ANNUAL Report
Sovereign Bond Fund
MAY 31, 1998
<PAGE>
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 and Chief Operating Officer
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
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
DEAR FELLOW SHAREHOLDERS:
During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.
After such a long and remarkable performance, many began this year wondering
what the market would do for an encore in 1998. The answer so far has been more
of the same, even with the recent increase in volatility caused by tremors from
Asia. This achievement continues to bolster many investors' convictions that the
market will produce these results forever, or, in the worst case, that market
declines will always be short-lived. While the economy remains solid and the
environment favorable, history and reason tell us it's a highly unlikely
scenario.
This doesn't mean we know what the market will do next, or that it's riding for
a fall. But after such a run, even in this "new era" of strong economic growth
with low inflation, we believe it would be wise for investors to set more
realistic expectations. As we've said before, markets do indeed move in two
directions. Over the long term, the market's historical results have been more
in the 10% per year range, which is still a solid result, considering it has
been produced despite wars, depressions and other social upheavals along the
way.
- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
- --------------------------------------------------------------------------------
In addition to adjusting, or at least re-examining, expectations, now could also
be a good time to review with your investment professional how your assets are
diversified, perhaps with an eye toward a more conservative approach. Stocks,
especially with their outsized gains of the last three years, might have grown
to represent a larger piece of your portfolio than you had originally intended,
given your objectives, time horizon and risk level.
At John Hancock Funds, our goal is to help you reach your financial objectives
and maintain wealth. One way we can do that is by helping you keep your feet on
the ground as you pursue your dreams.
Sincerely,
/s/Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
By James K. Ho, CFA, Portfolio Manager
John Hancock
Sovereign Bond Fund
Bond market, despite turbulence, produces
double-digit gains over last 12 months
Market turbulence greeted the Fund at the outset of the fiscal year with the
devaluation of the Thai baht in July of 1997. Inflation fears then got the best
of many investors in August, resulting in declining U.S. bond prices. While
Asia's currency woes continued to quietly build steam in the following weeks,
domestic bond markets shook off the yoke of nagging concern and resumed their
uphill charge.
By late October and early November, the fiscal ills plaguing the Asian region
spilled over into world markets, causing U.S. investment-grade corporate bonds,
high-yield debt and emerging-market issues to come under considerable pressure.
Worldwide, investors flocked to the relative safety of U.S. Treasury securities.
As a result, U.S. corporate bonds N both high-yield and investment-grade N
underperformed U.S. Treasury bonds during this period. Emerging-market debt
across the globe suffered the most, plunging in either direct response to the
spreading Asian crisis or in general sympathy with the Far East markets.
Relative stability returned quickly to the U.S. market, although
investment-grade corporate bonds and high-yield issues have yet to keep pace
with soaring Treasury bond prices. In fact, the yield on the bellwether 30-year
bond has traded within a historically low range of approximately 5.69% to 6.14%
since December. Emerging markets, however, have
"...opportun-istically selling most of our Asian positions..."
remained unsettled since. Bouts of volatility have continued across Asia, with
the rioting in Indonesia the most recent event to impact the markets.
- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Jim Jo (seated
and Fund management team members (l-r): Lester Duke, Beverly Cleathero and Seth
Robbins.]
- --------------------------------------------------------------------------------
3
<PAGE>
John Hancock Funds - Sovereign Bond Fund
- --------------------------------------------------------------------------------
[" Chart at top left column with the heading Top Five Bond Sectors. They are
numbered from 1-5. The first represents U.S. Government & Agencies 30%; The
second represents Bank/Financials 20%; The third represents Utilities 12%; The
fourth represents Media 7%; The fifth represents 4%. A footonote at the bottom
states As a percentage of net assets on May 31, 1998."]
- --------------------------------------------------------------------------------
Against this fitful backdrop, John Hancock Sovereign Bond Fund rewarded
investors with a 12-month gain of 10.54% for Class A shares and 9.78% for Class
B shares at net asset value. Keep in mind that your net asset value return will
be different from this performance if you were not invested in the Fund for the
entire period and did not reinvest all distributions. The Fund's performance was
in line with that of the average corporate debt A-rated fund, which produced a
gain of 10.85% at net asset value, according to Lipper Analytical Services,
Inc.1 Please see pages six and seven for longer-term performance information.
Emerging market exposure trimmed
A calm, well-researched approach to investing in emerging
markets has helped the Fund weather this sector's turbulence throughout the
period. Knowing when to invest and what credits to buy, sell and avoid has not
been a matter of chance. We have gone to great lengths to fortify our research
staff, employing not only credit analysts - researchers who scrutinize
individual companies N but also a sovereign credit analyst who examines both the
creditworthiness of individual governments and the economic and political
landscapes of various regions. Although the Fund was not immune to the effects
of the Asian currency debacle, we were able to avoid much of the carnage by
opportunistically selling most of our Asian positions late last summer.
Furthermore, by carefully adjusting our allocations, we were able to sidestep
troubled debt. For example, when several Japanese banks came to market a few
months ago issuing
"...media, telecommunications and utilities... were dominant sectors..."
attractively priced, high-yielding securities that carried an investment-grade
rating, many fund managers, including ourselves, found the issues too compelling
to ignore. However, we soon determined that the risk was not worth the potential
reward and sold our stake - a timely maneuver since the bonds have dropped
considerably in price since. To date, we have continued to avoid most Asian
debt, believing the investment environment remains murky. Our small investment
in Latin American bonds has come under pressure recently along with most
emerging market debt; however, we believe the securities are well positioned to
fully recover.
Corporate bond diversification
The Fund remains broadly
diversified across American industry in the corporate bond arena - the sector of
the market that generally accounts for the bulk of the Fund's assets. Holdings
in media, telecommunications and utilities, however, were dominant sectors at
the period's end. Merger and acquisition activity, deregulation and
consolidation have been the ongoing catalysts of change and opportunity in these
industries. The relative underperformance of high-yield and investment-grade
- --------------------------------------------------------------------------------
["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 Nextel
Communications followed by an up arrow and the phrase "Increasing market share,
dominant player". The second listing is Qwest Communications followed by a up
arrow with the phrase "Strong growth in company and industry". The third listing
is Zilog followed by a down arrow with the phrase "Semiconductor sector hurt by
Asia slowdown" Footnote at the bottom states See "Schedule of Investments."
Investment holdings are subject to change."]
- --------------------------------------------------------------------------------
4
<PAGE>
John Hancock Funds - Sovereign Bond Fund
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 2% with the 12% at the top and 0% at the bottom. The
first represents the 10.54% total return for John Hanacock Sovereign Bond Fund:
Class A. The second represents the 9.78% total return for John Hancock Sovereign
Bond Fund: Class B. The third represents the 10.85% total return for Average
corporate debt A-rated fund. A Footnote below reads " 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. See the following two pages for histroical performance
infomation."]
corporate bonds in the latter half of the fiscal year allowed us to add to
existing positions and purchase new holdings at attractive prices. Notable
performers in these categories included telecommunications companies TCI
Communications and Nextel Communications; utilities Long Island Lighting Co. and
Cleveland Electric Illuminating Co. and media companies Time Warner, Adelphia
Communications and News America Holdings.
Duration and yield curve strategies
While duration and yield curve strategies are not our primary focus, we will
capitalize on opportunities as they present themselves. For most of the fiscal
year, the Fund's average duration - a measure of the Fund's sensitivity to
interest rate changes - remained relatively neutral in comparison to its
benchmark. In the period's first half, we aligned the Fund's government
securities at opposite ends of the yield curve, owning both short- and long-term
securities. This structure, known as a "barbell," helped optimize the Fund's
total return potential as the difference in short- and long-term interest rates
narrowed and the yield curve flattened. In the second half of the period, we
took steps to position for the possibility that the yield curve might steepen,
redeploying assets in intermediate-term securities at the middle part of the
curve. This "bullet" strategy historically works well when the difference
between the interest rates of short- and long-term securities widens. Such a
move may have been a bit premature in hindsight, since the curve has remained
flat; however, we believe it will best serve the Fund should the yield curve
steepen as we anticipate in the months ahead.
More challenges ahead
As we enter fiscal 1999, the Fund is somewhat defensively positioned, with an
emphasis on corporate sectors that stand to perform well regardless of economic
swings. We believe at some point down the road there may be
"...the Fund is somewhat defensively positioned..."
opportunities to capture some value in emerging-market issues, but for now
extreme caution is the watchword. The crisis in Asia is just now starting to
take a bit of steam out of the robust U.S. economy, although whether it serves
to stave off inflation remains to be seen. How this situation affects U.S.
corporations bears close monitoring. Whatever occurs, selectivity in terms of
credit quality and price will remain our focus.
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
<PAGE>
John Hancock Funds - Sovereign Bond Fund
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Sovereign Bond Fund. Total return 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.
CLASS A
For the period ended March 31, 1998
ONE FIVE TEN
YEARS YEARS YEARS
---- ----- -----
Cumulative Total Returns 6.89% 36.64% 127.72%
Average Annual Total Returns 6.89% 6.44% 8.58%
CLASS B
For the period ended March 31, 1998
SINCE
ONE INCEPTION
YEAR (11/23/93)
---- ----------
Cumulative Total Returns 6.15% 30.72%
Average Annual Total Returns 6.15% 6.35%
YIELDS
As of May 31, 1998
SEC 30-DAY
YIELD
----------
John Hancock Sovereign Bond Fund: Class A 5.95%
John Hancock Sovereign Bond Fund: Class B 5.53%
6
<PAGE>
John Hancock Funds - Sovereign Bond Fund
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Sovereign Bond Fund would be worth, 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.
*No contingent deferred sales charge applicable.
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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 hypothetical $10,000
investment made in the Sovereign Bond Fund on May 31, 1988, before sales charge,
and is equal to $24,475 as of May 31, 1998. The second line represents the value
of the Lehman Brothers Corporate Bond Index and is equal to $23,899 as of May
31, 1998. The third line represents the value of the Sovereign Bond Fund, after
sales charge, and is equal to $23,373 as of May 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 $13,437 as of May 31, 1998. 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 $13,417 as of May 31,
1998. The third line represents the value of the Sovereign Bond Fund, after
sales charge, and is equal to $13,217 as of May 31, 1998.
- --------------------------------------------------------------------------------
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 May 31, 1998. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
May 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $1,376,559,912) ...................... $1,404,649,664
Preferred stocks and warrants
(cost - $22,878,714) .............................. 23,262,565
Joint repurchase agreement
(cost - $95,142,000) .............................. 95,142,000
Corporate savings account .......................... 18,097
--------------
1,523,072,326
Receivable for investments sold ...................... 23,931,169
Receivable for shares sold ........................... 1,077,896
Interest receivable .................................. 24,305,882
Other assets ......................................... 108,367
--------------
Total Assets ..................... 1,572,495,640
------------------------------------------------------
Liabilities:
Payable for investments purchased .................. 76,595,583
Payable for shares repurchased ..................... 102,046
Dividend payable ................................... 712,386
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ......................... 1,175,783
Accounts payable and accrued expenses .............. 198,685
--------------
Total Liabilities ................ 78,784,483
------------------------------------------------------
Net Assets:
Capital paid-in .................................... 1,492,295,029
Accumulated net realized loss on
investments and financial futures
contracts ......................................... (26,783,437)
Net unrealized appreciation of investments ......... 28,485,340
Distributions in excess of net
investment income ................................. (285,775)
--------------
Net Assets ....................... $1,493,711,157
------------------------------------------------------
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 - $1,327,727,687/87,043,498 .................. $15.25
==========================================================================
Class B N $165,983,470/10,881,585 ................... $15.25
==========================================================================
Maximum Offering Price Per Share*
Class A - ($15.25 x 104.71%) ......................... $15.97
==========================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended May 31, 1998
- -----------------------------------------
Investment Income:
Interest ........................................... $119,799,270
Dividends (net of foreign
withholding taxes of $14,416) ..................... 114,373
--------------
119,913,643
--------------
Expenses:
Investment management fee- Note B .................. 7,529,287
Distribution and service fee- Note B
Class A ........................................... 4,069,321
Class B ........................................... 1,498,695
Transfer agent fee- Note B ......................... 3,493,318
Custodian fee ...................................... 279,280
Financial services fee- Note B ..................... 267,540
Trustees' fees ..................................... 90,692
Registration and filing fees ....................... 43,603
Auditing fee ....................................... 42,000
Printing ........................................... 30,277
Miscellaneous ...................................... 25,258
Legal fees ......................................... 4,683
--------------
Total Expenses ................... 17,373,954
------------------------------------------------------
Net Investment Income ............ 102,539,689
------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts:
Net realized gain on investments sold .............. 5,750,766
Net realized gain on financial futures
contracts ......................................... 195,978
Change in net unrealized appreciation/
depreciation of investments ....................... 41,951,372
Change in net unrealized appreciation/
depreciation of financial futures
contracts ......................................... (71,000)
--------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts....... 47,827,116
-------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........ $150,366,805
------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 1, 1997 YEAR ENDED
DECEMBER 31, 1996 TO MAY 31, 1997(1) MAY 31, 1998
----------------- ------------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ......................... $113,173,641 $45,682,556 $102,539,689
Net realized gain (loss) on investments sold
and financial futures contracts .............. (7,543,254) (2,662,527) 5,946,744
Change in net unrealized appreciation/
depreciation of investments and financial
futures contracts ............................ (45,633,903) (10,582,752) 41,880,372
-------------- ------------- --------------
Net Increase in Net Assets Resulting
from Operations .............................. 59,996,484 32,437,277 150,366,805
-------------- ------------- --------------
Distributions to Shareholders:
Distributions from net investment income
Class A- ($1.0858, $0.4449 and $1.0541
per share, respectively) ..................... (105,555,822) (41,557,976) (93,841,029)
Class B- ($0.9813, $0.4021 and $0.9471
per share, respectively) ..................... (7,590,937) (3,536,786) (9,295,588)
-------------- ------------- --------------
Total Distributions to Shareholders ........... (113,146,759) (45,094,762) (103,136,617)
-------------- ------------- --------------
From Fund Share Transactions- Net:* ............. (30,564,714) (42,760,453) (48,328,644)
-------------- ------------- --------------
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 and $614,676
respectively, and distributions in excess
of net investment income of $285,775).......... $1,550,227,551 $1,494,809,613 $1,493,711,157
============== ============== ==============
* Analysis of Fund Share Transactions:
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1997 YEAR ENDED
DECEMBER 31, 1996 TO MAY 31, 1997(1) MAY 31, 1998
-------------------- ---------------------- -----------------
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 13,358,697 $202,416,255
Shares issued to shareholders
in reinvestment of distributions.. 5,504,983 81,567,467 2,161,346 31,871,020 4,785,248 72,548,258
----------- ------------ ----------- ------------- ------------ ------------
17,531,146 260,121,804 17,313,215 255,016,258 18,143,945 274,964,513
Less shares repurchased .......... (22,184,916) (329,117,996)(20,200,777) (297,599,361) (23,250,555) (352,004,533)
----------- ------------ ----------- ------------- ------------ ------------
Net decrease ..................... (4,653,770) ($68,996,192) (2,887,562) ($42,583,103) (5,106,610) ($77,040,020)
=========== ============ =========== ============= ============ ============
CLASS B
Shares sold ...................... 6,495,177 $96,388,497 1,583,824 $23,396,615 3,527,995 $53,560,903
Shares issued to
shareholders in reinvestment
of distributions ................. 297,182 4,401,471 137,791 2,031,711 347,196 5,266,476
----------- ------------ ----------- ------------- ------------ ------------
6,792,359 100,789,968 1,721,615 25,428,326 3,875,191 58,827,379
Less shares repurchased ........... (4,203,557) (62,358,490) (1,730,811) (25,605,676) (1,984,859) (30,116,003)
----------- ------------ ----------- ------------- ------------ ------------
Net increase (decrease) ........... 2,588,802 $38,431,478 (9,196) ($177,350) 1,890,332 $28,711,376
=========== ============ =========== ============= ============ ============
</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
<TABLE>
<CAPTION>
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:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------------------- JANUARY 1, 1997 YEAR ENDED
1993 1994 1995 1996 TO MAY 31, 1997(6) MAY 31, 1998
---- ---- ---- ---- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period... $15.29 $15.53 $13.90 $15.40 $14.90 $14.78
---------- ---------- ---------- ---------- ---------- ----------
Net Investment Income ................. 1.14 1.12 1.12 1.09 0.44 1.05(7)
Net Realized and Unrealized Gain
(Loss) on Investments and Financial
Futures Contracts ..................... 0.62 (1.55) 1.50 (0.50) (0.12) 0.47
---------- ---------- ---------- ---------- ---------- ----------
Total from Investment Operations ...... 1.76 (0.43) 2.62 0.59 0.32 1.52
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment
Income ................................ (1.14) (1.12) (1.12) (1.09) (0.44) (1.05)
Distributions from Net Realized
Gain on Investments Sold and
Financial Futures Contracts ........... (0.38) (0.08) - - - -
Total Distributions ................... (1.52) (1.20) (1.12) (1.09) (0.44) (1.05)
Net Asset Value, End of Period ........ $15.53 $13.90 $15.40 $14.90 $14.78 $15.25
========== ========== ========== ========== ========== ==========
Total Investment Return at Net
Asset Value(1) ........................ 11.80% (2.75%) 19.40% 4.11% 2.22%(3) 10.54%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) ........................ $1,505,754 $1,326,058 $1,535,204 $1,416,116 $1,361,924 $1,327,728
Ratio of Expenses to Average
Net Assets ............................ 1.41% 1.26% 1.13% 1.14% 1.11%(4 1.08%
Ratio of Net Investment Income
to Average Net Assets ................. 7.18% 7.74% 7.58% 7.32% 7.38%(4) 6.90%
Portfolio Turnover Rate ............... 107% 85% 103%(5) 123% 58% 198%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENT.
10
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
Financial Highlights (continued)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------------JANUARY 1, 1997 YEAR ENDED
1993 1994 1995 1996 TO MAY 31, 1997(6) MAY 31, 1998
---- ---- ---- ---- ------------------ ------------
<S> <C> <C> <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 $14.90 $14.78
---------- ---------- ---------- ---------- ---------- ----------
Net Investment Income ................. 0.11 1.04 1.02 0.98 0.40 0.95(7)
Net Realized and Unrealized Gain
(Loss) on Investments and Financial
Futures Contracts ..................... - (1.54) 1.50 (0.50) (0.12) 0.47
---------- ---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.11 (0.50) 2.52 0.48 0.28 1.42
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income... (0.11) (1.04) (1.02) (0.98) (0.40) (0.95)
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) (0.95)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ........ $15.52 $13.90 $15.40 $14.90 $14.78 $15.25
========== ========== ========== ========== ========== ==========
Total Investment Return at Net
Asset Value(1)........................ 0.90%(3) (3.13%) 18.66% 3.38% 1.93%(3) 9.78%
Ratios and Supplemental Data
Net Assets, End of Period (000s
omitted) .............................. $4,125 $40,299 $98,739 $134,112 $132,885 $165,983
Ratio of Expenses to Average
Net Assets ............................ 1.63%(4) 1.78% 1.75% 1.84% 1.81%(4) 1.78%
Ratio of Net Investment Income
to Average Net Assets ................. 0.57%(4) 7.30% 6.87% 6.62% 6.68%(4) 6.18%
Portfolio Turnover Rate ............... 107% 85% 103%(5) 123% 58% 198%
(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) Portfolio turnover excludes merger activity.
(6) Effective May 31, 1997, the fiscal period end changed from December 31 to
May 31.
(7) Based on the average of the shares outstanding at the end of each month.
</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
11
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Sovereign Bond Fund on May 31, 1998. It's divided into three main categories:
bonds, preferred stocks and warrant, and short-term investments. The bonds are
further broken down by industry group. Short-term investments, which represent
the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- ---- ------- -------- -----
<S> <C> <C> <C> <C>
BONDS
Aerospace (0.51%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2
08-15-14 (R) .............................. 10.910% BBB- $5,800 $7,570,160
-----------
Automobile/Trucks (0.74%)
ERAC USA Finance Co.,
Note 02-15-05 (R) ......................... 6.625 BBB 6,200 6,183,260
General Motors Corp.,
Bond 05-01-28 ............................. 6.750 A 4,855 4,855,000
-----------
11,038,260
-----------
Banks -D Foreign (3.93%)
Abbey National First Capital, B.V.,
Sub Note (United Kingdom)
10-15-04 (Y) .............................. 8.200 AA- 10,000 10,985,800
African Development Bank,
Sub Note (Supra National)
12-15-03 (Y) ............................. 9.750 AA- 8,000 9,378,960
International Bank for Reconstruction
& Development, Deb (Supra National)
09-01-16 (Y) .............................. 8.250 AAA 5,000 6,169,450
Landeskreditbank Baden-D Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) ........... 7.625 AAA 6,820 7,806,308
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 ..................... 10.125 A+ 10,605 12,502,553
Scotland International Finance No.
2 B.V., Gtd Sub Note (Netherlands)
11-01-06 (R) (Y) .......................... 8.850 A+ 10,250 11,832,190
-----------
58,675,261
===========
Banks -D United States (3.72%)
ABN-Amro Bank N.V. -D Chicago Branch,
Gtd Sub Deb 05-31-05 ....................... 7.250 AA- 5,000 5,262,800
Bank of New York,
Cap Security 12-01-26 (R) ................. 7.780 A- 5,425 5,675,093
BankBoston NA,
Sub Note 03-25-08 ......................... 6.375 A2 4,515 4,494,728
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 ...................... 9.750 AA- 8,925 10,017,063
National Westminster Bank Plc- New York
Branch, Sub Note 05-01-01 ................... 9.450 AA- 10,000 10,871,700
</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>
Banks- United States (continued)
NB Capital Trust IV,
Gtd Cap Security 04-15-27 .................. 8.250% A- $4,880 $5,418,166
Security Pacific Corp.,
Medium Term Sub Note 05-09-01 ............. 10.360 A1 6,000 6,697,980
Sub Note 11-15-00 ......................... 11.500 A 6,400 7,184,576
-----------
55,622,106
-----------
Building (0.17%)
M.D.C. Holdings, Inc.,
Sr Note 02-01-08 ........................... 8.375 BB- 2,560 2,528,000
-----------
Business Services - Misc (0.22%)
Wesco Distribution, Inc.,
Sr Sub Note 06-01-08 (R) + ................. 9.125 B 3,240 3,240,000
-----------
Containers (0.22%)
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental
Interest Cert) 04-01-02 .................... 12.250 B- 3,235 3,323,963
-----------
Cosmetics & Personal Care (0.64%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) ....................... 11.000 B+ 2,455 2,405,900
Johnson & Johnson,
Deb 11-15-23 ............................... 6.730 AAA 6,750 7,093,103
-----------
9,499,003
-----------
Diversified Operations (0.17%)
Perez Companc S.A.,
Bond (Argentina) 07-15-07 (Y)............... 8.125 BBB- 2,650 2,491,000
-----------
Electronics (0.19%)
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) ................... 9.500 B 3,500 2,835,000
-----------
Energy (1.16%)
AES Corp.,
Sr Sub Note 07-15-06 ...................... 10.250 B+ 6,005 6,530,438
Sr Sub Note 08-15-07 ...................... 8.375 B+ 3,435 3,460,763
CalEnergy Company, Inc.,
Sr Note 09-15-06 .......................... 9.500 BB+ 4,115 4,441,237
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R)................... 9.625 B 2,850 2,917,688
-----------
17,350,126
-----------
Finance (4.13%)
Chrysler Financial Corp.,
Deb 11-01-99 .............................. 12.750 A 3,000 3,269,700
</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)
CIT Group Holdings, Inc.,
Deb 03-15-01 .............................. 9.250% A $5,000 $5,408,200
Citibank Credit Card Master Trust I,
Pass Thru Ctf Ser 1998-2 Class A
01-15-10 .................................. 6.050 Aaa 890 882,769
Constitution Capital Trust I,
Gtd Cap Security 04-15-27 (R).............. 9.150 BBB 3,725 4,110,687
DR Investments,
Sr Note 05-15-07 (R) ...................... 7.450 A- 4,500 4,808,295
General Motors Acceptance Corp.,
Medium Term Note 04-06-00 ................. 5.850 A2 3,900 3,895,125
Merrill Lynch Mortgage Investors, Inc.,
Sub Bond Ser 1992-B Class B 04-15-12....... 8.500 Aaa 2,273 2,336,230
Midland American Capital Corp.,
Gtd Deb 11-15-03 .......................... 12.750 A 19,932 20,505,842
Niantic Bay Fuel Trust,
Bond 06-04-03 (R) + ....................... 8.590 B+ 2,350 2,350,000
Standard Credit Card Master Trust,
Credit Card Part Ctf Ser 1995-10
Class A 02-07-01 .......................... 5.900 AAA 4,580 4,585,725
United Companies Financial Corp.,
Sr Note 01-15-04 .......................... 7.700 BB+ 5,420 5,336,153
Yanacocha Receivables Master Trust,
Pass Thru Cert Ser 1997-A 06-15-05 (R)..... 8.400 BBB- 4,302 4,284,312
-----------
61,773,038
-----------
Food (0.22%)
Mastellone Hermanos S.A.,
Sr Bond (Argentina) 04-01-08 (R) (Y) ...... 11.750 B+ 3,240 3,288,600
-----------
Funeral Services & Related (0.67%)
Loewen Group International, Inc.,
Gtd Sr Note Ser 4 10-15-03 ................. 8.250 BB+ 6,860 7,014,350
Note 06-01-08 (R) .......................... 7.600 BB+ 2,950 2,960,532
-----------
9,974,882
-----------
Glass Products (0.30%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R) (Y)....... 11.375 B+ 4,140 4,429,800
-----------
Government - Foreign (2.38%)
Nova Scotia, Province of,
Deb (Canada) 04-01-22 (Y) .................. 8.750 A- 7,500 9,523,875
Panama, Republic of,
Note (Panama) 02-13-02 (R) (Y) ............ 7.875 BB+ 6,435 6,386,738
Quebec, Province of,
Deb (Canada) 10-01-13 (Y) .................. 13.000 A+ 11,000 11,758,670
Deb (Canada) 09-15-14 (Y) .................. 13.250 A+ 1,000 1,129,590
</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)
Saskatchewan, Province of,
Bond (Canada) 12-15-20 (Y).................. 9.375% A 5,000 $6,721,800
-----------
35,520,673
-----------
Government - U.S. (21.41%)
United States Treasury,
Bond 08-15-17 ............................. 8.875 AAA 9,667 53,153,780
Bond 05-15-18 ............................. 9.125 AAA 7,075 64,750,250
Bond 02-15-23 ............................. 7.125 AAA 2,219 71,989,250
Note 11-30-99 ............................. 7.750 AAA 3,270 3,371,174
Note 05-15-01 ............................. 8.000 AAA 5,791 38,111,688
Note 05-15-02 ............................. 7.500 AAA 8,775 20,013,024
Note 08-15-03 ............................. 5.750 AAA 2,890 12,982,679
Note 02-15-05 ............................. 7.500 AAA 7,420 30,230,550
Note 07-15-06 ............................. 7.000 AAA 3,207 25,172,401
-----------
319,774,796
-----------
Government - U.S. Agencies (8.99%)
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 ............... 11.250 AAA 1,057 1,183,146
Federal National Mortgage Assn.,
15 Yr SF Pass Thru Ctf 01-25-05 ............ 8.000 AAA 0,000 10,334,300
15 Yr SF Pass Thru Ctf 02-01-08 ............ 7.500 AAA 2,238 2,305,931
15 Yr SF Pass Thru Ctf 06-01-10 + .......... 7.000 AAA 4,530 4,619,150
30 Yr Pass Thru Ctf 03-01-24 + ............. 6.500 AAA 3,715 3,692,933
30 Yr SF Pass Thru Ctf 10-01-23 ............ 7.000 AAA 7,291 7,402,968
Note 02-15-11 + ............................ 6.500 AAA 0,980 11,041,708
Pass Thru Ctf Ser 1997-M8 Class
A-1 01-25-22 ............................... 6.940 AAA 3,464 3,582,951
Financing Corp.,
Bond 02-08-18 .............................. 9.400 AAA 7,000 9,583,420
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 12-01-99 + ............. 7.000 AAA 7,450 7,566,369
30 Yr Pass Thru Ctf 02-15-25 + ............. 7.500 AAA 2,610 12,996,118
30 Yr Pass Thru Ctf 01-01-27 + ............. 8.000 AAA 6,060 16,697,261
30 Yr SF Pass Thru Ctf 02-15-24
to 09-15-25 ................................ 7.500 AAA 8,106 18,674,113
30 Yr SF Pass Thru Ctf 11-15-22 ............ 8.000 AAA 4,479 4,676,103
30 Yr SF Pass Thru Ctf 07-15-16
to 01-15-25 ................................ 9.000 AAA 3,394 14,461,729
30 Yr SF Pass Thru Ctf 11-15-19
to 05-15-21 ................................ 9.500 AAA 2,981 3,228,884
30 Yr SF Pass Thru Ctf 06-15-20
to 03-15-25 ................................ 10.000 AAA 1,712 1,895,471
30 Yr SF Pass Thru Ctf 01-15-16 ............ 10.500 AAA 80 88,432
30 Yr SF Pass Thru Ctf 01-15-16 ............ 11.000 AAA 191 214,263
-----------
134,245,250
-----------
Insurance (4.89%)
Equitable Life Assurance Society of
the United States, Surplus Note
12-01-05 (R) ............................... 6.950 A 6,050 6,241,785
</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 $7,155,806
Liberty Mutual Insurance Co.,
Surplus Note 05-04-07 (R) .................. 8.200 A+ 10,000 11,207,800
Surplus Note 10-15-26 (R) .................. 7.875 A2 3,990 4,406,237
Massachusetts Mutual Life
Insurance Co., Surplus Note 11-15-23 (R).... 7.625 AA 10,450 11,599,187
NAC Re Corp.,
Note 06-15-99 .............................. 8.000 A- 3,360 3,421,118
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) .................. 7.500 AA- 15,000 15,467,250
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) .................. 6.625 AA 7,250 7,476,563
URC Holdings Corp.,
Sr Note 06-30-06 (R) ....................... 7.875 A- 5,665 6,070,671
-----------
73,046,417
-----------
Leisure (1.20%)
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 ................. 13.500 BB+ 1,500 1,912,500
Showboat Marina Casino Partnership/
Finance Corp., 1st Mtg Note Ser B 03-15-03.. 13.500 BB- 5,000 5,850,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 03-15-07 (Y)...... 9.000 B+ 2,000 2,100,000
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) ..... 8.625 B+ 2,225 2,291,750
Trump Hotels & Casino Resorts Funding,
Inc./Holdings, L.P., Sr Note 06-15-05....... 15.500 B- 5,150 5,819,500
-----------
17,973,750
-----------
Machinery (0.18%)
Newcor, Inc.,
Sr Sub Note 03-01-08 (R) ................... 9.875 B- 2,665 2,698,313
-----------
Media (6.58%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 ..................... 9.250 B3 4,750 4,880,625
CBS Corp.,
Sr Note 05-20-05 (R) ....................... 7.150 BB 2,960 2,970,153
Century Communications Corp.,
Sr Note 08-15-00 ........................... 9.500 BB- 2,545 2,653,163
Clear Channel Communications, Inc.,
Deb 10-15-27 ............................... 7.250 BBB- 4,515 4,634,196
Comcast Cable Communications Inc.,
Note 05-01-17 .............................. 8.875 BBB- 1,435 1,708,425
Comcast Corp.,
Sr Sub Deb 07-15-12 ........................ 10.625 BB+ 5,425 6,937,110
</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)
Continental Cablevision, Inc.,
Sr Sub Deb 06-01-07 ........................ 11.000% BBB- $12,205 $13,376,802
CSC Holdings, Inc.,
Sr Note 12-15-07 ........................... 7.875 BB+ 4,070 4,212,450
Garden State Newspapers, Inc.,
Sr Sub Note Ser B 10-01-09 ................. 8.750 B+ 2,365 2,400,475
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 (R) ................... 8.875 B- 1,405 1,405,000
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) .............. 10.625 Ba3 1,750 1,917,598
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 ........................ 8.250 BBB- 3,855 4,283,830
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y)......... 10.000 BB+ 8,000 8,840,000
Sec Second Priority Note (Canada)
08-01-02 (Y) ............................... 9.625 BB+ 2,585 2,765,950
SFX Broadcasting, Inc.,
Sr Sub Note Ser B 05-15-06 ................. 10.750 B- 4,505 4,978,025
TeleWest Communications Plc,
Sr Deb (United Kingdom) 10-01-06 (Y) ....... 9.625 B+ 3,420 3,591,000
Time Warner, Inc.,
Deb 01-15-13 ............................... 9.125 BBB- 4,620 5,616,673
TKR Cable I, Inc.,
Sr Deb 10-30-07 ............................ 10.500 BBB- 17,240 18,945,898
Ziff-Davis, Inc.,
Sr Sub Note 05-01-08 ....................... 8.500 B+ 2,150 2,166,125
-----------
98,283,498
-----------
Medical (2.32%)
Dynacare, Inc.,
Sr Note (Canada) 01-15-06 (Y) ............. 10.750 B+ 2,350 2,491,000
Everest Healthcare Services Corp.,
Sr Sub Note 05-01-08 (R) ................... 9.750 B- 3,025 3,066,594
Fesenius Medical Care Capital Trust II,
Gtd Trust Preferred Security
02-01-08 (R) ............................... 7.875 B+ 3,480 3,475,650
Integrated Health Services, Inc.,
Sr Sub Note 01-15-08 ....................... 9.250 B- 4,240 4,346,000
MEDIQ/PRN Life Support Services, Inc.,
Sr Sub Note 06-01-08 (R) ................... 11.000 B- 2,640 2,692,800
PharMerica, Inc.,
Sr Sub Note 04-01-08 (R) ................... 8.375 B 2,950 2,950,000
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 ....................... 10.750 B+ 3,155 3,533,600
Sola International, Inc.,
Note 03-15-08 .............................. 6.875 BBB- 3,600 3,576,636
</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>
Medical (continued)
Tenet Healthcare Corp.,
Sr Sub Note 01-15-07 ....................... 8.625% BB- $3,470 $3,556,750
Sr Sub Note 12-01-08 (R) ................... 8.125 BB- 2,015 2,009,963
Watson Pharmaceuticals, Inc.,
Sr Note 05-15-08 ........................... 7.125 BBB- 2,960 2,967,400
-----------
34,666,393
-----------
Metal (0.16%)
Freeport-McMoRan Copper & Gold, Inc.,
Sr Note 11-15-26 ........................... 7.200 CCC+ 2,870 2,370,477
-----------
Mortgage Banking (3.41%)
Citibank Credit Card Master Trust I,
Pass Thru Ctf Ser 1997-7 Class A 08-15-02... 6.350 AAA 3,900 3,937,324
ContiFinancial Corp.,
Sr Note 03-15-02 ........................... 7.500 BB+ 4,200 4,206,300
ContiMortgage Home Equity Loan Trust,
Pass Thru Ctf Ser 1995-2 Class A-5
08-15-25 ................................... 8.100 AAA 3,865 4,040,737
Deutsche Mortgage & Asset Receiving Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-
C1 Class C 03-15-08 ........................ 6.861 A2 3,585 3,643,256
First Plus Home Loan Trust,
Pass Thru Ctf Ser 1998-2 Class A-5
05-10-17 ................................... 6.610 Aaa 6,220 6,260,819
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1997-C2 Class A-3
11-15-07 ................................... 6.566 AAA 6,000 6,144,375
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-1 Class A-5
12-25-13 ................................... 6.290 AAA 6,816 6,813,870
Nomura Asset Securities Corp.,
Pass Thru Ctf Ser 1998-D6 Class A-1A
03-17-28 ................................... 6.280 AAA 4,369 4,382,208
Salomon Brothers Mortgage Securities VII,
Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class
A-2 07-25-24 ............................... 6.750 Aaa 3,940 4,000,440
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-D1 Class A6
02-15-25 ................................... 7.180 AAA 7,260 7,574,222
-----------
51,003,551
-----------
Oil & Gas (1.57%)
Camuzzi Gas Pampeana S.A.,
Bond (Argentina) 12-15-01 (Y)............... 9.250 BBB- 3,475 3,535,813
Norsk Hydro ASA,
Deb (Norway) 10-01-16 (Y) .................. 7.500 A 5,790 6,357,420
Petroleum Geo-Services,
Sr Note (Norway) 03-30-08 (Y)............... 6.625 BBB 4,745 4,751,928
Union Pacific Resources Group, Inc.,
Deb 05-15-28 ............................... 7.150 BBB 3,725 3,762,250
YPF Sociedad Anonima,
Sr Note (Argentina) 03-15-03 (Y)............ 7.250 BBB- 4,950 4,979,205
-----------
23,386,616
-----------
</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>
Paper & Paper Products (0.68%)
Fort James Corp.,
Sr Note 09-15-02 ........................... 6.500% BBB- $4,110 $4,130,221
Repap New Brunswick,
Sr Note (Canada) 04-15-05 (Y) + ............ 10.625 CCC+ 1,635 1,675,875
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 ................. 12.000 B+ 3,945 4,369,088
-----------
10,175,184
-----------
Real Estate Investment Trust (0.54%)
American Health Properties, Inc.,
Note 01-15-07 .............................. 7.500 BBB- 3,510 3,631,235
TriNet Corporate Realty Trust, Inc.,
Note 05-15-01 .............................. 7.300 BBB- 4,395 4,477,406
-----------
8,108,641
-----------
Retail (0.64%)
Disco S.A.,
Note (Argentina) 05-15-03 (R) (Y)........... 9.125 BB 2,085 2,058,938
Safeway, Inc.,
Deb 01-15-09 ............................... 13.500 BBB 2,609 2,932,981
Southern Foods Group L.P.,
Sr Sub Note 09-01-07 (R) ................... 9.875 B 4,455 4,588,650
-----------
9,580,569
-----------
Steel (0.37%)
Bayou Steel Corp.,
1st Mtg Bond 05-15-08 (R)................... 9.500 B 2,440 2,424,750
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) .............. 11.500 B+ 2,795 3,084,981
-----------
5,509,731
-----------
Telecommunications (3.81%)
Compagnie De Radiocomunicaciones Moviles S.A.,
Bond (Argentina) 05-08-08 (R) (Y) .......... 9.250 BBB- 1,440 1,393,200
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants),
Step Coupon (12.625%, 03-01-03)
03-01-08 (R) (A) ........................... Zero B- 4,410 2,337,300
Facilicom International,
Sr Note 01-15-08 (R) ....................... 10.500 B- 2,915 2,900,425
FLAG Ltd.,
Sr Note (Bermuda) 01-30-08 (R) (Y) ......... 8.250 B+ 4,165 4,227,475
McLeodUSA, Inc.,
Sr Note 03-15-08 (R) ....................... 8.375 B+ 3,515 3,515,000
MetroNet Communications Corp.,
Sr Note (Canada) 08-15-07 (Y) .............. 12.000 B 4,625 5,318,750
</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>
Telecommunications (continued)
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%,
02-15-99) 08-15-04 (A) ..................... Zero% CCC+ $8,195 $7,928,663
Sr Disc Note, Step Coupon (9.95%,
02-15-03) 02-15-08 (R) (A) ................. Zero CCC+ 3,725 2,351,406
NEXTLINK Communications, Inc.,
Sr Note 03-15-08 (R)........................ 9.000 B 1,340 1,353,400
Sr Note 10-01-07 ........................... 9.625 B 2,415 2,463,300
Paging Network, Inc.,
Sr Sub Note 10-15-08 ....................... 10.000 B 2,650 2,742,750
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 ..................... 10.875 B+ 4,090 4,693,275
Satelites Mexicanos S.A. de C.V.,
Sr Note (Mexico) 11-01-04 (R) (Y) .......... 10.125 B- 2,470 2,463,825
TCI Communications, Inc.,
Sr Deb 08-01-15 ............................ 8.750 BBB- 4,379 5,138,713
Telefonica de Argentina S.A.,
Note (Argentina) 05-07-08 (R) (Y)........... 9.125 BBB- 2,280 2,211,600
Teligent, Inc.,
Sr Note 12-01-07 ........................... 11.500 CCC 3,440 3,500,200
Viatel, Inc.,
Unit (Sr Note & Preferred Stock Ser A)
04-15-08 (R) ............................... 11.250 Caa1 2,345 2,438,800
-----------
56,978,082
-----------
Textile (0.59%)
Tommy Hilfiger USA,
Gtd Note 06-01-03 .......................... 6.500 BBB- 4,120 4,125,150
Unifi, Inc.,
Note 02-01-08 (R) .......................... 6.500 A- 4,680 4,629,924
-----------
8,755,074
-----------
Tobacco (0.50%)
RJR Nabisco, Inc.,
Note 12-01-02 .............................. 8.625 BBB- 4,555 4,744,579
Note 09-15-03 .............................. 7.625 BBB- 2,770 2,773,213
-----------
7,517,792
-----------
Transport (4.38%)
America West Airlines, Inc.,
Pass Thru Ctf Ser B 01-02-08 ............... 6.930 A- 4,747 4,806,400
Continental Airlines,
Pass Thru Ctf Ser 96-C 04-15-15 ............ 9.500 BBB+ 4,805 5,579,164
Enterprises Shipholding Corp.,
Sr Note (Greece) 05-01-08 (R) (Y)........... 8.875 BB 2,295 2,283,525
Humpuss Funding Corp.,
Gtd Note 12-15-09 (R)....................... 7.720 B3 4,861 3,714,376
</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>
Transport (continued)
Northwest Airlines, Inc.,
Gtd Note 03-15-04 .......................... 8.375% BB $1,360 $1,395,918
Pass Thru Ctf Ser 1996-1C 01-02-05 ......... 10.150 BB+ 3,247 3,474,079
Pass Thru Ctf Ser 1996-1D 01-02-15 ......... 8.970 BBB- 3,737 4,185,691
NWA Trust,
Sr Note Ser A 06-21-14 ..................... 9.250 A2 5,379 6,398,724
Rail Car Trust,
Pass Thru Ser 1992-1 Class A 06-01-04 ...... 7.750 AAA 14,545 15,290,849
Scandinavian Airlines System,
Deb (Multinational) 07-20-99 (Y) ........... 9.125 A3 6,834 7,090,275
U.S. Airways, Inc.,
Pass Thru Ctf Ser 1990-A1 03-19-05.......... 11.200 BB 7,828 8,806,148
Wisconsin Central Transportation Corp.,
Note 04-15-08 .............................. 6.625 BBB- 2,470 2,462,930
-----------
65,488,079
-----------
Utilities (12.45%)
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 .............. 9.000 BB- 4,220 4,824,768
British Columbia Hydro and Power Auth.,
Gtd Bond Ser FN (Canada) 09-01-13 (Y)....... 12.500 AA 6,175 6,516,601
British Telecom Finance, Inc.,
Gtd Deb (United Kingdom) 02-15-19 (Y)....... 9.625 AAA 9,805 10,475,760
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 ......... 8.890 BB- 6,600 7,590,000
Calpine Corp.,
Sr Note 05-15-06 ........................... 10.500 BB- 4,650 5,045,250
Sr Note 07-15-07 ........................... 8.750 BB- 1,725 1,781,063
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A (Philippines) 11-15-05 (Y).... 11.450 BB 4,100 4,182,000
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 ..................... 9.500 BB+ 9,705 10,669,968
EIP Funding-PNM,
Sec Fac Bond 10-01-12 ...................... 10.250 Ba2 9,253 10,862,744
Enersis S.A.,
Note (Cayman Islands) 12-01-16 (Y) ......... 7.400 A-D 4,830 4,709,105
Fideicomiso Petacalco Trust,
Sr Sec Note (Mexico) 12-23-09 (R) (Y)....... 10.160 BB 4,190 4,273,800
First PV Funding Corp.,
Deb Ser 86A 01-15-14 ....................... 10.300 BB- 2,015 2,128,122
Deb Ser 86B 01-15-16 ....................... 10.150 BB- 2,873 3,031,561
GTE Corp.,
Deb 11-01-20 ............................... 10.250 A 6,875 7,721,794
Hydro-Quebec,
Gtd Bond (Canada) 02-01-21 (Y) ............. 9.400 A+ 4,070 5,367,190
Gtd Deb Ser IF (Canada) 02-01-03 (Y)........ 7.375 A+ 7,185 7,543,747
Gtd Deb Ser FU (Canada) 02-01-12 (Y)........ 11.750 A+ 5,000 7,289,850
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<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)
Iberdrola International B.V.,
Note 10-01-02 ............................. 7.500% AA- $8,000 $8,368,000
Sr Note (Spain) 06-01-03 (R) (Y)............ 7.125 AA- 8,629 8,955,090
Long Island Lighting Co.,
Deb 07-15-19 ............................... 8.900 BB+ 3,475 3,696,914
Deb 11-01-22 ............................... 9.000 BB+ 3,205 3,649,886
Gen Ref Mtg 07-01-24 ....................... 9.625 BBB 6,530 6,570,813
Gen Ref Mtg Bond 05-01-21 .................. 9.750 BBB 11,085 11,322,662
Midland Cogeneration Venture L.P.,
Sec Deb Ser C-91 07-23-02 .................. 10.330 BB- 9,856 10,644,427
Midland Funding Corp. II,
Deb Ser A 07-23-05 ......................... 11.750 B 3,750 4,500,375
Deb Ser B 07-23-06 ......................... 13.250 B 1,900 2,447,219
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) (Y) ...... 9.625 BB 2,540 2,476,500
North Atlantic Energy Corp.,
1st Mtg Ser A 06-01-02 ..................... 9.050 B+ 4,800 4,937,088
Puget Sound Energy Capital Trust I,
Gtd Cap Security Ser B 06-01-27 ............ 8.231 Baa2 3,150 3,360,546
System Energy Resources, Inc.,
1st Mtg 08-01-01 ........................... 7.710 BBB- 5,525 5,649,147
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 ......... 8.090 BBB- 5,085 5,335,589
-----------
185,927,579
-----------
TOTAL BONDS
(Cost $1,376,559,912) (94.04%) 1,404,649,664
-------- -------------
NUMBER OF
SHARES OR
WARRANTS
--------
PREFERRED STOCKS AND WARRANTS
California Federal Preferred Capital Corp.,
9.125%, Ser A, Preferred Stock................................... 182,725 4,979,256
Connecticut Light & Power Co., 5.300%,
Ser 1993, Preferred Stock........................................ 194,398 8,845,109
MetroNet Communications Corp., Warrant
(Canada) (Y) (R) ................................................ 4,625 222,000
Time Warner, Inc., 10.25%, Ser M,
Preferred Stock ................................................. 8,120 9,216,200
-----------
TOTAL PREFERRED STOCKS AND WARRANTS
(Cost $22,878,714) (1.56%) 23,262,565
----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign Bond Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---- -------- -----
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (6.37%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion,
dated 05-29-98, due 06-01-98 (secured by
U.S. Treasury Notes, 5.125% thru 9.25%,
due 08-15-98 thru 11-15-05 and U.S.
Treasury Bonds, 6.00% thru 12.00%, due
08-15-13 thru 08-15-27) - Note A ........... 5.570% $95,142 $95,142,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% .......................... 18,097
------------
TOTAL SHORT-TERM INVESTMENTS (6.37%) 95,160,097
--------- ------------
TOTAL INVESTMENTS (101.97%)1,523,072,326
--------- -------------
OTHER ASSETS AND LIABILITIES, NET (1.97%) (29,361,169)
--------- ------------
TOTAL NET ASSETS (100.00%)$1,493,711,157
========= =============
</TABLE>
(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 $219,836,205 or 14.72% of net assets as of
May 31, 1998.
* Credit ratings are unaudited and rated by Moody's Investors Service or John
Hancock Advisers, Inc. where Standard and Poor's ratings are not available.
+ A portion of these securities having an aggregate value of $63,879,414 or
4.28% 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 value of $68,974,029 of
United States Treasury Bonds, 7.125%, 02-15-23 has been segregated to cover
the when-issued commitments.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMETNS.
23
<PAGE>
NOTES TO FINANCIAL STATEMETNTS
John Hancock Funds - Sovereign Bond Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Sovereign Bond Fund (the "Fund") is a diversified open-end
investment management company, registered under the Investment Company Act of
1940. The investment objective of the Fund is to generate a high level of
current income, consistent with prudent investment risk, through investment in a
diversified portfolio of freely marketable debt securities.
The Trustees have authorized the issuance of multiple classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemption, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution and service expenses under the terms of a distribution
plan, have exclusive voting rights regarding such distribution plan.
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, Inc., 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 $22,827,929 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. To the extent that such carryforwards are used by
the Fund, no capital gain distributions will be made. The carryforwards expire
as follows: May 31, 2001 N $3,894,200, May 31, 2002 N $9,347,493, May 31, 2004 N
$8,402,805 and May 31, 2005 N $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 net 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.
24
<PAGE>
NOTES TO FINANCIALS 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. These agreements enable the Fund
to participate with other funds managed by the Adviser in unsecured lines of
credit with banks which permit borrowings up to $800 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 rates ranging
from 0.070% to 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 May 31, 1998.
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 futures
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, 1998, 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 year ended May 31,
1998, JH Funds received net sales charges of $1,444,580 with regard to sales of
Class A shares. Out of this amount, $164,116 was retained and used for printing
of prospectuses, advertising, sales literature and other purposes, $372,323 was
paid as sales commissions to unrelated broker-dealers and $908,141 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
5.00% 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
25
<PAGE>
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 year
ended May 31, 1998, contingent deferred sales charges received by JH Funds
amounted to $359,205.
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 year 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 May 31, 1998, 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 year ended May 31, 1998, aggregated $1,096,959,509 and
$1,187,726,604, respectively. Purchases and proceeds from sales of obligations
of the U.S. government and its agencies, during the year ended May 31, 1998,
aggregated $1,724,339,434 and $1,640,718,324, respectively.
The cost of investments owned at May 31, 1998
(including the joint repurchase agreement) for federal income tax purposes was
$1,495,035,201. Gross unrealized appreciation and depreciation of investments
aggregated $45,606,006 and $17,586,978, respectively, resulting in net
unrealized appreciation of $28,019,028.
NOTE D-
Reclassification of accounts During the year ended May 31, 1998, the Fund has
reclassified amounts to reflect an increase in accumulated net realized loss on
investments of $14,036,842, an increase in distributions in excess of net
investment income of $303,523 and an increase in capital paid-in of $14,340,365.
This represents the amount necessary to report these balances on a tax basis,
excluding certain temporary differences, as of May 31, 1998. Additional
adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the Fund, are
primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Sovereign Bond Fund
We have audited the accompanying statement of assets and liabilities of the John
Hancock Sovereign Bond Fund (the "Fund"), including the schedule of investments,
as of May 31, 1998, and the related statement of operations for the year then
ended, and 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, 1998, by correspondence with the custodian and brokers, or other appropriate
auditing procedures where 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, 1998, the results of its operations
for the year then ended, 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 10, 1998
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,
1998.
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 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the total of all distributions which are taxable
for calendar year 1998.
27
<PAGE>
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