<PAGE> 1
John Hancock Funds
- --------------------------------------------------------------------------------
SOVEREIGN
BOND
FUND
ANNUAL REPORT
December 31, 1994
<PAGE> 2
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
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> 3
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> 4
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> 5
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> 6
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> 7
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.
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
<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> 19
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> 20
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> 21
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> 22
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> 23
NOTES
John Hancock Funds - Sovereign Bond Fund
23
<PAGE> 24
[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
