John Hancock Funds
Limited-
Term
Government
Fund
SEMI-ANNUAL REPORT
June 30, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Gail D. Fosler*
Bayard Henry*
Anne C. Hodsdon
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
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
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
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in
the mutual fund industry. At that time, Securities and Exchange
Commission Chairman Arthur Levitt called on fund companies to
make their prospectuses more user-friendly. He noted that prospectuses
are often overloaded with technical detail and are hard for most
investors to understand. Many industry observers agreed, and rightly so.
So it is my pleasure to let you know that John Hancock Funds has
introduced the first in a series of new prospectuses. Covering the John
Hancock growth funds, the new prospectus made its debut on July 1 after
being under development for a year. It is simplified, using shorter,
clearer language with a streamlined design, and consolidated,
incorporating several funds with similar investment objectives into one
document. We are excited about our new prospectus because we believe it
is a bold but sensible step forward. And while it is easier to read, it
still complies with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page
spread highlighting each fund's goals and investment strategy, the types
of securities it buys, its portfolio management and risk factors, all in
plainer language. Fund expenses and financial highlights are now found
here, too, as is a new bar chart that shows year-to-year volatility for
each fund. Other features include a better presentation of fund
services, a new glossary of investment risks and a discussion about how
funds are organized, including a diagram showing the connection of the
various players that provide services to your Hancock fund(s).
In the coming months, we will introduce similar prospectuses for our
growth and income, income, tax-free income, international/global and money
market funds. We believe we have made a significant advancement in the
drive toward better mutual fund prospectuses. We hope you will agree
because in the end, we did it for you, our shareholders.
Sincerely,
/S/EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By Barry Evans, Portfolio Manager
John Hancock
Limited-Term
Government Fund
Economy's strength stirs inflation concerns,
hammering bond market in first half of '96
So far this year, the bond market hasn't gotten any satisfaction. As
1996 began, investors expected a balanced Federal budget, a slow growth
economy, falling interest rates and low inflation, all factors the bond
market would have loved. But early on Congress dashed hopes for a
balanced budget deal, causing bond prices to tumble. Then in March the
release of stronger-than-expected employment numbers spooked the market
again. Soon it was clear: the economy had done an about-face and was
continuing to show unexpected strength. As inflation fears resurfaced,
investors pushed up bond yields and waited for the Federal Reserve to
raise short-term interest rates.
Nearly all sectors of the bond market felt the pinch. Long-term yields
climbed from 5.95% to 6.87%, with the benchmark 30-year Treasury losing
8.10%. At the same time, short-term yields jumped from 5.18% to 6.11%,
with the two-year Treasury rising only 1.20%. Mortgage securities, which
usually do better than Treasuries in a rising-rate environment, posted
even more modest results. During the first half of the year, the Merrill
Lynch Mortgage Index returned 0.21%.
"So far this
year, the bond
market hasn't
gotten any
satisfaction"
A 2 1/4" x 3 1/2" photo of Fund management team at bottom right.
Caption reads "(l-r) Barry Evans, Roger Hamilton, Seth Robbins".
A pie chart with the heading "Portfolio Diversification" at top
of left hand column. The chart is divided into five sections.
Going from top left to right: U.S. Gov't Agencies 10%; U.S.
Treasuries 43%; Short-Term Investments & Other 1%; Collateralized
Mortgage Obligations 29%; Adjustable-Rate Mortgage-Backed Securities
17%. A footnote states "As a percentage of net assets on June 30, 1996."
"...our strat-
egy was to
own bonds
with a yield
advantage
over
Treasuries..."
A look at performance
People often wonder why good economic news spells bad bond news. It's
because a faster-growing economy raises concerns about inflation and
rising interest rates. And a rise in interest rates hurts bond prices,
since the two move in opposite directions. But even when bond prices
fall, bond fund shareholders still receive income from the bonds held by
their fund. The drop in bond prices, however, creates a drag on the
fund's share price. For this reason, bond funds had a hard time
delivering significantly positive returns (income plus changes in share
price) during the first half of the year. John Hancock Limited-Term
Government Fund was no exception. For the six months ended June 30,
1996, the Fund's Class A and Class B shares had total returns of 0.11%
and -0.36%, respectively, at net asset value. By comparison, the average
U.S. short-intermediate government bond fund returned -0.17%, according
to Lipper Analytical Services.1 Please see pages six and seven for
longer-term Fund performance information.
The short-intermediate government bond fund category is a new one for
the Fund and for Lipper, which recently divided its old short-term
government bond fund category into short and short-intermediate groups.
Our Fund is one of the shorter maturity funds in the short-intermediate
group, which gives us a slight advantage in times of rising rates and a
slight disadvantage when rates are falling.
Changes in asset allocation and duration
To weather the rising-rate environment, our strategy was to own bonds
with a yield advantage over Treasuries and to lower interest-rate risk.
The most significant changes we made were to the Fund's asset
allocation. We sold longer-term Treasuries and government agency bonds
- -- mostly those with 10-year maturities. As a result, our stake in
agencies fell to 10%, down from 29% six months earlier. We also took
profits in our adjustable rate mortgages (ARMs).
We used the proceeds to buy both short-term Treasuries with maturities
of less than one year and short-maturity collateralized mortgage
obligations (CMOs). CMOs separate the cash flows of mortgage pools into
classes with various maturities and risk levels. Our focus was on the
most conservative CMOs, which have slightly more interest rate risk than
Treasuries because of the possibility that the underlying mortgages
could be refinanced early if interest rates drop. Even though they
aren't directly guaranteed by the U.S. government, the collateral of
these CMOs is guaranteed by several government agencies as to timely
payment of interest and principal. The bottom line is that they are
still very conservative, while helping boost the Fund's yield. Our stake
in CMOs grew to 29%, up from 20%. At the same time, our Treasury stake
went to 43%, up from 30% six months earlier.
We also shortened the Fund's duration, starting in mid-February.
Duration measures how sensitive bonds are to changes in interest rates.
The shorter a bond's duration, the less its price will fall as interest
rates rise. (By contrast, the longer a bond's duration, the more its
price will rise as interest rates fall.) The Fund's duration ended in
June at 1.8 years, down from two years.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote "For the six months ended June 30, 1996."
The chart is scaled in increments of 1% from top to bottom, with 1% at the
top and -1% at the bottom. Within the chart, there are three solid bars.
The first represents the 0.11% total return for John Hancock Limited-Term
Government Fund: Class A. The second represents the -0.36% total return
for John Hancock Limited-Term Government Fund: Class B. The third represents
the -0.17% total return for average short-intermediate government bond
fund. A footnote below reads: "The total returns for John Hancock
Limited-Term Government Fund are at net asset value with all distributions
reinvested. The average short-intermediate government fund is tracked by
Lipper Analytical Services. See following page for historical performance
information."
"...near term,
we'll maintain
the Fund's
below-average
duration..."
While 1.8 years is probably a neutral duration, the Fund is actually
behaving as if its duration were even shorter. That's because 60% of its
investments are in mortgage bonds of some type. Unlike Treasuries, these
bonds carry prepayment risk. This is the risk that as interest rates are
falling homeowners will refinance and pay off their old mortgages before
their due dates, forcing bond holders to invest at a lower rate.
Mortgage bonds reward investors for taking on this added risk by paying
higher yields. As a result, they tend to be less sensitive to changes in
interest rates.
Bumpy ride still ahead
The economy continues to chug along at a nice clip, which is surprising
given that the average economic expansion in the United States has
lasted only 45 months. By the end of June, the current expansion was 63
months old. A longer-than-average expansion coupled with unusually low
unemployment makes the environment ripe for a rise in inflation.
Although there have been no signs of inflation in either the consumer
price index or the producer price index, bond investors have already
factored higher inflation into bond prices.
We expect the Federal Reserve to raise short-interest rates some time
this year to slow economic growth. This would be positive for the bond
market, which has already anticipated a rate increase. Plus, we don't
expect the Fed will have to raise rates much to put the brakes on the
economy. A lot of what has been driving consumer spending -- this
spring's surge in refinancing activity, hefty tax refunds, and declining
mortgage rates -- is over. In addition, consumer debt levels are at
record highs. So it's quite possible consumer spending will slow of its
own accord. That in turn should slow the economy.
But until the Fed moves or the economy shows signs of slowing, the bond
market will most likely remain volatile. So near term, we'll maintain
the Fund's below-average duration and higher-than-average stake in bonds
that offer a yield premium to Treasuries. We may also decrease our
investment in ARMs in favor of short-term Treasuries. As 30-year fixed-
rate mortgages look less attractive and more people start buying ARMs,
supply will increase. That could hurt the value of ARMs. Only when the
Fed rate hike is over and the economy is showing signs of slowing will
we think about extending duration again.
- ----------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
1 Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Limited-Term
Government Fund. Total return is a performance measure that equals the
sum of all income and capital gain distributions, assuming reinvestment
of these distributions and the change in the price of the Fund's net
asset value per share. Performance figures include the maximum
applicable sales charge of 3% for Class A shares. The effect of the
maximum contingent deferred sales charge for Class B shares (maximum 3%
and declining to 0% over four years) is included in Class B performance.
Performance is affected by a 12b-1 plan, which commenced on January 1,
1990 for Class A shares and January 3, 1994 for Class B shares.
Different sales charge schedules for Class A shares were in effect prior
to May 1, 1993 and are not reflected in the above performance
information. Remember that all figures represent past performance and
are no guarantee of how the Fund will perform in the future. Also, keep
in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or
less than their original cost, depending on when you sell them.
CUMULATIVE TOTAL RETURNS
For the period ended June 30, 1996
One Five Most Recent
Year Years Ten Years
-------- -------- -------------
John Hancock Limited-Term
Government Fund: Class A 0.57% 30.34% 78.37%
John Hancock Limited-Term
Government Fund: Class B (1) (0.10%) 6.20% N/A
AVERAGE ANNUAL TOTAL RETURNS
One Five Most Recent
Year Years Ten Years
-------- -------- -------------
John Hancock Limited-Term
Government Fund: Class A 0.57% 5.44% 5.96%
John Hancock Limited-Term
Government Fund: Class B(1) (0.10%) 2.44% N/A
YIELDS
As of June 30, 1996
SEC 30-Day
Yield
------------
John Hancock Limited-Term
Government Fund: Class A 4.96%
John Hancock Limited-Term
Government Fund: Class B 4.42%
Notes to Performance
Notes to Performance
(1)Class B shares started on January 3, 1994.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Limited-Term Government Fund would be worth on June 30, 1996,
assuming you have been invested and have reinvested all distributions
for the entire time periods presented in the graphs. For comparison,
we've shown the same $10,000 investment in the Lehman Brothers
Intermediate-Term Government Fund Index -- an unmanaged index made up of
the Treasury Bond Index and the Agency Bond Index, which cover
intermediate issues. The same $10,000 investment is also shown in the
Lehman Brothers One- to Three-Year Government Fund Index, which is a
subindex composed of Agency and Treasury Securities with maturities of
one- to three-years.
Limited-Term Government Fund
Class A shares
Line chart with the heading Limited-Term Government Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the
most recent ten years. Within the chart are four lines.
The first line represents the value of the Lehman Brothers Intermediate-Term
Government Fund Index and is equal to $22,825 as of June 30, 1996. The
second line represents the value of the Lehman Brothers One-to-Three-Year
Government Index and is equal to $21,294 as of June 30, 1996. The third
line represents the value of the hypothetical $10,000 investment made
in the Limited-Term Government Fund on December 31, 1985, before sales
charge, and is equal to $19,996 as of June 30, 1996. The fourth line
represents the Limited-Term Government Fund after sales charge and is
equal to $19,388 as of June 30, 1996.
Limited-Term Government Fund
Class B shares
Line chart with the heading Limited-Term Government Fund: Class B,
representing the growth of a hypothetical $10,000 investment over
the life of the fund. Within the chart are four lines.
The first line represents the value of the Lehman Brothers One-to-Three-Year
Government Index and is equal to $11,301 as of June 30, 1996. The second
line represents the value of the Lehman Brothers Intermediate-Term
Government Fund Index and is equal to $11,240 as of June 30, 1996.
The third line represents the value of the hypothetical $10,000 investment
made in the Limited-Term Government Fund on January 3, 1994, before
contingent deferred sales charge, and is equal to $10,820 as of June
30, 1996. The fourth line represents the Limited-Term Government Fund
after contingent deferred sales charge and is equal to $10,620 as of
June 30, 1996.
<TABLE>
<CAPTION>
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 June 30, 1996. You'll
also find the net asset value and the maximum offering price per share as
of that date.
Statement of Assets and Liabilities
June 30, 1996 (Unaudited)
- ---------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
United States government and agencies obligations
(cost - $190,065,745) $188,510,367
Joint repurchase agreement (cost - $402,000) 402,000
------------
188,912,367
Receivable for shares sold 1,032
Interest receivable 2,129,512
Other assets 8,372
------------
Total Assets 191,051,283
- ---------------------------------------------------------------------------
Liabilities:
Dividend payable 32,145
Temporary overdraft of cash 101,163
Payable for shares repurchased 5,528
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 196,803
Accounts payable and accrued expenses 91,037
------------
Total Liabilities 426,676
- ---------------------------------------------------------------------------
Net Assets:
Capital paid-in 200,260,734
Accumulated net realized loss on investments (8,065,493)
Net unrealized depreciation of investments (1,554,502)
Distributions in excess of net investment income (16,132)
------------
Net Assets $190,624,607
===========================================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $180,753,908 / 21,276,772 $8.50
===========================================================================
Class B - $9,870,699 / 1,162,262 $8.49
===========================================================================
Maximum Offering Price Per Share*
Class A - ($8.50 x 103.09%) $8.76
===========================================================================
* 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.
See notes to financial statements.
</TABLE>
<TABLE>
<CPATION>
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
Six months ended June 30, 1996 (Unaudited)
<S> <C>
Investment Income:
Interest $6,915,173
------------
Expenses:
Investment management fee - Note B 597,021
Transfer agent fee - Note B 380,059
Distribution/service fee - Note B
Class A 282,720
Class B 52,636
Printing 24,363
Custodian fee 18,768
Registration and filing fees 18,454
Financial services fee - Note B 17,915
Auditing fee 17,352
Trustees' fees 10,363
Miscellaneous 4,693
Legal fees 3,618
------------
Total Expenses 1,427,962
- ---------------------------------------------------------------------------
Net Investment Income 5,487,211
- ---------------------------------------------------------------------------
Realized and Unrealized Loss on Investments:
Net realized loss on investments sold (779,453)
Change in net unrealized appreciation/depreciation
of investments (4,682,023)
------------
Net Realized and Unrealized
Loss on Investments (5,461,476)
- ---------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $25,735
===========================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1996
DECEMBER 31, 1995 (UNAUDITED)
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $12,261,116 $5,487,211
Net realized gain (loss) on
investments sold 18,754 (779,453)
Change in net unrealized appreciation/
depreciation of investments 10,474,785 (4,682,023)
------------ ------------
Net Increase in Net Assets Resulting
from Operations 22,754,655 25,735
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.4956 and $0.2378
per share, respectively) (11,820,582) (5,248,592)
Class B - ($0.4463 and $0.2077
per share, respectively) (440,534) (254,751)
------------ ------------
Total Distributions to
Shareholders (12,261,116) (5,503,343)
------------ ------------
From Fund Share Transactions - Net* (27,003,981) (13,344,160)
------------ ------------
Net Assets:
Beginning of period 225,956,817 209,446,375
------------ ------------
End of period (including distributions
in excess of none and $16,132, respectively) $209,446,375 $190,624,607
============ ============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1996
DECEMBER 31, 1995 (UNAUDITED)
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
CLASS A
Shares sold 5,589,248 $48,212,989 2,731,164 $23,666,526
Shares issued to shareholders in
reinvestment of distributions 1,175,325 10,108,924 528,283 4,529,368
------------ ------------ ------------ ------------
6,764,573 58,321,913 3,259,447 28,195,894
Less shares repurchased (10,330,451) (88,597,139) (4,746,351) (40,935,259)
------------ ------------ ------------ ------------
Net decrease (3,565,878) ($30,275,226) (1,486,904) ($12,739,365)
============ ============ ============ ============
CLASS B
Shares sold 4,230,179 $36,444,892 1,609,966 $13,803,624
Shares issued to shareholders in
reinvestment of distributions 39,700 341,783 22,805 195,482
------------ ------------ ------------ ------------
4,269,879 36,786,675 1,632,771 13,999,106
Less shares repurchased (3,891,751) (33,515,430) (1,704,116) (14,603,901)
------------ ------------ ------------ ------------
Net increase (decrease) 378,128 $3,271,245 (71,345) ($604,795)
============ ============ ============ ============
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------------------ JUNE 30, 1996
1991 1992 1993 1994 1995 (UNAUDITED)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.61 $8.97 $8.77 $8.80 $8.31 $8.73
-------- -------- -------- -------- -------- --------
Net Investment Income 0.67 0.54 0.48 0.38(1) 0.50(1) 0.24
Net Realized and Unrealized Gain
(Loss) on Investments 0.36 (0.18) 0.14 (0.49) 0.42 (0.23)
-------- -------- -------- -------- -------- --------
Total from Investment Operations 1.03 0.36 0.62 (0.11) 0.92 0.01
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.67) (0.54) (0.48) (0.38) (0.50) (0.24)
Distributions from Net Realized
Gain on Investments Sold -- (0.02) (0.11) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.67) (0.56) (0.59) (0.38) (0.50) (0.24)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $8.97 $8.77 $8.80 $8.31 $8.73 $8.50
======== ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value(2) 12.54% 4.19% 7.13% (1.31%) 11.23% 0.11%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $211,322 $259,170 $262,903 $218,846 $198,681 $180,754
Ratio of Expenses to Average
Net Assets 1.44% 1.55% 1.51% 1.41% 1.36% 1.40%(5)
Ratio of Net Investment Income
to Average Net Assets 7.72% 6.13% 5.34% 4.39% 5.76% 5.55%(5)
Portfolio Turnover Rate 134% 185% 175% 155% 105% 39%
SIX MONTHS ENDED
JUNE 30, 1996
1994(3) 1995 (UNAUDITED)
-------- -------- --------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.77 $8.31 $8.73
-------- -------- --------
Net Investment Income 0.30(1) 0.45(1) 0.21
Net Realized and Unrealized
Gain (Loss) on Investments (0.46) 0.42 (0.24)
-------- -------- --------
Total from Investment
Operations (0.16) 0.87 (0.03)
-------- -------- --------
Less Distributions:
Dividends from Net
Investment Income (0.30) (0.45) (0.21)
-------- -------- --------
Net Asset Value, End
of Period $8.31 $8.73 $8.49
======== ======== ========
Total Investment Return at
Net Asset Value(2) (1.84%)(4) 10.60% (0.36%)(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) $7,111 $10,765 $9,871
Ratio of Expenses to Average
Net Assets 2.12%(5) 1.93% 2.10%(5)
Ratio of Net Investment Income
to Average Net Assets 3.70%(5) 5.21% 4.83%(5)
Portfolio Turnover Rate 155% 105% 39%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(3) Class B shares commenced operations on January 3, 1994.
(4) Not annualized.
(5) Annualized.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
June 30, 1996 (Unaudited)
- -----------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Limited-Term Government Fund on June 30, 1996. It's divided into two main
categories: U.S. government and agencies securities and short-term investments.
Short-term investments, which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST MATURITY (000'S MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Governmental - U.S. (43.44%)
United States Treasury,
Note 8.000% 10/15/96 $24,000 $24,172,560
Note 9.000 5/15/98 5,000 5,252,350
Note 7.750 1/31/00 23,500 24,494,990
Note 8.500 11/15/00 26,800 28,889,596
------------
82,809,496
------------
Governmental - U.S. Agencies (55.45%)
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 8.500 06-01-06 to 8,010 8,285,077
37,802
CMO REMIC 1204-G 7.000 11/15/05 6,681 6,768,570
CMO REMIC 1419-F Var Rate # 5.800 11/15/97 20,830 20,790,509
Federal National Mortgage Association,
30 Yr ARM # 8.000 3/1/22 1,422 1,466,598
CMO REMIC 1991-159-C 7.000 10/25/04 16,703 16,901,536
CMO REMIC G-29-N 8.500 6/25/07 10,000 10,196,800
Note Series SM 2004-J 8.250 10/12/04 10,000 10,235,900
Government National Mortgage Association,
30 Yr Adj Rate # 7.000 10/20/24 22,669 23,016,057
30 Yr Adj Rate # 6.000 9/20/25 7,957 8,039,824
------------
105,700,871
------------
TOTAL U.S. GOVERNMENT AND
AGENCIES SECURITIES
(COST $190,065,745) (98.89%) 188,510,367
-------- ------------
<CAPTION>
PAR VALUE
INTEREST (000'S MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
------------ ------------ ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement ( .21% )
Investment in a joint repurchase agreement transaction
with Toronto Dominion Bank, Ltd., Dated 06-28-96, Due 07-01-96
(secured by U.S. Treasury Bills, 5.38% Due 12-12-96 and 5.69%
Due 06-26-97; U.S. Treasury Notes, 4.375% thru 7.75% Due
08-15-96 thru 11-15-01; U.S. Treasury Bonds, 7.25%
Due 05-15-16 and 7.50% Due 11-15-16) - Note A 5.500% $402 $402,000
------------
TOTAL SHORT-TERM INVESTMENTS (0.21%) 402,000
-------- ------------
TOTAL INVESTMENTS (99.10%) $188,912,367
======== ============
# Represents rate in effect on June 30, 1996.
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.
</TABLE>
Notes to financial statements.
John Hancock Funds - Limited-Term Government Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Limited-Term Government Fund (the "Fund") is a diversified
open-end management investment company, registered under the Investment
Company Act of 1940. The investment objective of the Fund is to provide
current income and security of principal through investments primarily
in securities of the United States government and its agencies.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A and Class B shares. The shares of
each class represent an interest in the same portfolio of investments of
the Fund and have equal rights to voting, redemptions, dividends, and
liquidation, except that certain expenses subject to the approval of the
Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under 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
investments maturing within 60 days are valued at amortized cost which
approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, may participate in a joint repurchase
agreement. Aggregate cash balances are invested in one or more
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $7,286,040 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 gains distributions will be made. The
carryforward expires December 31, 2002.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment
securities is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principals. 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 calculated 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 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.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund.
NOTE B --
MANAGEMENT FEE, AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.60% of the
first $250,000,000 of the Fund's average daily net asset value, (b)
0.55% of the next $250,000,000, and (c) 0.50% of the Fund's average
daily net asset value in excess of $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, 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. For the period ended
June 30, 1996, net sales charges received with regard to sales of Class
A shares amounted to $134,992. Out of this amount, $15,085 was retained
and used for printing prospectuses, advertising, sales literature and
other purposes, $46,133 was paid as sales commissions to unrelated
broker dealers and $73,774 was paid as sales commissions to sales
personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker
Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc.
("Sutro"), all of which are broker dealers. 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.
Class B shares which are redeemed within four years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 3.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended June 30, 1996, contingent deferred
sales charges paid to JH Funds amounted to $11,632.
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 to JH Funds for distribution and service expenses, at an annual
rate not to exceed 0.30% of Class A average daily net assets and 1.00%
of Class B average daily net assets to reimburse JH Funds for its
distribution/service costs. Up to a maximum of 0.25% of such payments
may be service fees as defined by the amended Rules of Fair Practice of
the National Association of Securities Dealers. Under the amended Rules
of Fair Practice, curtailment of a portion of the Fund's 12b-1 payments
could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. The Fund pays Investor Services a fee
based on the number of shareholder accounts and certain out-of-pocket
expenses.
On March 5, 1996, the Board of Trustees approved retroactively to
January 1, 1996, an agreement with the Adviser to perform necessary tax
and financial management services for the Funds. The compensation for
1996 is estimated to be at an annual rate of 0.01875% of the average net
assets of each Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are directors and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. Effective with the fees paid
for 1995, the unaffiliated Trustees may elect to defer for tax purposes
their receipt of this compensation under the John Hancock Group of Funds
Deferred Compensation Plan. The Fund makes investments into other John
Hancock funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. At
June 30, 1996, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $876.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of the
U.S. government and its agencies, other than short-term securities,
during the period ended June 30, 1996, aggregated $98,137,854 and
$118,045,330, respectively.
The cost of investments owned at June 30, 1996 for federal income tax
purposes was $190,467,745. Gross unrealized appreciation and
depreciation of investments aggregated $1,326,656 and $2,882,034,
respectively, resulting in net unrealized depreciation of $1,555,378.
A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the
page. A box sectioned in quadrants with a triangle in upper left, a circle
in upper right, a cube in lower left and a diamond in lower right. A tag
line below reads "A Global Investment Management Firm."
101 Huntington Avenue, Boston, MA 02199-7603
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Randolph, MA
Permit No. 75
This report is for the information of shareholders of the John Hancock
Limited-Term Government Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
A recycled logo in lower left hand corner with caption "Printed on
Recycled Paper."
220SA 6/96
8/96
