John Hancock Funds
Sovereign
Bond
Fund
ANNUAL REPORT
December 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way Ste 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
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:
Most analysts agree that the Social Security system will run out of
money by the year 2030 unless Congress makes some changes. Although it
seems a long way off, the issue is serious enough that at least one
group has already studied the problem, and experts and politicians alike
have weighed in with a slew of prescriptions. Legislative action could
be in the offing in 1997.
The problem stems from demographic and societal changes. The number
of retirees collecting Social Security is growing rapidly, while the
number of workers supporting the system is shrinking. Consider this: in
1950, there were 16 workers paying into the Social Security system for
each retiree collecting benefits. Today, there are three workers for
each retiree and by 2019 there will be two. Starting then, the Social
Security Administration estimates that the amount paid out in Social
Security benefits will start to be greater than the amount collected in
Social Security taxes. Compounding the issue is the fact that people are
retiring earlier and living longer.
The state of the system has already left many people, especially younger
and middle-aged workers, feeling insecure about Social Security. A
recent survey by the Employee Benefits Research Institute (EBRI) found
that 79% of current workers polled had little confidence in the ability
of Social Security to maintain the same level of benefits as those
received by today's retirees. Instead, they said they expect
to use their own savings or employer-sponsored pensions for their
retirement. Yet, remarkably, another EBRI survey revealed that only
slightly more than half of America's current workers are saving money
for retirement. Fewer than half own IRAs or participate in employer-
sponsored pension or savings plans.
No matter how Social Security's problems get solved, one thing is clear.
Americans need to rely on themselves for accumulating the bulk of their
retirement savings. There's no law that says you should have to reduce
your standard of living once you stop working. So we encourage you to
save all that you can now, so you can live the way you'd like to later.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY JAMES K. HO, CFA, PORTFOLIO MANAGER
John Hancock
Sovereign Bond Fund
Mixed economic data produces inflation fears
and lackluster bond performance in 1996
For bond investors, 1996 was a year of changing expectations. After the
double-digit returns of 1995, bondholders began 1996 with the assumption
that the Federal Reserve would continue to cut interest rates in order
to boost a sagging economy. The Fed did cut rates on January 31, and
bond prices rose (interest rates and bond prices typically move in the
opposite direction from each other). Within a few weeks, however, Fed
chairman Alan Greenspan was indicating that further cuts would be
unlikely for the present, based on the Fed's belief that the economy was
improving. When economic figures that appeared in March gave credence to
this assertion, markets reacted with the biggest one-day drop in
corporate bond prices in more than five years. The January rate cut
would prove to be the Fed's only rate action for 1996.
A 2 1/4" x 3 1/4" photo of Fund management team at bottom right. Caption
reads: "Jim Ho (seated) and Fund management team members (l - r) Lester Duke,
Beverly Cleathero, Seth Robbins, Linda Carter"
Having been caught off-guard by the sudden health of the economy and the
prospect of no further rate cuts, bond investors reversed their
expectations and began to fear that rates might rise. Thus bond prices
continued to slide throughout the spring and early summer as yields rose
in anticipation of inflation. (Rising inflation, often associated with a
booming economy, typically triggers a rise in interest rates.) Yields
peaked in July, with the benchmark 30-year Treasury reaching 7.2%, and
remained near this level throughout the summer. In September
expectations shifted once again, as the economy appeared to slow and
investors concluded that inflation fears were unwarranted. Falling rates
meant that prices rose, regaining some of the territory they had lost,
though not all of it.
"...1996
was a
year of
changing
expectations."
Chart with the heading "Top Five Bond Sectors" at top of left hand
column. The chart lists five sectors: 1) U.S. Government & Agencies 27%
2) Banks/Financials 19% 3) Utilities 14% 4) Broadcasting/Communications
8% 5) Transportation 5%. A footnote below states: "As a percentage of
net assets on December 31, 1996."
For the year ending December 31, 1996, the Lehman Brothers
government/corporate bond index, a broad market measure, showed a total
return of 2.90%. In that environment, John Hancock Sovereign Bond Fund
turned in a stronger performance than its peers. The Fund's Class A and
Class B shares posted total returns of 4.11% and 3.38% respectively, at
net asset value, for this same period. That compared favorably to the
2.49% return of the average corporate debt A-rated fund, according to
Lipper Analytical Services, Inc.1 Please see pages six and seven for
longer-term performance information.
"Corporate
bonds
were a
relative
bright
spot in
1996..."
Performance and strategy review
As in the past, we generally kept away from making major shifts in
portfolio duration (a measure of how sensitive a bond's price is to
interest rate changes), focusing on sector and credit decisions instead.
We looked for investments whose yield advantage over Treasuries appeared
to be shrinking (thus boosting their price performance relative to
Treasuries) or whose credit status appeared headed for improvement.
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 Bank Capital Notes followed by an up arrow and the phrase "Increased
investor comfort in this new type of security." The second listing is
Cleveland Electric followed by an up arrow and the phrase "Bonds improve with
Ohio Edison's announced buyout." The third listing is Riverwood International
followed by a down arrow and the phrase "Declining paper prices hurt
earnings." Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
We did keep duration comparatively short in the first nine months of the
year, utilizing a barbell strategy which involves overweighting long-
and short-duration securities while underweighting intermediate-duration
securities. In February our average duration was as short as 4.7 years,
which offered some protection when bond prices began their descent. In
September, when prices began to rise, we shifted to a more neutral
average duration of 5.0 years and moved away from the barbell.
New securities, foreign and corporate
bonds pay off
Corporate bonds were a relative bright spot in 1996. In the fall,
corporations took advantage of the lower cost of financing to issue a
flood of new bonds. This offered us the opportunity to swap out of
issues that had become rather highly valued and replace them with new
issues that were comparatively cheap.
The end of the year saw the debut of a new type of security called a
capital note. These notes are issued by banks, which carry them on their
balance sheets as equity but are able to claim a deduction for the
interest. Because investors did not seem to know what to make of these
securities at first, they came to the market fairly cheap. We benefited
by being an early buyer of these high-quality, but little understood,
securities. Another new security, one that is followed by relatively few
analysts and investors, is home equity loan-backed securities. These are
AAA-rated securities with less prepayment risk than traditional
mortgage-backed securities. By watching the market closely and selling
these securities when they are trading at a modest premium, it is
possible to reduce prepayment risk even further while achieving
investment gains.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended December 31,
1996." The chart is scaled in increments of 1% from bottom to top, with
5% at the top and 0% at the bottom. Within the chart, there are three
solid bars. The first represents the 4.11% total return for John Hancock
Sovereign Bond Fund: Class A. The second represents the 3.38% total
return for John Hancock Sovereign Bond Fund: Class B. The third
represents the 2.49% 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 the
following two pages for historical performance information."
Airline equipment trusts were another good performer. These issues are
smaller and therefore less liquid than corporate debt issued by the same
airlines, yet not only are they are secured (by airline equipment) but
they are less expensive than the corporate debt, which is unsecured. We
also held various issues of Cleveland Electric, a poorly regarded Ohio
utility that gained an "instant credit upgrade" when it was announced
that highly rated Ohio Edison intended to buy the company. When Public
Service of New Mexico offered to buy back some of its bonds at a
premium, we were able to take advantage of this opportunity as well.
Bonds from emerging markets, particularly those of corporations in
Argentina, Brazil and Venezuela, did well in 1996. Because no
corporation's credit rating can be higher than that of its home
country's government, we were able to invest in a number of issues whose
creditworthiness we believe is better than their ratings showed. These
provided high yields at comparatively low risk.
Outlook
Our expectations for 1997 hinge on the economy. In the near term, we
expect economic growth to increase. Rates are down, which is a stimulus
to economic activity, and the wealth created by the stock market's rise
should provide additional fuel. All of this suggests the possibility of
a Fed rate hike, and the market, which began the year in a fairly
neutral stance, may begin to factor this in. We expect to continue with
our current neutral duration stance, and if a market rally occurs we
would attempt to shorten duration in anticipation of the next market
turn. In any case, there seems little cause right now to take an extreme
position regarding future rate movements.
Among corporate bonds, we still favor the media sector, where
consolidation is benefiting large companies like Time-Warner and Viacom.
Overall, domestic corporate bonds are fairly valued, so we will be
selective in choosing individual securities. We will look for more
opportunities in foreign corporates, where markets are not as widely
followed and good values still can be found.
"In the
near term,
we expect
economic
growth to
increase."
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.
1Figures 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 December 31, 1996
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---------- ---------- ----------
John Hancock Sovereign Bond
Fund: Class A (0.60%) 39.54% 117.12%
John Hancock Sovereign Bond
Fund: Class B (1.62%) 16.85%(1) N/A
AVERAGE ANNUAL TOTAL RETURNS
For the period ended December 31, 1996
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---------- ---------- ----------
John Hancock Sovereign Bond
Fund: Class A (0.60%) 6.89% 8.06%
John Hancock Sovereign Bond
Fund: Class B (1.62%) 5.15%(1) N/A
YIELDS
As of December 31, 1996
SEC 30-DAY
YIELD
-----------
John Hancock Sovereign Bond Fund: Class A 6.27%
John Hancock Sovereign Bond Fund: Class B 5.85%
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 December 31, 1996. They
assume that you either had invested on the day each class of shares
started, or that you have been invested for the most recent 10 years. In
either case, they assume that you have reinvested all distributions. 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 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
$23,974 as of December 31, 1996. The second line represents the value
of the hypothetical $10,000 investment made in the Sovereign Bond Fund,
on December 31, 1986, before sales charge, and is equal to $22,737 as of
December 31, 1996. The third line represents the value of the Sovereign
Bond Fund, after sales charge, and is equal to $21,712
as of December 31, 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
$12,220 as of December 31, 1996. The second line represents the value
of the hypothetical $10,000 investment made in the Sovereign Bond Fund,
on November 23, 1993, before sales charge, and is equal to $11,985 as
of December 31, 1996. The third line represents the value of the Sovereign
Bond Fund, after sales charge, and is equal to $11,685 as of December 31, 1996.
<TABLE>
<CAPTION>
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, 1996.
You'll also find the net asset value and the maximum offering price per share
as of that date.
Statement of Assets and Liabilities
December 31, 1996
- -----------------------------------------------------------------------
<S> <C>
Assets:
Investments at value -- Note C:
Bonds (cost -- $1,474,111,232) $1,471,293,238
Joint repurchase agreement ---------------
(cost -- $56,823,000) 56,823,000
Corporate savings account 2,775
---------------
1,528,119,013
Receivable for shares sold 178,447
Interest receivable 28,027,823
Other assets 83,086
---------------
Total Assets 1,556,408,369
- -----------------------------------------------------------------------
Liabilities:
Payable for shares repurchased 214,453
Payable for investments purchased 4,172,736
Dividend payable 304,447
Payable to John Hancock Advisers, Inc.
and affiliates -- Note B 1,215,875
Accounts payable and accrued expenses 273,307
---------------
Total Liabilities 6,180,818
- -----------------------------------------------------------------------
Net Assets:
Capital paid-in 1,569,043,761
Accumulated net realized loss on investments
and financial futures contracts (16,030,812)
Net unrealized depreciation of investments (2,812,280)
Undistributed net investment income 26,882
---------------
Net Assets $1,550,227,551
=======================================================================
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 -- $1,416,115,706 / 95,037,670 $14.90
=======================================================================
Class B -- $134,111,845 / 9,000,449 $14.90
=======================================================================
Maximum Offering Price Per Share *
Class -- A ($14.90 x 104.71%) $15.60
=======================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or
more and on group sales the offering price is reduced.
See notes to financial statements.
</TABLE>
<TABLE>
<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
Year ended December 31, 1996
<S> <C>
Investment Income:
Interest $131,678,682
---------------
Expenses:
Investment management fee - Note B 7,799,825
Distribution/service fee - Note B
Class A 4,351,058
Class B 1,153,646
Transfer agent fee - Note B 4,073,058
Financial services fee - Note B 291,977
Custodian fee 274,623
Printing 232,979
Trustees' fees 130,832
Legal fees 86,135
Auditing fee 45,452
Registration and filing fees 40,653
Miscellaneous 24,803
---------------
Total Expenses 18,505,041
- -----------------------------------------------------------------------
Net Investment Income 113,173,641
- -----------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold (5,741,420)
Net realized loss on financial futures contracts (1,801,834)
Change in net unrealized appreciation/depreciation
of investments (45,633,903)
---------------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts (53,177,157)
- -----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $59,996,484
=======================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $111,800,337 $113,173,641
Net realized gain (loss) on investments sold and
financial futures contracts 9,875,400 (7,543,254)
Change in net unrealized appreciation/depreciation
of investments 140,081,956 (45,633,903)
-------------- --------------
Net Increase in Net Assets Resulting from
Operations 261,757,693 59,996,484
-------------- --------------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($1.1151 and $1.0858 per
share, respectively) (107,383,916) (105,555,822)
Class B -- ($1.0221 and $0.9813 per
share, respectively) (4,389,308) (7,590,937)
Class C** -- ($0.4338 and none per
share, respectively) (27,113) --
-------------- --------------
Total Distributions to Shareholders (111,800,337) (113,146,759)
-------------- --------------
From Fund Share Transactions -- Net* 115,957,978 (30,564,714)
-------------- --------------
Net Assets:
Beginning of period 1,368,027,206 1,633,942,540
-------------- --------------
End of period (including undistributed net
investment income of none and $26,882) $1,633,942,540 $1,550,227,551
============== ==============
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 value.
<CAPTION>
* Analysis of Fund Share Transactions:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996
-------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold 8,319,081 $123,160,717 12,026,163 $178,554,337
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 5,504,983 81,567,467
-------------- -------------- -------------- --------------
19,188,484 285,220,725 17,531,146 260,121,804
Less shares repurchased (14,896,492) (219,827,040) (22,184,916) (329,117,996)
-------------- -------------- -------------- --------------
Net increase (decrease) 4,291,992 $65,393,685 (4,653,770) ($68,996,192)
============== ============== ============== ==============
CLASS B
Shares sold 3,520,133 $52,253,097 6,495,177 $96,388,497
Shares issued in reorganization - Note D 493,051 7,421,307 -- --
Shares issued to shareholders in reinvestment
of distributions 181,534 2,696,476 297,182 4,401,471
-------------- -------------- -------------- --------------
4,194,718 62,370,880 6,792,359 100,789,968
Less shares repurchased (681,957) (10,100,167) (4,203,557) (62,358,490)
-------------- -------------- -------------- --------------
Net increase 3,512,761 $52,270,713 2,588,802 $38,431,478
============== ============== ============== ==============
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.
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,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $15.31 $15.29 $15.53 $13.90 $15.40
---------- ---------- ---------- ---------- ----------
Net Investment Income 1.20 1.14 1.12 1.12 1.09
Net Realized and Unrealized Gain
(Loss) on Investments
and Financial Futures Contracts (0.01) 0.62 (1.55) 1.50 (0.50)
---------- ---------- ---------- ---------- ----------
Total from Investment
Operations 1.19 1.76 (0.43) 2.62 0.59
---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income (1.21) (1.14) (1.12) (1.12) (1.09)
Distributions from Net Realized
Gain on Investments Sold
and Financial Futures Contracts -- (0.38) (0.08) -- --
---------- ---------- ---------- ---------- ----------
Total Distributions (1.21) (1.52) (1.20) (1.12) (1.09)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period $15.29 $15.53 $13.90 $15.40 $14.90
========== ========== ========== ========== ==========
Total Investment Return at Net
Asset Value (1) 8.08% 11.80% (2.75%) 19.40% 4.11%
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $1,386,260 $1,505,754 $1,326,058 $1,535,204 $1,416,116
Ratio of Expenses to Average
Net Assets 1.44% 1.41% 1.26% 1.13% 1.14%
Ratio of Net Investment Income
to Average Net Assets 7.89% 7.18% 7.74% 7.58% 7.32%
Portfolio Turnover Rate 87% 107% 85% 103%(6) 123%
CLASS B (2)
Per Share Operating Performance
Net Asset Value, Beginning of Period $15.90 $15.52 $13.90 $15.40
---------- ---------- ---------- ----------
Net Investment Income 0.11 1.04 1.02 0.98
Net Realized and Unrealized Gain
(Loss) on Investments
and Financial Futures Contracts -- (1.54) 1.50 (0.50)
---------- ---------- ---------- ----------
Total from Investment
Operations 0.11 (0.50) 2.52 0.48
---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment
Income (0.11) (1.04) (1.02) (0.98)
Distributions from Net Realized
Gain on Investments Sold
and Financial Futures Contracts (0.38) (0.08) -- --
---------- ---------- ---------- ----------
Total Distributions (0.49) (1.12) (1.02) (0.98)
---------- ---------- ---------- ----------
Net Asset Value, End of Period $15.52 $13.90 $15.40 $14.90
========== ========== ========== ==========
Total Investment Return at Net
Asset Value (1) 0.90%(3) (3.13%) 18.66% 3.38%
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) $4,125 $40,299 $98,739 $134,112
Ratio of Expenses to Average
Net Assets 1.63%(4) 1.78% 1.75% 1.84%
Ratio of Net Investment Income
to Average Net Assets 0.57%(4) 7.30% 6.87% 6.62%
Portfolio Turnover Rate 107% 85% 103%(6) 123%
<CAPTION>
PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, MAY 22, 1995
1993 1994 (UNAUDITED)
------------- ----------- ------------
<S> <C> <C> <C>
CLASS C (5)
Per Share Operating Performance
Net Asset Value, Beginning of
Period $15.86 $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%(3) (2.19%) 9.73%(3)
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%(4) 0.73% 0.67%(4)
Ratio of Net Investment Income
to Average Net Assets 4.90%(4) 8.28% 7.82%(4)
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) Not annualized.
(4) Annualized.
(5) 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.
(6) 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
December 31, 1996
- ---------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Sovereign Bond Fund on December 31, 1996. It's divided into two main categories:
bonds and short-term investments. The 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>
BONDS
Aerospace (0.42%)
Jet Equipment Trust,
Cert Ser 95B2 08-15-14 (R) 10.910% BB+ $5,800 $6,540,138
--------------
Banks (10.48%)
ABN-Amro Bank N.V. - Chicago Branch,
Sub Deb 05-31-05 7.250 AA- 5,000 5,080,400
Abbey National First Capital, B.V.,
Sub Note 10-15-04 (United
Kingdom) (Y) 8.200 AA- 10,000 10,725,700
African Development Bank,
Sub Note 12-15-03 (Supra
National) (Y) 9.750 AA- 8,000 9,304,000
Banco Nacional de Obras y
Servicios Publicos, SNC,
Note 11-15-03 (Mexico) (Y) 9.625 BB 5,635 5,663,175
Bank of New York,
Cap Security Bond 12-01-26 (R) 7.780 BBB+ 5,425 5,316,500
BankAmerica Institutional Capital A,
Gtd Cap Security 12-31-26 (R) 8.070 A- 5,295 5,261,906
Barclays North American Capital
Corp., Gtd Cap Note 05-15-21 9.750 AA- 8,925 10,185,656
Chase Capital I,
Gtd Cap Sec Ser A 12-01-26 7.670 BBB+ 5,295 5,177,292
Den Danske Bank Aktieselskab,
Sub Note 06-15-05
(Denmark) (R) (Y) 7.250 A- 3,745 3,770,054
First Interstate Bancorp.,
Sub Note 05-01-97 12.750 BBB+ 3,250 3,319,712
First Nationwide Escrow Corp.,
Sr Sub Note 10-01-03 (R) 10.625 Ba3 2,500 2,700,000
First Nationwide Holdings, Inc.,
Sr Note 04-15-03 12.500 B 5,850 6,478,875
International Bank for
Reconstruction and Development,
Deb 09-01-16 (Supra National) (Y) 8.250 AAA 5,000 5,610,700
Landeskreditbank Baden -
Wurttenberg, Sub Note 02-01-23
(Germany) (Y) 7.625 AAA 6,820 7,239,294
Midland American Capital Corp.,
Deb 11-15-03 12.750 A 19,932 22,119,936
National Westminster Bank PLC - New York Branch,
Sub Note 05-01-01 9.450 AA- 10,000 11,065,100
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 10.125 A+ 10,605 12,376,883
Republic of New York Corp.,
Bond 12-04-26 (R) 7.530 A+ 5,335 5,229,154
Scotland International Finance No. 2 B.V.,
Gtd Sub Note 11-01-06
(Netherlands) (R) (Y) 8.850 A 10,250 11,525,305
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 10.360 A 6,000 6,827,760
Sub Note 11-15-00 11.500 A 6,400 7,453,056
--------------
162,430,458
--------------
Broadcasting (5.72%)
Cablevision Systems Corp.,
Sr Sub Deb 04-01-04 10.750 B 6,500 6,760,000
Century Communications Corp.,
Sr Sub Deb 10-15-03 11.875 B+ 9,000 9,540,000
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 BBB+ 5,495 5,853,659
Sr Sub Deb 06-01-07 11.000 BBB 12,205 14,005,237
Jones Intercable, Inc.,
Sr Sub Deb 07-15-04 11.500 B+ 9,500 10,319,375
Le Groupe Videotron Ltee,
Sr Note 02-15-05
(Canada) (Y) 10.625 BB+ 1,750 1,925,000
Rogers Cablesystems Ltd.,
Sr Note Ser B 03-15-05
(Canada) (Y) 10.000 BB+ 8,000 8,520,000
SFX Broadcasting, Inc.,
Sr Sub Note Ser B 05-15-06 10.750 B- 4,505 4,730,250
TKR Cable I, Inc.,
Sr Deb 10-30-07 10.500 BBB- 11,000 11,561,770
TeleWest PLC,
Sr Deb 10-01-06
(United Kingdom) (Y) 9.625 BB 3,420 3,488,400
Viacom, Inc.,
Sr Note 06-01-05 7.750 BB+ 5,750 5,661,852
Sub Deb 07-07-06 8.000 BB- 6,580 6,366,150
--------------
88,731,693
--------------
Chemicals (0.63%)
OPP Petroquimica S.A.,
Bond 10-29-04 (Brazil)
(R) (Y) 11.000 NR 6,575 6,542,125
Sociedad Quimica y Minera de
Chile S.A.,
Loan Part Ctf 09-15-06
(Chile) (R) (Y) 7.700 BBB+ 3,200 3,282,880
--------------
9,825,005
--------------
Commercial Real Estate (0.26%)
Trinet Corp. Realty Trust,
Note 05-15-01 7.300 BBB- 4,000 4,049,600
--------------
Containers (0.21%)
AMTROL Inc.,
Sr Sub Note 12-31-06 (R) 10.625 B- 3,100 3,200,750
--------------
Cosmetics & Toiletries (0.41%)
Johnson & Johnson,
6.730 AAA 6,750 6,422,760
--------------
Energy (0.49%)
AES China Generating Co. Ltd.,
Sr Note 12-15-06
(China) (Y) 10.125 BB- 2,670 2,763,450
AES Corp.,
Sr Sub Note 07-15-06 10.250 B+ 4,500 4,837,500
--------------
7,600,950
--------------
Finance (8.27%)
Access Financial Mortgage Loan Trust,
Class A4 Pass Thru Ctf
Ser 1996-4 03-18-20 6.775 AAA 4,900 4,898,469
American Express Co.,
Gtd Deb Ser D 12-12-00 11.625 A+ 8,670 9,271,100
Banc One Credit Card Master Trust,
Class A Asset Backed
Ctf Ser 1994-B 12-15-99 7.550 AAA 10,000 10,143,700
CIT Group Holdings, Inc.
Deb 03-15-01 9.250 A 5,000 5,489,350
CS First Boston,
Sub Note 05-15-06 (R) 7.750 A3 4,635 4,830,736
Chrysler Financial Corp.,
Deb 11-01-99 12.750 A- 3,000 3,473,310
ContiFinancial Corp.,
Sr Note 08-15-03 8.375 BB+ 6,000 6,168,600
DSPL Finance Co., B.V.,
Sr Sec Note 12-30-10
(Netherlands) (R) (Y) 9.120 BBB 5,000 5,155,500
Green Tree Home Improvement
Loan Trust, Class M1 Ser
1995-D 09-15-25 6.950 Aa2 6,130 6,137,540
IMC Home Equity Loan Trust,
Class A-5 Ser 1996-1 12-25-13 6.290 AAA 6,816 6,601,935
Intertek Finance PLC,
Sr Sub Note 11-01-06
(United Kingdom) (R) (Y) 10.250 B2 2,385 2,480,400
MBNA Master Credit Card Trust,
Class A Ser 1995-D 11-15-02 6.050 AAA 16,075 15,944,310
Merrill Lynch Mortgage
Investors, Inc.,
Class B Sub Bond Ser
1992-B 04-15-12 8.500 Aa3 2,746 2,826,227
Money Store Home Equity Trust,
Ser 1995-C 09-15-11 6.375 AAA 2,920 2,857,950
Class A14 Ser 1996-B 04-15-12 7.350 AAA 4,000 4,050,000
Santander Financial Issuances Ltd.,
Sub Gtd Note 04-15-05
(Cayman Islands) (Y) 7.875 A+ 10,000 10,463,000
Standard Credit Card Master
Trust I, Class A Ser 1995-2
1/7/02 8.625 AAA 11,500 11,534,500
United Companies Financial Corp.,
Sr Note 01-15-04 7.700 BBB- 5,420 5,413,117
UCFC Home Equity Loan,
Class A3 Ser 1994-A 07-10-18 6.100 AAA 3,235 3,186,475
Class A6 Ser 1996-D1 02-15-25 7.180 AAA 7,260 7,323,525
--------------
128,249,744
--------------
Foods (0.33%)
Nabisco, Inc.,
Note 04-15-99 8.300 BBB 5,000 5,177,800
--------------
Funeral Services (0.45%)
Loewen Group International, Inc.,
Sr Gtd Note 10-15-03 (R) 8.250 BB+ 6,860 6,953,982
--------------
Glass Products (1.15%)
Owens-Illinois, Inc.,
Sr Deb 12-01-03 11.000 BB 16,090 17,900,125
--------------
Government - Foreign (4.42%)
Brazil, Republic of,
For Gvt Gtd 04-15-09 (Brazil) (Y) 6.563# B+ 7,500 6,093,750
Comtel Brasileira Ltd.,
Note 09-26-04 (Brazil) (R) (Y) 10.750 NR 4,370 4,501,100
Nova Scotia, Province of,
Deb 05-15-13 (Canada) (Y) 11.500 A- 10,655 11,794,765
Deb 04-01-22 (Canada) (Y) 8.750 A- 7,500 8,702,625
Ontario, Province of,
Deb 08-31-12 (Canada) (Y) 15.250 AA- 6,595 7,358,569
Deb 04-25-13 (Canada) (Y) 11.750 AA- 6,000 6,673,320
Quebec, Province of,
Deb 10-01-13 (Canada) (Y) 13.000 A+ 11,000 12,650,550
Deb 09-15-14 (Canada) (Y) 13.250 A+ 1,000 1,199,910
Saskatchewan, Province of,
Gvt Gtd 12-15-20 (Canada) (Y) 9.375 A- 5,000 6,170,000
Venezuela, Republic of,
Deb 12-18-07 (Venezuela) (Y) 6.500# Ba2 3,750 3,300,000
--------------
68,444,589
--------------
Government - U.S. (18.40%)
United States Treasury,
Bond 08-15-17 8.875 AAA 45,085 55,687,189
Bond 05-15-18 9.125 AAA 47,075 59,630,844
Bond 02-15-23 7.125 AAA 42,143 43,999,821
Note 05-15-98 9.000 AAA 20,945 21,828,670
Note 02-15-99 8.875 AAA 22,335 23,629,760
Note 11-30-99 7.750 AAA 37,930 39,630,781
Note 05-15-01 8.000 AAA 24,644 26,334,332
United States Treasury,
Note 02-15-05 7.500 AAA 13,511 14,450,420
--------------
285,191,817
--------------
Government - U.S. Agencies (7.43%)
Federal Home Loan Mortgage Corp.,
30 Yr Pass Thru Ctf 01-01-16 11.250 AAA 1,506 1,668,865
Federal National Mortgage Association,
15 Yr SF Pass Thru Ctf 01-25-05 8.000 AAA 10,000 10,303,100
15 Yr SF Pass Thru Ctf 02-01-08 7.500 AAA 2,956 3,005,588
30 Yr SF Pass Thru Ctf 10-01-23 7.000 AAA 8,583 8,427,656
Financing Corp.,
Bond 02-08-18 9.400 AAA 7,000 8,793,750
Government National Mortgage Association,
30 Yr Pass Thru Ctf 02-15-24 to 02-15-26 7.500 AAA 24,290 24,344,492
30 Yr Pass Thru Ctf 09-15-22 to 11-15-22 8.000 AAA 10,616 10,898,442
30 Yr Pass Thru Ctf 12-15-22 to 04-15-23 8.500 AAA 17,556 18,374,547
30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 9.000 AAA 18,907 20,188,877
30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 5,554 6,025,444
30 Yr Pass Thru Ctf 01-15-19 to 03-15-25 10.000 AAA 2,497 2,746,906
30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 144 160,838
30 Yr Pass Thru Ctf 01-15-16 11.000 AAA 246 277,448
--------------
115,215,953
--------------
Insurance (5.27%)
Conseco, Inc.,
Sr Note 12-15-04 10.500 BBB 6,820 8,049,441
Equitable Life Assurance Society of
the United States,
Surplus Note 12-01-05 (R) 6.950 A 6,050 5,931,420
Fairfax Financial Holdings Ltd.,
Note 04-15-26 (Canada) (Y) 8.300 BBB+ 6,440 6,748,025
Liberty Mutual Insurance Co.,
Surplus Note 10-15-26 (R) 7.875 A+ 3,990 4,005,361
Surplus Note 05-04-07 (R) 8.200 A+ 10,000 10,619,400
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 10,450 10,457,942
NAC Re Corp.,
Note 06-15-99 8.000 A- 3,360 3,466,579
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) 7.500 AA 15,000 14,533,800
Phoenix Home Life Mutual Insurance Co.,
Surplus Note 12-01-06 (R) 6.950 A+ 5,805 5,694,339
Sun Canada Financial Co.,
Note 12-15-07
(Canada) (R) (Y) 6.625 AA 7,250 6,952,315
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 A- 5,000 5,193,450
--------------
81,652,072
--------------
Leasing Companies (0.25%)
Ryder TRS, Inc.,
Sr Sub Note 12-01-06 (R) 10.000 B+ 3,750 3,900,000
--------------
Leisure & Recreation (0.86%)
Mohegan Tribal Gaming Authority,
Sr Note Ser B 11-15-02 13.500 BB+ 1,500 1,965,000
Showboat Marina Casino Partnership,
1st Mtg Ser B 03-15-03 13.500 B 5,000 5,512,500
Trump Hotels & Casinos Resorts
Funding, Inc., Sr Note 06-15-05 15.500 B+ 5,150 5,871,000
--------------
13,348,500
--------------
Medical Products (0.17%)
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 10.750 B+ 2,500 2,631,250
--------------
Oil & Gas (2.31%)
Ashland Oil, Inc.,
SF Deb 10-15-17 11.125 BBB 5,000 5,433,600
Camuzzi Gas, Pampeana S.A.,
Bond 12-15-01
(Argentina) (R) (Y) 9.250 BB- 2,965 2,994,650
Enserch Exploration, Inc.,
Pass Thru Ctf 01-02-09 (R) 7.540 BBB 4,800 4,716,000
Norsk Hydro ASA,
Deb 10-01-16 (Norway) (Y) 7.500 A 5,790 5,927,512
Petroliam Nasional Berhad,
Bond 10-15-26
(Malaysia) (R) (Y) 7.625 A+ 5,570 5,651,545
Transgas de Occidenta S.A.,
Sr Note 11-01-10
(Colombia) (R) (Y) 9.790 BBB- 6,000 6,250,200
TransTexas Gas Corp.,
Sr Note 06-15-02 11.500 BB- 4,460 4,816,800
--------------
35,790,307
--------------
Paper (1.31%)
Georgia Pacific Corp.,
Deb 01-15-18 9.750 BBB- 7,500 7,824,375
Indah Kiat International Finance Co.,
Co Gtd Ser C 06-15-06
(Indonesia) (Y) 12.500 BB 2,570 2,827,000
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 12.000 B+ 3,945 4,260,600
Stone Consolidated,
Sr Note 12-15-00
(Canada) (Y) 10.250 BB+ 5,000 5,325,000
--------------
20,236,975
--------------
Publishing (1.79%)
News America Holdings, Inc.,
Sr Deb 08-10-18 8.250 BBB 8,700 8,783,868
Sr Note 10-15-99 9.125 BBB 7,500 8,002,800
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB- 10,000 10,917,000
--------------
27,703,668
--------------
Retail (0.64%)
Flagstar Corp.,
Sr Note 09-15-01 10.750 B- 3,590 3,248,950
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 3,867,500
--------------
9,999,211
--------------
Steel (1.08%)
IVACO, Inc.,
Sr Note 09-15-05
(Canada) (Y) 11.500 B+ 5,235 5,215,369
NS Group, Inc.,
Unit (Sr Sec Note
07-15-03 & Warrant) 13.500 B- 5,750 5,980,000
Weirton Steel Corp.,
Sr Note 03-01-98 11.500 B 1,430 1,472,900
Sr Note 07-01-04 11.375 B 3,950 4,009,250
--------------
16,677,519
--------------
Telecommunications (2.16%)
British Telecom Finance, Inc.,
Gtd Deb 02-15-19
(United Kingdom) (Y) 9.625 AAA 9,000 9,959,940
IMPSAT Corp.,
Sr Gtd Note 07-15-03
(Argentina) (R) (Y) 12.125 BB- 5,270 5,586,200
Paging Network, Inc.,
Sr Sub Note 10-15-08 (R) 10.000 B 5,145 5,170,725
TCI Communications, Inc.,
Sr Deb 08-01-15 8.750 BBB- 5,420 5,354,310
Teleport Communications Group Inc.,
Sr Note 07-01-06 9.875 B 1,060 1,131,550
Total Access Communication
Public Co. Ltd., Bond 11-04-06
(Thailand) (R) (Y) 8.375 BBB- 6,250 6,291,875
--------------
33,494,600
--------------
Textile (0.21%)
Polysindo Eka Perkasa (P.T.),
Sec Co Gtd 06-15-01
(Indonesia) (Y) 13.000 BB 800 896,000
Polysindo International
Finance Co. B.V., Gtd Sec Note
06-15-06 (Netherlands) (Y) 11.375 BB 2,135 2,332,487
--------------
3,228,487
--------------
Tobacco (0.64%)
RJR Nabisco, Inc.,
Note 12-01-02 8.625 BBB- 3,075 3,138,775
RJR Nabisco, Inc.,
Note 09-15-03 7.625 BBB- 7,000 6,710,760
--------------
9,849,535
--------------
Transportation (5.24%)
America West Airlines,
Pass Thru Ctf Ser B 01-02-08 6.930 A- 4,915 4,871,994
Continental Airlines,
Pass Thru Ctf Ser 96-C 10-15-13 9.500 BBB 5,000 5,624,550
Humpuss Funding Inc.,
Company Gtd 12-15-09 (R) 7.720 Baa2 5,100 5,043,951
Northwest Airlines Inc.,
Pass Thru Ctf Ser 96-1C
1/2/05 10.150 BB+ 4,200 4,410,000
Pass Thru Ctf Ser 96-1D
1/2/15 8.970 BBB- 3,825 4,169,250
NWA Trust,
Sr Note Ser A 06-21-14 9.250 AA 5,522 6,283,489
Rail Car Trust,
Class A Pass Thru Ser 1992-1 06-01-04 7.750 AAA 15,875 16,591,579
Scandinavian Airlines System,
Deb 07-20-99 (Multinational) (Y) 9.125 A3 6,834 7,252,582
Sea-Land Service, Inc.,
Deb Ser A 01-02-11 10.600 BBB+ 5,000 5,290,850
Deb Ser B 01-02-11 10.600 BBB+ 7,000 7,407,190
Deb Ser C 01-02-11 10.600 BBB+ 6,000 6,349,020
USAir, Inc.,
Pass Thru Ctf Ser 90-A1
3/19/05 11.200 B+ 7,748 7,913,091
--------------
81,207,546
--------------
Utilities (13.91%)
British Columbia Hydro and Power
Auth., Bond Ser FN 09-01-13
(Canada) (Y) 12.500 AA+ 6,175 6,995,658
BVPS II Funding Corp.,
Collateralized Lease Bond
6/1/17 8.890 BB+ 6,600 6,539,214
CE Casecnan Water & Energy
Co. Inc., Sr Note Ser A 11-15-05
(Philippines) (Y) 11.450 BB 4,100 4,602,250
CSW Investments,
Sr Note 08-01-01 (United
Kingdom) (R) (Y) 6.950 A- 5,500 5,528,050
Sr Note 08-01-06 (United
Kingdom) (R) (Y) 7.450 A- 4,500 4,567,050
CTC Mansfield Funding Corp.,
Sec Lease Oblig Deb 03-30-03 10.250 B+ 4,500 4,566,420
Sec Lease Oblig Deb 09-30-16 11.125 B+ 17,270 18,219,850
CalEnergy Co. Inc.,
Sr Note 09-15-06 (R) 9.500 Ba2 4,115 4,259,025
Calpine Corp.,
Sr Note 05-15-06 10.500 B+ 4,650 4,917,375
Cleveland Electric
Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BB 7,560 7,971,113
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 BB- 9,538 10,103,985
Enersis S.A.,
Note 12-01-16
(Cayman Islands) (Y) 7.400 A- 7,530 7,330,455
First PV Funding Corp.,
Deb Ser 86A 01-15-14 10.300 BB- 2,253 2,399,445
Deb Ser 86B 01-15-16 10.150 BB- 6,744 7,165,500
GTE Corp.,
Deb 11-15-17 10.300 A- 8,725 9,444,376
Deb 11-01-20 10.250 A- 6,875 7,851,800
Hydro-Quebec,
Deb Ser IF 02-01-03
(Canada) (Y) 7.375 A+ 7,185 7,379,929
Deb Ser FU 02-01-12
(Canada) (Y) 11.750 A+ 5,000 7,028,900
Deb 02-01-21
(Canada) (Y) 9.400 A+ 7,500 9,044,400
Iberdrola International B.V.,
Note 10-01-02 7.500 AA- 8,000 8,310,000
Sr Note 06-01-03
(Netherlands) (R) (Y) 7.125 AA- 8,629 8,790,794
Long Island Lighting Co.,
Deb 03-15-03 7.050 BB+ 7,315 7,146,097
Deb 07-15-19 8.900 BB+ 1,775 1,810,944
Gen Ref Mtg 05-01-21 9.750 BBB- 6,075 6,487,371
Gen Ref Mtg 07-01-24 9.625 BBB- 6,000 6,381,060
Louisiana Power & Light Co.,
Sec Lease Oblig Bond Ser B 01-02-17 10.670 BBB- 10,000 10,703,000
Midland Cogeneration Venture,
Deb Ser C-91 07-23-02 10.330 BB- 12,370 13,143,268
Midland Funding Corp. II,
Deb 07-23-05 11.750 B- 3,000 3,321,480
Deb Ser B 07-23-06 13.250 B- 1,900 2,195,127
System Energy Resources, Inc.,
1st Mtg 08-01-01 7.710 BBB- 5,525 5,649,313
Tenaga Nasional Berhad,
Note 06-15-04 (Malaysia) (R) (Y) 7.875 A+ 5,500 5,784,955
--------------
215,638,204
--------------
TOTAL BONDS
(Cost $1,474,111,232) (94.91%) $1,471,293,238
------- --------------
<CAPTION>
PAR VALUE
INTEREST (000'S MARKET
ISSUER,DESCRIPTION RATE OMITTED) VALUE
- -------------------------------------------- -------- -------- ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.66%)
Investment in a joint repurchase
agreement transaction with Lehman
Brothers, Inc., Dated 12-31-96,
Due 01-02-97 (secured by U.S. Treasury Bonds,
7.25% thru 12.50%, due 08-15-14 thru
08-15-22) - Note A 6.700% $56,823 $56,823,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 2,775
--------------
TOTAL SHORT-TERM INVESTMENTS (3.66%) $56,825,775
------- --------------
TOTAL INVESTMENTS (98.57%) $1,528,119,013
======= ==============
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 $215,213,577
as of December 31, 1996.
(Y) Parenthetical disclosure of a foreign country in the security description represents
country of a foreign issuer, however, security is U.S. dollar denominated.
* Credit ratings are unaudited and are rated by Moody's Investor Services, Fitch or
John Hancock Advisers, Inc. where Standard and Poors ratings are not available.
# Represents rates effective on December 31, 1996.
The percentage shown for each investment category is the total value of that category as
a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
NOTES TO
FINANCIAL STATEMENTS
John Hancock Funds - 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 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 and Class B. The shares of each class
represent an interest in the same portfolio of investments of the Fund
and have equal rights to voting, redemption, dividends and liquidation,
except that certain expenses, subject to the approval of the Trustees,
may be applied differently to each class of shares in accordance with
current regulations of the Securities and Exchange Commission and the
Internal Revenue Service. Shareholders of a class which bears
distribution and 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, but were
abolished by the Trustees on August 28, 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 $30,237,728 of a capital
loss carryforward available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gain distributions will be
made. The carryforward expires as follows: December 31, 1997 -
$1,909,995, December 31 1999 - $755,945, December 31, 2001 -
$10,107,031, December 31, 2002 - $9,347,493 and December 31, 2004 -
$8,117,264. Of the capital loss carryovers expiring in 1997, 1999, 2001,
and 2002, $1,909,995, $755,945, $10,107,031 and $1,732,213,
respectively, were acquired on September 15, 1995 in the merger with
John Hancock Investment Quality Bond Fund. Additionally, net capital
losses of $1,146,716 attributable to security transactions occurring
after October 31, 1996 are treated as arising on the first day (January
1, 1997) of the Fund's current taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Interest income on investment
securities is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid by
the Fund 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.
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.
EXPENSES The majority of expenses of the Trust are directly identifiable
to an individual fund. Expenses which are not readily identifiable to a
specific fund are allocated in such a manner as deemed equitable, taking
into consideration, among other things, the nature and type of expense
and the relative sizes of the funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are determined at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
could differ from these estimates.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates
and other market conditions. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underling instrument or hedge other Fund
instruments. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified
amount of cash or U.S. government securities, known as "initial margin",
equal to a certain percentage of the value of the financial future
contracts being traded. Each day, the futures contract is valued at the
official settlement price of the board of trade or U.S. commodities
exchange on which it trades. Subsequent payments, known as "variation
margin", to and from the broker are made on a daily basis as the market
price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", are recorded by
the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there
may be an illiquid market and/or that a change in the value of the
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 December 31, 1996, there were no open positions in 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.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended
December 31, 1996, JH Funds received net sales charges of $2,262,589
with regard to sales of Class A shares. Out of this amount, $232,548 was
retained and used for printing of prospectuses, advertising, sales
literature and other purposes, and $606,148 was paid as sales
commissions and first year service fees to unrelated broker-dealers and
$1,423,893 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 ("JHMLICo"), is the
indirect sole shareholder of Distributors and was the indirect sole
shareholder until November 29, 1996 of 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 December 31, 1996, contingent
deferred sales charges received by JH Funds amounted to $281,653.
In addition, to reimburse 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 Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of
JHMLICo. The Fund pays transfer agent fees based on the number of
shareholder accounts and certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for 1996 is
to be paid at an annual rate of 0.01875% of the average net assets of
the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Richard S. Scipione
and 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
December 31, 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 December 31, 1996, aggregated
$959,868,565 and $847,387,177, respectively. Purchases and proceeds from
sales of obligations of the U.S. government and its agencies, during the
period ended December 31, 1996, aggregated $890,956,570 and
$1,062,656,955, respectively.
The cost of investments owned at December 31, 1996 (excluding the
corporate savings account) for Federal income tax purposes was
$1,531,531,148. Gross unrealized appreciation and depreciation of
investments aggregated $29,885,887 and $33,300,797, respectively,
resulting in net unrealized depreciation of $3,414,910.
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.
John Hancock Funds - Sovereign Bond Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Sovereign Bond Fund
We have audited the accompanying statement of assets and liabilities of
the John Hancock Sovereign Bond Fund (the "Fund"), including the
schedule of investments, as of December 31, 1996, 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 periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of December 31,
1996, by correspondence with the custodian and brokers, and other
appropriate auditing procedures when replies from brokers were not
received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock Sovereign Bond Fund at December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the indicated periods,
in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Boston, Massachusetts
February 7, 1997
SHAREHOLDER MEETING (UNAUDITED)
On June 26, 1996, a special meeting of John Hancock Sovereign Bond Fund
was held.
The shareholders elected the following Trustees with the votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- ---------------- -------------------------- ---------------
Dennis S. Aronowitz 64,870,900 1,693,902
Edward J. Boudreau, Jr. 64,869,476 1,695,325
Richard P. Chapman, Jr. 64,885,971 1,678,831
William J. Cosgrove 64,895,076 1,669,725
Douglas M. Costle 64,756,340 1,808,462
Leland O. Erdahl 64,854,841 1,709,961
Richard A. Farrell 64,892,358 1,672,443
Gail D. Fosler 64,870,105 1,694,696
William F. Glavin 64,756,753 1,808,049
Anne C. Hodsdon 64,850,089 1,714,712
Dr. John A. Moore 64,846,958 1,717,844
Patti McGill Peterson 64,874,648 1,690,153
John W. Pratt 64,854,815 1,709,986
Richard S. Scipione 64,736,064 1,828,737
Edward J. Spellman 64,877,126 1,687,675
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the
page. A box sectioned in quadrants with a triangle in upper left, a
circle in upper right, a cube in lower left and a diamond in lower
right. A tag line below reads: "A Global Investment Management Firm."
101 Huntington Avenue, Boston, MA 02199-7603
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Permit No. 75
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." 2100A 12/96
2/97
