John Hancock Funds
Sovereign
Bond
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
Susan S. Newton
Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
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 James K. Ho, Portfolio Manager
John Hancock
Sovereign Bond Fund
Bond prices lose momentum as the economy
expands and interest rates climb
During the past six months, bond-market sentiment shifted 180 degrees.
When the period began, inflationary pressures were mild and the economy
seemed in no danger of overheating. After two rate cuts in 1995, most
recently in December, many bond-market participants assumed that the
Federal Reserve would continue lowering interest rates into the spring.
Indeed, on January 31, 1996, the Fed lowered the rate banks charge each
other for overnight loans -- known as the federal funds rate -- one-
quarter percentage point, to 5.25%. After a record year in 1995, bond-
market participants looked forward to more of the same.
In retrospect, such optimism was misplaced. An
early indication was Fed chairman Alan Greenspan's testimony before
Congress in mid-February. Greenspan surprised many analysts by saying
that the economy was in no need of further stimulus. Conclusive evidence
arrived several weeks later with the release of the February employment
report, which showed new jobs being created at a rate four times greater
than expected. The result was the biggest one-day drop in bond prices in
more than five years. In the months that followed, it became
increasingly clear that the economy was expanding at a rate that would
preclude further rate cuts. During the first quarter of 1996, the gross
domestic product grew at an annual rate of 2.2% -- close to the Fed's
target rate for sustainable, non-inflationary growth. Though the final
figure is not yet known, all indications at the end of June were that
the growth rate during the second quarter was even higher, perhaps
dramatically so.
"During the past six months,
bond-market sentiment shifted 180 degrees."
A 2 1/4" x 3 3/4" photo of the Fund management team at bottom right.
Caption reads: "James K. Ho (seated) and members of the Fund
management team."
Chart with the heading "Top Five Bond Sectors" at top left hand column.
Chart lists five sectors: 1) U.S. Government & Agencies 30%; 2)
Financials 23%; 3) Utilities 14%; 4) Broadcasting/Communications 9%;
5) Transportation 5%. A footnote below states "As a percentage of
net assets on June 30, 1996."
"...we looked
for opportu-
nities in
so-called
cyclical
sectors of
the economy..."
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
the fund. The drop in prices, however, creates a drag on the fund's
share price. For this reason, bond funds had a hard time delivering
positive total returns (income plus changes in share price) during the
first half of the year. Even so, John Hancock Sovereign Bond Fund fared
better than most of its competitors. The Fund's total return for the six
months ended June 30, 1996 was -1.39% for Class A shares and -1.74% for
Class B shares, respectively, at net asset value. Meanwhile, the average
corporate debt A-rated fund had a total return of -2.32%, according to
Lipper Analytical Services.1 Please see pages six and seven for longer-
term Fund performance information.
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 "Long Island Lighting Company" followed by a down arrow
and the phrase "Surprise credit downgrade." The second listing is
"U.S. Treasury Securities" followed by a down arrow and the phrase
"Economic growth puts pressure on interest rates." The third listing
is "Northwest Airlines" followed by an up arrow and the phrase "Secured
bonds attract investors." Footnote below reads: "See "Schedule of
Investments". Investment holdings are subject to change."
Performance and strategy review
As it became increasingly clear that interest rates had bottomed out, we
became more defensive. For example, we shortened the Fund's average
duration. Duration measures the extent to which a bond's price will
change with changes in interest rates; the longer the duration, the more
volatile the bond. When the period began, the Fund had an average
duration of about 5.3 years; when the period ended, it was less than 4.9
years. Having a shorter-than-average duration at a time when interest
rates were rising was one of the main reasons we were able to outperform
our average competitor. Another factor was that the Fund emphasized
corporate bonds over Treasury securities to a greater extent than most
other funds in our peer group. Corporate bonds, which can improve in
price compared to Treasuries during periods of economic strength,
totaled about two-thirds of the Fund's net assets at the end of the
period.
Emphasis shifts to cyclical sectors
As consumer confidence grew and the nation's economic output increased,
we looked for opportunities in so-called cyclical sectors of the
economy, including paper, steel and air transportation. With the
airlines, we focused on a lesser-known class of securities called
equipment trust lease certificates -- secured loans backed by airplane
leases. As a rule, equipment trust lease certificates carry less credit
risk than ordinary unsecured bonds and therefore have higher credit
ratings. At the same time, they're cheaper because they don't trade as
actively. Top performers in that category included USAir and Northwest
Airlines. We pursued a similar strategy with the Fund's approximately
14% stake in utility bonds. Among our favorite utilities was an Ohio
Edison secured bond backed by a lease on a power plant. Disappointments
included Long Island Lighting Company, which received an unexpected
credit downgrade.
Bar chart with the heading "Fund Performance" at top of the 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 0% at the top and -3% at the bottom. Within the
chart, there are three solid bars. The first represents the -1.39%
total return for John Hancock Sovereign Bond Fund: Class A. The second
represents the -1.74% total return for John Hancock Sovereign Bond
Fund: Class B. The third represents the -2.32% total return for the
average corporate debt A-rated fund. Footnote below reads: "The total
returns for John Hancock Sovereign Bond Fund are at net asset value
with all distributions reinvested. The average corporate debt A-rated
fund is tracked by Lipper Analytical Services. See following page
for historical performance information."
Another way we tried to capitalize on the improving health of the
economy was by placing greater emphasis on high-yield bonds, also known
as junk bonds. Because so much of their value is dependent upon the
credit rating of the issuer, high-yield bonds tend to outperform higher-
quality bonds during periods when the economy is on the upswing. High-
yield bonds totaled about 18% of the Fund's net assets at the end of
June. The Fund also maintained a significant investment in bonds issued
by cable-television providers. Among the top performers was Continental
Cablevision, which received a credit upgrade following the announcement
of plans to merge with US West. As part of our larger effort to make the
Fund more defensive, we exchanged long-term cable securities for medium-
term securities. Finally, nearly 15% of the Fund's net assets were
invested in foreign bonds, mainly banks. European banks outperformed
their U.S. counterparts as growth accelerated on the Continent.
"...speculation
lately has
centered on
when the Fed
will raise
interest
rates, and by
how much."
Outlook
Most bond-market participants have long since stopped waiting for the
next Fed rate cut. Instead, speculation lately has centered on when the
Fed will raise interest rates, and by how much. The question is
complicated by the fact that traditionally, the Fed has been reluctant
to do anything so close to a presidential election. The sooner the Fed
acts, however, the greater chance it has of bringing inflationary
pressures under control. Assuming the Fed doesn't delay, we'd probably
treat a rate increase as an opportunity to buy longer-term securities
and lengthen the Fund's duration. That would follow from our belief that
a rate hike would calm the bond market's inflation fears and set the
stage for bond prices to improve. If, on the other hand, the Fed
postpones taking action until after the election, the first rate
increase may not be the last. In that event, we'd be afraid of extending
the Fund prematurely, and would prefer the added flexibility that comes
with having a shorter duration. In any case, shareholders would probably
do well to base their expectations on the recent modest results rather
than the record-setting pace of 1995.
- -----------------------------------------------------------------------
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 Sovereign Bond 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 4.5% for Class A shares. The effect of the maximum contingent
deferred sales charge for Class B shares (maximum 5.0% and declining to
0% over six years) is included in Class B performance. Performance is
affected by a 12b-1 plan, which commenced on January 1, 1990 and
November 23, 1993 for Class A shares and Class B shares, respectively.
For Class A shares, different sales charge schedules were in effect
prior to September 28, 1989 and are not reflected in the 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 Sovereign
Bond Fund: Class A 0.19% 45.87% 131.91%
John Hancock Sovereign
Bond Fund: Class B (0.78%) 10.44%(1) N/A
AVERAGE ANNUAL TOTAL RETURNS
For the period ended June 30, 1996
One Five Most Recent
Year Years Ten Years
------- ------- ------------
John Hancock Sovereign
Bond Fund: Class A 0.19% 7.84% 8.34%
John Hancock Sovereign
Bond Fund: Class B (0.78%) 3.89%(1) N/A
YIELDS
As of June 30, 1996
SEC 30-Day
Yield
------
John Hancock Sovereign
Bond Fund: Class A 6.45%
John Hancock Sovereign
Bond Fund: Class B(1) 6.05%
Notes to Performance
(1) Class B shares started on November 23, 1993.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Sovereign Bond 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 Corporate Bond Index
- - an unmanaged index that mirrors the investment objectives and
characteristics of the Fund.
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 most recent ten
years. Within the chart are three lines.
The first line represents the value of the Lehman Brothers Corporate Bond
Index and is equal to $26,468 as of June 30, 1996. The second line represents
the value of the hypothetical $10,000 investment made in the Sovereign Bond
Fund on December 31, 1985, before sales charge, and is equal to $24,288 as
of June 30, 1996. The third line represents the Sovereign Bond Fund after
sales charge and is equal to $23,191 as of June 30, 1996.
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.
Within the chart are three lines.
The first line represents the value of the Lehman Brothers Corporate Bond
Index and is equal to $11,418 as of June 30, 1996. 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 $11,344 as of June 30, 1996. The third line represents the Sovereign
Bond Fund after contingent deferred sales charge and is equal to $11,044 as
of June 30, 1996.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
June 30, 1996 (Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Publicly traded bonds (cost - $1,501,342,922) $1,471,374,211
Joint repurchase agreement (cost - $42,978,000) 42,978,000
Corporate savings account 54,291
--------------
1,514,406,502
Receivable for shares sold 622,222
Receivable for investments sold 30,015,876
Interest receivable 27,860,455
Other assets 83,087
--------------
Total Assets 1,572,988,142
- ----------------------------------------------------------------------------------------------
Liabilities:
Payable for variation margin 679,375
Payable for shares repurchased 125,328
Payable for investments purchased 31,448,938
Dividend payable 399,003
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 673,078
Accounts payable and accrued expenses 505,157
--------------
Total Liabilities 33,830,879
- ----------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 1,585,525,045
Accumulated net realized loss on investments
and financial futures contracts (15,192,677)
Net unrealized depreciation of investments (31,143,153)
Distributions in excess of net investment income (31,952)
--------------
Net Assets $1,539,157,263
==============================================================================================
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 - $1,425,899,340 / 97,422,770 $14.64
==============================================================================================
Class B - $113,257,923 / 7,738,223 $14.64
==============================================================================================
Maximum Offering Price Per Share *
Class A - ($14.64 x 104.71%) $15.33
==============================================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and on
group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on June 30, 1996. You'll also
find the net asset value and the maximum offering price per share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
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 $65,868,770
-----------
Expenses:
Investment management fee - Note B 3,893,032
Distribution/service fee - Note B
Class A 2,187,607
Class B 530,381
Transfer agent fee - Note B 1,963,366
Financial services fee -- Note B 140,951
Custodian fee 130,898
Printing 126,991
Trustees' fees 61,773
Legal fee 21,409
Miscellaneous 18,873
Registration and filing fees 18,699
Auditing fees 16,591
-----------
Total Expenses 9,110,571
- ----------------------------------------------------------------------------------------------
Net Investment Income 56,758,199
- ----------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts
Net realized loss on investments sold (6,737,176)
Net realized gain on financial futures contracts 32,057
Change in net unrealized appreciation/depreciation
of investments (72,784,620)
Change in net unrealized appreciation/depreciation
of financial futures contracts (1,180,156)
-----------
Net Realized and Unrealized Loss
on Investments and Financial
Futures Contracts (80,669,895)
- -----------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ($23,911,696)
===============================================================================================
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $111,800,337 $56,758,199
Net realized gain (loss) on investments sold and
financial futures contracts 9,875,400 (6,705,119)
Change in net unrealized appreciation/depreciation
of investments 140,081,956 (73,964,776)
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 261,757,693 (23,911,696)
-------------- --------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($1.1151 and $0.5449 per share, respectively) (107,383,916) (53,281,212)
Class B - ($1.0221 and $0.4926 per share, respectively) (4,389,308) (3,508,939)
Class C** - ($0.4338 and none per share, respectively) (27,113) --
-------------- --------------
Total Distributions to Shareholders (111,800,337) (56,790,151)
-------------- --------------
From Fund Share Transactions - Net* 115,957,978 (14,083,430)
-------------- --------------
Net Assets:
Beginning of period 1,368,027,206 1,633,942,540
-------------- --------------
End of period (including distributions
in excess of net investment income of
none and $31,952, respectively) $1,633,942,540 $1,539,157,263
============== ==============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
CLASS A
Shares sold 8,319,081 $123,160,717 5,658,736 $84,250,321
Shares issued in reorganization -- Note D 5,218,646 78,550,023 -- --
Shares issued to shareholders in reinvestment
of distributions 5,650,757 83,509,985 2,768,023 41,112,857
----------- ------------ ----------- ------------
19,188,484 285,220,725 8,426,759 125,363,178
Less shares repurchased (14,896,492) (219,827,040) (10,695,429) (159,255,041)
----------- ------------ ----------- ------------
Net increase (decrease) 4,291,992 $65,393,685 (2,268,670) ($33,891,863)
=========== =========== =========== ===========
CLASS B
Shares sold 3,520,133 $52,253,097 3,409,591 $50,693,024
Shares issued in reorganization -- Note D 493,051 7,421,307 -- --
Shares issued to shareholders in reinvestment
of distributions 181,534 2,696,476 138,015 2,047,792
----------- ------------ ----------- ------------
4,194,718 62,370,880 3,547,606 52,740,816
Less shares repurchased (681,957) (10,100,167) (2,221,030) (32,932,383)
----------- ------------ ----------- ------------
Net increase 3,512,761 $52,270,713 1,326,576 $19,808,433
=========== =========== =========== ===========
CLASS C**
Shares sold -- --
Shares issued to shareholders in reinvestment
of distributions -- --
----------- -----------
-- --
Less shares repurchased (120,133) ($1,706,420)
----------- -----------
Net decrease (120,133) ($1,706,420)
=========== ===========
**All Class C shares were redeemed on May 22, 1995.
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 last two periods, along with the corresponding
dollar values.
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 $14.33 $15.31 $15.29 $15.53 $13.90 $15.40
---------- ---------- ---------- ---------- ---------- ----------
Net Investment Income 1.29 1.20 1.14 1.12 1.12 0.54
Net Realized and Unrealized Gain
(Loss) on Investments
and Financial Futures Contracts 0.98 (0.01) 0.62 (1.55) 1.50 (0.76)
---------- ---------- ---------- ---------- ---------- ----------
Total from Investment Operations 2.27 1.19 1.76 (0.43) 2.62 (0.22)
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income (1.29) (1.21) (1.14) (1.12) (1.12) (0.54)
Distributions from Net Realized
Gain on Investments Sold
and Financial Futures Contracts -- -- (0.38) (0.08) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (1.29) (1.21) (1.52) (1.20) (1.12) (0.54)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period $15.31 $15.29 $15.53 $13.90 $15.40 $14.64
========== ========== ========== ========== ========== ==========
Total Investment Return at Net Asset Value (1) 16.59% 8.08% 11.80% (2.75%) 19.40% (1.39%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $1,249,980 $1,386,260 $1,505,754 $1,326,058 $1,535,204 $1,425,899
Ratio of Expenses to Average Net Assets 1.27% 1.44% 1.41% 1.26% 1.13% 1.12%(5)
Ratio of Net Investment Income to Average
Net Assets 8.81% 7.89% 7.18% 7.74% 7.58% 7.30%(5)
Portfolio Turnover Rate 90% 87% 107% 85% 103%(7) 60%
SIX MONTHS ENDED
JUNE 30, 1996
1993(2) 1994 1995 (UNAUDITED)
---------- ---------- ---------- ----------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 15.90(3) $15.52 $13.90 $15.40
---------- ---------- ---------- ----------
Net Investment Income 0.11 1.04 1.02 0.49
Net Realized and Unrealized Gain
(Loss) on Investments
and Financial Futures Contracts -- (1.54) 1.50 (0.76)
---------- ---------- ---------- ----------
Total from Investment Operations 0.11 (0.50) 2.52 (0.27)
---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income (0.11) (1.04) (1.02) (0.49)
Distributions from Net Realized
Gain on Investments Sold
and Financial Futures Contracts (0.38) (0.08) -- --
---------- ---------- ---------- ----------
Total Distributions (0.49) (1.12) (1.02) (0.49)
---------- ---------- ---------- ----------
Net Asset Value, End of Period $15.52 $13.90 $15.40 $14.64
========== ========== ========== ==========
Total Investment Return at Net
Asset Value (1) 0.90%(4) (3.13%) 18.66% (1.74%)(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $4,125 $40,299 $98,739 $113,258
Ratio of Expenses to Average
Net Assets 1.63%(5) 1.78% 1.75% 1.82%(5)
Ratio of Net Investment Income to
Average Net Assets 0.57%(5) 7.30% 6.87% 6.60%(5)
Portfolio Turnover Rate 107% 85% 103%(7) 60%
PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, MAY 22, 1995
1993 1994 (UNAUDITED)
---------- ---------- ----------
CLASS C (6)
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 15.86(3) $15.52 $13.90
---------- ---------- ----------
Net Investment Income 0.81 1.19 0.42
Net Realized and Unrealized Gain
(Loss) on Investments
and Financial Futures Contracts 0.04 (1.54) 0.91
---------- ---------- ----------
Total from Investment Operations 0.85 (0.35) 1.33
---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income (0.81) (1.19) (0.43)
Distributions from Net Realized
Gain on Investments Sold
and Financial Futures Contracts (0.38) (0.08) --
---------- ---------- ----------
Total Distributions (1.19) (1.27) (0.43)
---------- ---------- ----------
Net Asset Value, End of Period $15.52 $13.90 $14.80
========== ========== ==========
Total Investment Return at Net
Asset Value (1) 5.45%(4) (2.19%) 9.73%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $867 $1,670 $142
Ratio of Expenses to Average
Net Assets 0.90%(5) 0.73% 0.67%(5)
Ratio of Net Investment Income
to Average Net Assets 4.90%(5) 8.28% 7.82%(5)
Portfolio Turnover Rate 107% 85% N/A
(1) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(2) Class B shares commenced operations on November 23, 1993.
(3) Initial price to commence operations.
(4) Not annualized.
(5) Annualized.
(6) Class C shares commenced operations on May 7, 1993. Net asset value and net assets at
the end of the period reflect amounts prior to the redemption
of all shares on May 22, 1995.
(7) Portfolio turnover excludes merger activity.
The Financial Highlights summarizes the impact of the following factors on a single share for
the period indicated: net investment income, gains (losses), dividends and total investment
return of the Fund. It shows how the Fund's net asset value for a share has changed since the
end of the previous period. Additionally, important relationships between some items presented
in the financial statements are expressed in ratio form.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION
Schedule of Investments
June 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Sovereign Bond
Fund on June 30, 1996. It's divided into two main categories: publicly traded bonds and short-term
investments. Publicly traded bonds are further broken down by industry group. Short-term investments,
which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------------------------------------------ ------------ ------------------- -------------
<S> <C> <C> <C> <C>
PUBLICLY TRADED BONDS
Aerospace (0.40%)
Jet Equipment Trust Ser 95B2,
Cert 08-15-14 (R) 10.91% BB+ $5,800 $6,111,460
-------------
Banks (10.43%)
ABN Amro Bank N.V. - Chicago Branch,
Global Bond 05-31-05 7.250 AA- 5,000 4,984,700
Abbey National First Capital,
Sub Note 10-15-04 8.200 AA- 10,000 10,564,300
African Development Bank,
Sub Note 12-15-03 9.750 AA- 8,000 9,219,040
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 9.750 AA- 8,925 10,152,187
Den Danske Bank Aktieselskab,
Sub Note 06-15-05 (R) 7.250 A- 10,000 9,889,600
First Interstate Bancorp.,
Sub Note 05-01-97 12.750 BBB+ 3,250 3,419,585
First Nationwide Holdings, Inc.,
Sr Note 04-15-03 12.500 B 7,500 7,818,750
International Bank For Reconstruction & Development,
Deb 09-01-16 8.250 AAA 5,000 5,463,150
Deb 07-15-17 9.250 AAA 19,050 22,802,278
Midland American Capital Corp.,
Deb 11-15-03 12.750 A 19,932 22,516,782
National Westminster Bank PLC - New York Branch,
Sub Note 05-01-01 9.450 AA- 10,000 11,033,600
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 10.125 A+ 10,605 12,292,998
Scotland International Finance No. 2 B.V.,
Gtd Sub Note 11-01-06 (R) 8.850 A 10,250 11,295,029
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 10.360 A 6,000 6,836,040
Sub Note 11-15-00 11.500 A 6,400 7,456,320
Westdeutsche Landesbank Girozentrale - New York Branch,
Sub Note 06-15-05 6.750 AA+ 5,000 4,837,850
-------------
160,582,209
-------------
Broadcasting (6.03%)
Cablevision Systems Corp.,
Sr Sub Note 05-15-06 9.875% B 6,500 6,272,500
Century Communications Corp.,
Sr Sub Deb 10-15-03 11.875 B+ 9,000 9,562,500
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 BBB+ 6,000 6,203,760
Sr Sub Deb 06-01-07 11.000 BBB 12,205 13,700,112
Jones Intercable, Inc.,
Sr Sub Deb 07-15-04 11.500 B+ 9,500 10,331,250
Le Groupe Videotron Ltee,
Sr Note 02-15-05 10.625 BB+ 1,750 1,828,750
Lenfest Communications, Inc.,
Sr Sub Note 06-15-06 (R) 10.500 BB- 4,750 4,797,500
Rogers Cablesystems Ltd.,
Sr Sec Second Priority Note Ser B 03-15-05 10.000 BB+ 9,000 8,865,000
SFX Broadcasting, Inc.,
Sr Sub Note 05-15-06 (R) 10.750 B- 4,200 4,163,250
TKR Cable I, Inc.,
Sr Deb 10-30-07 10.500 BBB- 11,000 12,058,750
TeleWest PLC,
Sr Deb 10-01-06 9.625 BB 3,500 3,421,250
Viacom, Inc.,
Sr Note 06-01-05 7.750 BB+ 5,750 5,606,365
Sub Deb 07-07-06 8.000 BB- 6,580 6,020,700
-------------
92,831,687
-------------
Cosmetics & Toiletries (0.40%)
Johnson & Johnson,
Deb 11-15-23 6.730 AAA 6,750 6,216,412
-------------
Energy (0.29%)
AES Corp.,
Sr Sub Note 07-15-06 10.250 B+ 4,500 4,516,875
-------------
Finance (8.54%)
Aames Mortgage Trust,
Class A-1C Mtg Pass-Thru Ctf Series 1996-B 04-15-24 7.625 AAA 5,800 5,854,375
American Express Co.,
Gtd Deb Ser D 12-12-00 11.625 A+ 8,670 9,433,654
Banc One Credit Card Master Trust,
Class A Asset Backed Ctf Ser 1994-B 12-15-99 7.550 AAA 10,000 10,175,000
CIT Group Holdings, Inc. (The),
Sub Cap Medium Term Note 03-15-01 9.250 A 5,000 5,455,000
CS First Boston,
Sub Note 05-15-06 (R) 7.750 A3 10,000 10,067,000
Chrysler Financial Corp.,
Deb 11-01-99 12.750 A- 3,000 3,514,950
Green Tree Home Improvement Loan Trust,
Class M-1 Ser 1995-D 09-15-25 6.950% Aa2 6,130 5,984,412
Class HEA-4 Ser 1996-C 06-15-26 7.800 AAA 7,000 7,085,313
IMC Home Equity Loan Trust,
Class A-5 Ser 1996-1 12-25-13 6.290 AAA 6,816 6,522,060
MBNA Master Credit Card Trust,
Class A Ser 1995-D 11-15-02 6.050 AAA 16,000 15,634,880
Merrill Lynch Mortgage Investors, Inc.,
Class B Sub Bond Ser 1992-B 04-15-12 8.500 Aa3 2,969 3,031,160
Money Store Home Equity Trust (The),
Class A-14 Ser 1996-B 04-15-12 7.350 AAA 4,000 4,040,000
Santander Financial Issuances Ltd.,
Sub Gtd Note 04-15-05 7.875 A+ 10,000 10,289,400
Standard Credit Card Master Trust,
Class A Ser 1995-2 01-07-02 8.625 AAA 11,500 11,640,070
Class A Ser 1995-9 10-07-07 6.550 AAA 5,000 4,765,600
Standard Credit Card Trust 93,
Ser A 09-07-03 5.950 AAA 13,010 12,213,138
UCFC Acceptance Corp.,
Class A-7 Home Equity Ln Pass-Thru Ctf Ser 1996-B1 09-15-27 8.200 AAA 5,700 5,811,327
-------------
131,517,339
-------------
Foods (0.34%)
Nabisco Inc.,
Note 04-15-99 8.300 BBB 5,000 5,168,100
-------------
Glass Products (0.52%)
Owens-Illinois, Inc.,
Sr Deb 12-01-03 11.000 BB 7,500 8,062,500
-------------
Gold Mining & Processing (1.00%)
Magma Copper Co.,
Sr Sub Note 12-15-01 12.000 A 14,250 15,373,185
-------------
Governmental - Foreign (3.82%)
Nova Scotia, Province of,
Deb 05-15-13 11.500 A- 10,655 11,954,697
Deb 04-01-22 8.750 A- 7,500 8,347,875
Ontario, Province of,
Deb 11-05-11 17.000 AA- 3,750 4,128,788
Deb 08-31-12 15.250 AA- 6,595 7,589,724
Deb 04-25-13 11.750 AA- 6,000 6,777,720
Quebec, Province of,
Deb 10-01-13 13.000 A+ 11,000 12,813,460
Deb 09-15-14 13.250 A+ 1,000 1,215,000
Saskatchewan, Province of,
Deb 12-15-20 9.375 A- 5,000 5,955,300
-------------
58,782,564
-------------
Governmental - U.S. (20.75%)
United States Treasury,
Bond 08-15-17 8.875% AAA 69,675 83,653,199
Bond 05-15-18 9.125 AAA 47,075 57,938,969
Bond 02-15-23 7.125 AAA 49,775 50,311,575
Note 11-15-96 7.250 AAA 700 704,487
Note 05-15-98 9.000 AAA 48,520 50,968,804
Note 11-30-99 7.750 AAA 33,700 35,090,125
Note 05-15-01 8.000 AAA 23,002 24,453,886
Note 02-15-05 7.500 AAA 15,495 16,301,205
-------------
319,422,250
-------------
Governmental - U.S. Agencies (9.04%)
Federal Home Loan Mortgage Corp.,
30 Yr Pass Thru Ctf 01-01-16 11.250 AAA 1,801 2,008,021
Federal National Mortgage Association,
15 Yr SF Pass Thru Ctf 01-25-05 8.000 AAA 10,000 10,400,000
15 Yr SF Pass Thru Ctf 02-01-08 7.500 AAA 3,181 3,204,245
30 Yr SF Pass Thru Ctf 10-01-23 7.000 AAA 8,971 8,662,589
Financing Corp.,
Bond 02-08-18 9.400 AAA 7,000 8,532,370
Government National Mortgage Association,
30 Yr SF Pass Thru Ctf 11-15-23 To 12-15-23 7.000 AAA 7,712 7,428,470
30 Yr SF Pass Thru Ctf 02-15-24 To 02-15-26 7.500 AAA 17,221 17,018,978
30 Yr SF Pass Thru Ctf 09-15-22 To 10-15-25 8.000 AAA 25,781 26,070,247
30 Yr SF Pass Thru Ctf 12-15-22 To 04-15-23 8.500 AAA 23,027 23,724,284
30 Yr SF Pass Thru Ctf 07-15-16 To 01-15-25 9.000 AAA 20,732 21,861,956
30 Yr SF Pass Thru Ctf 11-15-19 To 05-15-21 9.500 AAA 6,135 6,579,896
30 Yr SF Pass Thru Ctf 01-15-19 To 03-15-25 10.000 AAA 2,915 3,176,662
30 Yr SF Pass Thru Ctf 01-15-16 10.500 AAA 175 192,245
30 Yr SF Pass Thru Ctf 01-15-16 11.000 AAA 291 322,968
-------------
139,182,931
-------------
Healthcare (0.29%)
Dynacare, Inc.,
Sr Note 01-15-06 10.750 B+ 4,500 4,511,250
-------------
Insurance (4.31%)
Conseco, Inc.,
Sr Note 12-15-04 10.500 BBB- 6,000 6,861,300
Equitable Life Assurance Society of the United States (The),
Surplus Note 12-01-05 (R) 6.950 A 6,050 5,792,875
Fairfax Financial Holdings Ltd.,
Note 04-15-26 8.300 BBB+ 4,700 4,637,772
Liberty Mutual Insurance Co.,
Surplus Note 05-04-07 (R) 8.200 A+ 10,000 10,458,400
Massachusetts Mutual Life Insurance Co,
Surplus Note 11-15-23 (R) 7.625 AA 10,450 10,097,626
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) 7.500% AA 17,800 16,612,028
Sun Canada Financial Co.,
Note 12-15-07 (R) 6.625 AA 7,250 6,784,695
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 A- 5,000 5,071,100
-------------
66,315,796
-------------
Leisure & Recreation (0.48%)
Mohegan Tribal Gaming Authority,
Sr Sec Note 11-15-02 (R) 13.500 NR 1,500 1,882,500
Showboat Marina Casino/Finance,
1st Mtg 03-15-03 (R) 13.500 B 5,000 5,425,000
-------------
7,307,500
-------------
Medical/Dental (0.56%)
Fisher Scientific International, Inc.,
Note 12-15-05 7.125 BBB 9,000 8,559,450
-------------
Oil & Gas (1.18%)
Ashland Oil, Inc.,
SF Deb 10-15-17 11.125 BBB 5,000 5,507,000
Norsk Hydro AS
Deb 06-15-23 7.750 A 2,000 2,003,040
TransTexas Gas Corp.,
Sr Sec Note 06-15-02 11.500 BB- 10,750 10,696,250
-------------
18,206,290
-------------
Paper (2.26%)
APP International Finance Co.,
Gtd Sec Note 10-01-05 11.750 BB 4,500 4,612,500
Georgia Pacific Corp.,
Deb 01-15-18 9.750 BBB- 7,500 7,853,775
Repap New Brunswick,
Sr Note 04-15-05 10.625 B+ 4,250 3,995,000
Riverwood International USA, Inc.,
Sr Sub Note 04-01-08 10.875 B 6,250 6,156,250
S.D. Warren Co.,
Sr Sub Note 12-15-04 12.000 B+ 6,700 7,068,500
Stone Consolidated,
Sr Sec Note 12-15-00 10.250 BB+ 5,000 5,156,250
-------------
34,842,275
-------------
Publishing (2.32%)
News America Holdings, Inc.,
Sr Deb 08-10-18 8.250 BBB 5,000 4,924,650
Sr Note 10-15-99 9.125 BBB 7,500 7,982,325
Sr Note 12-15-01 12.000 BBB 8,700 9,437,238
Time Warner Inc.,
Deb 01-15-13 9.125 BBB- 12,750 13,315,845
-------------
35,660,058
-------------
R E I T (0.26%)
Trinet Corp Realty Trust,
Note 05-15-01 7.30% BBB- 4,000 3,986,400
-------------
Retail (0.42%)
Safeway Stores, Inc.,
Deb 01-15-09 13.500 BBB- 2,609 2,882,761
Smith's Food & Drug Centers, Inc.,
Sr Sub Note 05-15-07 11.250 B- 3,500 3,517,500
-------------
6,400,261
-------------
Steel (1.58%)
Imexsa Export Trust 96-1,
Pass Thru Cert 05-31-03 (R) 10.125 BA2 3,125 3,136,719
NS Group, Inc.,
Unit (Sr Sec Note 07-15-03 & Warrant) 13.500 B- 3,150 3,055,500
Republic Engineered Steel,
1st Mtg 12-15-01 9.875 B 4,750 4,417,500
UCAR Global Enterprises, Inc.,
Sr Sub Note 01-15-05 12.000 BB- 4,150 4,710,250
Weirton Steel Corp.,
Sr Note 03-01-98 11.500 B 3,700 3,885,000
Sr Note 10-15-99 10.875 B 2,550 2,664,750
Sr Note 07-01-04 (R) 11.375 B 2,500 2,452,200
-------------
24,321,919
-------------
Telecommunications (1.03%)
British Telecom Finance, Inc.,
Gtd Deb 02-15-19 9.625 AAA 9,000 9,918,180
TCI Communications, Inc.,
Sr Deb 08-01-15 8.750 BBB- 6,000 5,897,280
-------------
15,815,460
-------------
Textiles (0.30%)
Polysindo International Finance Co. B.V.,
Gtd Sec Note 06-15-06 11.375 BB- 4,500 4,590,000
-------------
Tobacco (0.71%)
RJR Nabisco, Inc.,
Note 12-01-02 8.625 BBB- 10,725 10,875,043
-------------
Transportation (4.74%)
NWA, Inc.,
Note 08-01-96 8.625 B+ 14,165 14,165,000
Northwest Airlines Corp.,
Pass Thru Cert Ser 1996-1C 01-02-05 10.150 BB+ 4,200 4,347,000
Pass Thru Cert Ser 1996-1D 01-02-15 8.970 BBB- 3,825 3,993,300
Rail Car Trust,
Class A Pass Thru Ser 1992-1 06-01-04 7.750 AAA 16,353 16,870,230
Scandinavian Airlines System,
Deb 07-20-99 9.125 A3 6,834 7,252,583
Sea-Land Service, Inc.,
Deb Ser A 01-02-11 10.600% BBB+ 5,000 5,319,850
Deb Ser B 01-02-11 10.600 BBB+ 7,000 7,447,790
Deb Ser C 01-02-11 10.600 BBB+ 6,000 6,383,820
US Air, Inc.,
Pass Thru Ctf Ser 90-A1 03-19-05 11.200 B+ 7,194 7,175,944
-------------
72,955,517
-------------
Utilities (13.60%)
British Columbia Hydro And Power Auth.,
Bond Ser FJ 11-15-11 15.500 AA+ 1,081 1,189,078
Bond Ser FN 09-01-13 12.500 AA+ 6,175 7,112,735
CE Casecnan Water & Energy Co., Inc.,
Sr Note 11-15-05 (R) 11.450 BB 5,000 5,075,000
CTC Mansfield Funding Corp.,
Sec Lease Oblig 09-30-16 11.125 B+ 17,270 17,703,822
Calpine Corp., Inc.,
Sr Note 05-15-06 (R) 10.500 B 7,650 7,669,125
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BB 9,000 8,872,740
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 B+ 9,624 10,040,815
Empresa Electrica Pehuenche S.A.,
Note 05-01-03 7.300 BBB+ 5,250 5,226,900
First PV Funding Corp.,
Deb Ser 86-A 01-15-14 10.300 B+ 3,000 3,180,000
Deb Ser 86-B 01-15-16 10.150 B+ 14,001 14,736,052
GG1B Funding Corp.,
Sec Lease Oblig 01-15-11 7.430 BBB- 8,227 7,832,299
GTE Corp.,
Deb 11-15-17 10.300 BBB+ 8,725 9,558,237
Deb 11-01-20 10.250 BBB+ 6,875 7,809,175
Hydro-Quebec,
Deb Ser IF 02-01-03 7.375 A+ 7,185 7,276,178
Deb Ser FU 02-01-12 11.750 A+ 5,000 6,790,600
Deb 02-01-21 9.400 A+ 7,000 8,113,560
Iberdrola International B.V.,
Note 10-01-02 7.500 AA- 8,000 8,100,000
Sr Note 06-01-03 (R) 7.125 AA- 8,629 8,650,572
Long Island Lighting Co.,
Deb 03-15-03 7.050 BB+ 7,315 6,614,808
Gen Ref Mtg 05-01-21 9.750 BBB- 6,075 6,241,091
Gen Ref Mtg 07-01-24 9.625 BBB- 6,000 6,150,780
Louisiana Power & Light Co.,
Sec Lease Oblig Bond Ser B 01-02-17 10.670 BBB- 10,000 10,702,600
Midland Cogeneration Venture,
Deb Ser C-91 07-23-02 10.330% BB- 12,783 13,470,152
Midland Funding Corp. II,
Deb 07-23-05 11.750 B- 1,650 1,723,590
System Energy Resources, Inc.,
1st Mtg 09-01-96 10.500 BBB- 10,870 10,951,525
Sec Lease Oblig 01-15-14 8.200 BBB- 3,000 2,780,221
Tenaga Nasional Berhad,
Note 06-15-04 (R) 7.875 A+ 5,500 5,687,825
-------------
209,259,480
-------------
TOTAL PUBLICLY TRADED BONDS
(COST $1,501,342,922) (95.60%) 1,471,374,211
======== =============
<CAPTION>
PAR VALUE
INTERES (000'S MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ---------------------------- ------- ------- -------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS
Joint Repurchase Agreement (2.79%)
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% through 7.75% Due 08-15-96 through
11-15-01; U.S. Treasury Bonds, 7.25% Due
05-15-16 and 7.50% Due 11-15-16)
Note A 5.50% $42,978 $42,978,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 54,291
TOTAL SHORT-TERM INVESTMENTS (2.79%) 43,032,291
------- --------------
TOTAL INVESTMENTS (98.39%) $1,514,406,502
======= ==============
NOTES TO THE SCHEDULE OF INVESTMENTS
(R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933.
Such securities may be resold, normally to qualified institutional buyers, in transactions exempt
from registration. Rule 144A securities amounted to $141,119,504 as of June 30, 1996. See note A
of the Notes to Financial Statements for valuation policy.
* Credit ratings are rated by Moody's Investor Services or John Hancock Advisers, Inc. where
Standard and Poor's ratings are not available.
The percentage shown for each investment category is the total value of that category as a
percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
(UNAUDITED)
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 investment objective of the Fund is to generate a high
level of current income, consistent with prudent investment risk,
through investment in a diversified portfolio of freely marketable debt
securities.
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. Class C shares were outstanding in the prior fiscal
year during the period from January 1, 1995 through May 22, 1995.
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
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 $20,654,741 of a capital
loss carryovers available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforwards are used
by the Fund, no capital gain distributions will be made. The
carryforwards expire as follows: December 31, 1996 -- $1,909,995,
December 31, 1998 -- $755,945, December 31, 2000 -- $10,107,031,
December 31, 2001 -- $1,711,432 and December 31, 2002 -- $6,170,338.
Expired capital loss carryforwards are reclassified to capital paid-in
in he year of expiration. Of the capital loss carryovers expiring in
1996, 1998, 2000 and 2001, $1,909,995, $755,945, $10,107,031 and
$1,711,432, respectively, were acquired on 9/15/95 in the merger with
John Hancock Investment Quality Bond Fund. Their availability may be
limited in a given year. Additionally, net capital losses of $846,680
attributable to security transactions occurring after October 31, 1995
are treated as arising on the first day (January 1, 1996) of the Fund's
current taxable year.
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. 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. 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.
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.
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.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates
and other market conditions. At the time the Fund enters into a
financial futures contract, it will be required to deposit with its
custodian a specified amount of cash or U.S. government securities,
known as "initial margin". 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 positions because of
position limits or limits on daily price fluctuations imposed by an
exchange.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures
transactions.
At June 30, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- -------- -------------- -------- --------------
SEPT 1996 360 U.S. TREASURY BOND SHORT ($750,000)
SEPT 1996 410 U.S. TREASURY NOTE SHORT (430,156)
------------
($1,180,156)
============
At June 30, 1996, the Fund has deposited in a segregated account
$1,352,500 par value of U.S. Treasury Note, 9.00%, 5-15-98 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. For the period ended
June 30, 1996, JH Funds received net sales charges of $1,454,885 with
regard to sales of Class A shares. Out of this amount, $139,883 was
retained and used for printing of prospectuses, advertising, sales
literature and other purposes, and $446,711 was paid as sales
commissions and first year service fees to unrelated broker-dealers and
$868,291 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"), 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 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 June 30, 1996, contingent deferred
sales charges received by JH Funds amounted to $134,508.
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 Class A average daily net assets and 1.00%
of Class B average daily net assets, to reimburse JH Funds for its
distribution and service costs. Up to a maximum of 0.25% of these
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, Corp. ("Investor Services"), a wholly-owned subsidiary of The
Berkeley Financial Group. The Fund pays transfer agent fees 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 reimburse the Adviser
for compensation and related expenses incurred in connection with tax
and financial management services for the Fund.
Messrs. Edward J. Boudreau, Jr. and Richard S. Scipione and Ms. Anne C.
Hodsdon 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 investment to cover the deferred compensation
had unrealized appreciation of $5,714.
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 June 30, 1996, aggregated
$467,914,922 and $489,153,556, respectively. Purchases and proceeds from
sales of obligations of the U.S. government and its agencies, during the
period ended June 30, 1996, aggregated $449,740,950 and $459,599,665,
respectively.
The cost of investments owned at June 30, 1996 (excluding the corporate
savings account) for Federal income tax purposes was $1,544,320,922.
Gross unrealized appreciation and depreciation of investments aggregated
$17,122,357 and $47,091,068, respectively, resulting in net unrealized
depreciation of $29,968,711.
NOTE D --
REORGANIZATION
On September 8, 1995, the shareholders of John Hancock Investment
Quality Bond Fund (JHIQBF) approved a plan of reorganization between
JHIQBF and the Fund providing for the transfer of substantially all of
the assets and liabilities of JHIQBF to the Fund in exchange solely for
Class A shares and Class B shares of the Fund. The acquisition was
accounted for as a tax free exchange of 5,218, 646 Class A shares, and
493,051 Class B shares of John Hancock Sovereign Bond Fund for the net
assets of JHIQBF, which amounted to $78,550,023 and $7,421,307 for Class
A and Class B shares, respectively, including $730,736 of unrealized
appreciation, after the close of business at September 15, 1995.
NOTES
John Hancock Funds - Sovereign Bond Fund
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NOTES
John Hancock Funds - Sovereign Bond Fund
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210SA 6/96 8/96
