consistent with the
Fund's stated investment objective and policies, (ii) supervision of all aspects
of the Fund's operations except those delegated to a custodian, transfer agent
or other agent and (iii) such executive, administrative and clerical personnel,
officers and equipment as are necessary for the conduct of its business. The
Adviser is responsible for the management of the Fund's portfolio assets.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more other funds or clients are selling the same security. If opportunities for
the purchase or sale of securities by the Adviser or for other funds or clients,
for which the Adviser renders investment advice, arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund's
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Insurance Company
and its affiliates.
Under the terms of the investment management contract with the Fund, the
Adviser provides the Fund with office space, supplies and other facilities
required for the business of the Fund. The Adviser pays the compensation of all
other officers and employees of the Fund, and pays the expenses of clerical
services relating to the administration of the Fund.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund (including fees of Trustees of the Fund
who are not "interested persons," as such term is defined in the Investment
Company Act, but excluding certain distribution related activities required to
be paid by the Adviser or John Hancock Funds) and the continuous public offering
of the shares of the Fund are borne by the Fund. Subject to conditions set forth
in a private letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple-class structure, class expenses properly
allocable to any of Class A, Class B and Class C shares will be borne
exclusively by such class of shares.
<PAGE>
As discussed in the Prospectuses and as provided by the investment
management contract, the Fund pays the Adviser monthly an investment management
fee, which is accrued daily, based on a stated percentage of the average of the
daily net assets of the Fund as follows:
Net Asset Value Annual Rate
First $1,500,000,000 0.50%
Next $500,000,000 0.45%
Next $500,000,000 0.40%
Amount over $2,500,000,000 0.35%
From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of average
daily net assets. The Adviser retains the right to re-impose a fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
On December 31, 1994, the net assets of the Fund were $1,368,027,206. For
the years ended December 31, 1992, 1993 and 1994 the Adviser received fees of
$5,863,500, $6,488,835 and $7,116,092 respectively. The 1992 and 1993 advisory
fee figures reflect the different advisory fee schedule that was in effect
before January 1, 1994.
If the total of all ordinary business expenses of the Fund for any fiscal
year exceeds limitations prescribed in any state in which shares of the Fund are
qualified for sale, the fee payable to the Adviser will be reduced to the extent
required by these limitations. At this time, the most restrictive limit on
expenses imposed by a state requires that expenses charged to the Fund in any
fiscal year not exceed 2-1/2% of the first $30,000,000 of the Fund's average net
assets, 2% of the next $70,000,000 of such net assets, and 1-1/2% of the
remaining average net assets. When calculating the above limit, the Fund may
exclude interest, brokerage commissions and extraordinary expenses.
Pursuant to its investment management contract, the Adviser is not liable
to the Fund or its shareholders for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which the
investment management contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the investment management contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and presently has more than $13 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,060,000 shareholders.
The Adviser is an affiliate of the Life Insurance Company, one of the most
recognized and respected financial institutions in the nation. With total assets
under management of $80 billion, the Life Insurance Company is one of the ten
largest life insurance
<PAGE>
companies in the United States, and carries S&P's and A. M. Best's highest
ratings. Founded in 1862, John Hancock has been serving clients for over 130
years.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Insurance Company may grant the nonexclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity, including
but not limited to any investment company of which the Life Insurance Company or
any subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The investment management contract, and the distribution contract
discussed below, continue in effect from year to year if approved annually by
vote of a majority of the Fund's Trustees who are not interested persons of one
of the parties to the contract, cast in person at a meeting called for the
purpose of voting on such approval, and by either the Fund's Trustees or the
holders of a majority of the Fund's outstanding voting securities. The contract
automatically terminates upon assignment and may be terminated without penalty
on 60 days' notice at the option of either party to the contract or by vote of a
majority of the outstanding voting securities of the Fund.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, John Hancock Funds is obligated to use its best efforts to sell shares
of the Fund. Shares of the Fund are also sold by selected broker-dealers (the
"Selling Brokers") which have entered into selling agency agreements with John
Hancock Funds. John Hancock Funds accepts orders for the purchase of the shares
of the Fund which are continually offered at net asset value next determined
plus any applicable sales charge. In connection with the sale of Class A and
Class B shares, John Hancock Funds and Selling Brokers receive compensation in
the form of a sales charge imposed, in the case of Class A shares, at the time
of sale or, in the case of Class B shares, on a deferred basis. The sales
charges are discussed further in the Fund's Class A and Class B Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to the Class A
and Class B shares pursuant to Rule 12b-1 under the Investment Company Act.
Under the Class A Plan and the Class B Plan, the Fund will pay distribution and
service fees at an aggregate annual rate of up to 0.30% and 1.00%, respectively,
of the Fund's average daily net assets. However, the amount of the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. The distribution fees reimburse John Hancock Funds for its
distribution costs incurred in the promotion of sales of shares of the Fund, and
the service fees compensate Selling Brokers for providing personal and account
maintenance services to shareholders. The Plans were approved by a majority of
the voting securities of the applicable class of the Fund. The Plans and all
amendments were approved by a majority of the Trustees, including a majority of
the
<PAGE>
Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the
Fund with a written report of the amounts expended under the Plans and the
purpose for which such expenditures were made. The Trustees review these reports
on a quarterly basis.
During the fiscal year ended December 31, 1994 the Fund paid Investor
Services the following amounts of expenses with respect to the Class A shares
and Class B shares of the Fund:
Expense Items
Advertising Printing Compensation Expenses Interest
and to Selling of John Carrying or
Mailing of Brokers Hancock Other
Prospectus Funds Finance
to New Charges
Shareholders Other
Sovereign Bond
Class A shares $206,254 $12,680 $3,230,727 $743,987 $ 0
Class B shares 5,763 378 213,285 21,061 3,873
Each of the Plans provides that it will continue in effect only so long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated without penalty (a) by vote of a majority of the Independent
Trustees, (b) by a majority of the Fund's outstanding shares of the applicable
class in each case upon 60 days' written notice to John Hancock Funds, and (c)
automatically in the event of assignment. Each of the Plans further provides
that it may not be amended to increase the maximum amount of the fees for the
services described therein without the approval of a majority of the outstanding
shares of the class of the Fund which has voting rights with respect to the
Plan. And finally, each of the Plans provides that no material amendment to the
Plan will, in any event, be effective unless it is approved by a vote of a
majority of both the Trustees and the Independent Trustees of the Fund. The
holders of Class A shares and Class B shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans the Trustees concluded that, in their judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
Class C shares of the Fund are not subject to any distribution plan.
Expenses associated with the obligation of John Hancock Funds to use its best
efforts to sell Class C shares will be paid by the Adviser or John Hancock Funds
and will not be paid from the fees paid under Class A or Class B plans.
When the Fund seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the
<PAGE>
discretion of the Committee on Administration of the Trustees. The members of
the Committee on Administration are all Independent Trustees and are identified
in this Statement of Additional Information under the heading "Those Responsible
for Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished
by a principal market maker or a pricing service, both of which generally
utilize electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of a Fund's NAV
A Fund will not price its securities on the following national holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day. On any day an international
market is closed and the New York Stock Exchange is open, any foreign securities
will be valued at the prior day's close with the current day's exchange rate.
Trading of foreign securities may take place on Saturdays and U.S. business
holidays on which a Fund's NAV is not calculated. Consequently, a Fund's
portfolio securities may trade and the NAV of the Fund's redeemable securities
may be significantly affected on days when a shareholder has no access to the
Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Class A and Class B
Prospectus are described in detail below. In calculating the sales charge
applicable to current purchases of Class A shares, the investor is entitled to
accumulate current purchases with the greater of the current value (at offering
price) of the Class A shares of the Fund, or if Investor Services is notified by
the investor's dealer or the investor at the time of the purchase, the cost of
the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to
purchases of Class A shares made at one time, the purchases will be combined if
made by (a) an individual, his spouse
<PAGE>
and their children under the age of 21, purchasing securities for his or their
own account, (b) a trustee or other fiduciary purchasing for a single trust,
estate or fiduciary account and (c) certain groups of four or more individuals
making use of salary deductions or similar group methods of payment whose funds
are combined for the purchase of mutual fund shares. Further information about
combined purchases, including certain restrictions on combined group purchases,
is available from Fund Services or a Selling Broker's representative.
Without Sales Charges. As described in the Class A and Class B Prospectus,
Class A shares of the Fund may be sold without a sales charge to certain persons
described in the Prospectus.
Accumulation Privilege. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the benefit of
the reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or current value of the Class A shares
already held by such person.
Combination Privilege. Reduced sales charges (according to the schedule
set forth in the Class A and Class B Prospectus) also are available to an
investor based on the aggregate amount of his concurrent and prior investments
in Class A shares of the Fund and shares of all other John Hancock funds which
carry a sales charge.
Letter of Intention. The reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention (the
"LOI"), which should be read carefully prior to its execution by an investor.
The Fund offers two options regarding the specified period for making
investments under the LOI. All investors have the option of making their
investments over a specified period of thirteen (13) months. Investors who are
using the Fund as a funding medium for a qualified retirement plan, however, may
opt to make the necessary investments called for by the LOI over a forty-eight
(48) month period. These qualified retirement plans include group IRA, SEP,
SARSEP, TSA, 401(k), 403(b) and 457 plans. Such an investment (including
accumulations and combinations) must aggregate $100,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If such aggregate
amount is not actually invested, the difference in the sales charge actually
paid and the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
the sales charge applicable will not be higher than that which would have
applied (including accumulations and combinations) had the LOI been for the
amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Investor Services to act as his attorney-in-fact to
redeem any
<PAGE>
escrowed shares and adjust the sales charge, if necessary. A LOI does not
constitute a binding commitment by an investor to purchase, or by the Fund to
sell, any additional Class A shares and may be terminated at any time.
Because Class C shares are sold at net asset value without the imposition
of any sales charge, none of the privileges described under these captions are
available to Class C investors, with the following exception:
Combination Privilege. As explained in the Prospectus for Class C Shares,
a Class C investor may qualify for the minimum $1,000,000 investment (or such
other amount as may be determined by the Fund's officers) if the aggregate
amount of his current and prior investments in Class C shares of the Fund and
Class C shares of any other John Hancock Fund exceeds $1,000,000.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of an initial sales charge so that the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
six years of purchase will be subject to a contingent deferred sales charge
("CDSC") at the rates set forth in the Class A and Class B Prospectus as a
percentage of the dollar amount subject to the CDSC. The charge will be assessed
on an amount equal to the lesser of the current market value or the original
purchase cost of the Class B shares being redeemed. Accordingly, no CDSC will be
imposed on increases in account value above the initial purchase prices,
including Class B shares derived from reinvestment of dividends or capital gains
distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by Investor Services to defray its expenses related to
providing distribution-related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
Class B shares without a sales charge being deducted at the time of the
purchase. See the Class A and Class B Prospectus for additional information
regarding the CDSC.
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. If the shareholder were to sell
portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectuses, the Fund
permits exchanges of shares of any class of the Fund for shares of the same
class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Class A and Class
B Prospectus, the Fund permits the establishment of a Systematic Withdrawal
Plan. Payments under this plan represent proceeds from the redemption of Fund
shares. Since the redemption price of the Fund shares may be more or less than
the shareholder's cost, depending upon the market value of the securities owned
by the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A shares and the CDSC imposed on redemptions
of Class B shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Class A and Class B shares of the Fund at the
same time a Systematic Withdrawal Plan is in effect. The Fund reserves the right
to modify or discontinue the Systematic Withdrawal Plan of any shareholder on 30
days' prior written notice to such shareholder, or to discontinue the
availability of such plan in the future. The shareholder may terminate the plan
at any time by giving proper notice to Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained
more fully in the Fund's Class A and Class B Prospectus and the Account
Privileges Application. The program, as it relates to automatic investment
checks, is subject to the following conditions:
The investment drafts will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
<PAGE>
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the processing date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or in any other John Hancock mutual fund, subject to the minimum
investment limit of that fund. The proceeds from the redemption of Class A
shares may be reinvested at net asset value without paying a sales charge in
Class A shares of the Fund or in Class A shares of another John Hancock mutual
fund. If a CDSC was paid upon a redemption, a shareholder may reinvest the
proceeds from this redemption at net asset value in additional shares of the
class from which the redemption was made. The shareholder's account will be
credited with the amount of any CDSC charged upon the prior redemption and the
new shares will continue to be subject to the CDSC. The holding period of the
shares acquired through reinvestment will, for purposes of computing the CDSC
payable upon a subsequent redemption, include the holding period of the redeemed
shares. The Fund may modify or terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Fund are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have not authorized any additional
series of the Fund, other than the Fund, although they may do so in the future.
The Declaration of Trust also authorizes the Trustees to classify and reclassify
the shares of the Fund, or any other series of the Fund, into one or more
classes. As of the date of this Statement of Additional Information, the
Trustees have authorized the issuance of three classes of shares of the Fund,
designated as Class A, Class B and Class C shares.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Class A shares and Class B shares of the Fund will be sold exclusively to
members of the public (other than the institutional investors described in the
Class A and Class B Prospectus) at net asset value. A sales charge will be
imposed either at the time of the purchase, for Class A shares, or on a
contingent deferred basis, for Class B shares. For Class A shares, no sales
charge is payable at the time of purchase on
<PAGE>
investments of $1 million or more, but for such investments a contingent
deferred sales charge may be imposed in the event of certain redemption
transactions within one year of purchase.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective Rule 12b-1 distribution plans.
Holders of Class C shares have no voting rights with respect to Class A or Class
B distribution plans. Transfer agency costs will be allocated among the classes
of the Fund in accordance with the relative net assets of each class. The
different classes of the Fund may bear different expenses relating to the cost
of holding shareholder meetings necessitated by the exclusive voting rights of
any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and will be in the same
amount, except that (i) the distribution and service fees relating to Class A
and Class B shares will be borne exclusively by that class, (ii) Class B shares
will pay higher distribution and service fees than Class A shares and (iii) each
of Class A, Class B and Class C shares will bear any other class expenses
properly allocable to such class of shares, subject to the conditions set forth
in a private letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple-class structure. Accordingly, the net asset
value per share may vary depending on the class of shares purchased.
In the event of liquidation, shareholders are entitled to share pro rata
in the net assets of the Fund available for distribution to such shareholders.
Shares entitle their holders to one vote per share, are freely transferable and
have no preemptive subscription or conversion rights. When issued, shares are
fully paid and non-assessable except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration
of Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Fund's outstanding shares and the Trustees shall promptly call
a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Fund. Shareholders
may, under certain circumstances, communicate with other shareholders in
connection with requesting a special meeting of shareholders. However, at any
time that less than a majority of the Trustees holding office were elected by
the shareholders, the Trustees will call a special meeting of shareholders for
the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Fund's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
<PAGE>
TAX STATUS
The Fund has qualified and has elected to be treated as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions and the diversification
of its assets, the Fund will not be subject to Federal income tax on taxable
income (including net realized capital gains, if any) which is distributed to
shareholders at least annually in accordance with the timing requirements of the
Code.
The Fund will be subject to a four percent non-deductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus, whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for Federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distribution in cash, divided by the number of shares received.
The amount of net realized capital gains, if any, in any given year will
vary depending upon the Adviser's current investment strategy and whether the
Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities that will generate capital gains or to enter into options
or futures transactions. At the time of an investor's purchase of shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio. Consequently, subsequent distributions may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption of shares (including by exercise of the exchange
privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon his basis in his shares. Such gain or loss will be treated as
capital gain or loss if the shares are capital assets in the shareholder's hands
and will be long-term or short-term, depending upon the shareholder's tax
holding period for the shares. A sales charge paid in purchasing Class A shares
of the Fund cannot be taken into account for purposes of determining gain or
loss on the redemption or exchange of such shares within ninety (90) days after
their purchase to the extent Class A shares of the Fund or another John Hancock
fund are subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Such disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss
<PAGE>
realized on a redemption or exchange of shares may be disallowed to the extent
the shares disposed of are replaced with other shares of the Fund within a
period of sixty-one (61) days beginning thirty (30) days before and ending
thirty (30) days after the shares are disposed of, such as pursuant to the
Dividend Reinvestment Plan. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss. Any loss realized upon the
redemption of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
Although its present intention is to distribute all net capital gains, if
any, the Fund reserves the right to retain and reinvest all or any portion of
the excess, as computed for Federal income tax purposes, of net long-term
capital gain over net short-term capital loss in any year. The Fund will not in
any event distribute net long-term capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Each shareholder would be treated for
Federal income tax purposes as if the Fund had distributed to him on the last
day of its taxable year his pro rata share of such excess, and he had paid his
pro rata share of the taxes paid by the Fund and reinvested the remainder in the
Fund. Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain in his return for his taxable year in which the
last day of the Fund's taxable year falls, (b) be entitled either to a tax
credit on his return for, or to a refund of, his pro rata share of the taxes
paid by the Fund, and (c) be entitled to increase the adjusted tax basis for his
shares in the Fund by the difference between his pro rata share of this excess
and the pro rata share of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed to
shareholders. The Fund has $11,341,446 of a capital loss carryforward available
to the extent provided by regulations, to offset future net realized capital
gains. The carryforward expires December 31, 2002.
Distributions from the Fund will not qualify for the dividends received
deduction for corporations.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to the Fund's investments in certain foreign securities.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes. Because more than 50% of the Fund's assets at the close of any
taxable year is not expected to consist of stocks or securities of
<PAGE>
foreign corporations, the Fund will not be able to pass through such taxes to
its shareholders (as additional income) along with a corresponding entitlement
to a tax credit or deduction. The Fund will deduct such taxes in computing its
investment company taxable income.
The Fund accrues income on zero coupon securities or certain PIK or
increasing rate securities (and, in general, any other securities with original
issue discount or with market discount if the Fund elects to include market
discount in income currently) prior to the receipt of cash payments. The Fund
must distribute, at least annually, all or substantially all of its net income
to shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
The Fund may invest in debt obligations that are in the lower rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Fund. Tax rules are not entirely clear about issues such as when the Fund may
cease to accrue interest, original issue discount, or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions. The options and futures transactions undertaken by the Fund may
cause the Fund to recognize gains or losses from marking to market even though
its positions have not been sold or terminated and affect the character as
long-term or short-term and timing of some capital gains and losses realized by
the Fund. Also, some of the Fund's losses on its transactions involving options
and futures contracts and/or offsetting portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income. Some of the applicable tax rules may be modified if the Fund is eligible
and chooses to make one or more of certain tax elections that may be available.
These transactions may thereafter affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures transactions in order to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions and ownership of or gains
realized on the redemption (including an exchange) of shares of the Fund may
also be subject to state and
<PAGE>
local taxes. A state income (and possibly local income and/or intangible
property) tax exemption is generally available to the extent the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. The foregoing
discussion related to U.S. investors that are not exempt from U.S. Federal
income tax. Different tax consequences will apply to plan participants,
tax-exempt investors and investors that are subject to tax deferral. You should
consult your tax adviser for specific advice. Under the Code, a tax-exempt
investor in the Fund will not generally recognize unrelated business taxable
income from its investment in the Fund unless the tax-exempt investor incurred
indebtedness to acquire or continue to hold Fund shares and such indebtedness
remains unpaid. Shareholders should consult their own tax advisers as to the
Federal, state or local tax consequences of ownership of shares of, and receipt
of distributions from, the Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty), on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisors regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1994, the annualized yield on
Class A, Class B and Class C shares of the Fund was 7.43%, 7.26% and 8.40%,
respectively. The average annual total return of the Class A shares of the Fund
for the 1 year, 5 year and 10 year periods ended December 31, 1994 was (7.12)%,
9.28% and 6.90%, respectively and reflect payment of the maximum sales charge of
4.50%. The average annual total return of Class B shares of the Fund for the 1
year period ended December 31, 1994 and since inception on November 19, 1993 was
(7.97)% and (8.12)%, respectively. The average annual total return of Class C
shares of the Fund for the 1 year period ended December 31, 1994 and since
inception on May 7, 1993 was 2.19% and 1.89% as of December 31, 1994.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
_ _
| 6 |
| a - b |
Yield = 2 | (----- + 1) -1 |
| cd |
|_ _|
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
_______
/\n /
T = \/ ERV / P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of hypothetical $1,000 investment made at the
beginning of the 1 year, 5 year and life-of-fund periods.
In the case of Class A shares or Class B shares, this calculation assumes
the maximum sales charge of 4.5% and 5.0%, respectively, is included in the
initial investment or the CDSC applied at the end of the period. This
calculation also assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period. Performance
calculations for Class C shares do not include any sales charge or distribution
plan fees.
<PAGE>
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's 4.5% sales charge
on Class A shares or the 5% CDSC on Class B shares into account. The
"distribution rate" is determined by annualizing the result of dividing the
declared dividends of the Fund during the period stated by the maximum offering
price or net asset value at the end of the period. Excluding the Fund's sales
charge on Class A shares and the CDSC on Class B shares from a total return
calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's total
return will be ranked or compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper -Mutual Performance Analysis," a monthly
publication which tracks net assets, total return, and yield on more than 1,000
equity mutual funds in the United States. Ibottson and Associates, CDA
Weisenberger and F.C. Towers are also used for comparison purposes, as well as
the Russell and Wilshire indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MORNINGSTAR, and BARRON'S may also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, which consists of officers and
directors of the Adviser and affiliates, and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Investments in debt securities are generally traded on a net
basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the
<PAGE>
transaction including brokerage commissions. This policy governs the selection
of brokers and dealers and the market in which a transaction is executed.
Consistent with the foregoing primary policy, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and such other policies as the
Trustees may determine, the Adviser may consider sales of shares of the Fund as
a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and in the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Insurance Company or other advisory clients of the Adviser,
and, conversely, brokerage commissions and spreads paid by other advisory
clients of the Adviser may result in research information and statistical
assistance beneficial to the Fund. The Fund will make no commitment to allocate
portfolio transactions upon any prescribed basis. While the Fund's officers will
be primarily responsible for the allocation of the Fund's brokerage business,
their policies and practices in this regard must be consistent with the
foregoing and will at all times be subject to review by the Trustees. For the
years ended on December 31, 1994, 1993 and 1992, no negotiated brokerage
commissions were paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended December 31,
1994, the Fund directed commissions in the amount of $61,055 to compensate
brokers for research services such as industry, economic and company reviews and
evaluations of securities.
The Adviser's indirect parent, the Life Insurance Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated, John Hancock
Distributors, Inc. and Sutro & Company, Inc., are Affiliated Brokers. Pursuant
to procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Affiliated Brokers. During the year ending December 31, 1994, the Fund
did not execute any portfolio transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the connection with comparable transactions
<PAGE>
involving similar securities being purchased or sold. A transaction would not be
placed with an Affiliated Broker if the Fund would have to pay a commission rate
less favorable than the Affiliated Broker's contemporaneous charges for
comparable transactions for its other most favored, but unaffiliated, customers
except for accounts for which the Affiliated Broker acts as of the Trustees who
are not interested persons (as defined in the Investment Company Act) of the
Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is
affiliated with the Affiliated Brokers, has, as an investment adviser to the
Fund, the obligation to provide investment management services, which includes
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Brokers as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria. The Fund will not effect principal transactions with Affiliated
Brokers.
TRANSFER AGENT SERVICES
John Hancock Fund Services, P.O. Box 9116, Boston, MA 02205-9116, a
wholly-owned indirect subsidiary of the Life Insurance Company, is the transfer
and dividend paying agent of the Fund. The Fund pays Investor Services an annual
fee for Class A of $20.00 per shareholder account and for Class B shares of
$22.50 per shareholder account and 0.10% of the average daily net assets
attributable to the Class C shares, plus certain out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company, 24 Federal
Street, Boston, Massachusetts 02110. Under the custodian agreement, Investors
Bank & Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. Ernst & Young audits and renders an opinion
of the Fund's annual financial statements and prepares the Fund's annual Federal
income tax return.
<PAGE>
APPENDIX A
The ratings of Moody's Investors Service, Inc. and Standard &
Poor's Corporation represent their opinions as to the quality of
various debt instruments. Their ratings are a generally accepted
barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. Such limitations include
the following: the rating of an issue is heavily weighted by past
developments and does not necessarily reflect probable future
conditions; there is frequently a lag between the time a rating is
assigned and the time it is updated; and there are varying degrees of
difference in credit risk of securities in each rating category.
Therefore, it should be understood, that ratings are not absolute
standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may
have the same yield.
Description of Bond Ratings Moody's Investors Service, Inc.
-----------------------------------------------------------
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated b generally lack the characteristics
of desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period
of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principle or interest.
A-1
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Standard & Poor's Ratings Group
-------------------------------
AAA: Bonds rated AAA have the higher rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in
small degree.
A: Bonds rated A have a very strong capacity to pay interest
and repay principal, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for bonds in this category than in
higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C: The rating C is reserved for income bonds on which no
interest is being paid.
A-2
<PAGE>
The Annual Report of John Hancock Sovereign Bond Fund dated December 31,
1994 appears as Exhibit C to the Prospectus/Proxy Statement included in this
Registration Statement on Form N-14.
<PAGE>
EXHIBIT C
John Hancock Sovereign Bond
Pro-forma statement of assets and liabilities
December 31,1994
Unaudited
<TABLE>
<CAPTION>
John Hancock Pro
John Hancock Investment Quality Forms
Sovereign Bond Fund Bond Fund Adjustments Combined
<S> <C> <C> <C> <C>
Assets
Investment at value $ 1,340,075,927 $ 88,228,437 $ - $ 1,428,304,364
Cash - (91,360) - (91,360)
Receivable for shares sold 236,997 10,149 - 247,146
Interest receivable 29,705,652 1,503,389 - 31,209,041
Receivable for variation margin 85,000 (4,375) - 80,625
Other assets - 44,499 - 44,499
Total Assets 1,370,103,576 89,690,739 - 1,459,794,315
Liabilities -
Dividend payable 369,802 572,934 - 942,736
Payable for shares purchased 552,027 11,410 - 563,437
Payable for investments purchased - 1,045,691 - 1,045,691
Payable to John Hancock Advisers
and affiliates 1,006,626 108,809 - 1,115,435
Accounts payable and accrued expenses 147,915 45,002 - 192,917
Total Liabilities 2,076,370 1,783,846 - 3,860,216
Net Assets: -
Capital paid-in 1,484,381,233 112,009,926 - 1,596,391,159
Accumulated net realized loss -
on investment and financial -
futures contracts (18,362,958) (18,963,582) - (37,326,540)
Net unrealized depreciation -
of investments and financial -
futures contracts (97,991,069) (5,444,689) - (103,435,758)
Undistributed net investment income - 305,238 - 305,238
Total Net Assets $ 1,368,027,206 $ 87,906,893 - $ 1,455,934,099
Net Assets:
Sovereign Bond
Class A $ 1,326,058,253 $ - $ 81,016,556 (a) $ 1,407,074,809
Class B 40,298,738 - 6,890,337 (a) 47,189,075
Class C 1,670,215 - - 1,670,215
Investment Quality
Class A - 81,016,556 (81,016,556)(a) -
Class B - 6,890,337 (6,890,337)(a) -
Total $ 1,368,027,206 $ 87,906,893 $ - $ 1,455,934,099
Shares outstanding:
Sovereign Bond
Class A 95,399,448 - 5,828,278 (a) 101,227,726
Class B 2,898,886 - 495,654 (a) 3,394,540
Class C 120,133 - - 120,133
Investment Quality
Class A - 10,060,420 (10,060,420)(a) -
Class B - 855,477 (855,477)(a) -
Net asset value per share:
Sovereign Bond
Class A $ 13.90 $ - $ - $ 13.90
Class B $ 13.90 $ - $ - $ 13.90
Class C $ 13.90 $ - $ - $ 13.90
Investment Quality
Class A $ - $ 8.05 $ (8.05) $ -
Class B $ - $ 8.05 $ (8.05) $ -
</TABLE>
See Notes to Pro-Forma Financial Statements
<PAGE>
John Hancock Sovereign Bond
Pro-forma statement of operations
December 31,1994
Unaudited
<TABLE>
<CAPTION>
John Hancock Pro
John Hancock Investment Quality Forms
Sovereign Bond Fund Bond Fund * Adjustments Combined
<S> <C> <C> <C> <C>
Investment Income
Interest $ 128,113,058 $ 8,954,446 $ - $ 137,067,504
Expenses
Investment management fee 7,116,092 583,164 (98,928)(c) 7,600,328
Distribution fee
Class A 4,193,648 221,446 55,154(g) 4,470,248
Class B 244,360 67,390 - 311,750
Transfer agent fee
Class A 5,591,531 177,372 - 5,768,903(f)
Class B 53,759 13,540 - 67,299(f)
Class C 1,571 - - 1,571
Custodian fee 254,019 99,537 (76,139)(d) 277,417
Interest - 153,590 (153,590)(b) -
Registration and filling fees 96,149 14,927 (7,464)(e) 103,612
Auditing fee 40,669 29,329 (19,998)(e) 50,000
Legal fees 72,705 10,467 - 83,172
Printing 118,780 21,453 (10,726)(e) 129,507
Trustees fee 139,401 24,678 - 164,079
Misc. 96,184 18,343 (9,171)(e) 105,356
Total Expenses 18,018,868 1,435,236 (320,862) 19,133,242
Net Investment Income 110,094,190 7,519,210 320,862 117,934,262
Realized and Unrealized
Gain (Loss) on Investments,
Financial Futures Contracts,
Options and Forward Foreign
Currency Contracts
Net realized gain (loss) on
investments sold, financial
futures contracts, options
and forward foreign
currency transactions (18,179,593) (6,977,571) - (25,157,164)
Change in net unrealized
appreciation/depreciation of
investments, financial futures
contracts, options and forward
foreign currency contracts (133,477,882) (767,624) - (134,245,506)
Net Realized and Unrealized
Gain (loss) on Investments,
Financial Futures Contracts,
Options and Forward Foreign
Currency Contracts (151,657,475) (7,745,195) - (159,402,670)
Net increase (decrease) in
Net Assets Resulting
from Operations $(41,563,285) $ (225,985) $ 320,862 $(41,468,408)
</TABLE>
*Income and expenses for the nine months ended December 31, 1994
have been annualized.
See Notes to Pro-Forma Financial Statements
<PAGE>
JOHN HANCOCK SOVEREIGN BOND
NOTES TO PRO FORMA FINANCIAL STATEMENTS - (Unaudited)
DECEMBER 31, 1994
Pro forma information is intended to provide shareholders of the John Hancock
Investment Quality Bond Fund (JHIQ) with information about the impact of the
proposed merger by indicating how the merger might have affected information had
the merger been consummated as of December 31, 1993.
The pro forma statements of assets and liabilities and results of operations as
of December 31, 1994, have been prepared to reflect the merger of the John
Hancock Sovereign Bond Fund (JHSB) and (JHIQ) after annualizing the income and
expenses of JHIQ for the nine months ended December 31, 1994 and giving effect
to pro forma adjustments described in the notes listed below.
(a) Acquisition by JHSB of the net assets of JHIQ and issuance of JHSB Class
A and Class B shares in exchange for all of the outstanding Class A and
Class B shares, respectively of JHIQ.
(b) Interest expense incurred by JHIQ on reverse repurchase agreements, in
which JHSB does not invest, was eliminated.
(c) The investment advisory fee was adjusted to reflect the application of
the fee structure in effect for JHSB.
(d) Custodian fees were adjusted to reflect the application of the fee
structure in effect for JHSB during the year.
(e) The actual expenses incurred by JHSB and JHIQ for various expenses
included on a pro forma basis were reduced to reflect the estimated
savings arising from the merger
(f) The tranfer agent fee for the Class A and Class B shares is the total of
the respective individual fund's transfer agent fees. The main criteria
in determining the transfer agent fees for a specific class is the
number of shareholder accounts.
(g) It was assumed that pursuant to the Class A and Class B plans of
Distribution under rule 12b-1 of the Investment Company Act of 1940,
JHSB is to pay a distribution/service fee at 0.30% and 1.00% of the
average net assets of the Class A and Class B shares, respectively.
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
SOVEREIGN BOND FUND ON DECEMBER 31, 1994. IT'S DIVIDED INTO TWO MAIN CATEGORIES:
PUBLICLY TRADED BONDS AND SHORT-TERM INVESTMENTS. THE BONDS ARE FURTHER BROKEN
DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S
"CASH" POSITION, ARE LISTED LAST.
SCHEDULE OF INVESTMENTS
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
PUBLICLY TRADED BONDS
BANKS (11.08%)
Abbey National First Capital B.V.,
*Sub Note 10-15-04 ................................................. 8.200% AA- $ 7,000 $ 6,811,420
African Development Bank,
Sub Note 12-15-03 ................................................. 9.750 AA 8,000 8,681,680
Bank of Montreal - Chicago Branch,
Sub Note 11-01-00 ................................................. 9.800 A+ 8,500 8,619,850
Banque Paribas - New York Branch,
*Sub Note 03-01-09 ................................................. 6.875 A- 10,000 8,265,400
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 ............................................. 9.750 AA- 7,500 7,976,100
First Interstate Bancorp.,
Sub Note 05-01-97 ................................................. 12.750 BBB+ 3,250 3,524,170
International Bank for Reconstruction and Development,
*30 Yr Bond 09-01-16 ............................................... 8.250 AAA 5,000 4,950,250
30 Yr Bond 07-15-17 ............................................... 9.250 AAA 15,550 16,945,923
Midland American Capital Corp.,
Gtd Note 11-15-03 ................................................. 12.750 A- 19,932 22,665,674
National Westminster Bank PLC - New York Branch,
Sub Note 05-01-01 ................................................. 9.450 AA- 10,000 10,519,100
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 ............................................. 10.125 A+ 10,630 11,580,535
Scotland International Finance No. 2 B.V.,
*Sub Gtd Note 11-01-06 (R) ......................................... 8.850 A+ 10,250 10,218,020
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 ..................................... 10.360 A- 6,000 6,578,280
Sub Note 11-15-00 ................................................. 11.500 A- 6,400 7,226,752
Toronto Dominion Bank - New York Branch,
*Sub Note 01-15-09 ................................................. 6.450 AA- 10,000 8,180,400
Westdeutsche Landesbank Girozentrale - New York Branch,
Sub Note 06-15-05 ................................................. 6.750 AA+ 10,000 8,854,700
------------
151,598,254
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- ---------- --------- ------
<S> <C> <C> <C> <C>
BROADCASTING (3.88%)
Cablevision Systems Corp.,
Sr Sub Deb 04-01-04 ............................................. 10.750% B $ 8,000 $ 8,000,000
Century Communications Corp.,
Sr Sub Deb 10-15-03 ............................................. 11.875 B+ 10,125 10,555,313
Continental Cablevision, Inc.,
Sr Sub Deb 06-01-07 ............................................. 11.000 BB- 10,375 10,530,625
Jones Intercable, Inc.,
*Sr Sub Deb 07-15-04 ............................................. 11.500 B+ 5,000 5,175,000
Viacom International,
*Sub Deb 07-07-06 ................................................ 8.000 B+ 10,000 8,575,000
TKR Cable I, Inc.,
Sr Deb 10-30-07 ................................................. 10.500 BBB- 10,000 10,227,100
-----------
53,063,038
-----------
CHEMICALS (0.36%)
UCC Investors Holding, Inc.,
Sr Sub Note 05-01-03 ............................................ 11.000 B- 5,000 4,925,000
-----------
COMPUTERS (1.68%)
Unisys Corp.,
Credit Sensitive Note 07-01-97 .................................. 13.500 BB- 21,500 23,005,000
-----------
COSMETICS & TOILETRIES (0.41%)
Johnson & Johnson,
Deb 11-15-23 .................................................... 6.730 AAA 6,750 5,551,875
-----------
DIVERSIFIED OPERATIONS (0.51%)
Litton Industries, Inc.,
Sub Deb 07-01-05 ................................................ 12.625 BBB 6,500 6,946,875
-----------
FINANCE (3.58%)
American Express Co.,
Euronote 12-12-00 ............................................... 11.625 A+ 8,670 9,499,025
Banc One Credit Card Master Trust,
*Class A Asset Backed Cert, Ser 1994-B 12-15-99 .................. 7.550 AAA 10,000 9,853,125
Chrysler Financial Corp.,
Note 11-01-99 ................................................... 12.750 BBB+ 3,000 3,484,080
CIT Group Holdings, Inc. (The),
Medium Term Sr Sub Cap Note 03-15-01 ............................ 9.250 A 5,000 5,187,900
DR Structured Finance Corp.,
*Sec Pass thru Ctf Ser 1993K-1 08-15-18 .......................... 7.430 A 8,000 6,264,960
Great Western Financial Corp.,
Note 02-01-02 ................................................... 8.600 BBB+ 11,000 10,922,120
Merrill Lynch Mortgage Investors, Inc.,
Sr/Sub Pass thru Ctf Ser 1992 B, Class B Sub 04-15-12 ........... 8.500 AA 3,861 3,747,747
-----------
48,958,957
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- ---------- ------
<S> <C> <C> <C> <C>
FOODS (0.52%)
Beatrice Foods, Inc.,
Sr Sub Note Ser B 12-01-01 ...................................... 12.000% B $ 900 $ 886,500
Flagstar Corp.,
Sr Sub Deb 11-01-04 ............................................. 11.250 CCC+ 7,500 6,187,500
------------
7,074,000
------------
GLASS PRODUCTS (0.76%)
Owens-Illinois, Inc.,
Sr Deb 12-01-03 ................................................. 11.000 BB 10,000 10,375,000
------------
GOLD MINING & PROCESSING (1.13%)
Magma Copper Co.,
*Sr Sub Note 12-15-01 ............................................ 12.000 BB+ 14,250 15,390,000
------------
GOVERNMENTAL - FOREIGN (3.71%)
Nova Scotia, Province of,
Deb 04-01-22 .................................................... 8.750 A- 7,500 7,347,300
SF Deb 05-15-13 ................................................. 11.500 A- 8,400 9,340,548
Ontario, Province of,
*Deb 08-31-12 .................................................... 15.250 AA- 6,595 7,971,640
Deb 04-25-13 .................................................... 11.750 AA- 6,000 6,762,060
Quebec, Province de,
Deb 10-01-13 .................................................... 13.000 A+ 11,000 12,950,850
Deb 09-15-14 .................................................... 13.250 A+ 1,000 1,213,180
Saskatchewan, Province of,
Deb 12-15-20 .................................................... 9.375 BBB+ 5,000 5,228,800
------------
50,814,378
------------
GOVERNMENTAL - U.S. (24.15%)
United States Treasury,
Bond 11-15-02 ................................................... 11.625 AAA 8,500 10,332,770
Bond 08-15-05 ................................................... 10.750 AAA 47,775 57,389,719
Bond 08-15-17 ................................................... 8.875 AAA 89,465 97,460,487
Bond 05-15-18 ................................................... 9.125 AAA 47,100 52,619,649
Bond 02-15-23 ................................................... 7.125 AAA 11,700 10,647,000
*Note 04-15-96 ................................................... 9.375 AAA 11,138 11,385,152
*Note 11-15-96 ................................................... 7.250 AAA 19,000 18,851,610
*Note 05-15-98 ................................................... 9.000 AAA 22,000 22,738,980
*Note 11-30-99 ................................................... 7.750 AAA 20,500 20,423,125
Note 05-15-01 ................................................... 8.000 AAA 28,250 28,470,633
------------
330,319,125
------------
GOVERNMENTAL - U.S. AGENCIES (12.26%)
Federal National Mortgage Association,
15 Yr SF Pass thru Ctf 02-01-08 ................................. 7.500 AAA 4,106 3,930,043
*15 Yr SF Pass thru Ctf 01-25-05 ................................. 8.000 AAA 10,000 9,603,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
GOVERNMENTAL - U.S. AGENCIES (continued)
Financing Corp.,
Bond Ser A 02-08-18........................................... 9.400% AAA $ 7,000 $ 7,718,900
Bond Ser B 04-06-18........................................... 9.800 AAA 1,700 1,943,950
Bond Ser D 09-26-19........................................... 8.600 AAA 9,250 9,453,500
Government National Mortgage Association,
30 Yr SF Pass thru Ctf 10-15-23............................... 7.000 AAA 17,989 16,144,740
*30 Yr SF Pass thru Ctf 02-15-24............................... 7.500 AAA 18,817 17,458,195
30 Yr SF Pass thru Ctf 09-15-22 to 05-15-23................... 8.000 AAA 20,505 19,600,959
*30 Yr SF Pass thru Ctf 12-15-22 to 10-15-24................... 8.500 AAA 44,712 43,929,958
*30 Yr SF Pass thru Ctf 11-15-16 to 07-15-21................... 9.000 AAA 25,108 25,352,873
30 Yr SF Pass thru Ctf 11-15-19 to 05-15-21................... 9.500 AAA 7,821 8,069,133
30 Yr SF Pass thru Ctf 06-15-20 to 11-15-20................... 10.000 AAA 3,592 3,774,514
30 Yr SF Pass thru Ctf 01-15-16............................... 10.500 AAA 252 268,906
30 Yr SF Pass thru Ctf 01-15-16............................... 11.000 AAA 390 423,378
------------
167,672,174
------------
INSURANCE (2.24%)
Massachusetts Mutual Life Insurance Co.,
*Surplus Note 11-15-23 (R)..................................... 7.625 AA- 14,500 12,342,545
Metropolitan Life Insurance Co.,
*Surplus Note 11-01-03 (R)..................................... 6.300 AA 9,000 7,548,750
New York Life Insurance Co.,
Surplus Note 12-15-23 (R)..................................... 7.500 AA 13,000 10,752,300
------------
30,643,595
------------
OIL & GAS (3.17%)
Ashland Oil, Inc.,
SF Deb 10-15-17............................................... 11.125 BBB 5,000 5,493,500
Coastal Corp. (The),
Sr Deb 06-15-06............................................... 11.750 BB+ 10,500 11,484,375
Maxus Energy Corp.,
Deb 05-01-13.................................................. 11.250 BB- 428 393,760
*SF Deb 11-15-15............................................... 11.500 BB 2,000 1,840,000
Oryx Energy Co.,
Note 05-01-96................................................. 9.300 BB 5,000 4,958,200
Note 09-15-98................................................. 9.750 BB 8,000 7,776,880
TransTexas Gas Corp.,
Sr Sec Note 09-01-00.......................................... 10.500 BB- 12,000 11,460,000
------------
43,406,715
------------
PAPER (1.26%)
Georgia Pacific Corp.,
Deb 01-15-18.................................................. 9.750 BBB- 7,500 7,576,650
Stone Container Corp.,
*Sr Note 02-01-01.............................................. 9.875 B 5,000 4,700,000
*Sr Note 10-01-04.............................................. 11.500 B 5,000 5,025,000
------------
17,301,650
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S
ISSUER, DESCRIPTION RATE RATING** OMITTED) MARKET VALUE
- ------------------- -------- -------- --------- -------------
<S> <C> <C> <C> <C>
PUBLISHING (2.21%)
News America Holdings Inc.,
Sr Note 10-15-99 .......................... 9.125% BBB- $ 7,500 $ 7,559,625
Sr Note 12-15-01 .......................... 12.000 BBB- 8,700 9,666,222
Time Warner Entertainment Co.,
Note 05-01-12 ............................. 10.150 BBB- 3,200 3,220,288
Time Warner Inc.,
Deb 01-15-13 .............................. 9.125 BBB- 10,850 9,775,199
------------
30,221,334
------------
RETAIL (1.97%)
K mart Corp.,
Lease Ctf 01-01-09 ........................ 13.500 BBB+ 2,000 2,228,060
Pathmark Stores, Inc.,
Sub Note 06-15-02 ......................... 11.625 B 9,100 8,736,000
Sub Note 06-15-02 ........................ 12.625 B 5,000 5,000,000
Safeway Stores, Inc.,
Lease Ctf 01-15-09 ........................ 13.500 BB+ 2,750 3,038,750
S.D. Warren Co.,
*Sr Sub Note 12-15-04 (R) .................. 12.000 B+ 2,500 2,537,500
Thrifty Payless Inc.,
*Sr Note 04-15-03 .......................... 11.750 B 5,500 5,390,000
------------
26,930,310
------------
STEEL (0.88%)
Weirton Steel Corp.,
Sr Note 10-15-99 .......................... 10.875 B 12,250 12,096,875
------------
TELECOMMUNICATIONS (0.69%)
British Telecom Finance Inc.,
*Gtd Deb 02-15-19 .......................... 9.625 AAA 9,000 9,485,730
------------
TOBACCO (0.69%)
RJR Nabisco Capital Corp.,
*Sr Note 04-15-99 .......................... 8.300 BBB- 5,000 4,818,750
RJR Nabisco, Inc.,
*Note 12-01-02 ............................. 8.625 BBB- 5,000 4,637,650
------------
9,456,400
------------
TRANSPORTATION (9.50%)
American Airlines, Inc.,
1991-A Pass thru Trust 01-02-07 ........... 9.710 BBB- 7,597 7,304,728
Sec Equip Ctf Ser B 01-06-05 .............. 14.375 BBB- 12,000 12,760,800
AMR Corp.,
*Deb 05-15-01 .............................. 9.500 BB+ 4,250 4,201,168
Delta Air Lines, Inc.,
*Deb 05-15-21 .............................. 9.750 BB 5,050 4,642,061
Equip Tr Ctf Ser A 06-01-10 ............... 10.000 BB+ 1,750 1,655,850
Equip Tr Ctf Ser B 06-01-10 ............... 10.000 BB+ 2,928 2,744,209
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING** OMITTED) VALUE
- ------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
TRANSPORTATION (continued)
NWA Inc.,
Note 08-01-96........................................... 8.625% B- $14,165 $ 13,598,400
Railcar Trust No. 1992-1,
Trust Note Ser 92-1 06-01-04............................ 7.750 AAA 17,674 17,226,442
Scandinavian Airlines System,
Bond 07-20-99........................................... 9.125 A3 10,234 10,283,942
Sea-Land Service, Inc.,
Sec Bond Ser A 01-02-11................................. 10.600 BBB 5,000 5,245,550
Sec Bond Ser B 01-02-11................................. 10.600 BBB 7,000 7,343,770
Sec Bond Ser C 01-02-11................................. 10.600 BBB 6,000 6,294,660
Swire Pacific Ltd.,
*Note 09-29-04 (R)....................................... 8.500 A 5,000 4,811,000
United Air Lines, Inc.,
Deb 07-15-21............................................ 10.250 BB 5,000 4,712,000
*Deb Ser A 05-01-04...................................... 10.670 BB 4,275 4,310,953
*Deb Ser B 05-01-14...................................... 11.210 BB 10,460 10,715,433
USAir 1990-A Pass Through Trusts,
Pass thru Ctf Ser 1990-A1 03-19-05...................... 11.200 BB 14,024 12,060,406
------------
129,911,372
------------
UTILITIES (9.82%)
ALLTEL Corp.,
*Deb 04-01-09............................................ 10.375 A+ 5,000 5,329,200
British Columbia Hydro and Power Auth.
(Gtd by Prov of British Columbia),
Bond Ser FN 09-01-13.................................... 12.500 AA+ 6,175 7,158,492
CTC Mansfield Funding Corp.,
Sec Lease Oblig 09-30-16................................ 11.125 B+ 21,685 20,092,670
E.I.P. Refunding Corp.,
Sec Fac Bond 10-01-12................................... 10.250 B+ 9,795 8,717,550
First PV Funding Corp.,
*Lease Oblig Ser 1986 A 01-15-14......................... 10.300 B 7,150 6,792,500
GTE Corp.,
Deb 11-15-17............................................ 10.300 BBB+ 8,750 9,510,638
Hydro-Quebec (Gtd by Province of Quebec),
Deb 02-01-03............................................ 7.375 A+ 4,710 4,393,347
Deb Ser FV 02-01-12..................................... 11.750 A+ 5,000 6,322,050
Deb Ser HS 02-01-21..................................... 9.400 A+ 11,600 12,028,388
Iberdrola International B.V.,
Gtd Note 10-01-02 (R)................................... 7.500 AA- 8,000 7,491,840
Gtd Note 06-01-03 (R)................................... 7.125 AA- 8,654 7,898,592
Long Island Lighting Co.,
*Gen Ref Bond 05-01-21................................... 9.750 BBB- 2,000 1,833,040
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000'S
ISSUER, DESCRIPTION RATE RATING** OMITTED) MARKET VALUE
- ------------------- -------- -------- --------- ------------
<S> <C> <C> <C> <C>
UTILITIES (CONTINUED)
Midland Funding Corp. I,
Sr Sec Lease Oblig Ser C 07-23-02 .............................. 10.330% BB- $ 7,033 $ 6,646,546
System Energy Resources, Inc.,
*1st Mtg 09-01-96 ............................................... 10.500 BBB- 10,870 11,229,471
*Sec Lease Oblig 01-15-14 ....................................... 8.200 BBB- 3,000 2,589,330
Tenaga Nasional Berhad,
*Note 06-15-04 (R) .............................................. 7.875 A 6,000 5,696,280
Transco Energy Co.,
*Note 07-01-99 .................................................. 11.250 B+ 10,000 10,637,500
--------------
134,367,434
--------------
TOTAL PUBLICLY TRADED BONDS
(Cost $1,416,676,785) (96.46%) 1,319,515,091
------ --------------
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (1.50%)
Investment in a joint repurchase agreement transaction
with Lehman Bros., Inc. Dated 12-30-94, Due 01-03-95
(secured by U.S. Treasury Bonds, 9.25%, due 02-15-16 and
8.125%, due 08-15-21, and U.S. Treasury Notes, 5.500%,
due 02-15-95 and 4.625%, due 08-15-95) Note A .................. 5.850 -- 20,558 20,558,000
--------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 3.00% ............................................. 2,836
--------------
TOTAL SHORT-TERM INVESTMENTS ( 1.50%) 20,560,836
------ --------------
TOTAL INVESTMENTS (97.96%) $1,340,075,927
====== ==============
NOTES TO THE SCHEDULE OF INVESTMENTS
(R) These securites are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $69,296,827 as of December 31, 1994. See Note A
of the Notes to Financial Statements for valuation policy.
* Securities, other than short-term investments, newly added to the portfolio
during the year ended December 31, 1994.
** Credit ratings are unaudited and are rated by Moody's Investor Services or
John Hancock Advisers, Inc. where Standard and Poors ratings are not
available.
The percentage shown for each investment category is the total value as a
percentage of the net assets of the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
JOHN HANCOCK INVESTMENT QUALITY BOND FUND
Schedules of Investments
December 31, 1994
Unaudited
Face
Issuer Amount Value
PUBLICLY TRADED BONDS
Consumer Cyclicals (3.96%)
Sears Roebuck Co.
9.375% due 11/01/11 $ 1,000 $ 1,053,750
Wal-Mart Stores Inc.
8.000% due 09/15/06 2,500 2,425,000
-----------
3,478,750
Energy (2.22%)
Clark Oil & Refining Corp.
10.500% due 12/01/01 1,000 1,015,000
Maxus Energy Corp.
10.670% due 03/11/02 1,000 933,750
-----------
1,948,750
Financial Services - 2.33%
Card Establishment Services
10.000% due 10/01/03 1,000 1,043,750
World Book Finance Inc.
8.125% due 09/01/96 1,000 1,007,500
-----------
2,051,250
U.S. Dollar Denominated
Foreign Government
Bonds - 17.75%
Brazil (Republic of) Notes IDU Series A-L
*6.063% due 01/01/01 1,960 1,634,150
British Columbia Hydro & Power Authority
15.000% due 04/15/11 2,050 2,319,064
15.500% with various 1,306 1,540,126
maturities to 11/15/11
Hydro-Quebec Corp.
8.250% due 01/15/27 1,250 1,145,313
8.625% due 06/15/29 1,000 952,500
Nova Scotia, Province of,
11.500% due 05/15/13 2,255 2,519,962
Ontario, Province of,
17.000% due 11/05/11 3,750 4,514,063
South Africa (Republic of) Notes
9.625% due 12/15/99 1,000 972,500
-----------
15,597,678
U.S. Government and
U.S. Government Agency
Obligations - 50.66%
U.S. Treasury
Bonds - 18.91%
United States Treasury,
12.625% due 05/15/95 16,250 16,618,225
-----------
Federal Home
Loan Mortgage
Corporation - 6.28%
4.500% due 05/15/14 1,000 815,156
5.750% due 05/15/21 5,500 4,707,656
-----------
5,522,812
<PAGE>
Federal National Mortgage
Association - 15.52%
6.000% due 11/25/08 5,000 4,201,562
8.000% due 05/01/02 4 3,617
8.500% with various 9,622 9,438,533
maturities to 09/01/24 -----------
13,643,712
Government National
Mortgage
Association - 5.63%
6.500% with various 5,038 4,364,580
maturities to 05/15/24
8.000% due 02/15/04 3 3,006
11.500% with various 240 263,644
maturities to 08/15/13
12.000% due 03/15/13 98 110,036
12.500% with various 104 110,615
maturities to 12/15/10
13.000% due 11/15/10 33 36,051
15.000% due 07/15/11 53 57,328
-----------
4,945,260
U.S. Government
Agency - 4.32%
Tennessee Valley Authority
7.250% due 07/15/43 4,500 3,795,750
-----------
Industrial - 3.22%
Phillips-Van Heusen Corp.
7.750% due 11/15/23 1,000 856,250
Viatel Inc.
15.000% due 01/15/05 2,000 973,420
Waste Management Inc.
7.875% due 08/15/96 1,000 1,000,000
-----------
2,829,670
Manufacturing - 1.98%
Cemex S.A
9.500% due 09/20/01 1,000 850,000
Outboard Marine
9.125% due 04/15/17 1,000 886,250
-----------
1,736,250
Media and Leisure - 4.76%
Cablevision Industries Corp.
10.750% due 01/30/02 1,000 1,000,000
Capital Cities Communications
8.750% due 08/15/21 100 101,250
Continental Cablevision, Inc.
9.500% due 08/01/13 1,500 1,372,500
Disney, Walt Co.
7.550% due 07/15/93 2,000 1,705,000
-----------
4,178,750
Paper - 1.17%
Fort Howard Corp.
12.625% due 11/01/00 1,000 1,028,750
-----------
Technology-Related - 1.19%
Joy Technologies
10.250% due 09/01/03 1,000 1,048,750
-----------
<PAGE>
Utilities - 8.08%
CentraGas
10.650% due 12/01/10 2,000 1,910,000
Norsk Hydro A.S
7.750% due 06/15/23 2,000 1,770,000
Pacific Bell
6.625% due 10/15/34 2,000 1,547,500
System Energy Resources, Inc.
6.000% due 04/01/98 2,000 1,875,000
-----------
7,102,500
-----------
TOTAL PUBLICLY TRADED BONDS (97.32%) $85,526,857
-----------
Common Stock
Industrial - 0.32%
Viatel Inc. 72 281,580
-----------
TOTAL COMMON STOCK (0.32%) $ 281,580
-----------
SHORT-TERM INVESTMENT
U.S. Treasury Bond
5.500% due 01/03/95 2,420 2,420,000
-----------
TOTAL SHORT-TERM INVESTMENT (2.75%) 2,420,000
========= ===========
TOTAL INVESTMENTS (100.39%) $88,228,437
========= ===========
*Floating rate security, interest rate effective December 31, 1994.
The percentage shown for each investment category is the total value as a
percentage of the net assets of the Fund.
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Sovereign Bond Fund (the "Registrant") on
Form N-1A under the Securities Act of 1933 and the Investment Company
Act of 1940 and (File No. 811-2402), which information is incorporated
herein by reference.
ITEM 16. EXHIBITS:
1. Amended and Restated Declaration Filed as Exhibit 1 to
of Trust of Registrant dated Registrant's Registration
February 28, 1992. Statement on Form N-1A and
incorporated herein by
reference.
1.1 Amendment to Registrant's Filed as Exhibit 1 to
Declaration of Trust dated Registrant's Registration
May 1, 1992. Statement on Form N-1A and
incorporated herein by
reference.
1.2 Amendment to Registrant's Filed as Exhibit 1.2 to
Declaration of Trust dated Registrant's Registration
September 14, 1993. Statement on Form N-1A and
incorporated herein by
reference.
2. Amended and Restated By-Laws Filed as Exhibit 2 to the
of Registrant as adopted on Registrant's Registration
December 8, 1993. Statement on Form N-1A and
incorporated herein by
reference.
2.1 Amendment to By-Laws of Filed as Exhibit 2.1 to
Registrant dated the Registrant's
December 13, 1994. Registration Statement on
Form N-1A and incorporated
herein by reference.
3. Not applicable.
<PAGE>
4. Form of Agreement and Plan of Filed herewith as Exhibit
Reorganization between the A to the Proxy Statement
Registrant and John Hancock and Prospectus included as
Bond Fund, on behalf of Part A of this
John Hancock Investment Registration Statement on
Quality Bond Fund. Form N-14.
5. Not applicable.
6. Investment Management Contract Filed as Exhibit 5 to
between the Registrant and John Registrant's Registration
Hancock Advisers, Inc. Statement on Form N-1A and
incorporated herein by
reference.
7.1 Distribution Agreement between Filed as Exhibit 6 to
the Registrant and John Hancock Registrant's Registration
Funds, Inc. (formerly named John Statement on Form N-1A and
Hancock Broker Distribution incorporated herein by
Services, Inc.). reference.
7.2 Form of Soliciting Dealer Filed as Exhibit 6.1 to
Agreement between John Hancock Registrant's Registration
Funds, Inc. and Selected Dealers Statement on Form N-1A and
incorporated herein by
reference.
7.3 Form of Financial Institution Filed as Exhibit 6.2 to
Sales and Service Agreement Registrant's Registration
between John Hancock Funds, Inc. Statement on Form N-1A and
and Selected Financial incorporated herein by
Institutions. reference.
8. Not applicable.
9. Master Custodian Agreement Filed as Exhibit 8 to
between John Hancock Mutual Registrant's Registration
Funds (including Registrant) and Statement on Form N-1A
Investors Bank & Trust Company. and incorporated herein by
reference.
10.1 Class A Distribution Plan between Filed as Exhibit 15 to
the Registrant and John Registrant's Registration
Hancock Funds, Inc. Statement on Form N-1A and
incorporated herein by
reference.
- 2 -
<PAGE>
10.2 Class B Distribution Plan between Filed as Exhibit 15.1 to
the Registrant and John Hancock Registrant's Registration
Funds, Inc. Statement on Form N-1A and
incorporated herein by
reference.
10.3 Class A Distribution Plan between Filed as Exhibit 15 to
John Hancock Investment Quality John Hancock Bond Fund's
Bond Fund and John Hancock Registration Statement on
Funds, Inc. Form N-1A and incorporated
herein by reference.
10.4 Class B Distribution Plan between Filed as Exhibit 15.1 to
John Hancock Investment Quality John Hancock Bond Fund's
Bond Fund and John Hancock Registration Statement on
Funds, Inc. Form N-1A and incorporated
herein by reference.
11. Opinion as to legality of Filed herewith as Exhibit
shares, and consent. 11.
12. Form of Opinion as to tax Filed herewith as Exhibit
matters. 12.
13. Not applicable.
14.1 Consent of Ernst & Young LLP Filed herewith as Exhibit
regarding the financial 14.
statements and highlights of
John Hancock Sovereign Bond
Fund and John Hancock Investment
Quality Bond Fund.
15. Not applicable.
16. Powers of Attorney. Filed as addendum to
signature pages of
Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
17.1 Declaration of the Registrant Filed herewith as Exhibit
pursuant to Rule 24f-2 under 17.1.
the Investment Company Act of
1940.
17.2 Prospectus of John Hancock Filed herewith as Exhibit
Investment Quality Bond Fund 17.2.
for Class A and Class B shares,
dated May 15, 1995.
- 3 -
<PAGE>
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus
which is a part of this Registration Statement by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c)
under the Securities Act of 1933, as amended (the "1933 Act"), the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of an
amendment to the Registration Statement and will not be used until the
amendment is effective, and that, in determining any liability under
the 1933 Act, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
(3) The undersigned Registrant agrees that it will furnish to each
person to whom a Prospectus of the Registrant is delivered a copy of
the latest annual report to shareholders of the Registrant, upon
request and without charge.
- 4 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Boston and The Commonwealth of Massachusetts, on the 13th day of June,
1995.
JOHN HANCOCK SOVEREIGN BOND FUND
By:/s/Edward J. Boudreau, Jr.
--------------------------
Edward J. Boudreau, Jr.
Chairman and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
Signature Title
/s/Edward J. Boudreau, Jr. Chairman and Trustee )
-------------------------- (Principal Executive )
Edward J. Boudreau, Jr. Officer) )
)
) June 13, 1995
/s/James B. Little Senior Vice President )
------------------ and Chief Financial )
James B. Little Officer (Principal )
Financial and )
Accounting Officer) )
)
Trustees:
Dennis S. Aronowitz* Trustee )
------------------- )
Dennis S. Aronowitz )
)
)
Richard P. Chapman* Trustee )
------------------- )
Richard P. Chapman )
- 5 -
<PAGE>
)
)
William J. Cosgrove* Trustee )
-------------------- )
William J. Cosgrove )
)
)
Bayard Henry* Trustee )
------------- )
Bayard Henry )
)
)
Gail D. Fosler* Trustee )
--------------- )
Gail D. Fosler )
)
)
Richard S. Scipione* Trustee )
-------------------- )
Richard S. Scipione )
)
)
Edward J. Spellman* Trustee )
------------------- )
Edward J. Spellman )
)
)
--------------
*By:/s/Thomas H. Drohan Dated: June 13, 1995
----------------------------------
Thomas H. Drohan, Attorney-in-fact
- 6 -
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Registration
Statement.
Exhibit No. Description
4. Form of Agreement and Plan of
Reorganization between the
Registrant and John Hancock Bond Fund,
on behalf of John Hancock Investment
Quality Bond Fund.
11. Opinion as to legality of shares, and
consent.
12. Form of Opinion as to tax matters.
14. Consent of Ernst & Young LLP regarding
the financial statements and highlights
of John Hancock Investment
Quality Bond Fund and the Registrant.
17.1 Declaration of the Registrant pursuant
to Rule 24f-2 under the Investment
Company Act of 1940.
17.2 Prospectus of John Hancock Investment
Quality Bond Fund for Class A and Class B
shares, dated May 15, 1995.
- 7 -
EXHIBIT 11
June 14, 1995
John Hancock Sovereign Bond Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under
the Securities Act of 1993, as amended (the "Act"), on Form N-14,
with respect to the shares of beneficial interest of John Hancock
Sovereign Bond Fund, a Massachusetts business trust (the "Fund"), it
is the opinion of the undersigned that these shares when issued will
be legally issued, fully paid and nonassessable.
In connection with this opinion it should be noted that the
Fund is an entity of the type generally known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of a
Massachusetts business trust may be held personally liable for the
obligations of the trust. However, the Fund's Declaration of Trust
disclaims shareholder liability for obligations of the Fund and
indemnifies any shareholder of the Fund, with such indemnification to
be paid solely out of the assets of the Fund. Therefore, the
shareholder's risk is limited to circumstances in which the assets of
the Fund are insufficient to meet the obligations asserted against
such assets.
The undersigned hereby consents to the filing of a copy of this
opinion, as an exhibit to the Fund's registration statement on Form
N-14, with the Securities and Exchange Commission and with the
various state securities administrators.
Sincerely,
JOHN HANCOCK ADVISERS, INC.
/s/ Avery P. Maher
Avery P. Maher
Assistant Secretary
Member of Massachusetts Bar
APM/dmm
s:\corpsec\corresp\maher\letter\95june14.doc
EXHIBIT 12
, 1995
Board of Trustees
John Hancock Bond Fund, on behalf of
John Hancock Investment Quality Bond Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Board of Trustees
John Hancock Sovereign Bond Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Boards of Trustees:
You have requested our opinion regarding the federal income tax
consequences of the acquisition by John Hancock Sovereign Bond Fund
("Acquiring Fund") of all of the assets of John Hancock Investment
Quality Bond Fund ("Acquired Fund"), a series of John Hancock Bond Fund
(the "Trust"), in exchange solely for (i) the assumption by Acquiring
Fund of all of the liabilities of Acquired Fund and (ii) the issuance
of Class A and Class B voting shares of beneficial interest of
Acquiring Fund (the "Acquiring Fund Shares") to Acquired Fund, followed
by the distribution by Acquired Fund, in liquidation of Acquired Fund,
of the Acquiring Fund Shares to the shareholders of Acquired Fund and
the termination of Acquired Fund (the foregoing together constituting
the "reorganization" or the "transaction").
In rendering this opinion, we have examined and relied upon (i)
the prospectus for the Class A and Class B shares of Acquired Fund,
dated May 15, 1995, (ii) the statement of additional information for
the Class A and Class B shares of Acquired Fund, dated May 15, 1995,
(iii) the prospectus for the Class A and Class B shares of Acquiring
Fund, dated May 1, 1995, (iv) the statement of additional information
for the Class A and Class B shares of Acquiring Fund, dated May 1,
1995, (v) the registration statement on Form N-14 of Acquiring Fund
relating to the transaction (the "Registration Statement") filed with
the Securities and Exchange Commission (the "SEC") on June __, 1995,
(vi) the proxy
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 2
statement/prospectus relating to the transaction (the "Proxy
Statement") included in the Registration Statement, (vii) the Agreement
and Plan of Reorganization, dated as of , 1995, between Acquiring Fund
and the Trust, on behalf of Acquired Fund (the "Agreement"), (viii) the
representation letters on behalf of Acquiring Fund and Acquired Fund
referred to below and (ix) such other documents as we deemed
appropriate. We have assumed that all parties to the Agreement and to
other documents relating to the transaction have acted and will act in
accordance with the terms of the Agreement and such other documents.
The conclusions expressed herein represent our judgment regarding
the proper treatment of Acquiring Fund, Acquired Fund and the
shareholders of Acquired Fund on the basis of our analysis of the
Internal Revenue Code of 1986, as amended (the "Code"), case law,
Treasury regulations and the rulings and other pronouncements of the
Internal Revenue Service (the "Service") which exist at the time this
opinion is rendered, all of which are subject to prospective or
retroactive change. Our opinion represents our best judgment regarding
the issues presented and is not binding upon the Service or any court.
Moreover, our opinion does not provide any assurance that a position
taken in reliance on such opinion will not be challenged by the Service
and does not constitute any representation or warranty that such
position, if so challenged, will not be rejected by a court.
Acquiring Fund is a business trust established under the laws of
The Commonwealth of Massachusetts in 1984 (as the successor to a
Maryland corporation organized in 1973) and is registered as an
open-end investment company under the Investment Company Act of 1940,
as amended (the "1940 Act").
The investment objective of Acquiring Fund is to generate a high
level of current income, consistent with prudent investment risk,
through investment in a diversified portfolio of freely marketable debt
securities. Acquiring Fund seeks high current income consistent with
the moderate level of risk associated with a portfolio consisting
primarily of investment-grade debt securities. Under normal market
conditions, at least 65% of the value of Acquiring Fund's assets will
be comprised of bonds and/or debentures. In addition, Acquiring Fund
contemplates that at least 75% of the value of its total investments in
debt securities (other than commercial paper) will be represented by
those securities that have, at the time of purchase, a rating within
the four highest grades as determined by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") and debt
securities of banks, the U.S. Government and its agencies or
instrumentalities and other issuers which, although not rated as a
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 3
matter of policy by either Moody's or S&P, are considered by Acquiring
Fund to have investment quality comparable to securities receiving
ratings within the four highest grades.
Acquired Fund is a series of a business trust, the Trust, which
was established under the laws of The Commonwealth of Massachusetts in
1984 and is registered as an open-end investment company under the 1940
Act. The Trust has several separate series and may create additional
series in the future. Each series of the Trust has separate assets and
liabilities from those of each other series. Each such series is
treated as a separate corporation and regulated investment company
pursuant to Section 851(h) of the Code.
The investment objective of Acquired Fund is to earn a high level
of current income, consistent with prudent risk and safety of
principal, primarily through investing in a diversified portfolio of
"investment quality" fixed income securities. Under normal market
conditions, Acquired Fund pursues this objective by investing at least
65% of the value of its total assets in "investment quality" fixed
income securities, which include: (1) U.S. dollar denominated debt
securities of foreign and U.S. issuers which are issued in or outside
of the U.S. and are rated within the three highest quality ratings by
S&P or Moody's; (2) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; and (3) high quality
money market instruments including short-term obligations of the U.S.
Government or its agencies, certificates of deposit, bankers'
acceptances (each being of investment grade) and commercial paper rated
at least P-1 by Moody's or A-1 by S&P. Acquired Fund may also invest in
lower-rated securities, unrated securities, and certain other
securities or instruments described in its prospectus.
The steps to be taken in the reorganization, as set forth in the
Agreement, will be as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its
assets (consisting, without limitation, of portfolio securities and
instruments, dividend and interest receivables, cash and other assets).
In exchange for the assets transferred to it, Acquiring Fund will (A)
assume all of the liabilities of Acquired Fund (comprising all of its
known and unknown liabilities and referred to hereinafter as the
"Acquired Fund Liabilities") and (B) issue Acquiring Fund Shares to
Acquired Fund that have an aggregate net asset value equal to the value
of the assets transferred to Acquiring Fund by Acquired Fund, less the
value of the Acquired Fund Liabilities assumed by Acquiring Fund.
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 4
(ii) Promptly after the transfer of its assets to Acquiring
Fund, Acquired Fund will distribute in liquidation the Acquiring Fund
Shares it receives in the exchange to Acquired Fund shareholders pro
rata in exchange for their surrender of their shares of Acquired Fund
("Acquired Fund Shares"). In these exchanges, holders of Acquired Fund
Shares designated as Class A ("Class A Acquired Fund Shares") will
receive Acquiring Fund Shares designated as Class A ("Class A Acquiring
Fund Shares"), and holders of Acquired Fund Shares designated as Class
B ("Class B Acquired Fund Shares") will receive Acquiring Fund Shares
designated as Class B ("Class B Acquiring Fund Shares").
(iii) After such exchanges, liquidation and distribution, the
existence of Acquired Fund will be promptly terminated in accordance
with Massachusetts law.
The Agreement and the transactions contemplated thereby were
approved by the Board of Trustees of Acquiring Fund at a meeting held
on May 1, 1995. Acquiring Fund shareholders are not required and were
not asked to approve the transaction. The Agreement and the
transactions contemplated thereby were approved by the Board of
Trustees of the Trust, on behalf of Acquired Fund, at a meeting held on
May 16, 1995, subject to the approval of Acquired Fund shareholders.
Acquired Fund shareholders approved the transaction at a meeting held
on , 1995.
Massachusetts law does not provide dissenters' rights for Acquired
Fund shareholders in the transaction. Additionally, it is the position
of the Division of Investment Management of the SEC that appraisal
rights, in contexts such as the reorganization, are inconsistent with
Rule 22c-1 under the 1940 Act and are therefore preempted and
invalidated by such rule. Consequently, Acquired Fund shareholders will
not have dissenters' or appraisal rights in the transaction.
Our opinions set forth below are subject to the following factual
assumptions being true on the date the transaction is consummated,
i.e., the date of this opinion letter. Authorized representatives of
Acquiring Fund and Acquired Fund have represented to us by letters of
even date herewith that the following assumptions are true on this
date:
(a) Acquiring Fund has no plan or intention to redeem or otherwise
reacquire any of the Acquiring Fund Shares received by shareholders of
Acquired Fund in the transaction except in connection with its legal
obligation under Section 22(e) of the 1940 Act as a registered open-end
investment company to redeem its own shares.
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 5
(b) After the transaction, Acquiring Fund will continue the
historic business of Acquired Fund and will use all of the assets
acquired from Acquired Fund in the ordinary course of a business.
(c) Acquiring Fund has no plan or intention to sell or otherwise
dispose of any assets of Acquired Fund acquired in the transaction,
except for dispositions made in the ordinary course of its business or
to maintain its qualification as a regulated investment company under
Subchapter M of the Code.
(d) The shareholders of Acquiring Fund and the shareholders of
Acquired Fund will bear their respective expenses, if any, in
connection with the transaction.
(e) Acquiring Fund and Acquired Fund will each bear its own
expenses incurred in connection with the transaction. If any
liabilities of Acquired Fund attributable to such expenses remain
unpaid on the closing date of the transaction and are assumed by
Acquiring Fund in the transaction, the amount assumed will be
attributable to Acquired Fund's expenses that are solely and
directly related to the transaction in accordance with the
guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
(f) There is no indebtedness between Acquiring Fund and
Acquired Fund.
(g) Acquired Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code, has qualified as a
regulated investment company for each taxable year since its inception,
and qualifies as such for its final taxable year ending on the closing
date of the transaction.
(h) Acquiring Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code, has qualified as a
regulated investment company for each taxable year since its inception,
and qualifies as such as of the date of the transaction.
(i) Neither Acquiring Fund nor Acquired Fund is under the
jurisdiction of a court in a Title 11 or similar case within the
meaning of Section 368(a)(3)(A) of the Code.
(j) Acquiring Fund does not own and since its inception has not
owned, directly or indirectly, any shares of Acquired Fund.
(k) Acquiring Fund will not pay cash in lieu of fractional shares
in connection with the transaction.
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 6
(l) As of the date of the transaction, the fair market value of
the Acquiring Fund Shares issued to Acquired Fund in exchange for the
assets of Acquired Fund is approximately equal to the fair market value
of the assets of Acquired Fund received by Acquiring Fund, minus the
value of the Acquired Fund Liabilities assumed by Acquiring Fund.
(m) Acquired Fund shareholders will not be in control (within the
meaning of Sections 368(a)(2)(H) and 304(c) of the Code, which provide
that control means the ownership of shares possessing at least 50% of
the total combined voting power of all classes of shares that are
entitled to vote or at least 50% of the total value of shares of all
classes) of Acquiring Fund after the transaction.
(n) The principal business purposes of the transaction are to
combine the assets of Acquiring Fund and Acquired Fund in order to
capitalize on economies of scale in expenses such as the costs of
accounting, legal, transfer agency, insurance, custodial, and
administrative services and to increase diversification.
(o) As of the date of the transaction, the fair market value of
the Class A Acquiring Fund Shares received by each holder of Class A
Acquired Fund Shares is approximately equal to the fair market value of
the Class A Acquired Fund Shares surrendered by such shareholder, and
the fair market value of the Class B Acquiring Fund Shares received by
each holder of Class B Acquired Fund Shares is approximately equal to
the fair market value of the Class B Acquired Fund Shares surrendered
by such shareholder.
(p) There is no plan or intention on the part of any shareholder
of Acquired Fund that owns beneficially 5% or more of the Acquired Fund
Shares and, to the best knowledge of management of Acquired Fund, there
is no plan or intention on the part of the remaining shareholders of
Acquired Fund to sell, redeem, exchange or otherwise dispose of a
number of the Acquiring Fund Shares received in the transaction that
would reduce the aggregate ownership of the Acquiring Fund Shares by
former Acquired Fund shareholders to a number of shares having a value,
as of the date of the transaction, of less than fifty percent (50%) of
the value of all of the formerly outstanding Acquired Fund Shares as of
the same date. Shares of Acquired Fund and Acquiring Fund held by
Acquired Fund shareholders and otherwise sold, redeemed, exchanged or
disposed of prior or subsequent to the transaction as part of the plan
of reorganization are taken into account for purposes of this
representation.
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 7
(q) Acquired Fund assets transferred to Acquiring Fund comprise at
least ninety percent (90%) of the fair market value of the net assets
of Acquired Fund and at least seventy percent (70%) of the fair market
value of the gross assets held by Acquired Fund immediately prior to
the transaction. For purposes of this representation, amounts used by
Acquired Fund to pay its outstanding liabilities, including
reorganization expenses, and all redemptions and distributions (except
for redemptions in the ordinary course of business upon demand of a
shareholder that Acquired Fund is required to make as an open-end
investment company pursuant to Section 22(e) of the 1940 Act and
regular, normal dividends, which dividends include any final
distribution of previously undistributed investment company taxable
income and net capital gain for Acquired Fund's final taxable year
ending on the closing date of the transaction) made by Acquired Fund
immediately preceding the transaction are taken into account as assets
of Acquired Fund held immediately prior to the transaction.
(r) The Acquired Fund Liabilities assumed by Acquiring Fund plus
the liabilities, if any, to which the transferred assets are subject
were incurred by Acquired Fund in the ordinary course of its business
or are expenses of the transaction.
(s) The fair market value of the Acquired Fund assets transferred
to Acquiring Fund equals or exceeds the sum of the Acquired Fund
Liabilities assumed by Acquiring Fund and the amount of liabilities, if
any, to which the transferred assets are subject.
(t) The total adjusted basis of the Acquired Fund assets
transferred to Acquiring Fund equals or exceeds the sum of the Acquired
Fund Liabilities assumed by Acquiring Fund and the amount of
liabilities, if any, to which the transferred assets are subject.
(u) Acquired Fund does not pay compensation to any
shareholder-employee.
(v) Acquired Fund has no outstanding warrants, options,
convertible securities or any other type of right pursuant to which any
person could acquire Acquired Fund Shares.
On the basis of and subject to the foregoing and in reliance upon
the representations described above, we are of the opinion that:
(a) The acquisition by Acquiring Fund of all of the assets
of Acquired Fund solely in exchange for the issuance of Acquiring
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 8
Fund Shares to Acquired Fund and the assumption of all of the Acquired
Fund Liabilities by Acquiring Fund, followed by the distribution by
Acquired Fund, in liquidation of Acquired Fund, of Acquiring Fund
Shares to Acquired Fund shareholders in exchange for their Acquired
Fund Shares and the termination of Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the
Code. Acquiring Fund and Acquired Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by Acquired Fund upon (i)
the transfer of all of its assets to Acquiring Fund solely in exchange
for the issuance of Acquiring Fund Shares to Acquired Fund and the
assumption of all of the Acquired Fund Liabilities by Acquiring Fund
and (ii) the distribution by Acquired Fund of such Acquiring Fund
Shares to the shareholders of Acquired Fund (Sections 361(a) and 361(c)
of the Code.
(c) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund solely in exchange for the
issuance of Acquiring Fund Shares to Acquired Fund and the assumption
of all of the Acquired Fund Liabilities by Acquiring Fund (Section
1032(a) of the Code).
(d) The basis of the assets of Acquired Fund acquired by Acquiring
Fund will be, in each instance, the same as the basis of such assets in
the hands of Acquired Fund immediately prior to the transfer (Section
362(b) of the Code).
(e) The tax holding period of the assets of Acquired Fund in the
hands of Acquiring Fund will, in each instance, include Acquired Fund's
tax holding period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or
loss upon the exchange of all of their Acquired Fund Shares solely for
Acquiring Fund Shares as part of the transaction (Section 354(a)(l) of
the Code).
(g) The basis of the Acquiring Fund Shares received by the
Acquired Fund shareholders in the transaction will be the same as the
basis of the Acquired Fund Shares surrendered in exchange therefor
(Section 358(a)(1) of the Code).
(h) The tax holding period of the Acquiring Fund Shares received
by Acquired Fund shareholders will include, for each shareholder, the
tax holding period for the Acquired Fund Shares surrendered in exchange
therefor, provided the Acquired Fund
<PAGE>
Boards of Trustees
John Hancock Bond Fund
John Hancock Sovereign Bond Fund
, 1995
Page 9
Shares were held as capital assets on the date of the exchange (Section
1223(1) of the Code).
No opinion is expressed or implied regarding the federal income
tax consequences to Acquiring Fund, Acquired Fund or Acquired Fund
shareholders of any conditions existing at the time of, effects
resulting from, or other aspects of the transaction except as expressly
set forth above.
Very truly yours,
Hale and Dorr
EXHIBIT 14
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" in the Proxy Statement and Prospectus and to the use, in
this Registration Statement (Form N-14) dated June 16, 1995, of our
report on the financial statements and financial highlights of John
Hancock Investment Quality Bond Fund, a series of John Hancock Bond
Fund, dated May 15, 1995 and our report on the financial statements
and financial highlights of John Hancock Sovereign Bond Fund dated
February 13, 1995.
ERNST & YOUNG LLP
Boston, Massachusetts
June 9, 1995
EXHIBIT 17.1
Registration No. 2-48925
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No . [ ]
Post-Effective Amendment No. 24 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 [X]
(Check appropriate box or boxes)
___________________________
JOHN HANCOCK BOND TRUST
(Exact name of registrant as specified in charter)
John Hancock Place
P.O. Box 111
Boston, MA 02117
(Address of principal executive offices)
Registrant's Telephone Number -- (617) 421-4506
R. Bruce Oliver
John Hancock Advisers, Inc.
John Hancock Place
P.O. Box 111
Boston, MA 02117
(Name and Address of Agent for Service)
Copies to:
Woodrow W. Campbell, Jr. Esq. Richard S. Scipione, Esq
Debevoise & Plimpton John Hancock Mutual Life Insurance Company
875 Third Avenue John Hancock Place, P.O. Box 111
New York, NY 10022 Boston, MA 02117
______________________________
It is proposed that this filing will be come effective:
On April 30, 1985 pursuant to paragraph (b).
______________________________
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act
of 1940, Registrant has registered an indefinite number of shares
under the Securities Act of 1933, and Registrant's rule 24f-2 Notice
for fiscal year ended December 31, 1984 was filed on February 22,
1985.
<PAGE>
EXHIBIT 17.2
JOHN HANCOCK
INVESTMENT QUALITY
BOND FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 15, 1995
<TABLE>
- ---------------------------------------------------------------------------------------------
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 4
Organization and Management of the Fund............................................... 7
Alternative Purchase Arrangements..................................................... 8
The Fund's Expenses................................................................... 9
Dividends and Taxes................................................................... 10
Performance........................................................................... 11
How to Buy Shares..................................................................... 12
Share Price........................................................................... 14
How to Redeem Shares.................................................................. 20
Additional Services and Programs...................................................... 22
Investments, Techniques and Risk Factors.............................................. 25
</TABLE>
This Prospectus sets forth the information about John Hancock Investment
Quality Bond Fund (the "Fund"), a diversified series of John Hancock Bond Fund
(the "Trust"), that you should know before investing. Please read and retain it
for future reference.
Additional information about the Fund and the Trust has been filed with the
Securities and Exchange Commission (the "SEC"). You can obtain a copy of the
Fund's Statement of Additional Information, dated May 15, 1995 and incorporated
by reference into this Prospectus, free of charge by writing or telephoning:
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, Massachusetts
02205-9116, 1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
<TABLE>
EXPENSE INFORMATION
The purpose of the following information is to help you to understand the various fees and expenses you will bear, directly
or indirectly, when you purchase Fund shares. The operating expenses included in the table and hypothetical example below are based
on fees and expenses for the Fund's fiscal year ended March 31, 1994 adjusted to reflect current sales charges. Actual fees and
expenses in the future of the Class A and Class B shares may be greater or less than those indicated.
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of offering price)......................... 4.50% None
Maximum sales charge imposed on reinvested dividends.................................................. None None
Maximum deferred sales charge......................................................................... None* 5.00%
Redemption fee+....................................................................................... None None
Exchange fee.......................................................................................... None None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management fee........................................................................................ 0.60% 0.60%
12b-1 fee**........................................................................................... 0.25% 1.00%
Other expenses***..................................................................................... 0.40% 0.40%
Total Fund operating expenses......................................................................... 1.25% 2.00%
</TABLE>
* No sales charge is payable at the time of purchase on
investments of $1 million or more, but for these investments a
contingent deferred sales charge may be imposed, as described below
under the caption "Share Price," in the event of certain redemption
transactions within one year of purchase.
** The amount of the 12b-1 fee used to cover service expenses
will be up to 0.25% of the Fund's average net assets, and the
remaining portion will be used to cover distribution expenses.
*** Other Expenses include transfer agent, legal, audit,
custody and other expenses.
+ Redemption by wire fee (currently $4.00) not included.
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses for the indicated period of years on a
hypothetical $1,000 investment, assuming 5% annual return:
Class A Shares............................................................... $ 57 $83 $ 111 $189
Class B Shares
-- Assuming complete redemption at end of period......................... $ 70 $93 $ 128 $213
-- Assuming no redemption................................................ $ 20 $63 $ 108 $213
(This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.)
</TABLE>
The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "The Trust and Its Management" and
"Distribution Contract."
2
<PAGE>
<TABLE>
THE FUND'S FINANCIAL HIGHLIGHTS
The information in the following table of financial highlights for each of the periods ended March 31, 1994, and prior, has
been audited by Ernst & Young LLP, the Fund's independent auditors, whose unqualified report is included in the Statement of
Additional Information. The financial highlights for the six month period ended September 30, 1994 are unaudited. Further
information about the performance of the shares of the Fund is contained in the Fund's Annual and Semi-Annual Reports to
shareholders which may be obtained free of charge by writing or telephoning John Hancock Investor Services Corporation ("Investor
Services"), at the address or telephone number listed on the front page of this Prospectus.
Selected data for shares of the Fund outstanding during the indicated periods is as follows:
<CAPTION>
CLASS A SHARES
------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPT. 30, YEAR ENDED MARCH 31,
1994(2) ----------------------------------------------------------------------------
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988
---------- ------- -------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE INCOME AND CAPITAL CHANGES
FOR A SHARE OUTSTANDING DURING EACH
PERIOD:
Net asset value, beginning of
period............................... $8.72 $9.26 $8.93 $8.85 $8.52 $8.77 $9.24 $10.05
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 0.28 0.71 0.79 0.80 0.85 0.86 0.89 0.75
Net realized and unrealized gain
(loss) on investments................ (0.46) (0.55) 0.31 0.11 0.32 (0.22) (0.51) (0.55)
------- ------- -------- ------- ------- ------- -------- --------
Total from Investment Operations...... (0.18) 0.16 1.10 0.91 1.17 0.64 0.38 0.20
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (0.30) (0.70) (0.77) (0.83) (0.84) (0.89) (0.85) (0.75)
Distributions from realized gains..... -- -- -- -- -- -- -- (0.13)
Distributions in excess of net
investment income.................... (0.03) -- -- -- -- -- -- --
Returns of capital.................... -- -- -- -- -- -- -- (0.13)
------- ------- -------- ------- ------- ------- -------- --------
Total Distributions................... (0.33) (0.70) (0.77) (0.83) (0.84) (0.89) (0.85) (1.01)
------- ------- -------- ------- ------- ------- -------- --------
Net asset value, end of period........ $8.21 $8.72 $9.26 $8.93 $8.85 $8.52 $8.77 $9.24
======= ======= ======== ======= ======= ======= ======== ========
TOTAL RETURN*......................... (2.09)% 1.58% 12.77% 10.72% 14.51% 7.35% 4.39% 2.47%
======= ======= ======== ======= ======= ======= ======== ========
RATIOS AND SUPPLEMENTAL DATA
Ratio of operating expenses to average
net assets........................... 0.65% 1.25% 1.24% 1.36% 1.25% 1.18% 1.16% 1.14%
Ratio of interest expense to average
net assets........................... 0.02% -- 0.07% 0.34% -- -- -- --
------- ------- -------- ------- ------- ------- -------- --------
Ratio of total expenses to average
net assets........................... 0.67% 1.25% 1.31% 1.70% 1.25% 1.18% 1.16% 1.14%
======= ======= ======== ======= ======= ======= ======== ========
Ratio of net investment income to
average net assets................... 3.37% 7.63% 8.47% 8.84% 9.89% 9.64% 9.85% 8.08%
Portfolio turnover.................... 111% 242% 191% 316% 134% 162% 173% 189%
Net Assets, end of period (in
thousands)........................... $86,994 $95,601 $111,836 $96,516 $84,039 $88,521 $108,416 $131,682
Debt outstanding at end of period
(in thousands)(1).................... $14,079 $0 $0 $6,496 -- -- -- --
Average daily amount of debt
outstanding during the period (in
thousands)(1)........................ $885 $70 $2,003 $6,876 -- -- -- --
Average monthly number of shares
outstanding during the period
(in thousands)....................... 11,586 11,907 11,807 10,003 -- -- -- --
Average daily amount of debt
outstanding per share during the
period(1)............................ $0.08 $0.01 $0.17 $0.69 -- -- -- --
<CAPTION>
CLASS B SHARES
-------------------------
SIX MONTHS PERIOD FROM
ENDED JUNE 30, 1993
SEPT. 30, TO MARCH 31,
1987 1986 1985 1994(2) 1994(2)(3)
-------- -------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE INCOME AND CAPITAL CHANGES
FOR A SHARE OUTSTANDING DURING EACH
PERIOD:
Net asset value, beginning of
period............................... $11.18 $ 9.52 $9.26 $8.72 $9.31
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 0.75 0.93 1.02 0.26 0.49
Net realized and unrealized gain
(loss) on investments................ (0.11) 1.87 0.47 (0.46) (0.60)
-------- -------- ------- --------- ---------
Total from Investment Operations...... 0.64 2.80 1.49 (0.20) (0.11)
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (0.75) (0.93) (1.14) (0.28) (0.48)
Distributions from realized gains..... (1.02) (0.21) (0.09) -- --
Distributions in excess of net
investment income.................... -- -- -- (0.02) --
Returns of capital.................... -- -- -- -- --
-------- -------- ------- --------- --------
Total Distributions................... (1.77) (1.14) (1.23) (0.30) (0.48)
-------- -------- ------- --------- --------
Net asset value, end of period........ $10.05 $11.18 $9.52 $8.22 $8.72
======== ======== ======= ========= ========
TOTAL RETURN*......................... 6.51% 31.51% 17.46% (2.37)% (1.51)%
======== ======== ======= ========= ========
RATIOS AND SUPPLEMENTAL DATA
Ratio of operating expenses to average
net assets........................... 1.01% 1.01% 1.01% 1.02% 1.50%
Ratio of interest expense to average
net assets........................... -- -- -- 0.02% --
-------- -------- ------- -------- --------
Ratio of total expenses to average
net assets........................... 1.01% 1.01% 1.01% 1.04% 1.50%
======== ======== ======= ========= ========
Ratio of net investment income to
average net assets................... 7.08% 9.11% 10.97% 3.00% 4.96%
Portfolio turnover.................... 150% 322% 93% 111% 242%
Net Assets, end of period (in
thousands)........................... $161,466 $105,196 $77,999 $7,305 $5,923
Debt outstanding at end of period
(in thousands)(1).................... -- -- -- $14,079 $0
Average daily amount of debt
outstanding during the period (in
thousands)(1)........................ -- -- -- $885 $70
Average monthly number of shares
outstanding during the period
(in thousands)....................... -- -- -- 11,586 11,907
Average daily amount of debt
outstanding per share during the
period(1)............................ -- -- -- $0.08 $0.01
- ---------------
</TABLE>
(1) Debt outstanding consists of reverse repurchase agreements
entered into during the period.
(2) Financial highlights, including total return, have not been annualized.
(3) Portfolio turnover and information regarding debt
outstanding are for the year ended March 31, 1994 and are not
class specific.
* Total return does not include the effect of the initial sales
charge for Class A Shares or the contingent deferred sales charge for
Class B Shares.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to earn a high level of current income,
consistent with prudent risk and safety of principal, primarily through
investing in a diversified portfolio of "investment quality" fixed income
securities. Under normal market conditions, the Fund pursues this objective by
investing at least 65% of the value of its total assets in "investment quality"
fixed income securities, which include: (1) U.S. dollar denominated debt
securities of foreign and U.S. issuers which are issued in or outside of the
U.S. and are rated within the three highest quality ratings (AAA, AA or A by
Standard & Poor's Ratings Group ("Standard & Poor's") or Aaa, Aa or A by Moody's
Investors Service, Inc. ("Moody's")); (2) obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities ("U.S. Government
securities"); and (3) high quality money market instruments including short-term
obligations of the U.S. Government or its agencies, certificates of deposit,
bankers' acceptances (each being of investment grade) and commercial paper rated
at least P-1 by Moody's or A-1 by Standard & Poor's. The meanings of the various
ratings are explained in Appendix A to the Statement of Additional Information.
Non-rated securities will also be considered for investment by the Fund when
John Hancock Advisers, Inc. (the "Adviser") believes that the issuer's financial
condition, or the protection afforded by the terms of the securities themselves,
limits the risk to the Fund to a degree comparable to that of rated securities
consistent with the Fund's objective and policies. Because of the uncertainty
inherent in all investments, no assurance can be given that the Fund will
achieve its investment objective.
- -------------------------------------------------------------------------------
THE FUND SEEKS TO PROVIDE A HIGH LEVEL OF
CURRENT INCOME CONSISTENT WITH PRUDENT
RISK AND SAFETY OF PRINCIPAL, PRIMARILY
THROUGH INVESTING IN A DIVERSIFIED
PORTFOLIO OF "INVESTMENT QUALITY" FIXED
INCOME SECURITIES.
- -------------------------------------------------------------------------------
Up to 35% of the value of the Fund's total assets may be held in cash (for
temporary or liquidity purposes such as pending the investment of proceeds of
sales of Fund shares or sales of its portfolio securities) or invested in (1)
publicly offered fixed income securities which are rated lower than the three
highest ratings described above; (2) U.S. dollar denominated foreign fixed
income securities rated lower than the three highest ratings described above;
(3) non-dollar denominated foreign fixed income securities having quality
standards consistent with the Fund's objective and policies; (4) private
placements of fixed income securities so long as such private placements do not
exceed 20% of the Fund's total assets; (5) unrated securities which are
determined by the Adviser to be comparable in quality to securities rated less
than A so long as such unrated securities do not exceed 20% of the Fund's total
assets; (6) taxable municipal securities rated in the four highest ratings
applicable to such securities; (7) convertible fixed income securities within
the four highest ratings applicable to such securities; or (8) money market
instruments that are not of investment grade or rated A-1 or P-1 so long as such
money market investments do not exceed 5% of the Fund's total assets. The Fund
may, from time to time, own common stocks, warrants or other equity securities
as a result of a conversion feature on convertible fixed income securities or as
a result of their being attached to the fixed income security, but does not
intend to make direct purchases of equity securities other than by conversion or
exercise of convertible securities or warrants. As a non-fundamental investment
policy, the Fund will invest, under normal market conditions, at least 65% of
its total assets in corporate and government bonds both domestic and
4
<PAGE>
foreign. For purposes of this policy, the term "corporate bonds" is deemed to
mean debt obligations of corporate issuers secured by mortgages or liens on the
property or revenues of the issuers.
The Fund is authorized to invest up to 35% of its assets in both domestic and
foreign debt securities which are rated lower than the three highest ratings
assigned by Standard & Poor's or Moody's; however, the Adviser has determined
that in no event will investments in both domestic and foreign securities rated
lower than BBB by Standard & Poor's or Baa by Moody's ("High Yield/High Risk
Securities") exceed 34% of its assets. Bonds rated BBB by Standard & Poor's or
Baa by Moody's, although of investment quality, may have speculative
characteristics as well. The Fund may invest in securities rated as low as "CCC"
by Standard & Poor's or "Caa" by Moody's only where, in the opinion of the
Adviser, the rating does not reflect the true quality of the credit of the
issuer and is determined by the Adviser to be comparable to securities rated at
least "B" and provided that no more than 5% of the Fund's total assets are
invested in such securities. High yield/high risk securities, also known as
"junk bonds", generally involve greater volatility of price and risk of loss of
principal and income than securities in the higher rating categories and such
securities are considered speculative. See "Investments, Techniques and Risk
Factors" for a discussion of the credit ratings of the debt securities in which
the Fund may invest and their associated risks. The percentage and rating
limitations applicable to the Fund's investments apply at the time of
acquisition of a security based upon the last previous determination of the
Fund's net asset value; any subsequent change in any ratings by a rating service
or change in percentages resulting from market fluctuations or other changes in
total assets will not require elimination of any security from the Fund's
portfolio. However, the Adviser will evaluate and monitor the investment to
determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
When in the opinion of the Adviser, adverse market conditions warrant a
defensive posturing of the Fund's assets, the Fund may temporarily invest all or
a significant portion of its assets in money market instruments, including
commercial paper, certificates of deposit, bankers' acceptances and other
short-term obligations of financial institutions having total assets of at least
$500 million, and short-term obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, which may include securities
purchased subject to repurchase agreements (see "Investments, Techniques and
Risk Factors").
The Fund may invest, subject to the limitations described above, in debt
obligations of foreign issuers, including those issued by foreign governments
and supranational entities (such as the "World Bank"). While the Fund is
permitted to invest significantly in foreign securities, it intends to maintain
investment emphasis in debt securities of domestic issuers and has undertaken
that it will not invest more than 50% of its total assets in foreign securities
without having first given prior notice to shareholders. Investing in foreign
securities represents a greater degree of risk than investing in domestic
securities. The Fund may also enter into forward foreign currency exchange
contracts for the purchase or sale of foreign
5
<PAGE>
currency for hedging purposes. See "Investments, Techniques and Risk Factors --
Foreign Securities and Currency Transactions."
Included among domestic debt obligations eligible for purchase by the Fund are
adjustable and/or variable (floating) rate securities, zero coupon bonds,
mortgage related securities (including stripped securities, collateralized
mortgage obligations and multi-class pass through securities), asset-backed
securities and callable bonds. See "Investments, Techniques and Risk Factors."
The Fund will allocate its investments among a number of industries without
concentration in any particular industry.
In pursuing its investment objective, the Fund may, to the extent described
below, purchase and write put and call options on debt securities. In addition,
the Fund may engage in a variety of other techniques in an attempt to protect
against changes in the general level of interest rates. These techniques consist
of the purchase and sale of interest rate futures contracts and options on such
futures. Options and futures contracts derive their value from an underlying
instrument or index and accordingly are known as "derivatives" or "derivative
contracts." These derivative contracts, as well as other types of derivatives
(such as stripped mortgage-backed securities), involve substantial risk
including higher price volatility, liquidity risk and counterparty risk. These
investment techniques and various policies the Fund may employ in seeking to
achieve its investment objective, such as lending its portfolio securities,
entering into repurchase and reverse repurchase agreements, borrowing funds to
invest in securities, and investing in securities of foreign issuers, as well as
high yield/high risk securities, can involve a greater degree of risk than those
inherent in more conservative investment approaches. The Fund will limit its
investments in stripped mortgage-backed securities to 10% of its total assets.
While the Fund is permitted to invest up to 100% of its net assets in other
derivative securities, it does not expect to invest substantially in derivative
securities. See "Investments, Techniques and Risk Factors" for a discussion of
these techniques and their associated risks.
The value of the securities held by the Fund, and therefore the Fund's net asset
value per share, will fluctuate due to various factors, principally interest
rate changes and the ability of the issuers to pay interest and principal of
these obligations. Generally, a rise in interest rates will result in a decrease
in the Fund's net asset value, while a decline in interest rates will result in
an increase in the Fund's net asset value. Therefore, at the time of redemption,
an investor's shares may be worth more or less than their value at the time of
purchase.
The Fund has adopted certain investment restrictions which are enumerated in
detail in the Statement of Additional Information where they are classified as
fundamental or nonfundamental. The Fund's investment objective and fundamental
policies and restrictions may not be changed without the approval of the Fund's
shareholders. The Fund's non-fundamental policies and restrictions, however, may
be changed by a vote of the Trustees without shareholder approval.
Notwithstanding the Fund's fundamental investment restriction prohibiting
investments in other investment companies, the Fund may, pursuant to an order
granted by the SEC, invest in other investment companies in connection with a
deferred compensation plan for the non-interested Trustees of the John Hancock
funds. There can be no assurance that the Fund will achieve its investment
objective.
- -------------------------------------------------------------------------------
THE FUND FOLLOWS CERTAIN POLICIES WHICH
MAY HELP TO REDUCE INVESTMENT RISK.
- -------------------------------------------------------------------------------
6
<PAGE>
The primary consideration in choosing brokerage firms to carry out the Fund's
transactions is execution at the most favorable prices, taking into account the
broker's professional ability and quality of service. Consideration may also be
given to the broker's sales of Fund shares. Pursuant to procedures determined by
the Trustees, the Adviser may place securities transactions with brokers
affiliated with the Adviser. The brokers include Tucker Anthony Incorporated,
Sutro and Company, Inc. and John Hancock Distributors, Inc., which are
indirectly owned by the John Hancock Mutual Life Insurance Company (the "Life
Company"), which in turn indirectly owns the Adviser.
- -------------------------------------------------------------------------------
BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
- -------------------------------------------------------------------------------
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company organized as a Massachusetts business trust. The Trust has six series of
shares, one of which is the Fund. The Trust reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Trustees have
authorized the issuance of two classes of the Fund, designated Class A and Class
B. The shares of each class represent an interest in the same portfolio of
investments of the Fund. Each class has equal rights as to voting, redemption,
dividends and liquidation. However, each class bears different distribution and
transfer agent fees and other expenses. Also, Class A and Class B shareholders
have exclusive voting rights with respect to their distribution plans. The Trust
is not required to and does not intend to hold annual meetings of shareholders,
although special meetings may be held for such purposes as electing or removing
Trustees, changing fundamental policies or approving a management contract. The
Trust, under certain circumstances, will assist in shareholder communications
with other shareholders.
- -------------------------------------------------------------------------------
THE BOARD OF TRUSTEES ELECTS OFFICERS AND
RETAINS THE INVESTMENT ADVISER WHO IS
RESPONSIBLE FOR THE DAY-TO-DAY OPERATIONS
OF THE FUND, SUBJECT TO THE BOARD OF
TRUSTEES' POLICIES AND SUPERVISION.
- -------------------------------------------------------------------------------
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the Life Company, a financial services company. The Adviser provides the Fund,
and other investment companies in the John Hancock group of funds, with
investment research and portfolio management services. John Hancock Funds, Inc.
("John Hancock Funds") distributes shares for all of the John Hancock mutual
funds through brokers which have arrangements with John Hancock Funds ("Selling
Brokers"). Certain Trust officers are also officers of the Adviser and John
Hancock Funds.
- -------------------------------------------------------------------------------
JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING AN AGGREGATE
NET ASSET VALUE OF MORE THAN $13 BILLION.
- -------------------------------------------------------------------------------
All investment decisions for the Fund are made by Mr. James Ho, the Fund's
portfolio manager. Mr. Ho is Senior Vice President of the Adviser. He also
manages the John Hancock Sovereign Bond Fund and directs all taxable fixed
income investment management for the Adviser. He has been associated with the
Adviser since 1985.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by
7
<PAGE>
personnel of the Adviser and its affiliates. Some of these restrictions are:
preclearance for all personal trades and a ban on the purchase of initial public
offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount of your purchase is $1 million or more.
If you purchase $1 million or more of Class A shares, you will not be subject to
an initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price -- Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
- -------------------------------------------------------------------------------
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
those of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will also result in lower dividends than those paid on
Class A shares.
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
Class B shares are not available for full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares, given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider whether,
during the anticipated life of your Fund investment, the CDSC and accumulated
fees on Class B shares would be less than the initial sales charge and
accumulated fees on Class A shares purchased at the same time, and to what
extent this differential would be offset by the Class A shares' lower expenses.
To help you make this determination, the table under the caption "Expense
Information" on the inside cover page of this Prospectus shows examples of the
charges applicable to each class of shares. Class A shares will normally be more
beneficial if you qualify for reduced sales charges. See "Share
Price -- Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
8
<PAGE>
Class A shares are subject to lower distribution fees and, accordingly, pay
correspondingly higher dividends per share, to the extent any dividends are
paid. However, because initial sales charges are deducted at the time of
purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all of your funds invested initially. However, you will
be subject to higher distribution and service fees and, for a six-year period, a
CDSC.
In the case of Class A shares, the distribution expenses that John Hancock Funds
incurs in connection with the sale of the shares will be paid from the proceeds
of the initial sales charge and ongoing distribution and service fees. In the
case of Class B shares, the expenses will be paid from the proceeds of the
ongoing distribution and service fees, as well as from the CDSC incurred upon
redemption within six years of purchase. The purpose and function of the Class B
shares' CDSC and ongoing distribution and service fees are the same as those of
the Class A shares' initial sales charge and ongoing distribution and service
fees. Sales personnel distributing the Fund's shares may receive different
compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They also will be in the same
amount, except for differences resulting from each class bearing only its own
distribution and service fees, shareholder meeting expenses and any incremental
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a monthly fee to
the Adviser which is based on a stated percentage of the Fund's average daily
net assets as follows:
<TABLE>
<CAPTION>
NET ASSET VALUE ANNUAL RATE
--------------- -----------
<S> <C>
First $75,000,000...................................................... 0.6250%
Next $75,000,000....................................................... 0.5625%
Amount over $150,000,000............................................... 0.5000%
</TABLE>
9
<PAGE>
During the Fund's fiscal year ended March 31, 1994, the advisory fee paid by the
Fund to the Fund's former investment adviser was equal to 0.60% of the Fund's
average daily net assets.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans, the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.25% of the Class A shares' average daily
net assets and an aggregate annual rate of 1.00% of the Class B shares' average
daily net assets. In each case, up to 0.25% for Class A and Class B shares is
for service expenses and the remaining amount is for distribution expenses. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; (iii) unreimbursed distribution expenses under the Fund's prior
distribution plans; (iv) distribution expenses incurred by other investment
companies which sell all or substantially all of its assets to, merge or
otherwise engage in a reorganization transaction with the Fund; and (v) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders.
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
In the event John Hancock Funds is not fully reimbursed for payments it makes or
expenses it incurs under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. Unreimbursed expenses under
the Class B Plan will be carried forward together with interest on the balance
of these unreimbursed expenses. At March 31, 1994, an aggregate of $220,993 of
distribution expenses or 5.15% of the average net assets of the Fund's Class B
shares was not reimbursed or recovered by John Hancock Funds, or the Fund's
prior distributor, through the receipt of deferred sales charges or Rule 12b-1
fees in prior periods.
Information on the Fund's total expenses appears in the Financial Highlights
section of this Prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares daily and distributes monthly dividends
representing all or substantially all of its net investment income. The Fund
will distribute net realized long-term and short-term capital gains, if any, at
least annually.
- -------------------------------------------------------------------------------
THE FUND GENERALLY DECLARES DIVIDENDS
DAILY AND DISTRIBUTES THEM MONTHLY.
- -------------------------------------------------------------------------------
Dividends are reinvested in additional shares of your class unless you elect the
option to receive them in cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option. Because of the higher expenses associated with Class B
shares, any dividends on these shares will be lower than those on the Class A
shares. See "Share Price."
10
<PAGE>
TAXATION. Dividends from the Fund's net investment income, certain net foreign
exchange gains and net short-term capital gains are taxable to you as ordinary
income and dividends from the Fund's net long-term capital gains are taxable as
long-term capital gains. These dividends are taxable whether you take them in
cash or reinvest in additional shares. Certain dividends may be paid in January
of a given year but may be taxable as if you received them the previous
December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income or net realized
capital gains that are distributed to its shareholders within the time period
prescribed by the Code. When you redeem (sell) or exchange shares, you may
realize a taxable gain or loss.
The Fund anticipates that it may be subject to foreign withholding taxes or
other foreign taxes on income (possibly including capital gains) on certain
foreign investments, which will reduce the yield or return from such
investments. The Fund generally does not expect to qualify to pass such taxes
and any associated tax deductions or credits through to its shareholders.
On the account application, you must certify that the social security or other
taxpayer identification number you provide is your correct number and that you
are not subject to backup withholding of Federal income tax. If you do not
provide this information or are otherwise subject to this withholding, the Fund
may be required to withhold 31% of your dividends and the proceeds of
redemptions or exchanges.
In addition to Federal taxes, you may be subject to state, local or foreign
taxes with respect to your investment in and distributions from the Fund.
Non-U.S. shareholders and tax-exempt shareholders are subject to different tax
treatment not described above. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent the
Fund's distributions are derived from interest on (or, in the case of
intangibles taxes, the value of its assets is attributable to) certain U.S.
Government obligations, provided in some states that certain thresholds for
holdings of such obligations and/or reporting requirements are satisfied. You
should consult your tax adviser for specific tax advice.
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the Fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL
RETURN.
- -------------------------------------------------------------------------------
The Fund's total return shows the overall dollar or percentage change in value
of a hypothetical investment in the Fund, assuming the reinvestment of all
dividends.
11
<PAGE>
Cumulative total return shows the Fund's performance over a period of time.
Average annual total return shows the cumulative return divided over the number
of years included in the period. Because average annual total return tends to
smooth out variations in the Fund's performance, you should recognize that it is
not the same as actual year-to-year results.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at a lower sales charge would result in
higher performance figures. Total return and yield calculations for Class B
shares reflect the deduction of the applicable CDSC imposed on a redemption of
shares held for the applicable period. All calculations assume that all
dividends are reinvested at net asset value on the reinvestment dates during the
periods. Total return and yield of Class A and Class B shares will be calculated
separately and, because each class is subject to different expenses, the total
return and yield may differ with respect to each class for the same period. The
relative performance of the Class A and Class B shares will be affected by a
variety of factors, including the higher operating expenses attributable to the
Class B shares, whether the Fund's investment performance is better in the
earlier or later portions of the period measured and the level of net assets of
the classes during the period. The Fund will include the total return of Class A
and Class B shares in any advertisement or promotional materials including Fund
performance data. The value of Fund shares, when redeemed, may be more or less
than their original cost. Both yield and total return are historical
calculations and are not an indication of future performance. See "Factors to
Consider in Choosing an Alternative."
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
The minimum initial investment in Class A and Class B shares is $1,000 ($250 for
group investments and retirement plans). Complete the Account Application attached
to this Prospectus. Indicate whether you are purchasing Class A or Class B shares.
If you do not specify which class of shares you are purchasing, Investor Services
will assume that you are investing in Class A shares.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
- -------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services"), P.O. Box 9115, Boston, MA,
02205-9115.
2. Deliver the completed application and check to your registered
representative or Selling Broker or mail it directly to
Investor Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Investment Quality Bond Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative or Selling Broker or mail it directly to
Investor Services.
- ---------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
MONTHLY 1. Complete the "Automatic Investing" and "Bank Information"
AUTOMATIC sections on the Account Privileges Application designating a
ACCUMULATION bank account from which funds may be drawn.
PROGRAM
(MAAP) 2. The amount you elect to invest will be automatically withdrawn
from your bank or credit union account.
- ---------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-By-Phone" and "Bank Information" sections
on the Account Privileges Application designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, your account must be in a bank or credit
union that is a member of the Automated Clearing House system
(ACH).
2. After your authorization form has been processed, you may
purchase additional Class A or Class B shares by calling
Investor Services toll-free 1-800-225-5291.
3. Give the Investor Services representative the name(s) in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
BY CHECK 1. Either complete the detachable stub included on your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
BY WIRE Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Investment Quality Bond Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
- ---------------------------------------------------------------------------------
Other Requirements: All purchases must be made in U.S. dollars. Checks written on
foreign banks will delay purchases until U.S. funds are received, and a collection
charge may be imposed. Shares of the Fund are priced at the offering price based
on the net asset value computed after Investor Services receives notification of
the dollar equivalent from the Fund's custodian bank. Wire purchases normally take
two or more hours to complete and, to be accepted the same day, must be received
by 4:00 P.M., New York time. Your bank may charge a fee to wire funds. Telephone
transactions are recorded to verify information. Certificates are not issued
unless a request is made in writing to Investor Services.
- ---------------------------------------------------------------------------------
</TABLE>
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS THAT
YOU SHOULD KEEP TO HELP WITH YOUR PERSONAL
RECORDKEEPING.
- -------------------------------------------------------------------------------
13
<PAGE>
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV is
calculated by dividing the net assets of each class by the number of outstanding
shares of that class. The NAV of each class can differ. 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
according to procedures approved by the Trustees. Short-term debt investments
maturing within 60 days are valued at amortized cost which the Trustees have
determined approximates market value. Foreign securities are valued on the basis
of quotations from the primary market in which they are traded and are
translated from the local currency into U.S. dollars using current exchange
rates. If quotations are not readily available or, the values have been
materially affected by events occurring after the closing of a foreign market,
assets are valued by a method that the Trustees believes accurately reflects
fair value. The NAV is calculated once daily as of the close of regular trading
on the New York Stock Exchange (generally at 4:00 p.m., New York time) on each
day that the Exchange is open.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE, IF
APPLICABLE, WHICH WILL VARY WITH THE
PURCHASE ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your investment before the close of regular trading on the New York
Stock Exchange and transmit it to John Hancock Funds before its close of
business to receive that day's offering price.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED
SALES CHARGE AS REALLOWANCE REALLOWANCE TO
AMOUNT INVESTED SALES CHARGE AS A PERCENTAGE OF AND SERVICE FEE AS SELLING BROKERS AS
(INCLUDING SALES A PERCENTAGE OF THE AMOUNT A PERCENTAGE OF A PERCENTAGE OF
CHARGE) OFFERING PRICE INVESTED OFFERING PRICE(+) THE OFFERING PRICE(*)
- ------------------- --------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 2.75% 2.83% 2.30% 2.06%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. In addition to the reallowance allowed to all Selling Brokers,
John Hancock Funds will pay the following: round trip airfare to a resort
will be offered to each registered representative of a Selling Broker (if
the Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock Funds. John Hancock Funds will make these incentive
payments out of its own resources. A Selling Broker to whom substantially
the entire sales charge is reallowed or who receives these incentives may
be deemed to be an underwriter under the Securities Act of 1933. Other
than distribution and service fees, the Fund does not bear distribution
expenses.
14
<PAGE>
(**) No sales charge is payable at the time of purchase of Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions within one year of purchase.
(***) John Hancock Funds may pay a commission and the first year's service fee
(as described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of Class A shares of $1 million or more in
aggregate as follows: 1% on sales to $4,999,999, 0.50% on the next $5
million and 0.25% on $10 million and over.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance in an amount equal to 0.25% of the net
assets invested in the Fund at the time of the sale. Thereafter, it pays
the service fee periodically in arrears in an amount up to 0.25% of the
Fund's average annual net assets. Selling Brokers receive the fee as
compensation for providing personal and account maintenance services to
shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
In addition, John Hancock Funds will pay certain affiliated Selling Brokers at
an annual rate of up to 0.05% of the daily net assets of accounts attributable
to these brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge."
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
12 months after the end of the calendar month in which the purchase was made
(the CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on
the amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
--------------- ---------
<S> <C>
$1 million to $4,999,999................................................ 1.00%
Next $5 million to $9,999,999........................................... 0.50%
Amounts of $10 million and over......................................... 0.25%
</TABLE>
Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate.
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the redeemed Class A shares. Accordingly,
no CDSC will be imposed on increases in account value above the initial purchase
price, including any distributions which have been reinvested in additional
shares.
15
<PAGE>
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charges" below.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of funds within the John Hancock
family of funds (except money market funds), you may qualify for a reduced sales
charge on your investments in Class A shares through a LETTER OF INTENTION. You
may also be able to use the ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE
to take advantage of the value of your previous investments in Class A shares of
the John Hancock funds in meeting the breakpoints for a reduced sales charge.
For the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales
charge will be based on the total of:
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN
CLASS A SHARES.
- -------------------------------------------------------------------------------
1. Your current purchase of Class A shares of the Fund.
2. The net asset value (at the close of business on the previous day) of (a) all
Class A shares of the Fund you hold, and (b) all Class A shares of any other
John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$20,000 and, subsequently, invest $80,000 in Class A shares of the Fund, the
sales charge on this subsequent investment would be 3.75% and not 4.50% (the
rate that would otherwise be applicable to investments of less than $100,000.
See "Initial Sales Charge Alternative -- Class A Shares.")
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee or officer of the Fund; a Director or officer of the Adviser and its
affiliates or Selling Brokers; employees or sales representatives of any of
the foregoing; retired officers, employees or Directors of any of the
foregoing; a member of the immediate family of any of the foregoing; or any
fund, pension, profit sharing or other benefit plan for the individuals
described above.
- -------------------------------------------------------------------------------
CLASS A SHARES MAY BE AVAILABLE WITHOUT A
SALES CHARGE TO CERTAIN INDIVIDUALS AND
ORGANIZATIONS.
- -------------------------------------------------------------------------------
- - Any state, county, city or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
- - A bank, trust company, credit union, savings institution or other type of
depository institution, its trust departments or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
16
<PAGE>
- - A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to its clients.
- - A former participant in an employee benefit plan with John Hancock Funds, when
he/she withdraws from his/her plan and transfers any or all of his/her plan
distributions directly to the Fund.
- ------------------
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A shares of the Fund may be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without a sales charge so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates set forth below. This charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
shares being redeemed. Accordingly, you will not be assessed a CDSC on increases
in account value above the initial purchase price, including shares derived from
dividend reinvestment.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends, and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charges"
below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $ 600
- - Minus proceeds of 10 shares not subject to CDSC because they were
acquired through dividend reinvestment (10 X $12) -120
- - Minus appreciation on remaining shares, also not subject to CDSC (40 X
$2) - 80
------
- - Amount subject to CDSC $ 400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of Class B shares, such as
compensating Selling Brokers for selling these shares. The combination of the
CDSC and the distribution and service fees makes it possible for the Fund to
sell Class B shares without deducting a sales charge at the time of the
purchase.
17
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining this holding period, any payments you make
during the month will be aggregated and deemed to have been made on the last day
of the month.
<TABLE>
<CAPTION>
YEAR IN WHICH
CLASS B SHARES CONTINGENT DEFERRED SALES
REDEEMED FOLLOWING CHARGE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT SUBJECT TO CDSC
- ------------------ -----------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in these circumstances:
- - Redemptions of Class B shares made under a Systematic Withdrawal Plan (see
"How to Redeem Shares"), as long as your annual redemptions do not exceed 10%
of your account value at the time you establish your Systematic Withdrawal
Plan and 10% of the value of your subsequent investments (less redemptions) in
that account at the time you notify Investor Services. This waiver does not
apply to Systematic Withdrawal Plan redemptions of Class A shares that are
subject to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON
CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
the life expectancy or the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
18
<PAGE>
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
have less than $100 invested in the Fund.
- - Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- - Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
CONVERSION OF CLASS B SHARES. Your Class B shares and an appropriate portion of
reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur no later than the month following eight years
after the shares were purchased and will result in lower annual distribution
fees.
If you exchanged Class B shares into the Fund from another John Hancock fund,
the calculation will be based on the time you purchased the shares in the
original fund. The Fund has been advised that the conversion of Class B shares
to Class A shares should not be taxable for Federal income tax purposes and
should not change a shareholder's tax basis or tax holding period for the
converted shares.
19
<PAGE>
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to seven days or
longer, as permitted by Federal securities laws.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY TELEPHONE All Fund shareholders are automatically eligible for the
telephone redemption privilege. Call 1-800-225-5291, from 8:00
A.M. to 4:00 P.M. (New York time), Monday through Friday,
excluding days on which the Exchange is closed. Investor Services
employs the following procedures to confirm that instructions
received by telephone are genuine. Your name, the account number,
taxpayer identification number applicable to the account and
other relevant information may be requested. In addition,
telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address on
the account must not have changed for the last thirty days. A
check will be mailed to the exact name(s) and address shown on
the account.
If reasonable procedures, such as those described above, are not
followed, the Fund may be liable for any loss due to unauthorized
or fraudulent telephone instructions. In all other cases, neither
the Fund nor Investor Services will be liable for any loss or
expense for acting upon telephone instructions made in accordance
with the telephone transaction procedures mentioned above.
Telephone redemption is not available for IRAs or other
tax-qualified retirement plans or shares of the Fund that are in
certificated form.
During periods of extreme economic conditions or market changes,
telephone requests may be difficult to implement due to a large
volume of calls. During these times, you should consider placing
redemption requests in writing or use EASI-Line. EASI-Line's
telephone number is 1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the Fund,
redemption proceeds of $1,000 or more can be wired on the next
business day to your designated bank account, and a fee
(currently $4.00) will be deducted. You may also use electronic
funds transfer to your assigned bank account, and the funds are
usually collectible after two business days. Your bank may or may
not charge a fee for this service. Redemptions of less than
$1,000 will be sent by check or electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
IN WRITING Send a stock power or "letter of instruction" specifying the name
of the Fund, the dollar amount or the number of shares to be
redeemed, your name, class of shares, your account number and the
additional requirements listed below that apply to your
particular account.
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
-------------------- ------------
<S> <C> <C>
Individual, Joint Tenants, Sole A letter of instruction signed (with titles
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaran-
teed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signature(s)
guaranteed.
Trusts A letter of instruction signed by the
Trustee(s) with the signature(s) guaranteed.
(If the Trustee's name is not registered on
your account, also provide a copy of the
trust document, certified within the last 60
days.)
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
- ---------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less,
John Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that the institution meets
credit standards established by Investor Services: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or meets certain
net capital requirements; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
- -------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE.
- -------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
- -------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instructions. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds less than $100 (except accounts under retirement plans) and to mail the
proceeds to the shareholder, or the transfer agent may impose an annual fee of
$10.00. No account will be involuntarily redeemed or additional fee imposed if
the value of the account is in excess of the Fund's minimum initial investment
or if the value of the account falls below the required minimum as a result of
market action. No CDSC will be imposed on involuntary redemptions of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
- ---------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Class B shares of the Fund that are subject to a CDSC may be exchanged
into Class B shares of another John Hancock fund without incurring the CDSC;
however, these shares will be subject to the CDSC schedule of the shares
acquired (except that exchanges into John Hancock Short-Term Strategic Income
Fund, John Hancock Limited-Term Government Fund and John Hancock Adjustable U.S.
Government Trust will be subject to the initial fund's CDSC). For purposes of
computing the CDSC payable upon redemption of shares acquired in an exchange,
the holding period of the original shares is added to the holding period of the
shares acquired in an exchange. However, if you exchange Class B shares
purchased prior to January 1, 1994 for Class B shares of any other John Hancock
Fund, you will be subject to the CDSC schedule in effect on your initial
purchase date.
You may exchange Class B shares of the Fund into shares of a John Hancock money
market fund at net asset value. However, you will continue to be subject to the
same CDSC upon redemption.
The Fund reserves the right to require you to keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted to
execute a new exchange. The Fund may also terminate or alter the terms of the
exchange privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
22
<PAGE>
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
-- the name and class of the Fund whose shares you currently own
-- your account number
-- the name(s) in which the account is registered
-- the name of the fund in which you wish your exchange to be invested
-- the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
23
<PAGE>
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares reinvested in
shares of any John Hancock fund that is otherwise subject to a sales charge
as long as you reinvest within 120 days from the redemption date. If you paid
a CDSC upon a redemption, you may reinvest at net asset value in the same
class of shares from which you redeemed within 120 days. Your account will be
credited with the amount of the CDSC previously charged, and the reinvested
shares will continue to be subject to a CDSC. For purposes of computing the
CDSC payable upon a subsequent redemption, the holding period of the shares
acquired through reinvestment will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE FUND, YOU MAY
BE ABLE TO REINVEST ALL OR PART OF THE
PROCEEDS IN THE FUND OR ANOTHER JOHN
HANCOCK FUND WITHOUT PAYING AN ADDITIONAL
SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application by calling your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be automatically withdrawn each month from
your bank for investment in Fund shares under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
24
<PAGE>
2. You can also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program plan at any
time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
RETIREMENT PLANS
1. You may use the Fund as a funding medium for various types of qualified
retirement plans, including Individual Retirement Accounts, Keough Plans
(H.R. 10), Pension and Profit Sharing Plans (including 401(k) Plans), Tax
Sheltered Annuity Retirement Plans (403(b) Plans) and 457 Plans.
2. The initial investment minimum or aggregate minimum for any of the above
plans is $250. However, accounts being established as group IRA, SEP, SARSEP,
TSA, 401(k) and 457 Plans will be accepted without an initial minimum
investment.
INVESTMENTS, TECHNIQUES AND RISK FACTORS
Unless otherwise specified, each of the Fund's investment practices described in
this section is a non-fundamental policy and may be changed by the Trustees
without shareholder approval.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its total
assets in illiquid investments, which include repurchase agreements maturing in
more than seven days, certain over-the-counter options, certain stripped
mortgage-backed securities, certain restricted securities and securities that
are not readily marketable. The Fund may also invest up to 5% of its total
assets in restricted securities, including restricted securities eligible for
resale to certain institutional investors pursuant to Rule 144A under the
Securities Act of 1933. The Fund's limitation regarding restricted securities is
a fundamental policy.
25
<PAGE>
SHORT-TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. Short-term trading may have the effect of
increasing portfolio turnover rate. Short-term trading of fixed-income
securities should not increase direct transaction costs since fixed-income
securities are normally traded on a principal basis without brokerage
commissions. The Fund does not intend to invest for the purpose of seeking
short-term profits. The Fund's portfolio securities may be changed, however,
without regard to the holding period of these securities (subject to certain tax
restrictions), when the Adviser deems that this action will help achieve the
Fund's objective given a change in an issuer's operations or changes in general
market conditions. A rate of turnover of 100% would occur if the value of the
lesser of purchases and sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during the year
(excluding short-term securities). A high rate of portfolio turnover (100% or
more) may, under certain circumstances, make it more difficult for the Fund to
qualify as a regulated investment company under the Code. The Fund's portfolio
turnover rate is set forth in the table under "Financial Highlights."
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS. Although the Fund is permitted to
invest up to (i) 100% of its total assets in U.S. dollar denominated fixed
income securities, and (ii) 35% of its total assets in non-dollar denominated
fixed income securities of foreign governmental and other foreign issuers, the
Fund will not invest in foreign securities exceeding 50% of its assets without
prior notice to shareholders. In addition, it is anticipated that under normal
conditions no more than 35% of its total assets will be invested in foreign
securities issued in developing countries and no more than 25% of the Fund's
total assets will be invested in securities issued by any one foreign country.
Foreign securities involve certain risk not associated with the investment in
securities of U.S. issuers. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be less liquid or
subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the U.S. and foreign
transaction costs are generally higher than those associated with U.S.
investments. In addition, the values of foreign securities may be affected by
application of foreign laws (including withholding taxes), changes in
governmental administration of economic or monetary policy in the U.S. or
diplomatic relations with foreign countries. Finally, in the event of a default
of any such foreign debt obligations, it may be more difficult for the Fund to
obtain or to enforce a judgment against the issuers of such securities.
Investing in the fixed-income markets of developing countries (i.e., those that
are in the initial stages of industrialization cycle) involves
26
<PAGE>
exposure to economic structures that are generally less diverse and mature, and
to political systems that can be expected to have less stability, than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often have provided high
rates of return to investors.
The Fund may purchase foreign currencies on a spot or forward basis in
conjunction with its investments in foreign securities and to hedge against
fluctuations in foreign currencies. The precise matching of foreign currency
exchange transactions and portfolio securities will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities and it is
impossible to forecast with precision the change in market value of portfolio
securities. Currency hedging does not eliminate fluctuations in the underlying
prices of the securities, but rather establishes a rate of exchange at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
Transactions in foreign securities include currency conversion costs. Foreign
brokerage and custodial costs may be higher than in the United States. See
"Foreign Securities" and "Foreign Currency Transactions" in the Statement of
Additional Information for more information about foreign investments.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may buy and sell options contracts
on debt securities and buy and sell financial futures contracts and options on
futures contracts. Options and futures contracts are bought and sold to manage
the Fund's exposure to changing interest rates and security prices. Some options
and futures strategies, including selling futures and calls and buying puts,
tend to hedge the Fund's investment against price fluctuations. Buying futures
and calls and selling puts tend to increase market exposure. However, as a
fundamental policy, the Fund may buy and sell futures contracts and related
options only for hedging purposes. In addition, as a matter of non-fundamental
policy, the Fund will not invest in a put or call option if as a result the
amount of premiums paid for such options then outstanding would exceed 10% of
the Fund's total assets. Options and futures may be combined with each other or
with forward contracts in order to adjust the risk and return characteristics of
the overall strategy. The Fund may invest in options on debt securities and
futures based on securities or indices, including options and futures traded on
an exchange or board of trade and options not traded on exchanges.
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest but may produce capital gains or losses.
27
<PAGE>
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund from investing in
futures contracts and writing options on futures is potentially unlimited. The
Fund's transactions in options and futures contracts may be limited by the
requirements of the Code for qualification as a regulated investment company.
See "Derivative Instruments" in this Prospectus and the Statement of Additional
Information for a further discussion of options and futures transactions,
including tax effects and investment risks.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional income, the Fund may lend to broker-dealers portfolio securities
amounting to not more than 33 1/3% of its total assets taken at current value.
The Fund may also enter into repurchase agreements. In a repurchase agreement,
the Fund buys a security subject to the right and obligation to sell it back to
the issuer at the same price plus accrued interest. These transactions must be
fully collateralized at all times. The Fund may reinvest any cash collateral in
short-term liquid debt securities. However, these transactions may involve some
credit risk to the Fund if the other party should default on its obligation and
the Fund is delayed in or prevented from recovering the collateral. Securities
loaned by the Fund will remain subject to fluctuations of market value.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
REVERSE REPURCHASE AGREEMENTS AND BORROWING. The Fund may enter into reverse
repurchase agreements and borrow money from banks for investment in securities.
Reverse repurchase agreements involve the sale of a security by the Fund to a
bank or securities firm and its agreement to repurchase the instrument at a
specified time and price plus an agreed amount of interest. The Fund will use
the proceeds to purchase other investments. Reverse repurchase agreements are
considered to be borrowings by the Fund and, as an investment practice, may be
considered speculative.
Thus, the Fund will enter into a reverse repurchase agreement only when the
Adviser determines that the interest income to be earned from the investment of
the proceeds is greater than the interest expense and associated risks of the
transaction. To minimize various risks associated with reverse repurchase
agreements, the Fund will establish and maintain with the Custodian a separate
account consisting of cash or liquid, high grade debt securities in an amount at
least equal to the repurchase prices of the securities (plus any accrued
interest thereon) under such agreements. The Fund will not enter into reverse
repurchase agree-
28
<PAGE>
ments exceeding in the aggregate 33 1/3% of the value of its net assets
(including for this purpose other borrowings of the Fund). In addition, the
aggregate amount of borrowings (excluding reverse repurchase agreements), on the
date each borrowing is incurred, may not exceed 20% of the Fund's total assets.
The Fund will enter into reverse repurchase agreements only with selected
registered broker/dealers or with federally insured banks or savings and loan
associations which are approved in advance as being creditworthy by the
Trustees. Under procedures established by the Trustees, the Adviser will monitor
the creditworthiness of the firms involved.
ZERO COUPON BONDS. The Fund may invest in zero coupon U.S. Treasury securities,
such as (1) U.S. Treasury bills, and both notes and bonds which have been
stripped of their unmatured interest coupons and receipts or (ii) certificates
representing interests in such stripped obligations. A zero coupon security pays
no interest in cash to its holder during its life although interest is accrued
currently for federal income tax purposes. Its value to an investor consists of
the difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price). Investing in zero
coupon U.S. Treasury securities may help to preserve capital during periods of
declining interest rates. For example, if interest rates decline, GNMA
Certificates owned by the Fund which were purchased at greater than par are more
likely to be prepaid, which would cause a loss of principal. In anticipation of
this, the Fund might purchase zero coupon U.S. Treasury securities, the value of
which would be expected to increase when interest rates decline. Zero coupon
U.S. Treasury securities do not entitle the holder to any periodic payments of
interest prior to maturity. Accordingly, such securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate the
reinvestment risk and lock in a rate of return to maturity. Current federal tax
law requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund receives no interest payment in cash on the security during
the year. In order to satisfy the income distribution requirements applicable to
regulated investment companies under the Code, the Fund may therefore be
required to obtain cash for distribution corresponding to such accrued income by
selling portfolio securities, possibly under disadvantageous circumstances, or
through borrowing.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent participation
interests in pools of adjustable and fixed mortgage loans which are guaranteed
by agencies or instrumentalities of the U.S. Government. Unlike conventional
debt obligations, mortgage-backed securities provide monthly payments derived
from the monthly interest and principal payments (including any prepayments)
made by the individual borrowers on the pooled mortgage loans. The mortgage
loans underlying mortgage-backed securities are generally subject to a greater
rate of
29
<PAGE>
principal prepayments in a declining interest rate environment and to a lesser
rate of principal prepayments in an increasing interest rate environment. Under
certain interest and prepayment rate scenarios, the Fund may fail to recover the
full amount of its investment in mortgage-backed securities notwithstanding any
direct or indirect governmental or agency guarantee. Since faster than expected
prepayments must usually be invested in lower yielding securities,
mortgage-backed securities are less effective than conventional bonds in
"locking in" a specified interest rate. Conversely, in a rising interest rate
environment, a declining prepayment rate will extend the average life of many
mortgage-backed securities. This possibility is often referred to as extension
risk. Extending the average life of a mortgage-backed security increases the
risk of depreciation due to future increases in market interest rates.
The Fund's investments in mortgage-backed securities may include conventional
mortgage pass-through securities, stripped mortgage-backed securities ("SMBS")
and certain classes of multiple class collateralized mortgage obligations
("CMOs" and "REMICs"). The Fund may acquire "regular" interests in REMICs, but
does not intend to acquire "residual" interests in REMICs. The Fund will not
invest more than 10% of its total assets in SMBS. Examples of SMBS include
interest only and principal only and other illiquid securities. Senior CMO
classes will typically have priority over residual CMO classes as to the receipt
of principal and/or interest payments on the underlying mortgages.
The CMO classes in which the Fund may invest include sequential and parallel pay
CMOs, including planned amortization class ("PAC") and target amortization class
("TAC") securities. The Fund may also invest in the floating rate mortgage-
backed securities listed under "Indexed Securities."
INDEXED SECURITIES. The Fund may invest in indexed securities. The interest
rate or, in some cases, the principal payable at the maturity of an indexed
security may change positively or inversely in relation to one or more interest
rates, financial indices or other financial indicators ("reference prices"). An
indexed security may be leveraged to the extent that the magnitude of any change
in the interest rate or principal payable on an indexed security is a multiple
of the change in the reference price. Thus, indexed securities may decline in
value due to adverse market changes in reference prices.
The indexed securities purchased by the Fund may include interest only ("IO")
and principal only ("PO") securities, floating rate securities linked to the
Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate
securities, floating rate securities that are subject to a maximum interest rate
("capped floaters"), leveraged floating rate securities ("super floaters"),
leveraged inverse floating rate securities ("inverse floaters"), dual index
floaters and range floaters.
RISKS OF MORTGAGE-BACKED AND INDEXED SECURITIES. Different types of derivative
debt securities are subject to different combinations of prepayment, extension,
interest rate and/or other market risks. Conventional mortgage pass-through
securities and sequential pay CMOs are subject to all of these risks, but are
typically not leveraged. PACs, TACs and other senior classes of sequential and
30
<PAGE>
parallel pay CMOs involve less exposure to prepayment, extension and interest
rate risk than other mortgage-backed securities, provided that prepayment rates
remain within expected prepayment ranges or "collars."
The risk of early prepayments is the primary risk associated with mortgage IOs,
super floaters and other leveraged floating rate mortgage-backed securities. The
primary risks associated with COFI floaters, other "lagging rate" floaters,
capped floaters, inverse floaters, POs and leveraged inverse IOs are the
potential extension of average life and/or depreciation due to rising interest
rates. The residual classes of CMOs are subject to both prepayment and extension
risk.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates.
ASSET-BACKED SECURITIES. The Fund may invest in securities that represent
individual interests in pools of consumer loans and trade receivables similar in
structure to mortgage-backed securities. The assets are securitized either in a
pass-through structure (similar to a mortgage pass-through structure) or in a
pay-through structure (similar to the CMO structure). Although the collateral
supporting asset-backed securities generally is of a shorter maturity than
mortgage loans and historically has been less likely to experience substantial
prepayments, no assurance can be given as to the actual maturity of an
asset-backed security because prepayments of principal may be made at any time.
Payments of principal and interest are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or have a priority to certain of the borrower's other
securities. The degree of credit enhancement varies, and generally applies to
only a fraction of the asset-backed security's par value until exhausted. If the
credit enhancement of an asset-backed security has been exhausted, and if any
required payments of principal and interest are not made with respect to the
underlying loans, the Fund may experience losses or delays in receiving
payments.
Asset-backed securities entail certain risk similar to and in addition to those
presented by mortgage-backed securities (as discussed above). Asset-backed
securities do not have the benefit of the same type of security interest in the
related collateral. Credit card receivables are generally unsecured and a number
of state and federal consumer credit laws give debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the outstanding
balance. In the case of automobile receivables, there is a risk that the holders
may not have either a proper or first security interest in all of the
obligations backing such receivables due to a large number of vehicles involved
in a typical issuance and technical requirements under state laws. Therefore,
recoveries on repossessed collateral may not always be available to support
payments on the securities. For a further discussion of the risks of investing
in asset-backed securities, see the Statement of Additional Information. The
Fund will invest in asset-backed securi-
31
<PAGE>
ties only if they are rated at the time of purchase in the two highest grades by
a nationally recognized statistical rating organization.
RISKS ASSOCIATED WITH OPTIONS, FUTURES AND OTHER DERIVATIVE INSTRUMENTS. The
risks associated with the Fund's transactions in options, futures and other
derivative instruments may include some or all of the following:
Market Risk. Options and futures transactions, as well as other derivative
instruments, involve the risk that the applicable market will move against the
Fund's derivative position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund. Investments in
mortgage-backed and indexed securities are subject to the prepayment, extension,
interest rate and other market risks described above.
Leverage and Volatility Risk. Derivative instruments may increase or leverage
the Fund's exposure to a particular market risk, which may increase the
volatility of the Fund's net asset value. The Fund may partially offset the
leverage inherent in derivative instruments by maintaining a segregated account
consisting of cash and liquid, high grade debt securities, by holding offsetting
portfolio securities or currency positions or by covering written options.
Correlation Risk. The Fund's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instruments, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Over-the-counter instruments involve a risk that the issuer or
counterparty will fail to perform its contractual obligations.
Liquidity and Valuation Risk. Some derivative instruments are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, an exchange may suspend or limit
trading in an exchange-traded derivative instrument, which may make the contract
temporarily illiquid and difficult to price. The staff of the SEC takes the
position that certain over-the-counter options are subject to the Fund's 10%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative instruments may depend on the cooperation of the counterparties to
these instruments. For derivative instruments that are not heavily traded, the
only source of price quotations may be the selling dealer or counterparty.
LEVERAGE. The use of mortgage dollar rolls and reverse repurchase agreements
involves leverage. Leverage allows any investment gains made with the additional
monies received (in excess of the costs of the mortgage dollar roll or reverse
repurchase agreement) to increase the net asset value of the Fund's shares
faster than would otherwise be the case. On the other hand, if the additional
monies received are invested in ways that do not fully recover the costs of such
32
<PAGE>
transactions to the Fund, the net asset value of the Fund would fall faster than
would otherwise be the case.
INVESTMENT GRADE SECURITIES. The Fund may invest in securities that are rated
in the lowest category of "investment grade" (BBB by S&P or Baa by Moody's) or
unrated securities of comparable quality. Securities in the lowest investment
grade are considered medium grade obligations and normally exhibit adequate
protection parameters. However, these securities also have speculative
characteristics. Adverse changes in economic conditions or other circumstances
are more likely to lead to weakened capacity to make principal and interest
payments than in the case of higher grade obligations.
LOWER RATED SECURITIES. The Fund may invest in lower rated, dollar and non-
denominated, debt securities. Debt obligations rated in the lower ratings
categories, or which are unrated, involve greater volatility of price and risk
of loss of principal and income. In addition, lower ratings reflect a greater
possibility of an adverse change in financial condition affecting the ability of
the issuer to make payments of interest and principal.
The market price and liquidity of lower rated fixed-income securities generally
respond to short-term economic, corporate and market developments to a greater
extent than do the price and liquidity of higher rated securities, because these
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately the Fund's assets. The reduced availability of
reliable, objective data may increase the Fund's reliance on management's
judgment in valuing the high yield bonds. To the extent that the Fund invests in
lower rated securities, achieving the Fund's objective will depend more on the
Adviser's judgment and analysis than would otherwise be the case. In addition,
the Fund's investments in high yield securities may be susceptible to adverse
publicity and investor perceptions, whether or not justified by fundamental
factors. In the past, economic downturns and increases in interest rates have
caused a higher incidence of default by the issuers of these securities and may
do so in the future, particularly with respect to highly leveraged issuers. The
market prices of zero coupon and payment-in-kind bonds are affected to a greater
extent by interest rate changes and thereby tend to be more volatile than
securities which pay interest periodically and in cash. Increasing rate note
securities are typically refinanced by the issuers within a short period of
time. The Fund accrues income on these securities for tax and accounting
purposes, and this income is required to be distributed to shareholders. Because
no cash is received at the time income accrues on these securities, the Fund may
be forced to liquidate other investments or borrow money to make distributions.
33
<PAGE>
RATINGS OF PORTFOLIO SECURITIES. During the fiscal year ended March 31, 1994,
the Fund's portfolio contained domestic and foreign corporate bonds in the
following rating categories as rated by Standard & Poor's (the percentages
relate to the weighted month-end average value during the fiscal year of the
bonds in each rating category):
<TABLE>
<CAPTION>
RATED
------
<S> <C>
AAA.............................................................. 2.71%
AA............................................................... 10.56%
A................................................................ 17.00%
BBB.............................................................. 21.46%
BB............................................................... 6.88%
B................................................................ 3.58%
CCC.............................................................. 0.32%
CC............................................................... 0%
C................................................................ 0%
D................................................................ 0%
Subtotal......................................................... 62.51%
Plus U.S. Governments............................................ 37.49%
------
Total............................................................ 100%
======
</TABLE>
If a bond was not rated by Standard & Poor's but was rated by Moody's, it is
included in the comparable category. Bonds shown as unrated were not rated by
either Moody's or Standard & Poor's. (The Fund did not hold any unrated
securities at each month end during the fiscal year ended March 31, 1994.) The
Adviser does not rely solely on the ratings of rated securities in making
investment decisions but evaluates other economic and business factors affecting
the issuer as well. The relative proportion of securities in particular rating
categories will fluctuate over time, and the proportions listed above should not
be viewed as representing the Fund's current or future proportionate ownership
of securities in particular categories.
34
<PAGE>
(NOTES)
<PAGE>
JOHN HANCOCK
JOHN HANCOCK INVESTMENT INVESTMENT
QUALITY BOND FUND QUALITY BOND
FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts
02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc. CLASS A AND CLASS B SHARES
101 Huntington Avenue PROSPECTUS
Boston, Massachusetts MAY 15, 1995
02199-7603
A MUTUAL FUND SEEKING
TO OBTAIN A HIGH LEVEL
CUSTODIAN OF CURRENT INCOME
Investors Bank & Trust Company CURRENT CONSISTENT WITH
24 Federal Street PRUDENT RISK AND SAFETY
Boston, Massachusetts 02110 OF PRINCIPAL.
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts
02205-9116
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange call 1-800-225-5291
For Investment-by-Phone
For Telephone Redemption
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
For TDD call 1-800-554-6713 TELEPHONE 1-800-225-5291
T120P 5/95 (LOGO) Printed on Recycled Paper
