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John Hancock Funds
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Sovereign
Bond
Fund
ANNUAL REPORT
May 31, 1997
<PAGE>
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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
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 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
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the year. Stocks
began 1997 on the high wires, bolstered by a near-perfect "Goldilocks" economy -
not too hot, not too cold. In almost a straight shot, the Dow Jones Industrial
Average soared through the 7000 level for the first time in early March. Just
days later, stocks lost their footing and staged a month-long free-fall in a
nervous reaction to rising interest rates and data that showed the economy was
picking up steam. Stocks gave back all of their year's gain and suffered their
worst decline since 1990 during this period. No sooner had real fears begun to
beset investors than they were gone, erased in a euphoric rally caused by strong
earnings and no signs of inflation. By the end of May, the Dow had risen by
14.6% and the broader Standard & Poor's 500 Stock Index by 15.4% - levels not
many thought the market would reach all year, let alone in five months.
Bondholders have not enjoyed the same bounty, as the bond market has mostly
stayed worried about the strength of the economy, the direction of interest
rates, and the Federal Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left them
pondering their valuation models, since the market is now more expensive than it
has been in decades. It's impossible to know what will happen next in the
markets. But whether it's another strong move forward or a retreat, we recommend
keeping a long-term perspective, rather than over-focusing on the market's daily
twists and turns. While the economic backdrop seems to remain near perfect, the
one thing we believe investors should be prepared for is more market volatility.
It also makes sense to do something we've always advocated: set realistic
expectations, since, as we've also seen this year, markets can move down as fast
as they go up.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After such a
strong advance in equities over the last two and a half years, it could be time
to rebalance your portfolio, if you haven't already, to maintain your desired
targets of diversification. As part of that process, make sure that your
investment strategies still reflect your individual time horizons, objectives
and risk tolerance. Despite turbulence, one thing remains constant. A
well-constructed plan and a cool head can be the best tools for reaching your
financial goals.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By James K. Ho, CFA, Portfolio Manager
John Hancock
Sovereign Bond Fund
Bonds experience a yar of changing expectations
-----------------------------------------------
Recently, the Fund's fiscal year end changed from December to May. What follows
is a discussion of the Fund's performance for the 12 months ended May 31, 1997.
During the 12 months ended May 31, 1997, fixed-income securities had to dance
for their dinner amid a most fitful investment environment. Leading economic
indicators continually produced mixed signals about the economy and lurking
inflation, causing investors to speculate on the Federal Reserve Board's actions
and the direction of interest rates.
Last July, when the bond market sold off amid concerns about the strength of
the economy and higher inflation, the yield on the 30-year Treasury bond peaked
above the psychologically important 7% mark. As yields generally rose, bond
prices declined. The bond market then rebounded in the fall as signs of economic
slowing eased investors' inflation fears. However, no sooner did bonds regain
their footing and rally when another spate of data had investors questioning
their optimism by calendar year end. Further volatility accompanied the new year
as investors worried about the Fed raising rates at its March meeting.
Expectations were realized when the Fed did indeed raise the federal funds rate
by .25% to 5.50%. The market has remained unsettled since.
Against this backdrop, John Hancock Sovereign Bond Fund maintained an
even keel and closed fiscal 1997 on a positive note. For the year ended May 31,
1997, the Fund posted a total return of 9.07% for Class A shares and 8.31% for
Class B shares at net asset value. The Fund outperformed the average corporate
debt A-rated fund, as tracked by Lipper Analytical
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"...the Fund maintained an even keel and closed fiscal 1997 on a positive
note..."
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[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."]
3
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John Hancock Funds - Sovereign Bond Fund
[Chart with the heading "Top Five Bond Sectors" at top of left hand column. The
chart lists five sectors: 1) Banks/Financials 25% 2) U.S. Government & Agencies
23% 3) Utilities 14% 4) Broadcast/Communications 6% 5) Transportation 6%. A
footnote below states: "As a percentage of net assets on May 31, 1997."]
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"...the emerging market bonds we have selected offer high yields with, we
believe, comparatively low credit risk."
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Services, Inc., which produced a gain of 7.60% at net asset value.1 Please see
pages six and seven for longer-term performance information.
Timely duration adjustments helped Fund
While we generally try to avoid making major shifts in the portfolio's average
duration, a measure of the Fund's sensitivity to interest-rate changes, the
adjustments we did make proved timely. At the outset, we kept the Fund's
duration shorter than other comparable bond funds and its benchmark, the Lehman
Brothers Government/Corporate Bond Index. In addition, we "barbelled" the Fund's
holdings by aligning assets at opposite ends of the yield curve, owning both
short-term and long-term securities. A defensive orientation, this strategy
helped provide a level of stability when the yield curve flattened last summer
and yields rose while prices declined.
[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 Owens
Illinois followed by an up arrow and the phrase "Bonds tendered; gain on sale."
The second listing is Riverwood International followed by a horizontal arrow and
the phrase "Paper prices stabilize." The third listing is PageNet followed by a
down arrow and the phrase "Paging industry fundamentals deteriorating." Footnote
below reads: "See "Schedule of Investments." Investment holdings are subject to
change."]
Once the turbulence settled in the fall, we extended duration slightly and
moved toward a more neutral posture, easing up on the barbell structure. The
Fund was then able to take full advantage of the market's price appreciation in
October and November. Coming into January, we shortened duration yet again and
re-emphasized the barbell, allowing the Fund to weather the tumult caused by the
Fed's action in March and inaction in May. Given the likelihood of further
market turbulence and Fed rate increases, we believe maintaining a defensive
position is the most prudent course of action.
Tightening yield spreads
Over the year, yield spreads -- the difference in yields offered by corporate
and Treasury bonds, and corporate bonds of varying credit quality -- have
narrowed, contributing to the Fund's solid performance. Healthy demand for new
corporate issues, investors' continuing appetite for yield, and the financial
strength of corporate America helped boost corporate bond prices and push yields
lower, bringing them closer to one another and to the yields offered by Treasury
securities.
Going forward, should the Fed raise rates yet again, a weaker equity market
and economy may be down the road. Given this possibility, we have begun to
upgrade the portfolio's credit quality by slightly reducing our exposure to
high-yield bonds and cyclical issues, those whose fortunes rise and fall with
the state of the economy.
One way we have been able to improve quality without sacrificing yield has
been to explore opportunities in emerging-market corporate bonds whose values
are pegged to the U.S. dollar. As privatization and fiscal responsibility take
hold in many emerging nations, attractive opportunities are coming to market,
such as Camuzzi Gas, a gas company in Argentina. Because no
4
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John Hancock Funds - Sovereign Bond Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the 12 months ended May 31, 1997." The chart is
scaled in increments of 5% from bottom to top, with 10% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
9.07% total return for John Hancock Sovereign Bond Fund: Class A. The second
represents the 8.31% total return for John Hancock Sovereign Bond Fund: Class B.
The third represents the 7.60% 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."]
corporation's credit rating is allowed to be higher than that of its home
country's government bonds, the creditworthiness of many emerging market
corporate debt securities is often masked. As a result, the emerging-market
bonds we have selected for inclusion in the Fund offer high yields with, we
believe, comparatively low credit risk.
Pockets of strength
In creating a well diversified portfolio, we often uncover new investment
opportunities that have not been well researched by market analysts and are
often misunderstood. Such investments have the potential to generate high total
return. Two more recent structured debt issues we purchased include capital
notes and home equity loan-backed securities. Capital notes are junior
subordinated debt securities of a bank or corporation. Banks can carry them on
their balance sheets as equity yet deduct their interest. Home equity
loan-backed securities are asset-backed instruments that are rated AAA and offer
less prepayment risk than traditional mortgage-backed bonds. These issues came
to market fairly cheaply because relatively few analysts followed them. By
buying them early on, we capitalized on their price appreciation as they gained
recognition and popularity in the marketplace.
- --------------------------------------------------------------------------------
"... we believe maintaining a defensive position is the most prudent course of
action."
- --------------------------------------------------------------------------------
Holdings in the media and cable sectors, which benefited from industry-wide
consolidation, also contributed to performance. Merger and acquisition activity
pervaded the utility industry as well. The Fund owned several lower-quality
utility bonds that instantly traded as higher-quality issues, enjoying
substantial price appreciation, once higher-quality companies took steps to
acquire them. Cleveland Electric and Long Island Lighting are two worth
mentioning.
Outlook: caution is the watchword
Given the implications for economic growth, along with the fact that the Fed did
not raise interest rates in May, the stage appears set for further rate
increases this summer or fall. We plan to stay defensively positioned in the
near term, maintaining a duration shorter than that of the Fund's benchmark.
With corporate bond spreads still historically narrow, the yield-enhanced
sectors -- such as foreign corporate bonds, asset-backed and mortgage-backed
securities -- will continue to be our focus. Selectivity will be key in terms of
credit quality and price. Once the market settles down, we will look for an
entry point to take on more interest rate exposure by increasing our allocation
to Treasury bonds
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the fiscal
period discussed in this report. The manager's views are subject to change as
market and other conditions warrant.
1Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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A LOOK AT PERFORMANCE
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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 shares, expressed as a percentage 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. 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.
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CUMULATIVE TOTAL RETURNS
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For the period ended March 31, 1997
One Five Most Recent
Year Years Ten Years
------- ------- ---------
John Hancock Sovereign Bond Fund:
Class A 1.02% 39.71% 111.17%
John Hancock Sovereign Bond Fund:
Class B(1) 0.05% 16.29% N/A
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended March 31, 1997
One Five Most Recent
Year Years Ten Years
------- ------- ---------
John Hancock Sovereign Bond Fund:
Class A 1.02% 6.92% 7.76%
John Hancock Sovereign Bond Fund:
Class B(1) 0.05% 4.61% N/A
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YIELDS
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As of May 31, 1997
SEC 30-Day
Yield
--------
John Hancock Sovereign Bond Fund:
Class A 6.26%
John Hancock Sovereign Bond Fund:
Class B 5.85%
Notes to Performance
(1) Class B shares started on November 23, 1993.
6
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Sovereign Bond Fund would be worth on May 31, 1997. 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.
[Line chart with the heading Sovereign Bond Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the most recent 10 years.
Within the chart are three lines. The first line represents the value of the
Lehman Brothers Corporate Bond Index and is equal to $24,365 as of May 31, 1997.
The second line represents the value of the hypothetical $10,000 investment made
in the Sovereign Bond Fund, on May 31, 1987, before sales charge, and is equal
to $23,420 as of May 31, 1997. The third line represents the value of the
Sovereign Bond Fund, after sales charge, and is equal to $22,366 as of May 31,
1997.]
[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 $12,248 as of May 31, 1997. The
second line represents the value of the hypothetical $10,000 investment made in
the Sovereign Bond Fund, on November 23, 1993, and is equal to $12,222 as of May
31, 1997. The third line represents the value of the Sovereign Bond Fund, after
sales charge, and is equal to $11,922 as of May 31, 1997.]
7
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
Statement of Assets and Liabilities
May 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $1,392,751,116) ............................. $1,379,273,347
Joint repurchase agreement (cost - $99,066,000) ........... 99,066,000
Corporate savings account ................................. 4,227
--------------
.............................................................. 1,478,343,574
Receivable for investments sold ............................. 15,954,819
Receivable for shares sold .................................. 440,866
Interest receivable ......................................... 27,562,129
Receivable for variation margin - Note A .................... 60,031
Other assets ................................................ 92,918
--------------
Total Assets ......................... 1,522,454,337
------------------------------------------------------
Liabilities:
Payable for investments purchased ........................... 25,365,561
Payable for shares repurchased .............................. 307,817
Dividend payable ............................................ 529,115
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................... 1,083,640
Accounts payable and accrued expenses ....................... 358,591
--------------
Total Liabilities .................... 27,644,724
------------------------------------------------------
Net Assets:
Capital paid-in ............................................. 1,526,283,308
Accumulated net realized loss on investments and
financial futures contracts ............................... ( 18,693,339)
Net unrealized depreciation of investments and financial
futures contracts ......................................... ( 13,395,032)
Undistributed net investment income ......................... 614,676
--------------
Net Assets ........................... $1,494,809,613
======================================================
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 - $1,361,924,193/92,150,108 ......................... $ 14.78
=============================================================================
Class B - $132,885,420/8,991,253 ............................ $ 14.78
=============================================================================
Maximum Offering Price Per Share*
Class A - ($14.78 x 104.71%) ................................ $ 15.48
=============================================================================
* 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 May 31, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1997
DECEMBER 31, 1996 TO MAY 31, 1997(1)
----------------- ------------------
<S> <C> <C>
Investment Income:
Interest ........................................................................ $131,678,682 $53,003,235
------------ -----------
Expenses:
Investment management fee -- Note B ........................................... 7,799,825 3,116,997
Distribution and service fee -- Note B
Class A ..................................................................... 4,351,058 1,710,733
Class B ..................................................................... 1,153,646 537,480
Transfer agent fee -- Note B .................................................. 4,073,058 1,436,239
Financial services fee -- Note B .............................................. 291,977 116,998
Custodian fee ................................................................. 274,623 131,602
Printing ...................................................................... 232,979 112,401
Trustees' fees ................................................................ 130,832 109,575
Legal fees .................................................................... 86,135 4,537
Auditing fee .................................................................. 45,452 31,000
Registration and filing fees .................................................. 40,653 7,601
Miscellaneous ................................................................. 24,803 5,516
------------ -----------
Total Expenses ........................................... 18,505,041 7,320,679
----------------------------------------------------------------------------------------------
Net Investment Income .................................... 113,173,641 45,682,556
----------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized loss on investments sold ........................................... ( 5,741,420) ( 2,367,791)
Net realized loss on financial futures contracts ................................ ( 1,801,834) ( 294,736)
Change in net unrealized appreciation/depreciation
of investments ................................................................ ( 45,633,903) ( 10,653,752)
Change in net unrealized appreciation/depreciation
of financial futures contracts ................................................ - 71,000
------------ -----------
Net Realized and Unrealized Loss on
Investments and Financial Futures Contracts .............. ( 53,177,157) ( 13,245,279)
----------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................................ $ 59,996,484 $32,437,277
==============================================================================================
(1) Effective May 31, 1997, the fiscal period end changed from December 31 to May 31.
</TABLE>
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.
SEE NOTES TO FINANCIAL STATMENTS.
9
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------- JANUARY 1, 1997
1995 1996 TO MAY 31, 1997(1)
-------------- -------------- ------------------
<S> <C> <C> <C>
Increase in (Decrease) Net Assets:
From Operations:
Net investment income .................................................... $ 111,800,337 $ 113,173,641 $ 45,682,556
Net realized gain (loss) on investments sold and financial
futures contracts ...................................................... 9,875,400 ( 7,543,254) ( 2,662,527)
Change in net unrealized appreciation/depreciation of investments
and financial futures contracts ........................................ 140,081,956 ( 45,633,903) ( 10,582,752)
-------------- -------------- --------------
Net Increase in Net Assets Resulting from Operations ................. 261,757,693 59,996,484 32,437,277
-------------- -------------- --------------
Distributions to Shareholders:
Distributions from net investment income
Class A -- ($1.1151, $1.0858 and $0.4449 per share, respectively) ...... ( 107,383,916) ( 105,555,822) ( 41,557,976)
Class B -- ($1.0221, $0.9813 and $0.4021 per share, respectively) ...... ( 4,389,308) ( 7,590,937) ( 3,536,786)
Class C** -- ($0.4338, none and none per share, respectively) .......... ( 27,113) -- --
-------------- -------------- --------------
Total Distributions to Shareholders .................................. ( 111,800,337) ( 113,146,759) ( 45,094,762)
-------------- -------------- --------------
From Fund Share Transactions -- Net*: ...................................... 115,957,978 ( 30,564,714) ( 42,760,453)
-------------- -------------- --------------
Net Assets:
Beginning of period ...................................................... 1,368,027,206 1,633,942,540 1,550,227,551
-------------- -------------- --------------
End of period (including undistributed net investment income of
none, $26,882 and $614,676, respectively) .............................. $1,633,942,540 $1,550,227,551 $1,494,809,613
============== ============== ==============
<CAPTION>
* Analysis of Fund Share Transactions: YEAR ENDED DECEMBER 31, PERIOD FROM
-------------------------------------------------- JANUARY 1, 1997
1995 1996 TO MAY 31, 1997(1)
------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ....................................... 8,319,081 $123,160,717 12,026,163 $178,554,337 15,151,869 $223,139,215
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 2,161,346 31,871,020
---------- ------------ ---------- ------------ ---------- ------------
.................................................... 19,188,484 285,220,725 17,531,146 260,121,804 17,313,215 255,016,258
Less shares repurchased ........................... (14,896,492)( 219,827,040)(22,184,916)( 329,117,996)(20,200,777)( 297,599,361)
---------- ------------ ---------- ------------ ---------- ------------
Net increase (decrease) ........................... 4,291,992 $ 65,393,685 ( 4,653,770)($ 68,996,192)( 2,887,562)($ 42,583,103)
========== ============ ========== ============ ========== ============
CLASS B
Shares sold ....................................... 3,520,133 $ 52,253,097 6,495,177 $ 96,388,497 1,583,824 $ 23,396,615
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 4,401,471 137,791 2,031,711
---------- ------------ ---------- ------------ ---------- ------------
.................................................... 4,194,718 62,370,880 6,792,359 100,789,968 1,721,615 25,428,326
Less shares repurchased ........................... ( 681,957)( 10,100,167)( 4,203,557)( 62,358,490)( 1,730,811)( 25,605,676)
---------- ------------ ---------- ------------ ---------- ------------
Net increase (decrease) ........................... 3,512,761 $ 52,270,713 2,588,802 $ 38,431,478 ( 9,196)($ 177,350)
========== ============ ========== ============ ========== ============
CLASS C **
Shares sold ....................................... - -
Less shares repurchased ........................... ( 120,133)( 1,706,420)
---------- ------------
Net decrease ...................................... ( 120,133)($ 1,706,420)
---------- ------------
** All Class C shares were redeemed on March 31, 1995.
(1) Effective May 31, 1997, the fiscal period end changed from December 31 to May 31.
</TABLE>
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
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1997
------------------------------------------------------------- TO MAY 31,
1992 1993 1994 1995 1996 1997(7)
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <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 $ 14.90
--------- --------- --------- --------- --------- ---------
Net Investment Income ............................... 1.20 1.14 1.12 1.12 1.09 0.44
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ....... ( 0.01) 0.62 ( 1.55) 1.50 ( 0.50) ( 0.12)
--------- --------- --------- --------- --------- ---------
Total from Investment Operations ................ 1.19 1.76 ( 0.43) 2.62 0.59 0.32
--------- --------- --------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income .............. ( 1.21) ( 1.14) ( 1.12) ( 1.12) ( 1.09) ( 0.44)
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) ( 0.44)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ...................... $ 15.29 $ 15.53 $ 13.90 $ 15.40 $ 14.90 $ 14.78
========= ========= ========= ========= ========= =========
Total Investment Return at Net Asset Value (1) ...... 8.08% 11.80% ( 2.75%) 19.40% 4.11% 2.22%(3)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............ $1,386,260 $1,505,754 $1,326,058 $1,535,204 $1,416,116 $1,361,924
Ratio of Expenses to Average Net Assets ............. 1.44% 1.41% 1.26% 1.13% 1.14% 1.11%(4)
Ratio of Net Investment Income to Average
Net Assets ........................................ 7.89% 7.18% 7.74% 7.58% 7.32% 7.38%(4)
Portfolio Turnover Rate ............................. 87% 107% 85% 103%(6) 123% 58%
CLASS B (2)
Per Share Operating Performance
Net Asset Value, Beginning of Period ............................. $ 15.90 $ 15.52 $ 13.90 $ 15.40 $ 14.90
--------- --------- --------- --------- ---------
Net Investment Income ............................................ 0.11 1.04 1.02 0.98 0.40
Net Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts ................................ - ( 1.54) 1.50 ( 0.50) ( 0.12)
--------- --------- --------- --------- ---------
Total from Investment Operations ............................. 0.11 ( 0.50) 2.52 0.48 0.28
--------- --------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income ............................. ( 0.11) ( 1.04)( 1.02) ( 0.98) ( 0.40)
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) ( 0.40)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period ................................... $ 15.52 $ 13.90 $ 15.40 $ 14.90 $ 14.78
========= ========= ========= ========= =========
Total Investment Return at Net Asset Value (1) ................... 0.90%(3)( 3.13%) 18.66% 3.38% 1.93%(3)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ......................... $ 4,125 $ 40,299 $ 98,739 $ 134,112 $ 132,885
Ratio of Expenses to Average Net Assets .......................... 1.63%(4) 1.78% 1.75% 1.84% 1.81%(4)
Ratio of Net Investment Income to Average Net Assets ............. 0.57%(4) 7.30% 6.87% 6.62% 6.68%(4)
Portfolio Turnover Rate .......................................... 107% 85% 103%(6) 123% 58%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<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 (000s 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.
(7) Effective May 31, 1997, the fiscal period end changed from December 31 to May 31.
(8) On average month-end shares outstanding.
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each 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.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
Schedule of Investments
May 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Sovereign Bond Fund on May 31, 1997. 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.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
BONDS
Aerospace (0.45%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) ............... 10.910% BBB- $ 5,800 $ 6,724,346
------------
Banks - Foreign (3.44%)
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04 (Y) ................... 8.200 AA- 10,000 10,580,800
African Development Bank,
Sub Note (Supra National) 12-15-03 (Y) ................... 9.750 AA- 8,000 9,174,400
Dao Heng Bank Ltd.,
Sub Note (Hong Kong) 01-24-07 (R) (Y) .................... 7.750 BBB 7,955 7,896,133
International Bank for Reconstruction & Development,
Deb (Supra National) 09-01-16 (Y) ........................ 8.250 AAA 5,000 5,553,250
Landeskreditbank Baden - Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) .......................... 7.625 AAA 6,820 6,989,477
Scotland International Finance No. 2 B.V.,
Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) .............. 8.850 A 10,250 11,296,258
------------
51,490,318
------------
Banks - United States (5.16%)
ABN-Amro Bank N.V. - Chicago Branch,
Gtd Sub Deb 05-31-05 ..................................... 7.250 AA- 5,000 5,012,950
Bank of New York,
Cap Security 12-01-26 (R) ................................ 7.780 A- 5,425 5,160,531
Banque National de Paris - New York Branch,
Sub Note 01-15-07 ........................................ 7.200 A 4,890 4,793,960
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 .................................... 9.750 AA- 8,925 9,921,119
Centura Capital Trust I,
Cap Security 06-01-27 (R) ................................ 8.845 BB+ 2,680 2,713,500
National Westminster Bank PLC - New York Branch,
Sub Note 05-01-01 ........................................ 9.450 AA- 10,000 10,875,300
NB Capital Trust IV,
Cap Security 04-15-27 .................................... 8.250 A- 5,155 5,217,582
Peoples Heritage Capital Trust I,
Cap Security Ser B 02-01-27 .............................. 9.060 BB+ 2,095 2,104,428
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 .................................... 10.125 A+ 10,605 12,166,374
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Banks - United States (continued)
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 ............................ 10.360% A $ 6,000 $ 6,696,360
Sub Note 11-15-00 ........................................ 11.500 A 6,400 7,293,440
State Street Institutional Capital B,
Cap Security 03-15-27 (R) ................................ 8.035 A 5,335 5,228,300
------------
77,183,844
------------
Chemicals (0.56%)
OPP Petroquimica S.A.,
Bond (Brazil) 10-29-04 (R) (Y) ........................... 11.000 NR 5,095 5,158,688
Sociedad Quimica y Minera de Chile S.A.,
Loan Part Ctf (Chile) 09-15-06 (R) (Y) ................... 7.700 BBB+ 3,200 3,208,000
------------
8,366,688
------------
Containers (0.68%)
Owens-Illinois, Inc.,
Sr Note 05-15-07 ......................................... 8.100 BB+ 4,200 4,242,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 .. 12.250 B- 5,720 5,863,000
------------
10,105,000
------------
Cosmetics & Personal Care (0.42%)
Johnson & Johnson,
Deb 11-15-23 ............................................. 6.730 AAA 6,750 6,248,475
------------
Energy (1.21%)
AES China Generating Co. Ltd.,
Note (Bermuda) 12-15-06 (Y) .............................. 10.125 BB- 2,670 2,843,550
AES Corp.,
Sr Sub Note 06-15-00 ..................................... 9.750 B+ 5,855 6,045,287
Sr Sub Note 07-15-06 ..................................... 10.250 B+ 4,500 4,876,875
CalEnergy Co. Inc.,
Sr Note 09-15-06 ......................................... 9.500 BB+ 4,115 4,331,037
------------
18,096,749
------------
Finance (10.97%)
American Express Co.,
Gtd Deb Ser D 12-12-00 ................................... 11.625 A+ 8,670 9,081,235
Banc One Credit Card Master Trust,
Asset Backed Ctf Ser 1994-B Class A 12-15-99 ............. 7.550 AAA 10,000 10,075,000
Chrysler Financial Corp.,
Deb 11-01-99 ............................................. 12.750 A- 3,000 3,403,590
CIT Group Holdings, Inc.,
Deb 03-15-01 ............................................. 9.250 A 5,000 5,399,300
Constitution Capital Trust I,
Cap Security 04-15-27 (R) ................................ 9.150 BBB 3,725 3,737,963
ContiFinancial Corp.,
Sr Note 08-15-03 ......................................... 8.375 BB+ 6,000 6,092,520
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Finance (continued)
CS First Boston,
Sub Note 05-15-06 (R) .................................... 7.750% A3 $ 4,635 $ 4,743,969
CSW Investments,
Sr Note (United Kingdom) 08-01-06 (R) (Y) ................ 7.450 A- 4,500 4,475,565
DSPL Finance Co. B.V.,
Gtd Sr Sec Note (Netherlands) 12-30-10 (R) (Y) ........... 9.120 BBB 5,000 5,056,250
Green Tree Home Improvement Loan Trust,
Pass Thru Ctf Ser 1995-D Class M-1 09-15-25 .............. 6.950 Aa2 6,130 6,062,938
Pass Thru Ctf Ser 1996-F Class HI: A3 11-15-27 ........... 6.750 AAA 2,800 2,762,004
Pass Thru Ctf Ser 1997-A Class HI: A3 08-15-23 ........... 7.050 AAA 5,445 5,427,957
Greenpoint Capital Trust I,
Cap Security 06-01-27 (R) ................................ 9.100 BB 3,170 3,195,994
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-1 Class A-5 12-25-13 .............. 6.290 AAA 6,816 6,699,915
MBNA Master Credit Card Trust,
Ser 1995-D Class A 11-15-02 .............................. 6.050 AAA 16,075 15,853,969
Merrill Lynch Mortgage Investors, Inc.,
Sub Bond Ser 1992-B Class B 04-15-12 ..................... 8.500 Aaa 2,583 2,638,706
Midland American Capital Corp.,
Gtd Deb 11-15-03 ......................................... 12.750 A 19,932 21,619,044
Polysindo International Finance Co. B.V.,
Gtd Sr Sec Note (Netherlands) 06-15-06 (Y) ............... 11.375 BB 1,825 1,984,688
Santander Financial Issuances Ltd.,
Gtd Sub Note (Cayman Islands) 04-15-05 (Y) ............... 7.875 A+ 6,980 7,199,730
Standard Credit Card Master Trust,
Credit Card Part Ctf Ser 1995-10 Class A 02-07-01 ........ 5.900 AAA 4,580 4,548,490
Termoemcali Funding Corp.,
Sr Sec Note 12-15-14 (R) ................................. 10.125 BBB- 3,305 3,519,825
Trump Hotels & Casino Resorts Funding, Inc./Holdings, L.P.,
Sr Sec Note 06-15-05 ..................................... 15.500 B+ 5,150 5,896,750
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1994-A Class A3 07-10-18 ............... 6.100 AAA 3,235 3,181,926
Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 .............. 7.180 AAA 7,260 7,164,713
United Companies Financial Corp.,
Sr Note 01-15-04 ......................................... 7.700 BBB- 5,420 5,303,036
Wharf International Finance Ltd.,
Gtd Note (Cayman Islands) 03-13-07 (R) (Y) ............... 7.625 A 4,530 4,460,918
Yanacocha Receivables,
Pass Thru Cert Ser 1997-A 06-15-05 (R) ................... 8.400 BBB- 4,435 4,457,175
------------
164,043,170
------------
Food (0.17%)
Arisco Produtos Alimenticios S.A.,
Bond (Brazil) 05-22-05 (R) (Y) ........................... 10.750 NR 2,500 2,506,250
------------
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Funeral Services & Related (0.47%)
Loewen Group International, Inc.,
Gtd Sr Note Ser 4 10-15-03 ............................... 8.250% BB+ $ 6,860 $ 6,974,905
------------
Glass Products (0.29%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R) (Y) .................... 11.375 B+ 4,140 4,300,218
------------
Government - Foreign (4.83%)
Croatia, Republic of,
Sr Note (Croatia) 02-27-02 (R) (Y) ....................... 7.000 BBB- 4,600 4,473,638
Moscow, City of,
Unsub Deb (Russia) 05-31-00 (R) (Y) + .................... 9.500 NR 5,230 5,256,150
Nova Scotia, Province of,
Deb (Canada) 05-15-13 (Y) ................................ 11.500 A- 10,655 11,623,326
Deb (Canada) 04-01-22 (Y) ................................ 8.750 A- 7,500 8,411,100
Ontario, Province of,
Deb (Canada) 08-31-12 (Y) ................................ 15.250 AA- 6,595 7,119,500
Deb (Canada) 04-25-13 (Y) ................................ 11.750 AA- 6,000 6,557,820
Panama, Republic of,
Note (Panama) 02-13-02 (R) (Y) ........................... 7.875 BB+ 4,385 4,330,188
Quebec, Province of,
Deb (Canada) 10-01-13 (Y) ................................ 13.000 A+ 11,000 12,410,420
Deb (Canada) 09-15-14 (Y) ................................ 13.250 A+ 1,000 1,174,260
Saskatchewan, Province of,
Bond (Canada) 12-15-20 (Y) ............................... 9.375 A- 5,000 5,966,550
United Mexican States,
Gtd Sec Deb (Mexico) 12-31-19 (Y) ........................ 6.250 BB 2,920 2,197,300
Venezuela, Republic of,
Floating Rate Bond Ser DL (Venezuela) 12-18-07, (Y) ...... 6.625# Ba2 3,000 2,732,820
------------
72,253,072
------------
Government - U.S. (15.69%)
United States Treasury,
Bond 08-15-17 ............................................ 8.875 AAA 42,556 51,140,396
Bond 05-15-18 ++ ......................................... 9.125 AAA 47,075 57,990,280
Bond 02-15-23 ............................................ 7.125 AAA 44,140 44,760,608
Note 02-15-99 ............................................ 8.875 AAA 24,065 25,113,993
Note 11-30-99 ............................................ 7.750 AAA 25,840 26,687,810
Note 05-15-01 ............................................ 8.000 AAA 7,418 7,809,745
Note 02-15-05 ............................................ 7.500 AAA 20,037 21,067,102
------------
234,569,934
------------
Government - U.S. Agencies (7.51%)
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 ............................. 11.250 AAA 1,399 1,554,383
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 01-25-05 ............................. 8.000 AAA 10,000 10,306,200
15 Yr Pass Thru Ctf 02-01-08 ............................. 7.500 AAA 2,793 2,833,198
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Government - U.S. Agencies (continued)
15 Yr Pass Thru Ctf 06-01-10 + ........................... 7.000% AAA $ 8,280 $ 8,225,600
30 Yr Pass Thru Ctf 10-01-23 ............................. 7.000 AAA 8,306 8,136,789
Financing Corp.,
Bond 02-08-18 ............................................ 9.400 AAA 7,000 8,629,670
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 02-15-24 to 02-15-26 ................. 7.500 AAA 23,399 23,375,841
30 Yr Pass Thru Ctf 11-15-22 ............................. 8.000 AAA 4,942 5,062,350
30 Yr Pass Thru Ctf 12-15-22 to 04-15-23 ................. 8.500 AAA 16,530 17,237,209
30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 ................. 9.000 AAA 17,593 18,748,856
30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 ................. 9.500 AAA 4,924 5,304,331
30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 ................. 10.000 AAA 2,269 2,483,308
30 Yr Pass Thru Ctf 01-15-16 ............................. 10.500 AAA 108 118,447
30 Yr Pass Thru Ctf 01-15-16 ............................. 11.000 AAA 243 269,561
------------
112,285,743
------------
Insurance (5.02%)
Conseco, Inc.,
Sr Note 12-15-04 ......................................... 10.500 BBB 6,820 7,950,279
Equitable Life Assurance Society of the United States,
Surplus Note 12-01-05 (R) ................................ 6.950 A 6,050 5,868,500
Fairfax Financial Holdings Ltd.,
Note (Canada) 04-15-26 (Y) ............................... 8.300 BBB+ 6,440 6,580,456
Liberty Mutual Insurance Co.,
Surplus Note 05-04-07 (R) ................................ 8.200 A+ 10,000 10,530,400
Surplus Note 10-15-26 (R) ................................ 7.875 A+ 3,990 3,891,088
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) ................................ 7.625 AA 10,450 10,175,270
NAC Re Corp.,
Note 06-15-99 ............................................ 8.000 A- 3,360 3,447,226
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) ................................ 7.500 AA 15,000 13,913,250
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) ................................ 6.625 AA 7,250 6,896,998
URC Holdings Corp.,
Sr Note 06-30-06 (R) ..................................... 7.875 A- 5,665 5,781,926
------------
75,035,393
------------
Leisure (0.52%)
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 ............................... 13.500 BB+ 1,500 1,972,500
Showboat Marina Casino Partnership/Finance Corp.,
1st Mtg Ser B 03-15-03 ................................... 13.500 B 5,000 5,750,000
------------
7,722,500
------------
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Media (6.33%)
Cablevision Systems Corp.,
Sr Sub Deb 04-01-04 ...................................... 10.750% B $ 6,500 $ 6,743,750
Century Communications Corp.,
Sr Note 08-15-00 ......................................... 9.500 BB- 2,545 2,621,350
Comcast Corp.,
Sr Sub Deb 07-15-12 ...................................... 10.625 BB+ 5,425 6,211,625
Continental Cablevision, Inc.,
Sr Sub Deb 06-01-07 ...................................... 11.000 BBB 12,205 13,725,987
Jones Intercable, Inc.,
Sr Sub Deb 07-15-04 ...................................... 11.500 B+ 9,500 10,212,500
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ............................ 10.625 BB+ 1,750 1,933,750
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 ...................................... 8.250 BBB 9,380 9,386,378
Sr Note 10-15-99 ......................................... 9.125 BBB 7,500 7,897,800
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) ...................... 10.000 BB+ 8,000 8,580,000
SFX Broadcasting, Inc.,
Sr Sub Note Ser B 05-15-06 ............................... 10.750 B- 4,505 4,865,400
TeleWest Communications Plc,
Sr Deb (United Kingdom) 10-01-06 (Y) ..................... 9.625 B+ 3,420 3,488,400
Time Warner, Inc.,
Deb 01-15-13 ............................................. 9.125 BBB- 5,230 5,672,197
TKR Cable I, Inc.,
Sr Deb 10-30-07 .......................................... 10.500 BBB- 9,110 9,929,809
Viacom, Inc.,
Sr Note 06-01-05 ......................................... 7.750 BB+ 3,390 3,335,014
------------
94,603,960
------------
Medical (0.44%)
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 ..................................... 10.750 B+ 3,155 3,360,075
Tenet Healthcare Corp.,
Sr Sub Note 01-15-07 ..................................... 8.625 B+ 3,250 3,282,500
------------
6,642,575
------------
Real Estate Investment Trusts (0.59%)
Realty Income Corp.,
Note 05-06-07 ............................................ 7.750 BBB- 4,335 4,346,271
TriNet Corporate Realty Trust, Inc.,
Note 05-15-01 ............................................ 7.300 BBB- 4,395 4,420,052
------------
8,766,323
------------
Oil & Gas (2.27%)
Ashland Oil, Inc.,
SF Deb 10-15-17 .......................................... 11.125 BBB 5,000 5,356,950
Camuzzi Gas, Pampeana S.A.,
Bond (Argentina) 12-15-01 (R) (Y) ........................ 9.250 BB- 2,965 3,053,950
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Oil & Gas (continued)
Enserch Exploration, Inc.,
Pass Thru Ctf 01-02-09 (R) ............................... 7.540% BBB $ 4,800 $ 4,709,088
Norsk Hydro ASA,
Deb (Norway) 10-01-16 (Y) ................................ 7.500 A 5,790 5,770,372
Petroleos Mexicanos,
Bond (Mexico) 06-01-07 (R) (Y) + ......................... 9.000 NR 2,750 2,756,875
Petroliam Nasional Berhad,
Bond (Malaysia) 10-15-26 (R) (Y) ......................... 7.625 A+ 5,570 5,448,296
Transgas de Occidenta S.A.,
Sr Note (Colombia) 11-01-10 (R) (Y) ...................... 9.790 BBB- 6,592 6,834,459
------------
33,929,990
------------
Paper & Paper Products (1.80%)
APP Finance II Mauritius Ltd.,
Bond (Indonesia) 12-29-49 (R) (Y) ........................ 12.000 B+ 5,325 5,311,687
Copamex Industrias, S.A. de C.V.,
Bond (Mexico) 04-30-04 (R) (Y) ........................... 11.375 B1 3,935 4,176,019
Georgia Pacific Corp.,
Deb 01-15-18 ............................................. 9.750 BBB- 7,500 7,827,075
Indah Kiat International Finance Co.,
Gtd Sec Bond Ser C (Netherlands) 06-15-06, (Y) ........... 12.500 BB 4,575 5,146,875
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 ............................... 12.000 B+ 3,945 4,398,675
------------
26,860,331
------------
Retail (0.62%)
Proffitt's, Inc.,
Sr Note 05-15-04 (R) ..................................... 8.125 BB 1,750 1,741,250
Safeway, Inc.,
Deb 01-15-09 ............................................. 13.500 BBB 2,609 2,895,805
Supermercados Norte,
Bond (Argentina) 02-09-04 (R) (Y) ........................ 10.875 B1 4,440 4,584,300
------------
9,221,355
------------
Steel (0.69%)
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) ............................ 11.500 B+ 5,235 5,634,169
NS Group, Inc.,
Unit (Sr Sec Note & Warrant) 07-15-03 .................... 13.500 B- 2,785 3,188,825
Weirton Steel Corp.,
Sr Note 03-01-98 ......................................... 11.500 B 1,430 1,458,600
------------
10,281,594
------------
Telecommunications (1.46%)
Comtel Brasileira Ltd.,
Note (Brazil) 09-26-04 (R) (Y) ........................... 10.750 NR 3,470 3,708,563
Impsat Corp.,
Gtd Sr Sec Note 07-15-03 ................................. 12.125 BB- 3,220 3,445,400
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Telecommunications (continued)
Jasmine Submarine,
Gtd Sr Note 05-30-11 (R) ................................. 8.483% Baa1 $ 4,630 $ 4,653,150
Paging Network, Inc.,
Sr Sub Note 10-15-08 ..................................... 10.000 B 3,905 3,690,225
TCI Communications, Inc.,
Sr Deb 08-01-15 .......................................... 8.750 BBB- 6,289 6,382,580
------------
21,879,918
------------
Tobacco (0.83%)
Nabisco, Inc.,
Note 04-15-99 ............................................ 8.300 BBB 5,000 5,126,000
RJR Nabisco, Inc.,
Note 12-01-02 ............................................ 8.625 BBB- 4,555 4,646,054
Note 09-15-03 ............................................ 7.625 BBB- 2,770 2,670,086
------------
12,442,140
------------
Transport (5.63%)
America West Airlines,
Pass Thru Ctf Ser B 01-02-08 ............................. 6.930 A- 4,915 4,822,844
Continental Airlines,
Pass Thru Ctf Ser 96-C 04-15-15 .......................... 9.500 BBB 4,902 5,463,676
Humpuss Funding Corp.,
Gtd Note 12-15-09 (R) .................................... 7.720 Baa2 5,100 5,018,451
Northwest Airlines, Inc.,
Gtd Note 03-15-04 ........................................ 8.375 BB- 7,085 7,191,275
Pass Thru Ctf Ser 1996-1C 01-02-05 ....................... 10.150 BB+ 3,414 3,516,712
Pass Thru Ctf Ser 1996-1D 01-02-15 ....................... 8.970 BBB- 3,774 4,047,788
NWA Trust,
Sr Note Ser A 06-21-14 ................................... 9.250 AA 5,522 6,155,278
Rail Car Trust,
Pass Thru Ser 1992-1 Class A 06-01-04 .................... 7.750 AAA 15,450 15,969,535
Scandinavian Airlines System,
Deb (Multinational) 07-20-99 (Y) ......................... 9.125 A3 6,834 7,158,615
Sea-Land Service, Inc.,
Gtd Deb Ser A 01-02-11 ................................... 10.600 BBB 5,000 5,292,600
Gtd Deb Ser B 01-02-11 ................................... 10.600 BBB 7,000 7,409,640
Gtd Deb Ser C 01-02-11 ................................... 10.600 BBB 6,000 6,351,120
USAir, Inc.,
Pass Thru Ctf Ser 1990-A1 03-19-05 ....................... 11.200 B+ 5,521 5,796,573
------------
84,194,107
------------
Utilities (14.22%)
British Columbia Hydro and Power Auth.,
Gtd Bond Ser FN (Canada) 09-01-13 (Y) .................... 12.500 AA+ 6,175 6,851,842
British Telecom Finance, Inc.,
Gtd Deb (United Kingdom) 02-15-19 (Y) .................... 9.625 AAA 9,000 9,827,460
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 ....................... 8.890 BB+ 6,600 6,314,814
SEE NOTES TO FINANCIAL STATEMENTS.
20
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================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Utilities (continued)
Calpine Corp.,
Sr Note 05-15-06 ......................................... 10.500% B+ $ 4,650 $ 4,998,750
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A (Philippines) 11-15-05 (Y) ................. 11.450 BB 4,100 4,494,625
Centrais Eletricas Brasileiras S.A.,
Bond (Brazil) 07-06-04 (R) (Y) ........................... 10.000 NR 1,750 1,830,938
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 ................................... 9.500 BB 9,705 10,396,093
Compania Paranaense de Energy,
Note (Brazil) 05-02-05 (R) (Y) ........................... 9.750 NR 2,350 2,417,563
CTC Mansfield Funding Corp.,
Sec Lease Oblig Deb 03-30-03 ............................. 10.250 B+ 4,451 4,457,988
Sec Lease Oblig Deb 09-30-16 ............................. 11.125 B+ 17,270 18,405,848
EIP Funding-PNM,
Sec Fac Bond 10-01-12 .................................... 10.250 BB- 9,447 10,026,007
Enersis S.A.,
Note (Cayman Islands) 12-01-16 (Y) ....................... 7.400 A- 7,530 7,107,341
Fideicomiso Petacalco Trust,
Sr Sec Note (Mexico) 12-23-09 (R) (Y) .................... 10.160 BB 4,190 4,263,325
First PV Funding Corp.,
Deb Ser 86A 01-15-14 ..................................... 10.300 BB- 2,190 2,349,213
Deb Ser 86B 01-15-16 ..................................... 10.150 BB- 6,744 7,237,324
GTE Corp.,
Deb 11-15-17 ............................................. 10.300 A 8,725 9,293,259
Deb 11-01-20 ............................................. 10.250 A 6,875 7,752,181
Hydro-Quebec,
Gtd Bond (Canada) 02-01-21 (Y) ........................... 9.400 A+ 7,500 8,750,250
Gtd Deb Ser FU (Canada) 02-01-12 (Y) ..................... 11.750 A+ 5,000 6,856,500
Gtd Deb Ser IF (Canada) 02-01-03 (Y) ..................... 7.375 A+ 7,185 7,272,513
Iberdrola International B.V.,
Note 10-01-02 ............................................ 7.500 AA- 8,000 8,182,800
Sr Note (Netherlands) 06-01-03 (R) (Y) ................... 7.125 AA- 8,629 8,704,504
Long Island Lighting Co.,
Deb 07-15-19 ............................................. 8.900 BB+ 1,775 1,870,406
Gen Ref Mtg 05-01-21 ..................................... 9.750 BBB- 6,075 6,250,750
Gen Ref Mtg 07-01-24 ..................................... 9.625 BBB- 6,000 6,251,340
Louisiana Power & Light Co.,
Sec Lease Oblig Bond Ser B 01-02-17 ...................... 10.670 BBB- 10,000 10,698,700
Midland Cogeneration Venture L.P.,
Sec Deb Ser C-91 07-23-02 ................................ 10.330 BB- 11,736 12,557,886
Midland Funding Corp. II,
Deb 07-23-05 ............................................. 11.750 B 3,000 3,428,910
Deb Ser B 07-23-06 ....................................... 13.250 B 1,900 2,265,731
SEE NOTES TO FINANCIAL STATEMENTS.
21
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================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
Utilities (continued)
System Energy Resources, Inc.,
1st Mtg 08-01-01 ......................................... 7.710% BBB- $ 5,525 $ 5,721,138
Tenaga Nasional Berhad,
Note (Malaysia) 06-15-04 (R) (Y) ......................... 7.875 A+ 5,500 5,708,450
------------
212,544,449
------------
TOTAL LONG-TERM DEBT
(Cost $1,392,751,116) ( 92.27%) 1,379,273,347
------- -------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (6.63%)
Investment in a joint repurchase agreement
transaction with Swiss Bank Corp. -
Dated 05-30-97, Due 06-02-97
(secured by U.S. Treasury Notes, 6.375%, Due 05-15-99,
U.S. Treasury Bonds, 6.250% - 11.250%, Due 11-15-08
thru 08-15-23) - Note A .................................... 5.560% 99,066 99,066,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ......................................... 4,227
--------------
TOTAL SHORT-TERM INVESTMENTS ( 6.63%) 99,070,227
------- --------------
TOTAL INVESTMENTS ( 98.90%) $1,478,343,574
======= ==============
NOTES TO THE SCHEDULE OF INVESTMENTS
(Y) Parenthetical disclosure of a foreign country in the security description represents
country of a foreign issuer; however, security is U.S. dollar denominated.
(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 $233,878,159 as of May 31, 1997.
* Credit ratings are unaudited and are rated by Moody's Investor Services or John Hancock Advisers,
Inc. where Standard and Poor's ratings are not available.
# Represents rate effective on May 31, 1997.
+ These securities having an aggregate value of $16,238,625 or 1.09% of the Fund's net assets have
been purchased on a when-issued basis. The purchase price and the interest rate of such securities
are fixed at trade date, although the Fund does not earn any interest on such securities until
settlement date. The Fund has instructed its custodian bank to segregate assets with a current value
at least equal to the amount of when-issued commitments. Accordingly, the market value of $8,497,823
of U.S. Treasury Bond, 7.125%, due 2-15-23 and $10,594,082 of U.S. Treasury Bond, 9.125%, due 5-15-18
have been segregated to the when-issued commitments.
++ U.S. Treasury Bonds with a value of $227,896 owned by the Fund were designated as margin deposits for
futures contracts on May 31, 1997.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Sovereign Bond Fund (the "Fund") is a diversified open-end
investment management company, registered under the Investment Company Act of
1940. On May 21, 1996 the Trustees voted to approve a change in the fiscal
period end from December 31 to May 31. This change is effective May 31, 1997.
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.
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 obli-gations 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 $29,796,705 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: May 31, 1999 - $755,945, May 31, 2001 - $10,107,031, May 31,
2002 - $9,347,493, May 31, 2004 - $8,402,805 and May 31, 2005 - $1,183,431.
Expired capital loss carryforwards are reclassified to capital paid-in in the
year of expiration.
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.
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 and 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.
23
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
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.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Fund had no borrowing
activity for the period ended May 31, 1997.
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 underlying 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 May 31, 1997, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- ------------- -------- ------------
SEP 97 113 TREASURY BOND LONG $ 71,000
========
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 May 31,
1997, JH Funds received net sales charges of $695,419 with regard to sales of
Class A shares. Out of this amount, $80,489 was retained and used for printing
of prospectuses, advertising, sales literature and other purposes, and $132,654
was paid as sales commissions to unrelated broker-dealers and $482,276 was paid
as sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro &
Co., Inc. ("Sutro"), all of which are broker-dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect
sole shareholder of Distributors and was the indirect 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
24
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
shares. For the period ended May 31, 1997, contingent deferred sales charges
received by JH Funds amounted to $185,280.
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 the period was
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 Mr. Richard S. Scipione
are trustees 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. 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 May 31, 1997, the Fund's investment to cover the deferred
compensation had unrealized appreciation of $11,737.
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 May 31, 1997 aggregated $397,951,647 and $430,577,535,
respectively. Purchases and proceeds from sales of obligations of the U.S.
government and its agencies, during the period ended May 31, 1997, aggregated
$422,197,358 and $468,558,585, respectively.
The cost of investments owned at May 31, 1997 (excluding the corporate
savings account) for federal income tax purposes was $1,494,683,305. Gross
unrealized appreciation and depreciation of investments aggregated $24,464,953
and $40,808,911, respectively, resulting in net unrealized depreciation of
$16,343,958.
25
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
REPORT OF 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 May 31, 1997, and the related statement of operations for the period from
January 1, 1997 to May 31, 1997 and for the year ended December 31, 1996, the
statement of changes in net assets 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. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the custodian and brokers, and other 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 May 31, 1997, the results of
its operations for the period from January 1, 1997 to May 31, 1997 and the year
ended December 31, 1996, and the changes in its net assets and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 11, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended May 31,
1997.
All of the dividends paid for the fiscal year are taxable as ordinary income.
None of the dividends qualify for the dividends received deduction available to
corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-DIV in
January 1998. This will reflect the total of all distributions which are taxable
for calendar year 1997.
26
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NOTES
27
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