SEMIANNUAL REPORT
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Sovereign
Bond Fund
NOVEMBER 30, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<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 02109-1803
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===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 have been anything but dull. Bond investors have
enjoyed the benefits of a strong economy with no inflation. Stock investors have
been treated to record-breaking performance by the Dow Jones Industrial Average,
but with record-breaking volatility. After two years of strong advances with
relatively minor swings, the stock market's recent sharp drops and enormous
rebounds have caused a fair share of investor concern.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
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
Tame inflation, moderate economy trigger bond rally
Bond investors fared well over the last six months, as interest rates mostly
moved down and prices rose. When the period began in June, bonds were rallying
on economic data that suggested growth was slowing from its torrid first-quarter
pace and that inflation remained tame. In mid July, however, volatility
increased and bonds had a setback when monthly economic data suggested the
economy was picking up steam. Yet for all investors' fears, inflation remained
dormant, and bonds turned upward again in early September and maintained their
march through the period's end. In large part the bond surge reflected the
market's growing confidence in the notion that the Federal Reserve was not going
to raise interest rates again to slow down the economy, given its moderating
pace and subdued inflation. Other factors keeping the Fed neutral were the
strength of the U.S. dollar, which eroded the overseas profits of multinational
companies, and the credit and currency woes that struck Southeast Asia in the
summer. These events served to further ease U.S. inflation fears.
Yet the shock waves in the Pacific Rim reverberated throughout world markets
in October, after the fears of currency devaluations spread to Latin America. As
equity markets plunged worldwide, investors in a classic "flight to safety"
headed for the security of the more stable U.S. market, and U.S. Treasury bonds
in particular. In this brief period, U.S. corporate bonds -- both
investment-grade and lower-rated high-yield bonds -- saw their prices drop
sharply compared to Treasuries, cutting short their uphill charge.
Emerging-market bonds were hardest hit by the turbulence. By the end of
November, however, stability returned to most of the U.S. corporate market,
"Bond investors fared well over the last six months..."
[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 and Linda Carter."]
3
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John Hancock Funds - Sovereign Bond Fund
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TOP FIVE BOND SECTORS
[Chart with the heading "Top Five Bond Sectors" at top of left hand column. The
chart lists five sectors: 1) U.S. Government & Agencies 29% 2) Banks/Financials
22% 3) Utilities 13% 4) Media 7% 5) Transport 6%. A footnote below states: "As a
percentage of net assets on November 30, 1997."]
As a percentage of net assets on November 30, 1997
- --------------------------------------------------------------------------------
while uncertainty still abounded in the emerging markets.
Despite the late-period turbulence, it was a rewarding time for bond
investors, and John Hancock Sovereign Bond Fund was no exception. For the six
months ended November 30, 1997, the Fund's Class A and Class B shares posted
total returns of 6.38% and 6.01%, respectively, at net asset value. Those
results were in line with the 6.58% return of the average corporate debt A-rated
fund, according to Lipper Analytical Services, Inc.(1) Longer-term performance
can be found on pages six and seven.
Timely moves, defensive strategy pay off
We believe that the key to the Fund's steady long-term performance lies in our
in-depth research analysis that helps us both anticipate market moves and know
which credits to buy and to avoid. What's more, we maintain such a highly
diversified portfolio that the Fund feels the effects less when any sector or
specific credit has a downturn.
Our timely moves this period helped us successfully maneuver through the
late-period pitfalls. We sold some of our corporate bonds in anticipation that
their prices, which had risen steadily with the robust U.S. economy, would begin
to come down as turbulence increased. In particular, we avoided the most
volatile emerging markets, including Thailand, Malaysia and Korea, by selling
our small positions there ahead of the worst turmoil. In early summer, for
example, we sold a Bangkok Bank bond for only slightly less than what we had
paid for it earlier in the year. By the end of October, its price had plunged as
the spread, or difference, between its yield and that of U.S. Treasuries widened
from 155 basis points (1.5%) when we bought it, to more than 600 basis points
(6.0%) at the end of November. We also eliminated our small exposure to Hong
Kong. Although we didn't completely escape price declines as we sold our stake,
we managed to keep our losses down.
In their place, we upped our stake in U.S. Treasury and government agency
bonds, which rose to 29% of the Fund's net assets. That defensive strategy
served us well in October and November as Treasuries were the biggest
beneficiaries of the market concerns. Once we felt that bond prices had bottomed
out, we tried to capture the upswing by buying some U.S. high-grade corporate
bonds that had been particularly hard hit, many of them unfairly so given their
solid credits. We've already seen some prices rebound. Furthermore, we bought
some new-issue high-yield bonds that came to the market at attractive prices
amid the market's hysteria.
High-yield and emerging markets stumble
As long-time Sovereign Bond Fund investors
"...we avoided the most volatile emerging markets..."
[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 MetroNet
Communications followed by an up arrow and the phraseImproving fundamentals and
equity issuance." The second listing is Cleveland Electric followed by an up
arrow and the phrase "Takeover by Ohio Edison." The third listing MRS Logistica
followed by a down arrow and the phrase "Bond prices fall with Asian turmoil."
Footnote below reads: "See "Schedule of Investments." Investment holdings are
subject to change."]
4
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John Hancock Funds - Sovereign Bond Fund
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FUND PERFORMANCE
For the six months ended November 30, 1997
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended November 30, 1997." The chart is
scaled in increments of 2% from bottom to top, with 8% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
6.38% total return for John Hancock Sovereign Bond Fund: Class A. The second
represents the 6.01% total return for John Hancock Sovereign Bond Fund: Class B.
The third represents the 6.58% 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
corporate debt A-rated fund is tracked by Lipper Analytical Services, Inc. (1)
See the following two pages for historical performance information."]
Total returns for John Hancock Sovereign Bond Fund are at net asset value with
all distributions reinvested. The average corporate debt A-rated fund is tracked
by Lipper Analytical Services, Inc.(1) See the following two pages for
historical performance information.
- --------------------------------------------------------------------------------
know, we maintain the Fund's average A credit rating by investing in a mix of
U.S. government bonds, investment-grade corporate bonds and, to a lesser extent,
high-yield bonds whose credit ratings are below investment grade.
As we mentioned earlier, high-yield bonds, including those in emerging
markets, were hardest hit at the end of the period, and the Fund was not immune
to that downturn. Most notably, our Brazilian corporate bonds, such as rail
transport company MRS Logistica and Voto-Votorantim Overseas Trading Operations,
a major conglomerate, suffered price drops. Our bonds of Indonesian paper
company Indah Kiat also suffered by association with its country's woes. Yet we
remain convinced that these world-class companies are likely to withstand the
currency volatility, given their strong sources of dollar-based revenues.
A look ahead
In our view, there is still room for interest rates to come down more and for
bonds to do well in 1998. Recent worldwide events suggest that the trend is
toward slower, rather than faster, economic growth. As the Asian countries try
to export their way back to financial health, their weaker currencies and
therefore less expensive products will keep the pricing pressure on -- and
inflation low. Given this scenario, it's fairly certain that the Fed will stay
on the sidelines for now and not raise rates again. In fact, the next move could
even be a rate decrease, something the market could begin to anticipate
happening some time in 1998.
With this outlook, we'll keep the Fund's duration -- a measure of the Fund's
sensitivity to changes in interest rates -- neutral or slightly longer to
capture the benefits of any more rate drops. The longer the duration, the more
the Fund's share price moves with changes in interest rates. Credit selection
will remain as important as ever, since a slowdown in economic growth could put
pressure on corporate bond prices later in the year. For now, we'll minimize our
investments in the emerging markets until there are further signs that the
crisis has passed. Until then, heavier exposure to this sector would present too
much volatility for this type of fund.
"...there is still room for interest rates to come down more..."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
(1) Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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John Hancock Funds - Sovereign Bond Fund
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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 measures
the change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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. Please read your
prospectus carefully before you invest or send money.
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CLASS A
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For the period ended September 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
---- ----- -----
Cumulative Total Returns 5.73% 37.99% 139.78%
Average Annual Total Returns 5.73% 6.65% 9.14%
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CLASS B
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For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (11/23/93)
---- ----------
Cumulative Total Returns 4.95% 25.00%
Average Annual Total Returns 4.95% 5.97%
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YIELDS
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As of November 30, 1997
SEC 30-DAY
YIELD
----------
John Hancock Sovereign Bond Fund: Class A 5.96%
John Hancock Sovereign Bond Fund: Class B 5.55%
6
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John Hancock Funds - Sovereign Bond Fund
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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, assuming all distributions were reinvested
for the period indicated. 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. Past
performance is not indicative of future results.
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 $26,529 as of November 30, 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 $24,915 as of November 30, 1997. The third line represents the value of the
Sovereign Bond Fund, after sales charge, and is equal to $23,794 as of November
30, 1997.]
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 $13,062 as of November 30, 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 $12,957 as of
November 30, 1997. The third line represents the value of the Sovereign Bond
Fund, after sales charge, and is equal to $12,757as of November 30, 1997.]
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on November 30, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value -- Note C:
Bonds (cost $1,416,657,498) ............................. $1,441,119,110
Joint repurchase agreement (cost $53,385,000) ........... 53,385,000
Corporate savings account ............................... 969
---------------
1,494,505,079
Receivable for investments sold .......................... 4,908,726
Receivable for shares sold ............................... 231,709
Interest receivable ...................................... 27,854,926
Other assets ............................................. 78,502
---------------
Total Assets ........................... 1,527,578,942
-----------------------------------------------------------
Liabilities:
Payable for investments purchased ........................ 20,962,089
Payable for shares repurchased ........................... 408,001
Dividend payable ......................................... 1,390,192
Payable to John Hancock Advisers, Inc. ...................
and affiliates -- Note B ................................ 1,233,481
Accounts payable and accrued expenses .................... 353,820
---------------
Total Liabilities ...................... 24,347,583
-----------------------------------------------------------
Net Assets:
Capital paid-in .......................................... 1,494,334,880
Accumulated net realized loss on investments and
financial futures contracts ............................. (15,599,152)
Net unrealized appreciation of investments ............... 24,473,349
Undistributed net investment income ...................... 22,282
---------------
Net Assets ............................. $1,503,231,359
===========================================================
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)
Class A -- $1,354,060,064/89,177,463 ..................... $15.18
=============================================================================
Class B -- $149,171,295/9,824,319 ........................ $15.18
=============================================================================
Maximum Offering Price Per Share*
Class A -- ($15.18 x 104.71%) ............................ $15.90
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended November 30, 1997 (Unaudited)
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Investment Income:
Interest ................................................... $61,174,192
------------
Expenses:
Investment management fee -- Note B ....................... 3,785,010
Distribution and service fee-- Note B
Class A ................................................. 2,057,857
Class B ................................................. 712,423
Transfer agent fee -- Note B .............................. 1,868,689
Custodian fee ............................................. 150,637
Financial services fee -- Note B .......................... 135,171
Trustees' fees ............................................ 66,282
Printing .................................................. 24,449
Auditing fee .............................................. 22,792
Registration and filing fees .............................. 18,664
Miscellaneous ............................................. 16,976
Legal fees ................................................ 4,236
------------
Total Expenses ........................... 8,863,186
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Net Investment Income .................... 52,311,006
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Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized gain on investments sold ...................... 2,898,209
Net realized gain on financial futures contracts ........... 195,978
Change in net unrealized appreciation/depreciation
of investments .......................................... 37,939,381
Change in net unrealized appreciation/depreciation
of financial futures contracts .......................... (71,000)
------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts .............. 40,962,568
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................ $93,273,574
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SEE NOTES TO FINANCIAL STATEMENTS.
8
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==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JANUARY 1, 1997 TO NOVEMBER 30, 1997
DECEMBER 31, 1996 MAY 31, 1997(1) (UNAUDITED)
----------------- --------------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................. $113,173,641 $45,682,556 $52,311,006
Net realized gain (loss) on investments sold and
financial futures contracts ..................................... (7,543,254) (2,662,527) 3,094,187
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts .................. (45,633,903) (10,582,752) 37,868,381
--------------- --------------- ---------------
Net Increase in Net Assets Resulting from Operations ............. 59,996,484 32,437,277 93,273,574
--------------- --------------- ---------------
Distributions to Shareholders:
Distributions from net investment income
Class A - ($1.0858, $0.4449 and $0.5300 per share,
respectively) .................................................. (105,555,822) (41,557,976) (48,383,038)
Class B - ($0.9813, $0.4021 and $0.4772 per share,
respectively) .................................................. (7,590,937) (3,536,786) (4,520,362)
--------------- --------------- ---------------
Total Distributions to Shareholders ............................ (113,146,759) (45,094,762) (52,903,400)
--------------- --------------- ---------------
From Fund Share Transactions - Net: * ............................... (30,564,714) (42,760,453) (31,948,428)
--------------- --------------- ---------------
Net Assets:
Beginning of period ............................................... 1,633,942,540 1,550,227,551 1,494,809,613
--------------- --------------- ---------------
End of period (including undistributed net investment income
of $26,882, $614,676 and $22,282, respectively) .................. $1,550,227,551 $1,494,809,613 $1,503,231,359
=============== =============== ===============
* Analysis of Fund Share Transactions:
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JANUARY 1, 1997 NOVEMBER 30, 1997
DECEMBER 31, 1996 TO MAY 31, 1997(1) (UNAUDITED)
---------------------------- ---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ........................ 12,026,163 $178,554,337 15,151,869 $223,145,238 5,442,428 $81,706,957
Shares issued to shareholders in
reinvestment of distributions ..... 5,504,983 81,567,467 2,161,346 31,871,020 2,429,324 36,717,914
------------ ------------- ------------ ------------- ------------ -------------
17,531,146 260,121,804 17,313,215 255,016,258 7,871,752 118,424,871
Less shares repurchased ............ (22,184,916) (329,117,996) (20,200,777) (297,599,361) (10,844,397) (162,952,475)
------------ ------------- ------------ ------------- ------------ -------------
Net decrease ....................... (4,653,770) ($68,996,192) (2,887,562) ($42,583,103) (2,972,645) ($44,527,604)
============ ============= ============ ============= ============ =============
CLASS B
Shares sold ........................ 6,495,177 $96,388,497 1,583,824 $23,396,615 1,470,979 $22,182,916
Shares issued to shareholders in
reinvestment of distributions ..... 297,182 4,401,471 137,791 2,031,711 165,099 2,496,980
------------ ------------- ------------ ------------- ------------ -------------
6,792,359 100,789,968 1,721,615 25,428,326 1,636,078 24,679,896
Less shares repurchased ............ (4,203,557) (62,358,490) (1,730,811) (25,605,676) (803,012) (12,100,720)
------------ ------------- ------------ ------------- ------------ -------------
Net increase (decrease) ............ 2,588,802 $38,431,478 (9,196) ($177,350) 833,066 $12,579,176
============ ============= ============ ============= ============ =============
</TABLE>
(1) Effective May 31, 1997, the fiscal period end changed from December 31 to
May 31.
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.
9
<PAGE>
==============================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:
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<TABLE>
<CAPTION>
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 (000s 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%
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM NOVEMBER 30,
JANUARY 1, 1997 1997
TO MAY 31, 1997(7) (UNAUDITED)
--------------- -----------------
<S> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ......... $14.90 $14.78
---------- ----------
Net Investment Income ........................ 0.44 0.53(8)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial
Futures Contracts .......................... (0.12) 0.40
---------- ----------
Total from Investment Operations ........... 0.32 0.93
---------- ----------
Less Distributions:
Dividends from Net Investment Income ......... (0.44) (0.53)
Distributions from Net Realized Gain
on Investments Sold and Financial
Futures Contracts .......................... -- --
---------- ----------
Total Distributions ........................ (0.44) (0.53)
---------- ----------
Net Asset Value, End of Period ............... $14.78 $15.18
========== ==========
Total Investment Return at Net Asset Value (1) 2.22%(3) 6.38%(3)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..... $1,361,924 $1,354,060
Ratio of Expenses to Average Net Assets ...... 1.11%(4) 1.10%(4)
Ratio of Net Investment Income to
Average Net Assets ......................... 7.38%(4) 6.97%(4)
Portfolio Turnover Rate ...................... 58% 76%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
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 (000s 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%
<S> <C> <C>
CLASS B (2)
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................... $14.90 $14.78
---------- ----------
Net Investment Income .................................... 0.40 0.48(8)
Net Realized and Unrealized Gain
(Loss) on Investments and Financial
Futures Contracts ...................................... (0.12) 0.40
---------- ----------
Total from Investment Operations ....................... 0.28 0.88
---------- ----------
Less Distributions:
Dividends from Net Investment Income ..................... (0.40) (0.48)
Distributions from Net Realized Gain on
Investments Sold and Financial
Futures Contracts ...................................... -- --
---------- ----------
Total Distributions .................................... (0.40) (0.48)
---------- ----------
Net Asset Value, End of Period ........................... $14.78 $15.18
========== ==========
Total Investment Return at Net Asset Value (1) ........... 1.93%(3) 6.01%(3)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................. $132,885 $149,171
Ratio of Expenses to Average Net Assets .................. 1.81%(4) 1.80%(4)
Ratio of Net Investment Income to
Average Net Assets ..................................... 6.68%(4) 6.27%(4)
Portfolio Turnover Rate .................................. 58% 76%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<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
</TABLE>
(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) Based on the average of the shares outstanding at the end of each month.
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.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
Schedule of Investments
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Sovereign Bond Fund on November 30, 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 CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
BONDS
Aerospace (0.49%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) .................................. 10.910% BBB- $5,800 $7,370,814
--------------
Banks - Foreign (3.04%)
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04 (Y) ...................................... 8.200 AA- 10,000 10,870,700
African Development Bank,
Sub Note (Supra National) 12-15-03 (Y) ...................................... 9.750 AA- 8,000 9,411,760
International Bank for Reconstruction & Development,
Deb 09-01-16 ................................................................ 8.250 AAA 5,000 6,023,700
Landeskreditbank Baden - Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) ............................................. 7.625 AAA 6,820 7,625,851
Scotland International Finance No. 2 B.V.,
Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) ................................. 8.850 A+ 10,250 11,771,069
--------------
45,703,080
--------------
Banks - United States (4.95%)
ABN-Amro Bank N.V. - Chicago Branch,
Gtd Sub Deb 05-31-05 ........................................................ 7.250 AA- 5,000 5,214,350
Bank of New York,
Cap Security 12-01-26 (R) ................................................... 7.780 A- 5,425 5,562,524
Banque National de Paris - New York Branch,
Sub Note 01-15-07 ........................................................... 7.200 A 4,890 5,017,776
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 ....................................................... 9.750 AA- 8,925 10,044,106
National Westminster Bank Plc - New York Branch,
Sub Note 05-01-01 ........................................................... 9.450 AA- 10,000 10,905,000
NB Capital Trust IV,
Cap Security 04-15-27 ....................................................... 8.250 A- 5,040 5,450,155
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 ....................................................... 10.125 A+ 10,605 12,516,551
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 ............................................... 10.360 A1 6,000 6,747,480
Sub Note 11-15-00 ........................................................... 11.500 A 6,400 7,271,616
State Street Institutional Capital B,
Cap Security 03-15-27 (R) ................................................... 8.035 A 5,335 5,641,762
--------------
74,371,320
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Broker Services (0.33%)
CS First Boston,
Sub Note 05-15-06 (R) ....................................................... 7.750% AA- $4,635 $4,933,587
--------------
Building (0.52%)
Georgia-Pacific Corp.,
Deb 01-15-18 ................................................................ 9.750 BBB- 7,500 7,825,275
--------------
Chemicals (0.53%)
OPP Petroquimica S.A.,
Bond (Brazil) 10-29-04 (R) (Y) .............................................. 11.000 B+ 5,095 4,738,350
Sociedad Quimica y Minera de Chile S.A.,
Loan Part Ctf (Chile) 09-15-06 (R) (Y) ...................................... 7.700 BBB+ 3,200 3,268,000
--------------
8,006,350
--------------
Containers (0.58%)
Riverwood International Corp.,
Gtd Sr Sub Note 04-01-08 .................................................... 10.875 CCC+ 2,790 2,734,200
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 ..................... 12.250 B- 5,720 5,948,800
--------------
8,683,000
--------------
Cosmetics & Personal Care (0.46%)
Johnson & Johnson,
Deb 11-15-23 ................................................................ 6.730 AAA 6,750 6,843,285
--------------
Energy (1.07%)
AES China Generating Co. Ltd.,
Note (China) 12-15-06 (Y) ................................................... 10.125 BB- 2,670 2,710,050
AES Corp.,
Sr Sub Note 07-15-06 ........................................................ 10.250 B+ 6,005 6,440,362
Sr Sub Note 08-15-07 ........................................................ 8.375 B+ 2,475 2,477,022
CalEnergy Co. Inc.,
Sr Note 09-15-06 ............................................................ 9.500 BB- 4,115 4,440,949
--------------
16,068,383
--------------
Finance (8.12%)
American Express Co.,
Gtd Deb Ser D 12-12-00 ...................................................... 11.625 A+ 8,670 8,896,920
Chrysler Financial Corp.,
Deb 11-01-99 ................................................................ 12.750 A 3,000 3,341,040
CIT Group Holdings, Inc.,
Deb 03-15-01 ................................................................ 9.250 A 5,000 5,437,150
Constitution Capital Trust I,
Cap Security 04-15-27 (R) ................................................... 9.150 BBB 3,725 4,142,982
ContiFinancial Corp.,
Sr Note 08-15-03 ............................................................ 8.375 BB+ 3,525 3,657,187
DR Investments,
Sr Note 05-15-07 (R) ........................................................ 7.450 A- 4,500 4,753,620
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Finance (continued)
DSPL Finance Co. B.V.,
Gtd Sr Sec Note (Netherlands) 12-30-10 (R) (Y) .............................. 9.120% BBB $5,000 $5,118,750
Ford Motor Credit Co.,
Note 12-08-05 ............................................................... 6.250 A 4,085 4,012,205
Green Tree Home Improvement Loan Trust,
Pass Thru Ctf Ser 1995-D Class M-1 09-15-25 ................................. 6.950 Aa2 6,130 6,181,676
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-1 Class A-5 12-25-13 ................................. 6.290 AAA 6,816 6,759,555
Industrial Credit & Investment Corporation of India Ltd.,
Note (India) 08-15-07 (R) (Y) ............................................... 7.550 BB+ 4,695 4,061,175
MBNA Master Credit Card Trust,
Ser 1995-D Class A 11-15-02 ................................................. 6.050 AAA 16,075 16,014,719
Merrill Lynch Mortgage Investors, Inc.,
Sub Bond Ser 1992-B Class B 04-15-12 ........................................ 8.500 Aaa 2,415 2,455,303
Midland American Capital Corp.,
Gtd Deb 11-15-03 ............................................................ 12.750 A 19,932 21,106,991
Standard Credit Card Master Trust,
Credit Card Part Cert Ser 1995-9 Class A 10-07-07 ........................... 6.550 AAA 5,815 5,842,214
Credit Card Part Ctf Ser 1995-10 Class A 02-07-01 ........................... 5.900 AAA 4,580 4,568,550
Superior National Capital Trust I,
Gtd Trust Preferred Security 12-01-17 (R) ................................... 10.750 BB 1,620 1,620,000
United Companies Financial Corp.,
Sr Note 01-15-04 ............................................................ 7.700 BBB- 5,420 5,419,621
Voto-Votorantim Overseas Trading Operations N.V.,
Gtd Note (Netherlands) 06-27-05 (Y) ......................................... 8.500 BB- 4,870 4,273,425
Yanacocha Receivables,
Pass Thru Cert Ser 1997-A 06-15-05 (R) ...................................... 8.400 BBB- 4,391 4,456,510
--------------
122,119,593
--------------
Funeral Services & Related (0.47%)
Loewen Group International, Inc.,
Gtd Sr Note Ser 4 10-15-03 .................................................. 8.250 BB+ 6,860 7,134,400
--------------
Glass Products (0.30%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R) (Y) ....................................... 11.375 B+ 4,140 4,491,900
--------------
Government - Foreign (3.89%)
Croatia, Republic of,
Government Bond (Croatia) 02-27-02 (R) (Y) .................................. 7.000 BBB- 4,600 4,591,375
Nova Scotia, Province of,
Deb (Canada) 05-15-13 (Y) ................................................... 11.500 A- 10,655 11,382,417
Deb (Canada) 04-01-22 (Y) ................................................... 8.750 A- 7,500 9,234,075
Ontario, Province of,
Deb (Canada) 04-25-13 (Y) ................................................... 11.750 AA- 6,000 6,413,400
Panama, Republic of,
Note (Panama) 02-13-02 (R) (Y) .............................................. 7.875 BB+ 4,545 4,454,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Government - Foreign (continued)
Quebec, Province of,
Deb (Canada) 10-01-13 (Y) ................................................... 13.000% A+ $11,000 $12,089,550
Deb (Canada) 09-15-14 (Y) ................................................... 13.250 A+ 1,000 1,157,670
Deb (Canada) 07-15-23 (Y) ................................................... 7.500 A+ 2,425 2,571,082
Saskatchewan, Province of,
Bond (Canada) 12-15-20 (Y) .................................................. 9.375 A 5,000 6,550,800
--------------
58,444,469
--------------
Government - U.S. (21.76%)
United States Treasury,
Bond 08-15-17 ............................................................... 8.875 AAA 39,612 51,990,750
Bond 05-15-18 ............................................................... 9.125 AAA 47,075 63,403,905
Bond 02-15-23 ............................................................... 7.125 AAA 64,046 72,131,807
Note 02-15-99 ............................................................... 8.875 AAA 19,760 20,463,851
Note 11-30-99 ............................................................... 7.750 AAA 31,138 32,266,752
Note 05-15-01 ............................................................... 8.000 AAA 8,033 8,563,901
Note 05-15-02 ............................................................... 7.500 AAA 37,893 40,290,869
Note 02-15-05 ............................................................... 7.500 AAA 34,750 37,969,935
--------------
327,081,770
--------------
Government - U.S. Agencies (7.38%)
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 ................................................ 11.250 AAA 1,300 1,460,621
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 01-25-05 ................................................ 8.000 AAA 10,000 10,412,500
15 Yr Pass Thru Ctf 02-01-08 ................................................ 7.500 AAA 2,565 2,628,601
15 Yr Pass Thru Ctf 06-01-10 + .............................................. 7.000 AAA 4,530 4,579,513
30 Yr Pass Thru Ctf 10-01-23 ................................................ 7.000 AAA 7,854 7,910,081
Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 ................................ 6.940 AAA 3,529 3,649,563
Financing Corp.,
Bond 02-08-18 ............................................................... 9.400 A-1+ 7,000 9,399,670
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 02-15-24 to 09-15-25 + .................................. 7.500 AAA 27,883 28,476,870
30 Yr Pass Thru Ctf 11-15-22 ................................................ 8.000 AAA 4,821 5,014,210
30 Yr Pass Thru Ctf 12-15-22 to 04-15-23 .................................... 8.500 AAA 13,022 13,687,799
30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 .................................... 9.000 AAA 15,847 17,098,262
30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 .................................... 9.500 AAA 3,680 3,995,129
30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 .................................... 10.000 AAA 2,006 2,239,718
30 Yr Pass Thru Ctf 01-15-16 ................................................ 10.500 AAA 80 90,274
30 Yr Pass Thru Ctf 01-15-16 ................................................ 11.000 AAA 238 269,225
--------------
110,912,036
--------------
Insurance (5.34%)
Conseco, Inc.,
Sr Note 12-15-04 ............................................................ 10.500 BBB 6,820 8,130,668
Equitable Life Assurance Society of the United States,
Surplus Note 12-01-05 (R) ................................................... 6.950 A 6,050 6,139,842
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Insurance (continued)
Fairfax Financial Holdings Ltd.,
Note (Canada) 04-15-26 (Y) .................................................. 8.300% BBB+ $6,440 $7,230,768
Liberty Mutual Insurance Co.,
Surplus Note 05-04-07 (R) ................................................... 8.200 A+ 10,000 10,975,250
Surplus Note 10-15-26 (R) ................................................... 7.875 A2 3,990 4,333,499
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) ................................................... 7.625 AA 10,450 11,268,862
NAC Re Corp.,
Note 06-15-99 ............................................................... 8.000 A- 3,360 3,437,885
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) ................................................... 7.500 AA- 15,000 15,392,550
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) ................................................... 6.625 AA 7,250 7,340,625
URC Holdings Corp.,
Sr Note 06-30-06 (R) ........................................................ 7.875 A- 5,665 6,071,747
--------------
80,321,696
--------------
Leisure (0.91%)
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 .................................................. 13.500 BB+ 1,500 1,927,500
Showboat Marina Casino Partnership/Finance Corp.,
1st Mtg Note Ser B 03-15-03 ................................................. 13.500 B 5,000 5,712,500
Trump Hotels & Casino Resorts Funding, Inc./Holdings, L.P.,
Sr Sec Note 06-15-05 ........................................................ 15.500 B+ 5,150 5,974,000
--------------
13,614,000
--------------
Media (7.17%)
Adelphia Communications Corp.,
Sr Note 10-01-02 ............................................................ 9.250 B3 4,750 4,738,125
Century Communications Corp.,
Sr Note 08-15-00 ............................................................ 9.500 BB- 2,545 2,646,800
Clear Channel Communications, Inc.,
Deb 10-15-27 ................................................................ 7.250 BBB- 4,675 4,628,250
Comcast Cable Communications, Inc.,
Note 05-01-17 ............................................................... 8.875 BBB- 1,435 1,669,407
Comcast Corp.,
Sr Sub Deb 07-15-12 ......................................................... 10.625 BB+ 5,425 6,660,489
Continental Cablevision, Inc.,
Sr Sub Deb 06-01-07 ......................................................... 11.000 BBB 12,205 13,568,054
Garden State Newspapers, Inc.,
Sr Sub Note 10-01-09 (R) .................................................... 8.750 B+ 2,980 2,935,300
Hearst-Argyle Television, Inc.,
Note 11-15-07 ............................................................... 7.000 Baa3 4,325 4,322,621
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ............................................... 10.625 Ba3 1,750 1,926,032
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Media (continued)
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 ......................................................... 8.250% BBB $6,105 $6,542,301
Sr Note 10-15-99 ............................................................ 9.125 BBB 7,500 7,845,375
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) ......................................... 10.000 BB+ 8,000 8,760,000
SFX Broadcasting, Inc.,
Sr Sub Note Ser B 05-15-06 .................................................. 10.750 B- 4,505 4,910,450
TeleWest Communications Plc,
Sr Deb (United Kingdom) 10-01-06 (Y) ........................................ 9.625 B+ 3,420 3,539,700
Time Warner, Inc.,
Deb 01-15-13 ................................................................ 9.125 BBB- 2,445 2,874,415
TKR Cable I, Inc.,
Sr Deb 10-30-07 ............................................................. 10.500 BBB- 17,240 19,310,352
Viacom, Inc.,
Sr Note 06-01-05 ............................................................ 7.750 BB+ 4,420 4,455,581
Videotron Holdings Plc,
Sr Disc Note (United Kingdom) 08-15-05 (Y) .................................. 11.000 BBB+ 7,355 6,469,532
--------------
107,802,784
--------------
Medical (1.05%)
Integrated Health Services, Inc.,
Sr Sub Note 01-15-08 (R) .................................................... 9.250 B 5,120 5,101,097
Physician Sales & Service, Inc.,
Sr Sub Note 10-01-07 (R) .................................................... 8.500 B 2,035 1,999,388
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 ........................................................ 10.750 B+ 3,155 3,438,950
Tenet Healthcare Corp.,
Sr Sub Note 01-15-07 ........................................................ 8.625 B+ 5,050 5,163,625
--------------
15,703,060
--------------
Metal (0.15%)
Centaur Mining & Exploration Ltd.,
Gdt Sr Note (Australia) 12-01-07 (R) (Y) .................................... 11.000 B+ 2,280 2,305,650
--------------
Mortgage Banking (0.76%)
Salomon Brothers Mortgage Securities VII, Inc.,
Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 7-25-24 ........................... 6.750 Aaa 3,940 3,968,319
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 ................................. 7.180 AAA 7,260 7,522,791
--------------
11,491,110
--------------
Oil & Gas (0.98%)
Camuzzi Gas Pampeana S.A.,
Bond (Argentina) 12-15-01 (Y) ............................................... 9.250 BBB- 2,965 3,002,063
Norsk Hydro ASA,
Deb (Norway) 10-01-16 (Y) ................................................... 7.500 A 5,790 6,187,078
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Oil & Gas (continued)
Transgas de Occidenta S.A.,
Sr Note (Colombia) 11-01-10 (R) (Y) ......................................... 9.790% BBB- $5,270 $5,586,575
--------------
14,775,716
--------------
Paper & Paper Products (1.28%)
APP Finance II Mauritius Ltd.,
Bond (Indonesia) 12-29-49 (Y) ............................................... 12.000 B 4,275 4,007,813
Celulosa Arauco Y Constitucion S.A.,
Note (Chile) 09-15-09 (Y) ................................................... 7.200 Baa2 4,910 4,787,250
Indah Kiat International Finance Co.,
Gtd Sec Bond Ser B (Indonesia) 06-15-02 (Y) ................................. 11.875 BB 1,225 1,255,625
Gtd Sec Bond Ser C (Indonesia) 06-15-06 (Y) ................................. 12.500 BB 4,580 4,774,650
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 .................................................. 12.000 B+ 3,945 4,418,400
--------------
19,243,738
--------------
Real Estate Investment Trust (0.30%)
TriNet Corporate Realty Trust, Inc.,
Note 05-15-01 ............................................................... 7.300 BBB- 4,395 4,476,967
--------------
Retail (1.22%)
Fort James Corp.,
Sr Note 09-15-02 ............................................................ 6.500 BBB- 4,110 4,101,246
Friendly Ice Cream Corp.,
Sr Note 12-01-07 ............................................................ 10.500 B 2,430 2,433,730
Safeway, Inc.,
Deb 01-15-09 ................................................................ 13.500 BBB 2,609 2,908,849
Southern Foods Group L.P.,
Sr Sub Note 09-01-07 (R) .................................................... 9.875 B 4,455 4,633,200
Supermercados Norte,
Bond (Argentina) 02-09-04 (R) (Y) ........................................... 10.875 B1 4,440 4,195,800
--------------
18,272,825
--------------
Steel (0.55%)
IVACO Inc.,
Sr Note (Canada) 09-15-05 (Y) ............................................... 11.500 B+ 2,795 3,053,538
NS Group, Inc.,
Unit (Sr Sec Note & Warrant) 07-15-03 ....................................... 13.500 B- 2,785 3,780,638
Weirton Steel Corp.,
Sr Note 03-01-98 ............................................................ 11.500 B 1,430 1,430,000
--------------
8,264,176
--------------
Telecommunications (2.37%)
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 .................................................. 13.000 B- 2,850 2,931,564
MetroNet Communications Corp.,
Unit (Sr Note & Warrant) (Canada) 08-15-07 (R) (Y) .......................... 12.000 B- 4,625 5,226,250
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%, 02-15-99) 08-15-04 (A) .................... Zero CCC 13,255 11,432,438
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Telecommunications (continued)
NEXTLINK Communications, Inc.,
Sr Note 10-01-07 ............................................................ 9.625% B $1,620 $1,636,200
Qwest Communications International Inc.,
Sr Note Ser B 04-01-07 ...................................................... 10.875 B+ 4,090 4,601,250
TCI Communications, Inc.,
Sr Deb 08-01-15 ............................................................. 8.750 BBB- 6,724 7,639,742
Teligent, Inc.,
Sr Note 12-01-07 ............................................................ 11.500 CCC 2,230 2,218,672
--------------
35,686,116
--------------
Tobacco (0.51%)
RJR Nabisco, Inc.,
Note 12-01-02 ............................................................... 8.625 BBB- 4,555 4,828,710
Note 09-15-03 ............................................................... 7.625 BBB- 2,770 2,802,963
--------------
7,631,673
--------------
Transport (6.04%)
America West Airlines, Inc.,
Pass Thru Ctf Ser B 01-02-08 ................................................ 6.930 A- 4,867 4,885,697
Continental Airlines,
Pass Thru Ctf Ser 96-C 04-15-15 ............................................. 9.500 BBB 4,902 5,677,892
Greater Beijing First Expressways Ltd.,
Sr Note (China) 06-15-04 (R) (Y) ............................................ 9.250 BB 4,080 3,651,600
Humpuss Funding Corp.,
Gtd Note 12-15-09 (R) ....................................................... 7.720 Baa2 4,983 4,844,125
MRS Logistica S.A.,
Bond Ser B (Brazil) 08-15-05 (R) (Y) ........................................ 10.625 B 3,870 3,570,075
Northwest Airlines Inc.,
Gtd Note 03-15-04 ........................................................... 8.375 BB- 2,260 2,331,190
Pass Thru Ctf Ser 1996-1C 01-02-05 .......................................... 10.150 BB+ 3,414 3,670,355
Pass Thru Ctf Ser 1996-1D 01-02-15 .......................................... 8.970 BBB- 3,757 4,194,116
NWA Trust,
Sr Note Ser A 06-21-14 ...................................................... 9.250 A2 5,450 6,388,379
Rail Car Trust,
Pass Thru Ser 1992-1 Class A 06-01-04 ....................................... 7.750 AAA 15,085 15,796,324
Scandinavian Airlines System,
Deb (Multinational) 07-20-99 (Y) ............................................ 9.125 A3 6,834 7,141,530
Sea-Land Service, Inc.,
Gtd Deb Ser A 01-02-11 ...................................................... 10.600 BBB 5,000 5,291,700
Gtd Deb Ser B 01-02-11 ...................................................... 10.600 BBB 7,000 7,408,380
Gtd Deb Ser C 01-02-11 ...................................................... 10.600 BBB 6,000 6,350,040
U.S. Air, Inc.,
Pass Thru Ctf Ser 1989-A2 01-01-13 .......................................... 9.820 A- 3,100 3,425,500
Pass Thru Ctf Ser 1990-A1 03-19-05 .......................................... 11.200 BB+ 5,493 6,159,354
--------------
90,786,257
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Utilities (13.35%)
British Columbia Hydro and Power Auth.,
Gtd Bond Ser FN (Canada) 09-01-13 (Y) ....................................... 12.500% AA $6,175 $6,695,614
British Telecom Finance, Inc.,
Gtd Deb (United Kingdom) 02-15-19 (Y) ....................................... 9.625 AAA 9,805 10,592,342
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 .......................................... 8.890 BB- 6,600 7,326,508
Calpine Corp.,
Sr Note 05-15-06 ............................................................ 10.500 B+ 4,650 4,987,125
Sr Note 07-15-07 (R) ........................................................ 8.750 BB- 1,725 1,737,938
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A (Philippines) 11-15-05 (Y) .................................... 11.450 BB 4,100 4,223,000
Cleveland Electric Illuminating Co. & Toledo Edison Co.,
Sec Note Ser B 07-01-04 ..................................................... 7.670 BB+ 5,120 5,295,155
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 ...................................................... 9.500 BB+ 9,705 10,678,217
Sr Sec Note 11-01-17 (R) .................................................... 7.880 BB+ 2,460 2,543,025
EIP Funding-PNM,
Sec Fac Bond 10-01-12 ....................................................... 10.250 Ba2 9,352 10,793,611
Enersis S.A.,
Note (Cayman Islands) 12-01-16 (Y) .......................................... 7.400 A- 7,530 7,480,528
Fideicomiso Petacalco Trust,
Sr Sec Note (Mexico) 12-23-09 (R) (Y) ....................................... 10.160 BB 4,190 4,190,000
First PV Funding Corp.,
Deb Ser 86A 01-15-14 ........................................................ 10.300 BB- 2,123 2,317,424
Deb Ser 86B 01-15-16 ........................................................ 10.150 BB- 6,866 7,360,627
GTE Corp.,
Deb 11-01-20 ................................................................ 10.250 A 6,875 7,760,294
Hydro-Quebec,
Gtd Bond (Canada) 02-01-21 (Y) .............................................. 9.400 A+ 7,500 9,539,175
Gtd Deb Ser IF (Canada) 02-01-03 (Y) ........................................ 7.375 A+ 7,185 7,466,652
Gtd Deb Ser FU (Canada) 02-01-12 (Y) ........................................ 11.750 A+ 5,000 7,193,550
Iberdrola International B.V.,
Sr Note (Netherlands) 06-01-03 (R) (Y) ...................................... 7.125 A 8,629 8,870,612
Note 10-01-02 ............................................................... 7.500 AA- 8,000 8,382,480
Long Island Lighting Co.,
Deb 07-15-19 ................................................................ 8.900 BB+ 3,475 3,831,361
Gen Ref Bond 05-01-21 ....................................................... 9.750 BBB 11,585 11,826,663
Gen Ref Mtg 07-01-24 ........................................................ 9.625 BBB 8,660 8,896,158
Midland Cogeneration Venture L.P.,
Sec Deb Ser C-91 07-23-02 ................................................... 10.330 BB 10,820 11,813,155
Midland Funding Corp. II,
Deb Ser A 07-23-05 .......................................................... 11.750 B 3,000 3,586,590
Deb Ser B 07-23-06 .......................................................... 13.250 B 1,900 2,429,511
North Atlantic Energy Corp.,
1st Mtg Ser A 06-01-02 ...................................................... 9.050 B+ 5,150 5,217,825
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ------ ------- ---------- ------
<S> <C> <C> <C> <C>
Utilities (continued)
Philippine Long Distance Telephone Co.,
Note (Philippines) 03-06-07 (Y) ............................................. 7.850% BB+ $4,770 $4,088,186
Puget Sound Energy Capital Trust I
Cap Security 06-01-27 (R) ................................................... 8.231 Baa3 2,910 3,022,763
System Energy Resources, Inc.,
1st Mtg 08-01-01 ............................................................ 7.710 BBB- 5,525 5,710,198
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 .......................................... 8.090 BBB- 4,755 4,897,793
--------------
200,754,080
--------------
TOTAL BONDS
(Cost $1,416,657,498) (95.87%) 1,441,119,110
------ --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.55%)
Investment in a joint repurchase agreement
transaction with Swiss Bank Corp., - Dated 11-28-97,
Due 12-1-97 (secured by U.S. Treasury Note, 7.75%,
Due 12-31-99 and U.S. Treasury Bonds,
6.50% thru 11.25%, Due 2-15-15 thru 11-15-26) - Note A ...................... 5.670% 53,385 53,385,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.950%.......................................................... 969
--------------
TOTAL SHORT-TERM INVESTMENTS (3.55%) 53,385,969
----- --------------
TOTAL INVESTMENTS (99.42%) $1,494,505,079
======= ==============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(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 $206,912,291 as of November 30, 1997.
* Credit Ratings are rated by Moody's Investor Services or John Hancock
Advisers, Inc. where Standard and Poors ratings are not available.
+ A portion of these securities having an aggregate value of $12,153,013 or
.81% 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 current values at least equal to the amounts of its
when issued commitments. Accordingly, the market values of $4,829,686 of
United States Treasury 8.875%, 08-15-17 and $8,027,820 of United States
Treasury 9.125%, 05-15-18 have been segregated to the when issued
commitments.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS========================
John Hancock Funds - Sovereign Bond Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Sovereign Bond Fund (the "Fund") is a diversified open-end
investment management company, registered under the Investment Company Act of
1940. The investment objective of the Fund is to generate a high level of
current income, consistent with prudent investment risk, through investment in a
diversified portfolio of freely marketable debt securities.
The Trustees have authorized the issuance of multiple classes of the Fund,
designated as Class A 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 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 $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
22
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS========================
John Hancock Funds - Sovereign Bond Fund
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.
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. These agreements enable
the Fund to participate with other Funds managed by the Advisor in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended November 30, 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.
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 November
30, 1997, JH Funds received net sales charges of $711,879 with regard to sales
of Class A shares. Out of this amount, $82,583 was retained and used for
printing of prospectuses, advertising, sales literature and other purposes, and
$175,925 was paid as sales commissions to unrelated broker-dealers and $453,371
was paid as sales commissions to sales personnel of John Hancock Distributors,
Inc. ("Distributors"), a related broker-dealer. The Adviser's indirect parent,
John Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
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
23
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS========================
John Hancock Funds - Sovereign Bond Fund
in whole or in part to defray its expenses related to providing distribution
related services to the Fund in connection with the sale of Class B shares. For
the period ended November 30, 1997, contingent deferred sales charges received
by JH Funds amounted to $148,784.
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 less than 0.02% 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 November 30, 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 November 30, 1997, aggregated $457,197,278 and
$503,503,887, respectively. Purchases and proceeds from sales of obligations of
the U.S. government and its agencies, during the period ended November 30, 1997,
aggregated $651,122,382 and $584,337,252, respectively.
The cost of investments owned at November 30, 1997 (excluding the corporate
savings account) for federal income tax purposes was $1,740,042,498. Gross
unrealized appreciation and depreciation of investments aggregated $44,078,447
and $19,616,835, respectively, resulting in net unrealized depreciation of
$24,461,612.
24
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Sovereign Bond Fund
25
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Sovereign Bond Fund
26
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Sovereign Bond Fund
27
<PAGE>
================================================================================
----------------
JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
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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
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- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Sovereign U.S. Government Income 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."]
210SA 11/97
1/98
