John Hancock Funds
Utilities
Fund
Annual Report
May 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Gail D. Fosler*
Anne C. Hodsdon
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 is
proving to be a tough act to follow in 1996. Volatility has returned to
the market after being relatively calm last year. And while the stock
market has continued its advance, albeit at a slower and more erratic
pace, bonds have retreated this year in the face of stronger economic
data that has sparked inflation fears. The change is not surprising,
especially after the anomaly of last year's almost straight-up advance,
when both the bond and stock markets soared.
As the old saying "trees don't grow to the sky" suggests, it would be
unrealistic to expect the market to stage a repeat in 1996. Shareholders
would do well to temper expectations of investment returns and perhaps
revisit your investment allocations with your financial advisor to
determine if rebalancing your portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John
Hancock Funds, we never stop working to find ways to sustain and improve
the quality of information and the level of assistance we provide you.
Our commitment to this task is no less than John Hancock's loyalty was
to his fledgling country when he is said to have uttered, "if it does
the public good, burn Boston." We won't go that far, of course, but we
share our namesake's dedication to putting the public before all else.
In our case, that public is you, our shareholders. We take very
seriously the role you have entrusted to us, that of helping you achieve
your financial goals. Part of that will always involve good customer
service. So please do not hesitate to call your Customer Service
Representative at 1-800-225-5291 if you have any questions or need
information. We take pride in helping you with the same spirit that John
Hancock displayed at the dawning of America.
Sincerely,
/S/EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By Gregory K. Phelps, Portfolio Manager
John Hancock
Utilities Fund
Utilities give back a portion of earlier gains as economic
growth accelerates and interest rates rise
"Utility stocks
behaved with
uncharacteristic
volatility during
the past year..."
In April, Gregory K. Phelps, already a member of the John Hancock
Utilities Fund management team, assumed the day-to-day management of the
Fund. Mr. Phelps is a vice president of John Hancock Advisers and also
leads the portfolio management teams of John Hancock Funds' Patriot
series of closed-end funds.
Utility stocks behaved with uncharacteristic volatility during the past
year, soaring to near record heights during the bond market rally in
1995 and sinking almost as fast during the first quarter of 1996. Last
June when the period began, utility stocks were riding a wave of
investor enthusiasm. Declining interest rates, modest economic growth
and good news on the inflation front all contributed to the mood of
optimism. Moreover, just before the period began, California regulators
had announced their intention to extend the timetable for introducing
retail competition among electricity providers. The decision was hailed
as positive for utility companies' earnings prospects, not only in
California but throughout the country. In the fall, as investors
increasingly sought to protect profits earned in the broader market,
utilities benefited from their perceived status as a safe haven,
propelling prices still higher. When the Federal Reserve followed up its
July 1995 quarter-percentage-point interest-rate cut with matching cuts
in December 1995 and January 1996, utility stocks received yet another
boost.
A 2 1/4" x 3 1/4" photo of the Utilities Fund management team: Gregory
Phelps and Fund management team members Laura Provost (l) and Beverly
Cleathero (r) at Boston Edison's natural gas-fired South Boston power
plant."
But after soaring to double-digit returns in 1995, bonds retreated
sharply during the first quarter of 1996, dragging utility stocks down
with them. Three factors sparked the downturn. First, the Treasury's
semiannual auction of 30-year bonds inundated the market with a new
supply of government debt. Second, a broad increase in new corporate
debt aggravated the supply imbalance. Third, the unexpectedly strong
February employment report surprised analysts, leading some to think
that the econ-omy was in danger of overheating. The report triggered the
bond market's biggest one-day decline in more than five years. The March
employment report, released in early April, added fuel to the fire,
sending fixed-income markets still lower. And recent problems at two
high-profile nuclear-powerplants in Connec-ticut and New Jersey cast a
pall over the entire industry.
Portfolio Diversification
Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into five sections. Going from left to right:
Electric Utilities 47%; Telephone/Telecommunications 6%; Natural Gas 17%;
Short-Term Investments and Other 7% ; Oil & Gas 23%. A footnote below states
"As a percentage of net assets on May 31, 1996."
"The Fund's
strategy
continues to
be a defensive
one..."
Thankfully, market sentiment has improved slightly since then, due to
somewhat better news on the inflation front, the Fed's decision not to
raise interest rates when it met to discuss monetary policy in late May
and a recent major ruling by the Federal Energy Regulatory Commission
(FERC) pertaining to so-called "stranded costs," which was seen as good
news for the electric utilities industry in general.
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 Brooklyn
Union Gas followed by an up arrow and the phrase "Vertically integrated gas
company." The second listing is Mid-American Energy followed by an up arrow
and the phrase "Profitable oil and gas subsidiary." The third listing is Peco
Energy followed by a down arrow and the phrase "Problems with nuclear power
plant." Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
"See "Schedule of Investments." Investment holdings are subject to
change. "
The upshot was an attractive overall return for John Hancock Utilities
Fund, in absolute terms. During the one-year period that ended May 31,
1996, the Fund's Class A and Class B shares had total returns of 14.44%
and 13.68%, respectively, at net asset value. The Fund's result slightly
lagged its peers, however. During the same period, the average utility
fund had a total return of 15.60%, according to Lipper Analytical
Services.1
Strategy recap
The Fund's strategy continues to be a defensive one that de-emphasizes
electric utility common stocks and focuses on preferred stocks, which
generally pay dividends higher than comparable utility common stocks and
are less sensitive to changes in the interest-rate environment. We
continue to be concerned about the earnings prospects of electric
utilities and at the end of the period, electric utilities still totaled
only 47% of the Fund's net assets. As long as the utility rally lasted,
the Fund suffered for not being more aggressive and that's probably the
main reason we lagged our competitors during the period. Happily, during
the last three months of the period, the Fund benefited from having a
more defensive strategy than most of its peers.
Around the beginning of the calendar year, the Fund began building up
its stake in integrated oil and gas exploration companies, as well as
drillers and oil-field service providers. One reason gas utilities look
attractive right now is that they've already been through some of the
regulatory battles now facing the electric utility industry and have
emerged stronger and more competitive as a result. Another is that gas
and oil prices have risen during the last couple of years and seem
likely to maintain those higher levels for the foreseeable future.
Fund performance
Bar chart with heading "Fund Performance" at top of left hand column. Under
the heading is the footnote: "For the year ended May 31, 1996." The chart is
scaled in increments of 5% from bottom to top, with 20% at the top and 0% at
the bottom. Within the chart, there are three solid bars. The first
represents the 14.44% total return for John Hancock Utilities Fund: Class A.
The second represents the 13.68% total return for John Hancock Utilities
Fund: Class B. The third represents the 15.60% total return for the average
utility fund. Footnote below reads: "Total returns for John Hancock Utilities
Fund are at net asset value with all distributions reinvested. The average
utility fund is tracked by Lipper Analytical Services. See following page for
historical performance information."
Winners and losers
Two of the Fund's top performing stocks in recent months were in fact
oil and gas companies: Diamond Offshore Drilling, which reported strong
earnings from rising gas and oil prices as well as higher capacity
utilization on the drilling-equipment side of the business, and Brooklyn
Union Gas, a utility with business units involved in exploration,
pipelines and local service. Both stocks have seen healthy gains in
recent months.
Among the disappointments was Peco Energy Company, a co-owner of the two
Salem nuclear power plants in New Jersey. Peco has suffered in part
because of heightened concern over the viability of those plants since
they were shut down by regulators in 1995. Indications are that the
problems facing at least one of the plants are more regulatory than
mechanical and may soon be solved--reason enough not to unload the stock
prematurely.
Outlook
Even with some misgivings about earnings prospects, we see cause for
mild optimism for electric utilities in the favorable FERC ruling and
our sense that recent worries about operating problems at nuclear power
plants may have been overblown. On the oil and gas side, we see a number
of very promising trends, including rising gas and oil prices and an
accelerating pace of mergers and acquisitions. In one high-profile case,
Texas Utilities, an electric company, is poised to acquire Enserch, a
gas company. As always, however, the key to performance will be the
direction of interest rates, and there the outlook is cloudy. About all
that seems certain at this point is that rates are not likely to fall
anytime soon. After a year in which the Fund profited from falling
interest rates, we have more modest goals going forward: to preserve the
Fund's net asset value while maximizing yield.
"On the oil
and gas side,
we see a
number of
very promising
trends..."
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Utilities Fund. Total
return is a performance measure that equals the sum of all income and
capital gain distributions, assuming reinvestment of these distributions
and the change in the price of the Fund's shares, expressed as a
percentage of the Fund's net asset value per share. Performance figures
include the maximum applicable sales charge of 5.00% for Class A shares.
The effect of the maximum contingent deferred sales charge for Class B
shares (maximum 5% and declining to 0% over six years) is included in
Class B performance. Remember that all figures represent past
performance and are no guarantee of how the Fund will perform in the
future. Also, keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may
be worth more or less than their original cost, depending on when you
sell them. Please see the prospectus for risks associated with industry
segment investing.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1996
One Life of
Year Fund
----- -------
John Hancock Utilities Fund: Class A (1) 12.83% 12.13%
John Hancock Utilities Fund: Class B (1) 12.94% 13.40%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1996
One Life of
Year Fund
----- -------
John Hancock Utilities Fund: Class A(1, 2) 12.83% 5.44%
John Hancock Utilities Fund: Class B(1, 2) 12.94% 6.00%
Notes to Performance
(1) Both Class A and Class B shares started on February 1, 1994.
(2) Without the limitation of expenses, the average annualized total
returns for the one-year period and since inception would have been
12.17% and 3.21% for Class A shares and 12.28% and 3.77% for Class B
shares.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Utilities Fund would be worth on May 31, 1996, assuming you had
invested on the day each class of shares started and have reinvested all
distributions. For comparison, we've shown the same $10,000 investment
in the Dow Jones Utilities Average -- an unmanaged index that measures
the performance of the utility industry in the United States. It
consists of 15 actively traded stocks representing a cross-section of
corporations involved in various phases of the utility industry.
Utilities Fund
Class A shares
Line chart with the heading Utilities 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 Utilities Fund on February 1, 1994, before sales
charge, and is equal to $11,911 as of May 31, 1996. The second line
represents the Utilities Fund after sales charge and is equal to $11,312
as of May 31, 1996. The third line represents the value of the Dow
Jones Utilities Index and is equal to $9,290 as of May 31, 1996.
Utilities Fund
Class B shares
Line chart with the heading Utilities 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 hypothetical $10,000
investment made in the Utilities Fund on February 1, 1994, before
contingent deferred sales charge, and is equal to $11,730 as of May 31,
1996. The second line represents the Utilities Fund after contingent
deferred sales charge and is equal to $11,430 as of May 31, 1996. The
third line represents the value of the Dow Jones Utilities Index and is
equal to $9,290 as of May 31, 1996.
<TABLE>
<CAPTION>
John Hancock Funds - Utilities Fund
Statement of Assets and Liabilities
May 31, 1996
<S> <C>
Assets:
Investments at value -- Note C:
Common stocks (cost -- $46,476,129) $50,746,725
Preferred stocks (cost -- $15,248,652) 15,774,545
Joint repurchase agreement (cost -- $2,759,000) 2,759,000
Corporate savings account 8,156
-----------
69,288,426
Receivable for shares sold 80,163
Receivable for investments sold 1,536,761
Dividends receivable 229,855
Interest receivable 488
Receivable from John Hancock Advisers, Inc. -- Note B 28,036
Deferred organization expenses -- Note A 24,202
Other assets 1,957
-----------
Total Assets 71,189,888
- ------------------------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased 50,160
Payable for investments purchased 693,989
Payable to John Hancock Advisers, Inc. and
affiliates -- Note B 70,083
Accounts payable and accrued expenses 42,052
-----------
Total Liabilities 856,284
- ------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 62,033,169
Accumulated net realized gain on investments and foreign
currency transactions 3,144,504
Net unrealized appreciation of investments and foreign
currency transactions 4,794,780
Undistributed net investment income 361,151
-----------
Net Assets $70,333,604
==========================================================================================
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 -- $22,574,130 / 2,460,837 $9.17
==========================================================================================
Class B -- $47,759,474 / 5,226,206 $9.14
==========================================================================================
Maximum Offering Price Per Share *
Class A -- ($9.17 x 105.26%) $9.65
==========================================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1996. You'll also
find the net asset value and the maximum offering price per share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year ended May 31, 1996
<S> <C>
Investment Income:
Dividends (net of foreign withholding taxes of $18,696) $3,367,327
Interest 523,887
-----------
3,891,214
-----------
Expenses:
Investment management fee -- Note B 492,174
Distribution/service fee -- Note B
Class A 71,612
Class B 464,398
Transfer agent fee -- Note B 178,131
Custodian fee 45,488
Registration and filing fees 38,641
Printing 32,211
Auditing fee 20,000
Organization Expense -- Note A 6,984
Trustees' fees 6,460
Miscellaneous 6,323
Financial services fee -- Note B 5,780
Legal fees 3,737
-----------
Total Expenses 1,371,939
Less Expenses Reimbursable by John Hancock Advisers,
Inc. -- Note B (302,645)
- ------------------------------------------------------------------------------------------
Net Expenses 1,069,294
- ------------------------------------------------------------------------------------------
Net Investment Income 2,821,920
- ------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments and Foreign
Currency Transactions:
Net realized gain on investments sold 3,972,848
Net realized gain on foreign currency transactions 3,216
Change in net unrealized appreciation/depreciation of investments 2,353,641
Change in net unrealized appreciation/depreciation of foreign
currency transactions (5,886)
-----------
Net Realized and Unrealized Gain on Investments and Foreign
Currency Transactions 6,323,819
- ------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $9,145,739
==========================================================================================
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses)
for the period stated.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $2,821,920 $1,639,725
Net realized gain on investments sold and foreign
currency transactions 3,976,064 1,432
Change in net unrealized appreciation/depreciation
of investments and foreign currency transactions 2,347,755 2,466,201
----------- -----------
Net Increase in Net Assets Resulting from
Operations 9,145,739 4,107,358
----------- -----------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($0.4066 and $0.3401 per
share, respectively) (1,082,445) (493,188)
Class B -- ($0.3441 and $0.2988 per
share, respectively) (1,783,735) (767,459)
Distributions from net realized gain on
investments sold
Class A -- ($0.0963 and none per
share, respectively) (311,873) --
Class B -- ($0.0963 and none per
share, respectively) (513,330) --
----------- -----------
Total Distributions to Shareholders (3,691,383) (1,260,647)
----------- -----------
From Fund Share Transactions -- Net* 7,306,556 53,500,247
----------- -----------
Net Assets:
Beginning of period 57,572,692 1,225,734
----------- -----------
End of period (including undistributed net
investment income of $361,151 and $397,138,
respectively) $70,333,604 $57,572,692
=========== ===========
* Analysis of Fund Share Transactions:
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
CLASS A
Shares sold 4,072,162 $35,815,891 3,085,752 $24,890,175
Shares issued to shareholders in reinvestment
of distributions 107,077 941,191 49,990 400,435
---------- ----------- ---------- -----------
4,179,239 36,757,082 3,135,742 25,290,610
Less shares repurchased (3,987,048) (35,252,919) (961,612) (7,849,867)
---------- ----------- ---------- -----------
Net increase 192,191 1,504,163 2,174,130 $17,440,743
========== =========== ========== ===========
CLASS B
Shares sold 2,183,807 $18,762,882 4,745,699 $38,182,620
Shares issued to shareholders in reinvestment
of distributions 161,956 1,417,990 79,202 633,888
---------- ----------- ---------- -----------
2,345,763 20,180,872 4,824,901 38,816,508
Less shares repurchased (1,656,864) (14,378,479) (341,569) (2,757,004)
---------- ----------- ---------- -----------
Net increase 688,899 $5,802,393 4,483,332 $36,059,504
========== =========== ========== ===========
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 fiscal period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in
the Fund. The footnote illustrates the number of Fund shares sold, reinvested
and redeemed during the last two periods, along with the corresponding
dollar values.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout
the period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- ----------------------------------------------------------------------------------------------------
FOR THE PERIOD
FEBRUARY 1,
1994
YEAR ENDED MAY 31, (COMMENCEMENT
----------------- OF OPERATIONS)
1996 1995 TO MAY 31, 1994
------ ------- ---------------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.48 $8.26 $8.50
------- ------- -------
Net Investment Income 0.41(b) 0.44(b) 0.12(b)
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions 0.79 0.12 (0.36)
------- ------- -------
Total from Investment Operations 1.20 0.56 (0.24)
------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.41) (0.34) --
Distributions from Net Realized Gain on Investments Sold (0.10) -- --
------- ------- -------
Total Distributions (0.51) (0.34) --
------- ------- -------
Net Asset Value, End of Period $9.17 $8.48 $8.26
======= ======= =======
Total Investment Return at Net Asset Value (c) 14.44% 7.10% (2.82%)(d)
Total Adjusted Investment Return at Net
Asset Value (c)(e) 14.01% 6.44% (13.89%)(d)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $22,574 $19,229 $781
Ratio of Expenses to Average Net Assets 1.04% 1.04% 1.00%*
Ratio of Adjusted Expenses to Average
Net Assets (a) 1.47% 1.70% 12.07%*
Ratio of Net Investment Income to
Average Net Assets 4.49% 5.39% 4.53%*
Ratio of Adjusted Net Investment Income
(Loss) to Average Net Assets (a) 4.06% 4.73% (6.54%)*
Portfolio Turnover Rate 124% 98% 6%
Fee Reduction Per Share $0.04(b) $0.05(b) $0.27(b)
The Financial Highlights summarizes the impact of the following factors on a single
share for the periods indicated: the net investment income, gains (losses), distributions
and total investment returns of the Fund. It shows how the Fund's net asset value
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.45 $8.25 $8.50
------- ------- -------
Net Investment Income 0.34(b) 0.38(b) 0.08(b)
Net Realized and Unrealized Gain (Loss)
on Investments
and Foreign Currency Transactions 0.79 0.12 (0.33)
------- ------- -------
Total from Investment Operations 1.13 0.50 (0.25)
------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.34) (0.30) --
Distributions from Net Realized Gain
on Investments Sold (0.10) -- --
------- ------- -------
Total Distributions (0.44) (0.30) --
------- ------- -------
Net Asset Value, End of Period $9.14 $8.45 $8.25
======= ======= =======
Total Investment Return at Net Asset
Value (c) 13.68% 6.31% (2.94%)(d)
Total Adjusted Investment Return at Net
Asset Value (c)(e) 13.25% 5.65% (14.01%)(d)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $47,759 $38,344 $445
Ratio of Expenses to Average Net Assets 1.77% 1.71% 1.72%*
Ratio of Adjusted Expenses to Average
Net Assets (a) 2.20% 2.37% 12.79%*
Ratio of Net Investment Income to
Average Net Assets 3.77% 4.64% 4.20%*
Ratio of Adjusted Net Investment
Income (Loss) to Average Net Assets (a) 3.34% 3.98% (6.87%)*
Portfolio Turnover Rate 124% 98% 6%
Fee Reduction Per Share $0.04(b) $0.05(b) $0.27(b)
* On an annualized basis.
(a) On an unreimbursed basis.
(b) On average month end shares outstanding.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) Not annualized.
(e) An estimated total return calculation which takes into consideration fees and expenses
waived or borne by the Adviser during the periods shown.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION
The Schedule of Investments is a complete list of all securities owned by the
Fund on May 31, 1996. It's divided into three main categories: common stocks,
preferred stocks and short-term investments. Short-term investments, which
represent the Fund's "cash" position, are listed last.
Schedule of Investments
May 31, 1996
- ------------------------------------------------------------------------------
INTEREST NUMBER OF MARKET
ISSUER, DESCRIPTION RATE SHARES VALUE
- ---------------------- -------- --------- ---------
<S> <C> <C> <C>
COMMON STOCKS
Oil & Gas (18.06%)
Baker Hughes, Inc. 29,000 $909,875
Cairn Energy USA, Inc.* 25,000 300,000
Diamond Offshore Drilling, Inc.* 25,000 1,196,875
Enron Corp. 30,000 1,200,000
Global Marine, Inc.* 66,000 808,500
Kerr - McGee Corp. 8,000 470,000
Lomak Petroleum, Inc. 46,000 632,500
Nabors Industries, Inc.* 15,000 230,625
PanEnergy Corp.(formerly PanHandle
Eastern Corp.) 13,500 433,688
Reading & Bates Corp.* 30,000 660,000
Repsol S.A., American Depositary
Receipt (ADR)(Spain) 50,000 1,700,000
Rowan Companies, Inc.* 50,000 756,250
Sonat Offshore Drilling Inc. 15,000 795,000
Swift Energy Co.* 39,000 697,125
Tidewater, Inc. 25,000 1,031,250
Vintage Petroleum, Inc. 34,000 884,000
-----------
12,705,688
-----------
Utilities (54.09%)
American Electric Power Co. 22,000 882,750
Bell Atlantic Corp. 14,750 920,031
Boston Edison Co. 50,000 1,225,000
Brooklyn Union Gas Co. 60,000 1,605,000
Central & South West Corp. 42,600 1,176,825
CMS Energy Corp. 65,860 1,893,475
Columbia Gas System, Inc. 15,000 733,125
Commonwealth Energy System Cos. 7,400 357,975
Connecticut Energy Corp. 25,200 513,450
Delmarva Power & Light Co. 65,000 1,275,625
DTE Energy Corp. (formerly
Detroit Edison Co.) 23,000 672,750
Energen Corp. 9,500 223,250
Florida Progress Corp. 27,500 907,500
Frontier Corp. 35,000 1,120,000
GTE Corp. 14,700 628,425
Houston Industries, Inc. 60,000 1,312,500
IPALCO Enterprises, Inc. 32,250 810,281
Long Island Lighting Co. 75,000 1,284,375
MidAmerican Energy Co. 60,800 1,041,200
Midlands Electricity PLC, ADR
(United Kingdom) 70,000 924,049
National Fuel Gas Co. 31,600 $1,086,250
National Grid Group PLC
(United Kingdom) 5,663 158,564
National Power PLC, ADR
(United Kingdom) 25,000 587,500
New England Electric System 42,600 1,432,425
New Jersey Resources Corp. 35,000 962,500
NYNEX Corp. 20,000 922,500
Ohio Edison Co. 57,000 1,246,875
Pacific Enterprises 75,000 1,978,125
PacifiCorp 64,600 1,300,075
Peco Energy Co. 31,700 780,612
Portland General Corp. 22,550 665,225
PowerGen PLC, ADR (United Kingdom) 2,000 65,000
Providence Energy Corp. 7,200 124,200
Public Service Enterprise Group, Inc. 56,000 1,484,000
Southern Union Co. 29,100 683,850
Union Electric Co. 26,000 1,023,750
United Cities Gas Co. 57,000 840,750
Utilicorp United, Inc 40,000 1,030,000
Western Resources, Inc. 36,800 1,062,600
Wicor, Inc. 30,100 1,098,650
-----------
38,041,037
-----------
TOTAL COMMON STOCKS
(COST $46,476,129) (72.15%) 50,746,725
------- -----------
PREFERRED STOCKS
Machinery (1.93%)
Cooper Industries, Inc., 6.00% 85,000 1,360,000
-----------
Oil & Gas (5.39%)
Coastal Corp., $2.125, Ser H 67,130 1,695,032
Enron Capital LLC, 8.00% 26,500 659,188
Lasmo PLC, 10.00%, Ser A, American
Depositary Shares (ADS)
(United Kingdom) 57,000 1,432,125
-----------
3,786,345
-----------
Utilities (15.11%)
Baltimore Gas & Electric Co., 6.99% 5,000 $496,250
CL & P Capital L.P., 9.30%, Ser A 20,000 492,500
Commonwealth Energy System Cos.,
4.80%, Ser A 4,300 366,575
Illinois Power Financing I, 8.00% 32,000 780,000
Kentucky Power, 8.72%, Ser A 40,000 1,020,000
MCN Michigan, L.P., 9.375%, Ser A 30,000 791,250
Minnesota Power &
Light Capital l, 8.05% 80,000 1,940,000
NWPS Capital Financing I, 8.125% 40,000 995,000
PG & E Capital, 7.90%, Ser A 60,000 1,477,500
Phillips 66 Capital l, 8.24% 38,500 943,250
Public Service Electric & Gas Co., 6.92% 7,000 705,250
Sprint Corp., 8.25% 15,000 620,625
-----------
10,628,200
-----------
TOTAL PREFERRED STOCKS
(COST $15,248,652) (22.43%) 15,774,545
------- -----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.92%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Bank Ltd. --
Dated 05-31-96, Due 06-03-96
(secured by U.S. Treasury Notes
5.375% thru 8.750%, due
10-15-97 thru 05-31-98) 5.33% $2,759 $2,759,000
-----------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 8,156
TOTAL SHORT-TERM INVESTMENTS (3.93%) 2,767,156
------- -----------
TOTAL INVESTMENTS (98.51%) $69,288,426
======= ===========
*Non-income producing security.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company
Act of 1940. The Trust consists of three series portfolios: John Hancock
Utilities Fund (the "Fund"), John Hancock Strategic Income Fund and John
Hancock Independence Equity Fund. Prior to June 3, 1996, John Hancock
Independence Equity Fund was known as John Hancock Independence
Diversified Core Equity Fund. The investment objectives of the Fund are
to seek current income, and, to the extent consistent with that
objective, growth of income and long-term capital growth.
The Trustees have authorized the issuance of two classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each
class represent an interest in the same portfolio of investments of the
Fund and have equal rights to voting, redemptions, dividends, and
liquidation, except that certain expenses subject to the approval of the
Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under 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. All portfolio transactions initially
expressed in terms of foreign currencies have been translated into U.S.
dollars as described in "Foreign Currency Translation" below.
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. 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.
Capital gains realized on some foreign securities are subject to foreign
taxes and are accrued, as applicable.
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 its taxable income,
including any net realized gain on investments, to its shareholders.
Therefore, no federal income tax provision is required.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Fund is made aware
of the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding
taxes which are accrued as applicable.
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 principals. Dividends paid by
the Fund with respect to each class of shares will be calculated in the
same manner, at the same time and will be in the same amount, except for
the effect of expenses that may be applied differently to each class as
explained previously.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
ORGANIZATION EXPENSE Expenses incurred in connection with the
organization of the Fund have been capitalized and are being charged to
the Fund's operations ratably over a five-year period that began with
the commencement of investment operations of the 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
may differ from these estimates.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.,
London time, on the date of any determination of the net asset value of
the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates
prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain
or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference
between the amounts of dividends, interest, and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains
or losses arise from changes in the value of assets and liabilities
other than investments in securities at fiscal year end, resulting from
changes in the exchange rate.
NOTE B --
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.70% of the
first $250,000,000 of the Fund's average daily net asset value and (b)
0.65% of the Fund's average daily net asset value in excess of
$250,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares, the fee payable
to the Adviser will be reduced to the extent of such excess, and the
Adviser will make additional arrangements necessary to eliminate any
remaining excess expenses. The current limits are 2.5% of the first
$30,000,000 of the Fund's average daily net asset value, 2.0% of the
next $70,000,000, and 1.5% of the remaining average daily net asset
value.
The Adviser has agreed to limit Fund expenses, including the management
fee (but not including the transfer agent fee and the 12b-1 fee), to
0.50% of the Fund's average daily net assets. Accordingly, the reduction
in the Adviser's fee amounted to $302,645 for the period ended May 31,
1996. The Adviser reserves the right to terminate this limitation in the
future.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended
May 31, 1996, net sales charges received with regard to sales of Class A
shares amounted to $237,529. Out of this amount, $34,261 was retained
and used for printing prospectuses, advertising, sales literature and
other purposes, $220 was paid as sales commissions to unrelated broker-
dealers and $203,048 was paid as sales commissions to sales personnel of
John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony,
Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of
which are broker dealers. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended May 31, 1996, contingent deferred
sales charges paid to JH Funds amounted to $225,563.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution
Plan 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/service costs. Up to a maximum of 0.25% of these payments
may be service fees as defined by the amended Rules of Fair Practice of
the National Association of Securities Dealers. Under the amended Rules
of Fair Practice, curtailment of a portion of the Fund's 12b-1 payments
could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. Prior to October 1, 1995, the Fund paid
transfer agent fees as a class specific expense based on the number of
shareholder accounts and certain out-of-pocket expenses. For the four
months ended September 30, 1995, the transfer agent expense, calculated
as a class specific expense, was $12,863 for Class A and $45,275 for
Class B, respectively. Effective October 1, 1995, transfer agent expense
is a fund expense.
On March 26, 1996, the Board of Directors approved retroactively to
January 1, 1996, an agreement with the Adviser to reimburse the Adviser
for compensation and related expenses incurred in connection with tax
and financial management services for the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are directors and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. Effective with the fees paid
for 1995, the unaffiliated Trustees may elect to defer for tax purposes
their receipt of this compensation under the John Hancock Group of Funds
Deferred Compensation Plan. The Fund makes investments into other John
Hancock funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. At
May 31, 1996, the Fund's investments to cover the deferred compensation
liability had unrealized appreciation of $161.
NOTE C --
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities, other than
obligations of the U.S. government and its agencies and short-term
securities, during the year ended May 31, 1996, aggregated $64,038,423
and $51,877,997, respectively. Purchases and proceeds from sales of
obligations of the U.S. government and its agencies aggregated
$28,492,500 and $28,937,500, respectively, during the year ended May 31,
1996.
The cost of investments owned at May 31, 1996 (excluding the corporate
savings account) for federal income tax purposes was $64,489,150. Gross
unrealized appreciation and depreciation of investments aggregated
$5,879,539 and $1,088,419, respectively, resulting in net unrealized
appreciation of $4,791,120.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS:
During the year ended May 31, 1996, the Fund has reclassified amounts to
reflect a decrease in capital paid-in of $5,057, an increase in
undistributed net investment income of $8,273 and a decrease in
accumulated net realized gains of $3,216. This represents the cumulative
amount necessary to report these balances on a tax basis, excluding
certain temporary differences, as of May 31, 1996. Additional
adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the
Fund, are attributable to differences in the computation of
distributable income and capital gains under federal tax rules versus
generally accepted accounting principles.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Utilities Fund and the
Trustees of John Hancock Strategic Series
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of John
Hancock Utilities Fund (the "Fund") (a portfolio of John Hancock
Strategic Series) at May 31, 1996, and the results of its operations,
the changes in its net assets, and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility
of the Fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 15, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund for its fiscal year ended
May 31, 1996.
The Fund distributed to shareholders of record December 22, 1995 and
payable December 28, 1995 a long-term capital gains dividend of
$298,210. This amount was reported on the 1995 U.S. Treasury Department
Form 1099-DIV. With respect to the Fund's ordinary taxable income for
the fiscal year ended May 31, 1996, 41% qualifies for the dividends
received deduction available to corporations.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-DIV
in January of 1997. This will reflect the total of all distributions
which are taxable for the calendar year 1996.
John Hancock Funds - Utilities Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page.
A box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."
John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 582
This report is for the information of shareholders of the John Hancock
Utilities 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."
Printed on Recycled Paper 4100A 5/96
7/96
John Hancock Funds
Strategic
Income
Fund
Annual Report
May 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Gail D. Fosler*
Anne C. Hodsdon
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse llp
160 Federal Street
Boston, Massachusetts 02110
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and
Chief Executive Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 is
proving to be a tough act to follow in 1996. Volatility has returned to
the market after being relatively calm last year. And while the stock
market has continued its advance, albeit at a slower and more erratic
pace, bonds have retreated this year in the face of strong economic data
that has sparked inflation fears. The change is not surprising,
especially after the anomaly of last year's almost straight-up advance,
when both the bond and stock markets soared.
As the old saying "trees don't grow to the sky" suggests, it would be
unrealistic to expect the market to stage a repeat in 1996. Shareholders
would do well to temper expectations of investment returns and perhaps
revisit your investment allocations with your financial advisor to
determine if rebalancing your portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John
Hancock Funds, we never stop working to find ways to sustain and improve
the quality of information and the level of assistance we provide you.
Our commitment to this task is no less than John Hancock's loyalty was
to his fledgling country when he is said to have uttered, "if it does
the public good, burn Boston." We won't go that far, of course, but we
share our namesake's dedication to putting the public before all else.
In our case, that public is you, our shareholders. We take very
seriously the role you have entrusted to us, that of helping you achieve
your financial goals. Part of that will always involve good customer
service. So please do not hesitate to call your Customer Service
Representative at 1-800-225-5291 if you have any questions or need
information. We take pride in helping you with the same spirit that John
Hancock displayed at the dawning of America.
Sincerely,
/S/EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By Frederick Cavanaugh, Portfolio Manager
John Hancock
Strategic Income Fund
High-yield corporate bonds perform well
despite weak U.S. bond market
U.S. interest rates crept higher during the past six months, causing a
serious setback for most types of bonds issued in this country. U.S.
Treasury and government agency bond prices fell on repeated evidence
that the economy's growth was much better than expected. Bond yields --
which move in the opposite direction of bond prices -- moved up to
levels not seen in more than a year: the yield on the benchmark 10-Year
U.S. Treasury bond rose to 6.90% on May 31, 1996, from roughly 5.75% on
November 30, 1995.
Boosted by strong technical market factors, U.S. high-yield corporate
bonds escaped the U.S. bond market's malaise and performed quite well
during the most recent period. Demand for high-yield bonds rose
dramatically as investors searched for yields that bettered those
offered by government, agency and high-quality securities. Rising demand
easily absorbed the supply of new high-yield bonds.
In local currency terms, European government bonds also posted strong
gains during the period. Virtually all of Europe continued to suffer a
great deal of economic weakness, characterized by low levels of growth,
high unemployment, anemic retail sales, slowing industrial production
and low consumer confidence. As European governments cut interest rates
in an effort to offset slow growth and stimulate their economies, their
bond markets enjoyed impressive rallies.
A 2 1/4" x 3 1/4" photo of Strategic Income Fund management team at
bottom
center. Caption reads: "Frederick Cavanaugh (seated left), and Fund
management team members (l-r) Thomas Huggins, Arthur Calavritinos, Linda
Carter."
"U.S. interest
rates crept
higher
during the
past six
months..."
Performance and strategy review
For the 12-month period ended May 31, 1996, John Hancock Strategic
Income Fund's Class A and Class B shares posted total returns of 11.37%
and 10.61%, respectively, at net asset value. Both classes outpaced the
average general bond fund's total return of 7.20% for the same period,
according to Lipper Analytical Services.1 For comparison purposes, the
Fund was recently moved from the general bond fund category to one that
more accurately reflects its goals and strategy. From this report on,
the Fund will be compared to a new category of funds created by Lipper -
- - the multi-sector income category, whose average fund returned 10.52%
for the 12-month period ended May 31, 1996, according to Lipper.
Chart with heading "Top Five Bond Sectors" at top left hand column. The
chart lists five holdings: 1) Foreign Governments 29%; 2) Broadcasting 10%; 3)
U.S. Treasury & Government Agencies 10%; 4) Leisure & Recreation 5%; 5) Oil &
Gas 4%. Footnote below reads: "As a percentage of net assets on May 31, 1996."
"...high-yield
bonds were
...some of
the Fund's
strongest
performers..."
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
High-yield corporate bonds followed by an up arrow and the phrase "Rising
demand boosts sector." The second listing is Spanish government bonds followed
by an up arrow and the phrase "Falling interest rates push prices higher." The
third listing is U.S. Treasuries followed by a down arrow and the phrase
"Rising U.S. interest rates stymie rally." Footnote below reads: "See
"Schedule of Investments." Investment holdings are subject to change."
The Fund seeks to attain a high level of current income, with relative
price stability, through a flexible investment strategy that allows it
to invest across three bond categories -- higher-yielding, lower-rated
corporate bonds; foreign bonds; and U.S. government securities. That
level of diversity helps the Fund in its efforts to maximize income and
manage interest-rate, credit and currency risk.
U.S. high-yield bonds strong performers
The increasing demand for U.S. high-yield corporate bonds, which we
mentioned earlier, provided the major underpinnings for this sector's
rally. Two of our best-performing high-yield bonds over the past six
months were the holding company Apparel Retailers, and its operating
company Specialty Retailers. Despite a relatively weak consumer-spending
environment, these companies benefited from improved operating results.
While high-yield bonds were undoubtedly some of the Fund's strongest
performers over the past year, we gradually reduced our stake in them to
about 47% of investments at the end of May. At the end of last year, we
wanted to begin to position the Fund a little more defensively by
scaling back our high-yield holdings. The reason? We expect that the
U.S. economy will be sluggish in the second half of 1996. If that is the
case, high-yield bonds could still perform well, although it's doubtful
that their performance would be as strong as what we expect from higher-
quality bonds over the coming year. In our view, interest rates could
fall in the second half of the year. That could help the more interest-
rate sensitive, higher-quality corporate bonds to do better than the
lower-quality higher-yielding ones. So we took advantage of the market's
recent strength to sell some of our high-yield holdings, lock in profits
and position the Fund for the remainder of the year.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1996." The
chart is scaled in increments of 5% from bottom to top, with 15% at the top and
0% at the bottom. Within the chart, there are four solid bars. The first
represents the 11.37% total return for John Hancock Strategic Income Fund: Class
A. The second represents the 10.61% total return for John Hancock Strategic
Income Fund: Class B. The third represents the 7.20% total return for the
average general bond fund. The fourth represents the 10.52% average multi-
sector income fund. Footnote below reads: "Total returns for John Hancock
Strategic Income Fund are at net asset value with all distributions reinvested.
The average general bond fund is tracked by Lipper Analytical Services (1).
See following page for historical performance information."
European bonds post strong gains
Throughout the past six months, we continued to emphasize investments in
high-quality bonds from such established European markets as Denmark,
Spain and the United Kingdom. The Spanish government cut interest rates
four times from the beginning of 1996 through the end of May, and its
bonds were among the Fund's and the market's best performers. Denmark
bonds also posted impressive gains when interest rates in that country
fell, although to a lesser extent than in Spain.
From the end of November 1995 through the end of May 1996, the U.S.
dollar rose roughly 5.3% versus the German mark. The rise in the U.S.
dollar versus the mark would have significantly offset gains the Fund
enjoyed from rising European bond prices had we not hedged our European
holdings into German marks. From a philosophical standpoint, we believe
that the Fund's foreign holdings should be hedged most of the time.
However, we are not currency traders and our aim is not to add value
through currency gains. Rather, we hedge our currency risk in an effort
to smooth out the volatility of the Fund's share price.
U.S. government and agency bonds
disappoint
Our U.S. Treasury holdings proved to be disappointing over the past six
months as their yields edged higher and their prices moved lower.
Throughout the past year we've kept our Treasury holdings fairly light
because, even with the recent increases, their yields were insufficient
to maintain our desired level of income. Toward the end of the period,
we added a Ginnie Mae mortgage-backed security which offered roughly a
full percentage point more in yield than a comparable Treasury.
Outlook and strategy
In our view, the U.S. economy will continue to grow, albeit at a slow
pace. We believe that U.S. government and agency securities aren't
offering attractive enough yields to warrant further investment in them
at this time. And we expect that while the high-yield market could
continue to be strong, it might not outpace other bonds, including
foreign bonds, over the next 12 months or so.
With respect to foreign bonds, we'll most likely continue to emphasize
high-quality bonds issued in countries where we believe interest rates
can continue to decline.
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Strategic Income Fund.
Total return is a performance measure that equals the sum of all income
and capital gain distributions, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 4.50%
for Class A shares. Different sales charge schedules for Class A shares
were in effect prior to September 28, 1989 and are not reflected in the
performance information. The effect of the maximum contingent deferred
sales charge for Class B shares (maximum 5% and declining to 0% over six
years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will
perform in the future. Also, keep in mind that the total return and
share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost,
depending on when you sell them. Please see the prospectus
for a discussion of risks associated with international investing and
high-yield bonds.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1996
One Five Life of
Year Years Fund
------ ---------- -------
John Hancock
Strategic Income Fund: Class A (1) 9.75% 59.03% 96.13%
John Hancock
Strategic Income Fund: Class B (2) 9.15% N/A 15.16%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1996
One Five Life of
Year Years Fund
------ ---------- -------
John Hancock
Strategic Income Fund: Class A (1) 9.75% 9.67% 7.25%
John Hancock
Strategic Income Fund: Class B (2) 9.15% N/A 5.83%
YIELDS
As of May 31, 1996
SEC 30-Day
Yield
------------
John Hancock Strategic Income Fund: Class A 7.50%
John Hancock Strategic Income Fund: Class B 7.14%
Notes to Performance
(1) Class A shares started on August 19, 1986.
(2) Class B shares started on October 4, 1993.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Strategic Income Fund would be worth on May 31, 1996, assuming
you had invested on the day each class of shares started and have
reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Lehman Government/Corporate Bond Index -- an
unmanaged index that measures the performance of U.S. government bonds,
U.S. corporate bonds, and Yankee bonds.
Strategic Income Fund
Class A shares
Line chart with the heading Strategic Income 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 Government Bond Index
and is equal to $21,975 as of May 31, 1996. The second line represents
the value of the hypothetical $10,000 investment made in the Strategic
Income Fund on August 19, 1986, before sales charge, and is equal to
$20,853 as of May 31, 1996. The third line represents the Strategic
Income Fund after sales charge and is equal to $19,917 as of May 31,
1996.
Strategic Income Fund
Class B shares
Line chart with the heading Strategic Income 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 hypothetical $10,000
investment made in the Strategic Income Fund on October 4, 1993, before
contingent deferred sales charge, and is equal to $12,041 as of May 31,
1996. The second line represents the Strategic Income Fund after
contingent deferred sales charge and is equal to $11,985 as of May 31,
1996. The third line represents the value of the Lehman Government Bond
Index and is equal to $11,685 as of May 31, 1996.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
May 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value -- Note C:
Bonds (cost -- $491,220,307) $493,703,739
Common and preferred stocks and warrants (cost -- $28,054,498) 32,173,373
Joint repurchase agreement (cost -- $28,926,000) 28,926,000
Corporate savings account 33,933
-------------
554,837,045
Receivable for shares sold 1,101,359
Receivable for investments sold 17,625,859
Receivable for forward foreign currency exchange contracts sold -- Note A 1,288,461
Interest receivable 13,487,439
Dividends receivable 75,780
Foreign tax receivable 270,188
Other assets 17,342
-------------
Total Assets 588,703,473
- -------------------------------------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased 329,014
Payable for investments purchased 11,853,268
Dividend payable 32,106
Payable to John Hancock Advisers, Inc. and affiliates -- Note B 320,013
Accounts payable and accrued expenses 291,083
-------------
Total Liabilities 12,825,484
- -------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 603,480,252
Accumulated net realized loss on investments, foreign currency
transactions, and financial futures contracts (37,196,115)
Net unrealized appreciation of investments, foreign currency
transactions and financial futures contracts 7,845,851
Undistributed net investment income 1,748,001
-------------
Net Assets $575,877,989
=======================================================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial interest
outstanding -- unlimited number of shares authorized with
no par value, respectively) Class A -- $369,126,668 / 50,747,371 $7.27
=======================================================================================================
Class B -- $206,751,321 / 28,426,334 $7.27
=======================================================================================================
Maximum Offering Price Per Share*
Class A -- ($7.27 x 104.71%) $7.61
=======================================================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1996. You'll also
find the net asset value and the maximum offering price per share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
Year ended May 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (net of foreign withholding taxes of $39,607) $50,353,291
Dividends 1,520,508
-----------
51,873,799
-----------
Expenses:
Investment management fee -- Note B 2,313,339
Distribution/service fee -- Note B
Class A 1,045,076
Class B 1,625,955
Transfer agent fee -- Note B 889,795
Custodian fee 253,475
Registration and filing fees 75,750
Printing 57,939
Trustees' fees 43,516
Auditing fee 43,500
Financial services fee -- Note B 33,524
Legal fees 12,452
Miscellaneous 11,276
-----------
Total Expenses 6,405,597
- -------------------------------------------------------------------------------------------------------
Net Investment Income 45,468,202
- -------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments, Foreign Currency
Transactions and Financial Futures Contracts
Net realized gain on investments sold 1,155,638
Net realized gain on financial futures contracts 227,200
Net realized gain on foreign currency transactions 7,090,087
Change in net unrealized appreciation/depreciation of investments (2,894,714)
Change in net unrealized appreciation/depreciation of foreign
currency transactions 2,327,068
-----------
Net Realized and Unrealized Gain on Investments, Foreign Currency
Transactions and Financial Futures Contracts 7,905,279
- -------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $53,373,481
=======================================================================================================
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses)
for the period stated.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $45,468,202 $39,282,084
Net realized gain (loss) on investments sold,
foreign currency transactions and financial
futures contracts 8,472,925 (28,439,885)
Change in net unrealized appreciation/
depreciation of investments, foreign
currency transactions and financial
futures contracts (567,646) 27,919,122
------------ ------------
Net Increase in Net Assets Resulting
from Operations 53,373,481 38,761,321
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($0.6643 and $0.5563
per share, respectively) (31,814,278) (26,071,776)
Class B -- ($0.6138 and $0.5151
per share, respectively) (13,654,321) (7,895,442)
Distributions from capital paid-in
Class A -- (none and $0.0870 per
share, respectively) -- (4,079,463)
Class B -- (none and $0.0806 per
share, respectively) -- (1,235,403)
Total Distributions to Shareholders (45,468,599) (39,282,084)
------------ ------------
From Fund Share Transactions -- Net* 105,570,421 49,971,675
------------ ------------
Net Assets:
Beginning of period 462,402,686 412,951,774
------------ ------------
End of period (including undistributed
and distributions in excess of
net investment income of $1,748,001 and
($3,835,222), respectively) 575,877,989 462,402,686
============ ============
* Analysis of Fund Share Transactions: YEAR ENDED MAY 31
--------------------------------------------------------------
1996 1995
--------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
CLASS A
Shares sold 13,814,860 $100,644,593 8,980,711 $62,660,103
Shares issued to shareholders in
reinvestment of distributions 2,783,247 20,217,302 2,633,453 18,333,201
----------- ----------- ----------- -----------
16,598,107 120,861,895 11,614,164 80,993,304
Less shares repurchased (11,730,367) (85,419,278) (12,502,115) (86,921,900)
----------- ----------- ----------- -----------
Net increase (decrease) 4,867,740 $35,442,617 (887,951) ($5,928,596)
========== =========== ========== ===========
CLASS B
Shares sold 15,428,983 $112,410,866 9,883,638 $69,070,960
Shares issued to shareholders in
reinvestment of distributions 904,705 6,576,391 600,041 4,173,148
----------- ----------- ----------- -----------
16,333,688 118,987,257 10,483,679 73,244,108
Less shares repurchased (6,733,353) (48,859,453) (2,496,190) (17,343,837)
----------- ----------- ----------- -----------
Net increase 9,600,335 $70,127,804 7,987,489 $55,900,271
========== =========== ========== ===========
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 fiscal period. The
difference reflects earnings less expenses, any investment gains and
losses, distributions paid to shareholders, and any increase or decrease
in money shareholders invested in the Fund. The footnote illustrates
the number of Fund shares sold, reinvested and redeemed during the last
two periods, along with the corresponding dollar values.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
The Financial Highlights summarizes the impact of the following factors on a
single share for the periods indicated: the net investment income, gains
(losses), distributions and total investment returns 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.
Selected data for a share of beneficial interest outstanding throughout the period
indicated, investment returns, key ratios and supplemental data are listed as follows:
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $7.15 $7.17 $7.55 $7.78 $7.20
------- ------- ------- ------- -------
Net Investment Income 0.66(b) 0.64 0.68 0.71 0.80
Net Realized and Unrealized Gain (Loss)
on Investments, Foreign Currency Transactions
and Financial Futures Contracts 0.12 (0.02) (0.33) (0.22) 0.52
------- ------- ------- ------- -------
Total from Investment Operations 0.78 0.62 0.35 0.49 1.32
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.66) (0.55) (0.58)+ (0.72)+ (0.74)+
Distributions in Excess of Net
Investment Income -- -- (0.05) -- --
Distributions from Capital Paid-In -- (0.09) (0.10) -- --
------- ------- ------- ------- -------
Total Distributions (0.66) (0.64) (0.73) (0.72) (0.74)
------- ------- ------- ------- -------
Net Asset Value, End of Period $7.27 $7.15 $7.17 $7.55 $7.78
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (c) 11.37% 9.33% 4.54% 6.81% 19.92%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $369,127 $327,876 $335,261 $262,137 $153,568
Ratio of Expenses to Average Net Assets 1.03% 1.09% 1.32% 1.58% 1.69%
Ratio of Net Investment Income to
Average Net Assets 9.13% 9.24% 8.71% 9.63% 10.64%
Portfolio Turnover Rate 78% 55% 91% 97% 80%
FOR THE PERIOD
OCTOBER 4, 1993
(COMMENCEMENT OF
YEAR ENDED MAY 31, OPERATIONS)
--------------------- TO
1996 1995 MAY 31, 1994
------- ------- ------------
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $7.15 $7.17 $ 7.58(a)
------- ------- -------
Net Investment Income 0.61(b) 0.60(b) 0.40
Net Realized and Unrealized Gain (Loss)
on Investments,
Foreign Currency Transactions and
Financial Futures Contracts 0.12 (0.02) (0.41)
------- ------- -------
Total from Investment Operations 0.73 0.58 (0.01)
------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.61) (0.52) (0.32)
Distributions in Excess of Net
Investment Income -- -- (0.03)
Distributions from Capital Paid-in -- (0.08) (0.05)
------- ------- -------
Total Distributions (0.61) (0.60) (0.40)
------- ------- -------
Net Asset Value, End of Period $7.27 $7.15 $7.17
======= ======= =======
Total Investment Return at Net
Asset Value (c) 10.61% 8.58% (0.22%)
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) $206,751 $134,527 $77,691
Ratio of Expenses to Average
Net Assets 1.73% 1.76% 1.91%*
Ratio of Net Investment Income
to Average Net Assets 8.42% 8.55% 8.12%*
Portfolio Turnover Rate 78% 55% 91%
* On an annualized basis.
(a) Initial price at commencement of operations.
(b) On average month end shares outstanding.
(c) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
+ The dividend policy of the Fund was changed, effective August 1, 1991,
from one which utilized daily dividend declarations to one which declares
dividends monthly. Additionally, the dividend policy of the Fund was changed,
effective October 1, 1993, from one which declared dividends monthly to
daily dividend declarations.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Strategic Income Fund on May 31, 1996.
It's divided into three main catagories: bonds, common and preferred stocks and warrants, and short-term investments.
The bonds are further broken down by industry groups. Under each industry group is a list of the bonds owned by the Fund.
Short-term investments, which represent the Fund's "cash" position, are listed last.
investments. The bond
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- -------------------------------------------------- ---------- -------- ---------- -----------
John Hancock Funds - Strategic Income Fund
BONDS
Aerospace/Aircraft (0.78%)
Jet Equipment Trust, Equipment Trust 08-15-14 (R) 10.910% BB+ $1,500 $1,539,000
Rohr, Inc., Sr Note 05-15-03 11.625 BB- 1,750 1,916,250
Tracor, Inc., Sr Sub Note 08-15-01 10.875 B 1,000 1,040,000
------------
4,495,250
------------
Automobile/Truck (1.12%)
Am General Corp., Sr Note Ser B 05-01-02 12.875 B 3,000 3,120,000
Fruehauf Trailer Corp., Sr Note Ser B 04-30-02 14.750 CCC+ 2,894 2,459,900
Venture Holdings Trust, Sr Sub Note 04-01-04 9.750 B 1,000 870,000
------------
6,449,900
------------
Banks (0.54%)
First Nationwide Holdings, Inc., Sr Note 04-15-03 (R) 12.500 B 3,000 3,112,500
------------
Broadcasting (3.18%)
American Radio Systems Corp., Sr Sub Note 02-01-06 9.000 B- 3,000 2,850,000
Australis Media Ltd., (Australia), Unit (Sr Sub Discount Note,
Step Coupon (14.000%, 05-15-00), 05-15-03 & Warrant) (Y) Zero CCC 3,000 1,875,000
CBS, Inc., Deb 06-01-22 8.875 BB 4,000 3,814,520
Chancellor Broadcasting Co., Sr Sub Note 10-01-04 12.500 B- 1,125 1,237,500
Chancellor Broadcasting Co., Sr Sub Note 10-01-04 9.375 B- 1,000 935,000
SFX Broadcasting, Inc., Sr Sub Note 05-15-06 (R) 10.750 B- 2,000 1,990,000
Scandinavian Broadcasting System, (Luxembourg),
Conv Sub Deb 08-01-05 (Y) 7.250 B- 1,390 1,508,150
Sullivan Broadcasting, Sr Sub Note 12-15-05 10.250 B- 3,000 2,842,500
Young Broadcasting, Inc., Sr Sub Note 01-15-06 9.000 B 1,400 1,256,500
------------
18,309,170
------------
Building Products (1.91%)
AAF-McQuay Inc., Sr Note 02-15-03 8.875 B+ 1,120 1,072,400
Fortress Group, Inc., Sr Note 05-15-03 13.750 B3 3,000 3,090,000
P.T. Semen Cibinong, (Indonesia), Note 12-15-98 (R), (Y) 9.000 BB 3,000 3,060,000
Peters (JM) Co., Sr Note 05-01-02 12.750 B- 2,900 2,740,500
Tarkett International, (Germany), Sr Sub Note 03-01-02 (Y) 9.000 BBB- 1,000 1,015,000
------------
10,977,900
------------
Cable TV (6.67%)
American Telecasting, Inc., Sr Discount Note Ser B,
Step Coupon (14.50%, 08-15-00), 08-15-05 Zero CCC+ $4,000 $2,520,000
Bell Cablemedia PLC, (United Kingdom), Sr Discount Note, Step Coupon
(11.95%, 7-15-99), 07-15-04 (Y) Zero BB- 4,000 2,860,000
Cablevision Systems Corp., Sr Sub Deb 04-01-23 9.88% B 2,000 1,860,000
CF Cable TV, Inc., (Canada), Sr Note 02-15-05 (Y) 11.625 BB+ 2,000 2,175,000
Comcast Corp., Sr Sub Deb 05-15-05 9.375 BB- 4,000 3,960,000
Comcast UK Cable, (Bermuda), Deb, Step Coupon
(11.20%, 11-15-00), 11-15-07 (Y) Zero B 4,000 2,360,000
Diamond Cable Communications PLC, (United Kingdom), Sr Discount Note,
Step Coupon (13.25%, 09-30-99), 09-30-04 (Y) Zero B- 3,000 2,137,500
EchoStar Satellite Broadcasting Corp., Sr Discount Note,
Step Coupon (13.125%, 3-15-00), 03-15-04 (R) Zero B- 2,700 1,768,500
Falcon Holdings Group, L.P., Payment-In-Kind Sr Sub Note 09-15-03 11.000 B- 3,921 3,783,649
Galaxy Telecom, L.P., Sr Sub Note 10-01-05 12.375 B- 2,000 2,110,000
International CableTel, Inc., Sr Note, Step Coupon
(11.50%, 02-01-01), 02-01-06 Zero B3 1,750 1,032,500
Jones Intercable, Inc., Sr Sub Deb 07-15-04 11.500 B+ 3,000 3,285,000
Le Groupe Videotron Ltee, (Canada), Sr Note 02-15-05 (Y) 10.625 BB+ 1,250 1,318,750
Marcus Cable Co., L.P., Sr Discount Note, Step Coupon
(14.25%, 6-15-00), 12-15-05 Zero B 2,000 1,260,000
Rogers Cablesystems, (Canada), Sr Note Ser B 03-15-05 (Y) 10.000 BB+ 3,000 3,007,500
Videotron Holdings PLC, (United Kingdom), Sr Discount Note,
Step Coupon (11.125%, 7-1-99), 07-01-04 (Y) Zero B+ 4,000 3,000,000
------------
38,438,399
------------
Chemicals (0.31%)
NL Industries, Inc., Sr Note 10-15-03 11.750 B 1,750 1,802,500
------------
Computers (0.73%)
Computervision Corp., Sr Sub Note 08-15-99 11.375 B- 4,000 4,180,000
------------
Containers (0.35%)
Stone Container Corp., Sr Note 10-01-04 11.500 B+ 2,000 2,015,000
------------
Cosmetics & Toiletries (0.35%)
Renaissance Cosmetics, Sr Note 08-15-01 13.750 B- 2,000 2,000,000
------------
Diversified Operations (0.52%)
Alpine Group, Inc., Sr Note 07-15-03 12.250 B 3,000 3,000,000
------------
Electronics (0.26%)
Alliant Techsystems, Inc., Sr Sub Note 03-01-03 11.750 B 1,375 1,491,875
------------
Finance (0.93%)
Norgeskreditt, (Norway), Foreign Corp Bond 06-19-96# 10.750 A 35,000 5,375,160
------------
Foods (0.18%)
PMI Acquisition Corp., Sr Sub Note 09-01-03 10.250 B 1,000 1,000,000
------------
Governmental -- Foreign (29.01%)
Commonwealth of Australia, (Australia), Government Bond 03-15-99# 6.250 AAA 20,000 15,146,402
Federative Republic of Brazil, (Brazil), Government Bond
(Floating Rate Note) 04-15-24 (Y) 5.000 B+ 20,000 10,525,000
Governmental -- Foreign (continued)
Kingdom of Denmark, (Denmark), Government Bond-Bullet 11-15-98# 0.090 AAA $30,000 $5,538,225
Kingdom of Denmark, (Denmark), Government Bond-Bullet 11-10-24# 7.000 AAA 65,000 9,433,535
Kingdom of Norway, (Norway), Government Bond 01-31-99# 9.000 AAA 55,000 9,193,167
Kingdom of Spain, (Spain), Government Bond 08-30-98# 11.450 AAA 1,300,000 10,837,970
Kingdom of Spain, (Spain), Government Bond 03-25-00# 12.250 AAA 1,300,000 11,389,170
Kingdom of Spain, (Spain), Government Bond 01-31-06# 10.150 AAA 750,000 6,188,475
Kingdom of Sweden, (Sweden), Government Bond 01-21-99# 11.000 AAA 85,000 13,858,884
Kingdom of Sweden, (Sweden), Government Bond 06-15-01# 13.000 AAA 50,000 9,035,765
Kingdom of Sweden, (Sweden), Government Bond 02-09-05# 6.000 AAA 45,000 5,704,389
Republic of Argentina, (Argentina), Deb 03-31-23 (Y) 5.250 BB- 15,000 8,193,750
Republic of Ireland Treasury Gilts, (Ireland),
Government Bond 10-18-00# 8.000 AAA 12,000 19,822,757
Republic of Poland, (Poland), Government Bond 10-27-24 (Y) 2.750 BBB- 13,000 6,467,500
United Kingdom of Great Britain Treasury Gilts, (United Kingdom),
Government Conv Bond 08-06-97# 7.000 AAA 3,000 4,687,136
United Kingdom of Great Britain Treasury Gilts, (United Kingdom),
Government Bond 11-06-01# 7.000 AAA 3,000 4,512,677
United Kingdom of Great Britain Treasury Gilts, (United Kingdom),
Government Bond 08-27-02# 9.750 AAA 4,000 6,776,770
United Mexican States Cetes, (Mexico), Government Bill 08-15-96# Zero A2 2,400 3,056,772
United Mexican States Cetes, (Mexico), Government Bill 09-05-96# Zero A2 5,348 6,694,724
------------
167,063,068
------------
Governmental -- U.S. (6.87%)
United States Treasury, Bond 02-15-16 9.250 AAA 11,000 13,394,260
United States Treasury, Bond 08-15-19 8.125 AAA 5,500 6,074,915
United States Treasury, Note 05-15-01 8.000 AAA 19,000 20,068,750
------------
39,537,925
------------
Governmental -- U.S. Agencies (2.84%)
Federal Home Loan Mortgage Corp., REMIC 44-E 11-15-19 9.000 AAA 1,161 1,190,608
Federal National Mortgage Association, Multicurrency PERLS 07-10-96+ (r) 11.450 AAA 500 228,750
Government National Mortgage Association, 30 Yr Pass Thru Ctf 05-15-26 7.500 AAA 15,150 14,818,594
Student Loan Marketing Association, Multicurrency PERLS 11-19-96+ (r) 10.000 AAA 500 145,000
------------
16,382,952
------------
Insurance (0.18%)
American Life Holding Co., Sr Sub Note 09-15-04 11.250 BB- 1,000 1,050,000
------------
Leasing (0.26%)
Scotsman Group, Inc., Sr Sec Note 12-15-00 9.500 BB- 1,500 1,515,000
------------
Leisure & Recreation (5.03%)
Act III Theaters, Inc., Sr Sub Note 02-01-03 11.875 B3 1,550 1,708,875
Bally Park Place Funding, 1st Mtg Note 03-15-04 9.250 BB 5,000 5,037,500
Bally's Grand, 1st Mtg Note Ser B 12-15-03 10.375 BB 3,000 3,112,500
Coast Hotels & Casinos, Inc., 1st Mtg Note 12-15-02 (R) 13.000 B 2,000 2,130,000
Cobb Theatres, Sr Note 03-01-03 (R) 10.625 BB- 1,000 1,025,000
Leisure & Recreation (continued)
GB Property Funding, 1st Mtg Note 01-15-04 0.109 B+ $3,000 $2,587,500
Mohegan Tribal Gaming Authority, Sr Note 11-15-02 (R) 13.500 B+ 3,900 4,777,500
Showboat Marina Casino Partnership/ Financing Corp.,
1st Mtg Note 03-15-03 (R) 13.500 B 3,000 3,240,000
Showboat, Inc., Sr Sub Note 08-01-09 13.000 B 3,000 3,435,000
Station Casinos, Inc., Sr Sub Note 03-15-06 10.125 B+ 2,000 1,915,000
------------
28,968,875
------------
Metals (1.28%)
Easco Corp., Sr Note 03-15-01 10.000 B- 3,000 3,030,000
Kaiser Aluminum & Chemical Corp., Sr Sub Note 02-01-03 12.750 B- 4,000 4,320,000
------------
7,350,000
------------
Office Equip & Supplies (0.38%)
United Stationer Supply, Sr Sub Note 05-01-05 12.750 B- 2,000 2,165,000
------------
Oil & Gas (4.33%)
Cliffs Drilling, Sr Note 05-15-03 (R) 10.250 B 1,250 1,256,250
Dual Drilling Co., Sr Sub Note 01-15-04 9.875 B- 1,000 1,050,000
Falcon Drilling Co., Sr Sub Note Ser B 03-15-05 12.500 B- 1,500 1,680,000
Falcon Drilling Co., Sr Note Ser B 03-15-03 8.875 B+ 1,500 1,458,750
Mobil North Sea, PLC, (United Kingdom), Company Guaranty 07-15-99# 9.625 AA 1,000 1,635,494
Petroleum Heat & Power Co., Inc., Sub Deb 02-01-05 12.250 B+ 2,500 2,762,500
Plains Resources, Inc., Sr Sub Note 03-15-06 (R) 10.250 B- 3,000 3,030,000
TransAmerican Refining Corp., Unit (1st Mtg Note 02-15-02 & Warrant) 16.500 CCC+ 2,000 1,856,800
TransTexas Gas Corp., Sr Note 06-15-02 11.500 BB- 5,000 4,900,000
Vintage Petroleum, Inc., Sr Sub Note 12-15-05 9.000 B+ 3,000 2,857,500
Wainoco Oil Corp., Sr Note 08-01-02 12.000 B- 2,500 2,475,000
------------
24,962,294
------------
Paper (2.51%)
Indah Kiat International Finance, (Indonesia),
Company Guaranty 06-15-06 (Y) 12.500 BB 6,000 6,360,000
Riverwood International USA, Inc., Sr Sub Note 04-01-08 10.875 B 4,000 3,985,000
SD Warren Co., Sr Sub Note 12-15-04 12.000 B+ 2,000 2,100,000
Williamhouse-Regency of Delaware, Inc., Sr Sub Note 11-15-05 (R) 13.000 B- 1,800 2,034,000
------------
14,479,000
------------
Pollution Control (0.40%)
ICF Kaiser International, Sr Sub Note 12-31-03 13.000 B- 2,500 2,318,750
------------
Precious Metals/Jewelry (0.53%)
Finlay Fine Jewelry, Sr Note 05-01-03 10.625 B 3,000 3,030,000
------------
Publishing (1.24%)
K-III Communication Corp., Sr Note 02-01-06 (R) 8.500 BB- 1,000 917,500
News America Holdings, Inc., (Australia), Deb 02-07-14# 8.625 BBB 7,000 4,694,130
Park Newspapers, Inc., Sr Note 05-15-04 (R) 11.875 B 1,500 1,530,000
------------
7,141,630
------------
Retail (2.59%)
Apparel Retailers, Inc., Deb, Step Coupon (12.75%, 8-15-98), 08-15-05 Zero B- $3,960 $2,970,000
Apparel Ventures, Inc., Sr Note 12-31-00 12.25% B- 1,350 1,026,000
DiGiorgio Corp., Sr Note 02-15-03 12.000 B 1,495 1,405,300
Petro PSC Properties, L.P., Sr Note 06-01-02 12.500 B 2,500 2,362,500
Smith's Food & Drug Centers, Inc., Sr Sub Note 05-15-07 11.250 B- 1,100 1,116,500
Specialty Retailers, Inc., Sr Sub Note 08-15-03 11.000 B- 3,000 3,120,000
Thrifty Payless Inc., Sr Sub Note 04-15-04 12.250 B- 2,600 2,905,500
------------
14,905,800
------------
Steel (2.60%)
AK Steel Corp, Sr Note 04-01-04 10.750 BB 2,000 2,185,000
Acme Metals, Inc., Sr Sec Note 08-01-02 12.500 B 3,000 3,067,500
GS Technologies Operating Co., Inc., Sr Note 10-01-05 12.250 B 2,000 2,070,000
Inland Steel Industries, Inc., Note 12-15-02 12.750 B+ 2,000 2,250,000
Weirton Steel Corp., Sr Note 06-01-05 10.750 B 3,650 3,504,000
Wheeling-Pittsburgh Corp., Sr Note 11-15-03 9.375 BB- 2,000 1,910,000
------------
14,986,500
------------
Telecommunications (3.78%)
A+ Network, Inc., Sr Sub Note 11-01-05 11.875 CCC+ 2,000 2,080,000
Arch Communications Group, Inc., Sr Discount Note, Step Coupon
(10.875%, 3-15-01), 03-15-08 Zero B- 2,125 1,190,000
Comunicacion Celular SA, (Colombia), Sr Deferred Coupon Bond,
Step Coupon (13.125%, 11-15-00), 11-15-03 (R), (Y) Zero B+ 3,250 1,917,500
Fonorola, Inc., (Canada), Sr Sec Note 08-15-02 (Y) 12.500 B+ 1,500 1,620,000
Intercel, Inc., Unit (Sr Discount Note, Step Coupon (12.00%, 02-01-01),
02-01-06 & Warrant) Zero B- 900 551,250
Nextel Communications, Inc., Sr Discount Note, Step Coupon
(9.75%, 02-15-99), 08-15-04 Zero CCC- 6,000 3,645,000
Occidente Y Caribe Celular SA, (Colombia), Unit (Sr Disc Note,
Step Coupon (14.00%, 03-15-01), 03-15-04 & Warrant) (R), (Y) Zero B 4,000 2,097,040
Rogers Cantel, Inc., (Canada), Sr Note 06-01-06# 10.500 BB+ 4,000 2,907,706
Shared Technologies Fairchild, Inc., Sr Discount Note,
Step Coupon (12.25%, 03-01-99), 03-01-06 (R) Zero B- 2,400 1,824,000
Vanguard Cellular System, Deb 04-15-06 9.375 B+ 1,500 1,473,750
WinStar Communications, Inc., Conv Sr Discount Note, Step Coupon
(14.00%, 10-15-00), 10-15-05 Zero B- 1,300 936,000
WinStar Communications, Inc., Sr Discount Note, Step Coupon
(14.00%, 10-15-00), 10-15-05 Zero B- 2,600 1,495,000
------------
21,737,246
------------
Textiles (0.48%)
Dan River, Inc., Sr Sub Note 12-15-03 10.125 B 2,000 1,930,000
Decorative Home Accents, Inc., Sr Note 06-30-02 13.000 B- 1,000 830,000
------------
2,760,000
------------
Transportation (2.01%)
NWA, Inc., Note 08-01-96 8.625 B+ 5,000 5,025,000
Northwest Airlines, Sr Note 12-31-00 12.092 BB- 2,341 2,413,712
TNT Transport PLC/TNT USA, Inc., Sr Note 04-15-04 11.500 B+ 4,000 4,160,000
------------
11,598,712
------------
Utilities (1.58%)
CE Casecnan Water & Energy Co., Inc., (Philippines),
Sr Note 11-15-05 (R), (Y) 11.45% BB $2,000 $1,980,000
Calpine Corp., Sr Note 02-01-04 9.250 B 2,000 1,875,000
Cleveland Electric Illuminating Co., 1st Mtg Note 05-15-05 9.500 BB 2,625 2,510,839
El Paso Electric Co., 1st Mtg Bond 02-01-06 8.900 BB- 1,000 995,000
Midland Cogeneration Venture, Deb 07-23-02 10.330 BB- 1,661 1,742,494
------------
9,103,333
------------
TOTAL BONDS
(Cost $491,220,307) (85.73%) $493,703,739
------- ------------
<CAPTION>
NUMBER OF SHARES
OR WARRANTS
-------------
<C> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
AVI Holdings, Inc., Warrant (R)** 1,500 7,500
American Telecasting, Warrant** 4,000 14,000
Cablevision Systems Corp., 11.125% Ser L Payment-In-Kind Pref Stock (R) 30,000 2,910,000
California Federal Bank 10.625% Ser B Pref Stock 6,667 723,370
Comunicacion Celular SA, Warrant** (Colombia) (Y) 32,500 130,000
Credit Lyonnais Capital S.C.A., American Depositary Shares,
9.50% Ser DTC Pref Stock (R) (Luxembourg) (Y) 100,000 2,325,000
Decorative Home Accents, Common Stock** 1,000 7,000
Earthwatch, Inc., 12.00% Ser C Conv Pref Stock (R) 200,000 2,000,000
EchoStar Communications Corp. (Class A), Common Stock** 18,000 621,000
Finlay Enterprises, Inc., Common Stock** 4,000 65,500
First Nationwide Bank, 11.50% Pref Stock 5,000 545,000
ICF Kaiser International Inc., Warrant (r)** 12,000 9,000
IRT Property Co., Common Stock 75,000 703,125
Intermedia Communications Of Florida, Inc., Common Stock** 15,000 525,000
K-III Communications Corp., $2.875 Sr Exch Pref Stock 60,000 1,597,500
Lasmo PLC, 10.00% Ser A Pref Stock (United Kingdom) (Y) 50,000 1,256,250
Maxus Energy Corp., $2.50 Pref Stock 40,000 1,005,000
Northwest Airlines Corp. (Class A), Common Stock** 140,000 5,565,000
Panamsat Corp., 12.75% Pref Stock 1,918 2,215,290
Petro PSC Properties, L.P., Warrant (r)** 2,000 68,000
Qantas Airways Ltd., American Depositary Shares (R) (Australia) 13,800 246,816
Renaissance Cosmetics, Warrants** 4,000 90,000
SFX Broadcasting, Inc., 6.50% Ser D Conv Pref Stock (R) 25,000 1,275,000
St. Johnsbury Trucking Co., Inc., Common Stock (r)** 47,224 472
Station Casinos, Inc., 7.00% Conv Pref Stock 5,000 296,875
Sun Carriers Inc., Common Stock (r)** 195,600 1,956
TLC Beatrice International Holdings (Class A), Common Stock (r) 20,000 1,000,000
Thrifty Payless Holdings, Inc. (Class B), Common Stock (r)** 11,400 163,875
Time Warner, Inc., 10.25% Ser K Exch Pref Stock (R) 30,000 2,955,000
TransTexas Gas Corp., Common Stock** 10,000 90,000
UAL Corp., Common Stock** 38,308 2,188,344
Valero Energy Corp., $3.125 Conv Pfd Stock 25,000 1,412,500
Western Pacific Airlines, Inc., Common Stock** 10,000 160,000
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(COST $28,054,498) (5.59%) $32,173,373
------ -----------
<CAPTION>
PAR VALUE
INTEREST (000's MARKET
RATE OMITTED) VALUE
---------- --------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.02%)
Investment in a joint repurchase agreement transaction with
Toronto Dominion, Inc. -- Dated 05-31-96, Due 06-03-96
(secured by U.S. Treasury Notes, 8.75% Due 10-15-97,
5.375% Due 11-30-97, 5.875% Due 4-30-98, and 6.00%
Due 05-31-98) Note A 5.330% $ 28,926 $ 28,926,000
-------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 33,933
-------------
TOTAL SHORT-TERM INVESTMENTS (5.03%) 28,959,933
------ -------------
TOTAL INVESTMENTS (96.35%) $554,837,045
====== =============
* Credit Ratings are rated by Moody's Investors Service or John Hancock Advisers, Inc. where Standard &
Poor's ratings are not available.
** Non-income producing security.
+ Principal Exchange Rate Linked Securities (PERLS). PERLS are debt instruments that are denominated
in U.S. dollars and pay interest in U.S. Dollars, but whose principal repayments are linked to the
performance of the U.S. dollar versus a foreign currency. If the foreign currency gains value against
the U.S. dollar when the PERL matures, redemption will be at a premium. The redemption will be at a
discount if the foreign dollar loses value against the U.S. dollar. As of 05/31/96, the fund has PERLS
with a total cost of $1,022,850 and a total value of $373,750, or 0.06% of the Fund's total net assets.
# Par value of foreign bonds is expressed in local currency, as shown parenthetically in security description.
(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. See Note A of the Notes to Financial Statements for valuation policy. Rule 144A securities
amounted to $50,948,106, as of May 31, 1996.
(Y) Parenthetical disclosure of a foreign country in the security description represents country of foreign
issuer, however, security is U. S. dollar denominated.
(r) Direct placement securities are restricted to resale. They have been valued in accordance with procedures
approved by the Trustees after considerations of restrictions as to resale, financial condition and
prospects of the issuer, general market conditions and pertinent information in accordance with the
Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to
registration under the Securities Act of 1933 with respect to these restricted securities.
<CAPTION>
VALUE AS A
PERCENTAGE VALUE AT
ACQUISITION ACQUISITION OF FUND'S MAY 31,
ISSUER, DESCRIPTION DATE COST NET ASSETS 1996
- -------------------------------------------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Additional information on each restricted security is as follows:
Federal National Mortgage Association, Multicurrency PERLS 07-10-96 11/5/91 $522,850 0.04% $228,750
ICF Kaiser International Inc., Warrant 1/4/94 15,000 0.00 9,000
Petro PSC Properties, LP, Warrant 5/17/94 73,140 0.01 68,000
St. Johnsbury Trucking Co., Inc., Common Stock 1/19/93 1,301,659 0.00 472
Student Loan Marketing Association, Multicurrency PERLS 11-19-96 11/5/91 500,000 0.03 145,000
Sun Carriers, Inc., Common Stock 11/23/88 218,247 0.00 1,956
TLC Beatrice International Holdings (Class A), Common Stock 11/25/87 1,006,000 0.17 1,000,000
Thrifty Payless Holdings (Class C), Common Stock 7/22/94 213,334 0.03 163,875
The percentage shown for each investment category is the total
value of that category as a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
The Strategic Income Fund invests primarily in securities issued in the
United States of America. The performance of this Fund is closely tied
to the economic and financial conditions within the countries it
invests. The concentration of investments by industry category for
individual securities held by the Fund is shown in the schedule of
investments.
In addition, concentration of investments can be aggregated by various
countries. The table below shows the percentages of the Fund's
investments at May 31, 1996 assigned to country categories.
Portfolio Concentrated (Unaudited)
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------------------------
Argentina 1.42%
Australia 3.81
Bermuda .41
Brazil 1.83
Canada 1.92
Columbia 0.72
Denmark 2.60
Germany 0.18
Indonesia 1.64
Ireland 3.44
Luxembourg 0.67
Mexico 1.69
Norway 2.53
Philippines 0.34
Poland 1.12
Spain 4.93
Sweden 4.97
United Kingdom 4.67
United States 57.46
-----
TOTAL INVESTMENTS 96.35%
=====
Additionally, the concentration of investments can be
aggregated by the quality rating for each debt security.
QUALITY DISTRIBUTION
- --------------------
AAA 32.65%
AA 0.29
A 2.63
BBB 2.11
BB 12.57
B 32.97
CCC 2.51
-----
TOTAL BONDS 85.73%
=====
See notes to financial statements.
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940.
The Trust consists of three series of portfolios: John Hancock Strategic
Income Fund (the "Fund"), John Hancock Utilities Fund and John Hancock
Independence Equity Fund. Prior to June 3, 1996, John Hancock
Independence Equity Fund was known as John Hancock Independence
Diversified Core Equity Fund. The investment objective of the Fund is a
high level of current income.
The Trustees have authorized the issuance of two classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each
class represent an interest in the same portfolio of investments of the
Fund and have equal rights to voting, redemption, dividends, and
liquidation, except that certain expenses, subject to the approval of
the Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under the terms of a
distribution plan, have exclusive voting rights regarding such
distribution plan. 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. All portfolio transactions initially
expressed in terms of foreign currencies have been translated into U.S.
dollars as described in "Foreign Currency Translation" below. The Fund
may invest in indexed securities whose value is linked either directly
or inversely to changes in foreign currencies, interest rates,
commodities, indices or other reference instruments. Indexed securities
may be more volatile than the reference instrument itself, but any loss
is limited to the amount of the original investment.
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. It will not be subject to Federal income
tax on taxable earnings which are distributed to shareholders. For
Federal income tax purposes, net currency exchange gains and losses from
sales of foreign debt securities may be treated as ordinary income even
though such items are capital gains and losses for accounting purposes.
The Fund has $36,610,402 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 gains distributions will be made. The carryforwards expire as
follows: May 31, 1998 -- $2,471,816, May 31, 1999 -- $13,103,961, May
31, 2002 -- $454,810, May 31, 2003 -- $20,312,907 and May 31, 2004 --
$266,908. Expired capital loss carryforwards are reclassified to capital
paid-in, in the year of expiration.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Fund is made aware
of the dividend. Interest income on investment securities is recorded on
the accrual basis. Foreign income may be subject to foreign withholding
taxes which are accrued as applicable.
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 as explained previously.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are determined at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
may differ from these estimates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into
forward foreign currency exchange contracts as a hedge against the
effect of fluctuations in currency exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date at a set price. The aggregate
principal amounts of the contracts are marked-to-market daily at the
applicable foreign currency exchange rates. Any resulting unrealized
gains and losses are included in the determination of the Fund's daily
net assets. The Fund records realized gains and losses at the time the
forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering these contracts from potential
inability of counterparties to meet the terms of the contract and from
unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets and
Liabilities. The Fund may also purchase and sell forward contracts to
facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intends to take delivery of the foreign
currency. Such contracts normally involve no market risk other than that
offset by the currency amount of the underlying transaction.
Open foreign currency forward sell contracts at May 31, 1996 were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY: COVERED BY CONTRACT MONTH (DEPRECIATION)
- ---------- --------------------- ------------ --------------
GERMAN MARK 52,657,000 JUNE 96 $ 881,575
GERMAN MARK 71,074,000 JULY 96 467,338
GERMAN MARK 74,730,000 AUG 96 (126,296)
NEW ZEALAND
DOLLAR 10,017,886 JUNE 96 65,844
-------------
$1,288,461
=============
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.
London time, on the date of any determination of the net asset value of
the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates
prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain
or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference
between the amounts of dividends, interest, and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains
and losses arise from changes in the value of assets and liabilities
other than investments in securities resulting from changes in the
exchange rate.
OPTIONS Listed options will be valued at the last quoted sales price on
the exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid"
prices obtained from two independent brokers. Written put or call over-
the-counter options will be valued at the average of the "asked" prices
obtained from two independent brokers. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund will be
included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be
subsequently marked-to-market to reflect the current market value of the
written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument and buying puts and writing calls
will tend to decrease the Fund's exposure to the underlying instrument,
or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the
face (or "notional") amount of each contract at value will reflect the
maximum exposure of the Fund in these contracts, but the actual exposure
will be limited to the change in value of the contract over the period
the contract remains open.
Risks may also arise if counterparties do not perform under the
contracts' terms, or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded
options have minimal credit risk as the exchanges act as counterparties
to each transaction, and only present liquidity risk in highly unusual
market conditions. To minimize credit and liquidity risks in over-the-
counter option contracts, the Fund will continuously monitor the
creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's
period-end Statement of Assets and Liabilities.
There were no written option transactions for the period ended May 31,
1996.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects
of fluctuations in interest rates, currency exchange rates and other
market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified
amount of cash or U.S. government securities, known as "initial margin,"
equal to a certain percentage of the value of the financial futures
contract being traded. Each day, the futures contract is valued at the
official settlement price on the board of trade or U.S. commodities
exchange. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the
financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market", will be 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
contracts 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
contracts.
At May 31, 1996, there were no open positions in financial futures
contracts.
DISCOUNTS ON SECURITIES The Fund accretes discounts from par value on
securities purchased from either the date of issue or the date of
purchase over the life of the security, as required by the Internal
Revenue Code.
NOTE B --
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of: (a) 0.60% of the
first $100,000,000 of the Fund's average daily net asset value, (b)
0.45% of the next $150,000,000, (c) 0.40% of the next $250,000,000, (d)
0.35% of the next $150,000,000, and (e) 0.30% of the Fund's average
daily net asset value in excess of $650,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent
of such excess and the Adviser will make additional arrangements
necessary to eliminate any remaining excess expenses. The current limits
are 2.5% of the first $30,000,000 of the Fund's average daily net asset
value, 2.0% of the next $70,000,000 and 1.5% of the remaining average
daily net asset value.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended
May 31, 1996, JH Funds received net sales charges of $2,095,227 with
regard to sales of Class A shares. Out of this amount, $232,623 was
retained and used for printing of prospectuses, advertising, sales
literature and other purposes, $470,805 was paid as sales commissions
and service fees to unrelated broker-dealers and $1,391,799 was paid as
sales commissions and service fees to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated
("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of which are
broker dealers. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company, is the indirect sole shareholder of Distributors and
John Hancock Freedom Securities Corporation and its subsidiaries, which
include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended May 31, 1996, contingent deferred
sales charges received by JH Funds amounted to $463,556.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution
Plans with respect to Class A and Class B shares pursuant to Rule 12b-1
under the Investment Company Act of 1940. Accordingly, the Fund will
make payments to JH Funds for distribution and service expenses at an
annual rate not to exceed 0.30% of Class A average daily net assets and
1.00% of Class B average daily net assets, to reimburse JH Funds for its
distribution and service costs. Up to a maximum of 0.25% of these
payments may be service fees as defined by the amended Rules of Fair
Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's
12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. The Fund pays transfer agent fees based on
the number of shareholder accounts and certain out-of-pocket expenses.
On March 5, 1996, the Board of Trustees approved, retroactively to
January 1, 1996, an agreement with the Adviser to perform necessary tax
and financial management services for the Funds. The compensation for
1996 was estimated to be at an annual rate of 0.01875% of the average
net assets of the Fund.
Messrs. Edward J. Boudreau, Jr. and Richard S. Scipione and Ms. Anne C.
Hodsdon are directors and officers of the Adviser and its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees
is borne by the Fund. Effective with the fees paid for 1995, the
unaffiliated Trustees may elect to defer for tax purposes their receipt
of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock
funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. At
May 31, 1996, the Fund's investment to cover the deferred compensation
had unrealized appreciation of $1,665.
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
investments, during the period ended May 31, 1996, aggregated
$448,834,081 and $368,359,414, respectively. Purchases and proceeds from
sales of obligations of the U.S. government and its agencies during the
period ended May 31, 1996, aggregated none and $7,253,203 respectively.
The cost of investments owned at May 31, 1996 (excluding the corporate
saving account), for Federal income tax purposes was $548,273,390. Gross
unrealized appreciation and depreciation of investments aggregated
$16,890,095 and $10,360,373, respectively, resulting in net unrealized
appreciation of $6,529,722.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended May 31, 1996, the Fund reclassified amounts
to reflect an increase in undistributed net investment income of
$5,583,620, an increase in accumulated net realized loss on
investments of $5,583,615 and a decrease in capital paid-in of $5. This
represents the cumulative amount necessary to report these balances on a
tax basis, excluding certain temporary differences, as of May 31, 1996.
Additinal adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of
the Fund, are attributable to differences in the computation of
distributable income and capital gains under federal tax rules versus
generally accepted accounting principles.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Strategic Income Fund
and the Trustees of John Hancock Strategic Series, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of John
Hancock Strategic Income Fund (the "Fund") (a portfolio of John Hancock
Strategic Series, Inc.) at May 31, 1996, the results of its operations
for the year then ended, and the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements")
are the responsibility of the Fund's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at May 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
July 15, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished
with respect to the distributions of the Fund for its fiscal year ended
May 31, 1996.
With respect to the Fund's ordinary taxable income for the fiscal year
ended May 31, 1996, 3% of the dividends qualify for the corproate
dividends received deduction.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-DIV
in January of 1997. This will reflect the total of all distributions
which are taxable for the calendar year 1996.
[THIS PAGE LEFT INTENTIONALLY BLANK]
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page.
A box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."
John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 582
This report is for the information of shareholders of the John Hancock
Strategic 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.
Printed on Recycled Paper 9100A 5/96
7/96
John Hancock Funds
Independence
Equity Fund
Annual Report
May 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Gail D. Fosler*
Anne C. Hodsdon
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse llp
160 Federal Street
Boston, Massachusetts 02110
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 is
proving to be a tough act to follow in 1996. Volatility has returned to
the market after being relatively calm last year. And while the stock
market has continued its advance, albeit at a slower and more erratic
pace, bonds have retreated this year in the face of strong economic data
that has sparked inflation fears. The change is not surprising,
especially after the anomaly of last year's almost straight-up advance,
when both the bond and stock markets soared.
As the old saying "trees don't grow to the sky" suggests, it would be
unrealistic to expect the market to stage a repeat in 1996. Shareholders
would do well to temper expectations of investment returns and perhaps
revisit your investment allocations with your financial advisor to
determine if rebalancing your portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John
Hancock Funds, we never stop working to find ways to sustain and improve
the quality of information and the level of assistance we provide you.
Our commitment to this task is no less than John Hancock's loyalty was
to his fledgling country when he is said to have uttered, "if it does
the public good, burn Boston." We won't go that far, of course, but we
share our namesake's dedication to putting the public before all else.
In our case, that public is you, our shareholders. We take very
seriously the role you have entrusted to us, that of helping you achieve
your financial goals. Part of that will always involve good customer
service. So please do not hesitate to call your Customer Service
Representative at 1-800-225-5291 if you have any questions or need
information. We take pride in helping you with the same spirit that John
Hancock displayed at the dawning of America.
Sincerely,
/S/EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
"... the overall
market turned
in a strong
performance
during the
period..."
By Paul McManus for the Portfolio Management Team
John Hancock
Independence Equity Fund
Surging stock market turns volatile in 1996
In May, the Fund's Trustees voted to shorten the name of John Hancock
Independence Diversified Core Equity Fund. Effective June 3, 1996, the
Fund became known as John Hancock Independence Equity Fund.
Stocks were an attractive place to be during the Fund's entire fiscal
year, but the waters got decidedly choppier in the second half of the
period. When the Fund's fiscal year began in June 1995, the environment
favored growth stocks more than the cyclical companies whose profits are
more dramatically impacted by swings in the economy. At that time, the
economic outlook was for slower growth, interest rates were declining
and inflation was under control. Then in early 1996, investor sentiment
changed substantially after the economy showed signs of picking up steam
and commodity prices rose. That prompted inflation fears and caused a
jump in interest rates that sent bond prices tumbling. Investors even
began to fear that the Fed would have to raise short-term interest rates
to slow the economy down. Politics also figured in the mix more than
usual when last year's efforts to reduce the budget deficit fell apart
as the primaries heated up. However, those efforts appear to be back on
track.
A 2 1/4" x3 3/4" photo of Independence Equity Fund management team
members:
(l-r) Paul McManus, Jane Shigley, Jeff Saef, David Canavan, Coreen
Kraysler
The stock market reflected this increased nervousness as investors tried
to decipher which way the economy was headed. And as the consensus
turned toward a belief in a faster-growing economy, the larger, cyclical
companies -- such as aluminum, paper, chemical and automobile companies
- -- began to outperform the rest. Even with the ups and downs and changes
in leadership, the overall market turned in a strong performance during
the period. For the 12 months ended May 31, 1996, the Standard & Poor's
500-Stock Index, a broad measure of the market's performance, returned
28.44%. John Hancock Independence Equity Fund also turned in a solid
performance. For the fiscal year ended May 31, 1996, the Fund's Class A
shares posted a total return of 29.12% at net asset value. That compared
favorably to the 25.24% return for the average growth and income fund,
according to Lipper Analytical Services.1 At the same time, the Fund's
Class B shares returned 18.46% at net asset value from inception on
September 7, 1995 through May 31, 1996.
Chart with heading "Top Five Common Stock Holdings" at top of left hand
column. The chart lists five holdings: 1) AT&T 3.8%; 2) Xerox Corp.
3.5%; 3) Bristol-Myers Squibb 3.0% 4) Phillips Petroleum 2.5% 5) PepsiCo
2.5%. A footnote below reads: "As a percentage of net assets on May 31,
1996."
"The airline
group was a
strong
performer
throughout
the Fund's
fiscal year."
Autos in, paper out
We continued to apply our disciplined investment style across a wide
range of company types and sizes to find ones whose stocks are well-
priced and which have improving fundamentals, meaning that the company's
prospects are getting better. We find these companies by conducting in-
depth analysis of such measures as earnings growth, cash flow and
dividends, and then factor in the direction of earnings estimates and
the stock's price to determine its relative attractiveness. Our
automobile stock holdings were a perfect example of our valuation system
at work. Late last year and early in 1996, automobile companies were
lagging the overall market. More recently, sales of trucks and sport
utility vehicles picked up and the momentum was stronger than analysts
expected. As a result, earnings estimates rose while stock prices lagged
the earnings estimate advances. We took the opportunity to increase our
auto holdings in such companies as Ford Motor Company, whose stock has
risen nicely since we bought it late last year. The positive moves in
the auto industry also paid off well for the Fund's position in
Chrysler.
The airline group was a strong performer throughout the Fund's fiscal
year. Stock prices have moved up as the airline industry has rebounded
and generated strong earnings growth. Recently, we began to take profits
on some of our airline stocks, selling our position in United Airlines
and paring our Delta holdings while the industry appears to be in the
midst of another good year marked by strong passenger traffic and good
pricing. While industry fundamentals remain attractive, the earnings
estimates have stopped advancing as rapidly as they had been; it appears
that we could be at the peak of earnings momentum. We also cut back on
our paper and forest product stocks earlier this year. Even though these
cyclical stocks outperformed the broader market beginning in January,
their earnings estimates were dropping, so they no longer met our
criteria.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investments"; the header for the right column is
"Recent performance ... and what's behind the numbers." The first
listing is Ford Motor Company followed by an up arrow and the phrase
"Earnings estimates rise faster than stock prices." The second listing
is Delta Air Lines followed by an up arrow and the phrase "Rebounding
airline industry boosts earnings." The third listing is Pacific Telesis
followed by a down arrow and the phrase "Bell operating company
pressured by long-line competitors." Footnote below reads: "See
"Schedule of Investments." Investment holdings are subject to change."
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For Class A shares and the average
growth and income fund, results are for the year ended May 31, 1996. For
Class B shares, result is for the period of September 7, 1995 through
May 31, 1996." The chart is scaled in increments of 15% from bottom to
top, with 30% at the top and 0% at the bottom. Within the chart, there
are three solid bars. The first represents the 29.12% total return for
John Hancock Independence Equity Fund: Class A. The second represents
the 18.46% total return for John Hancock Independence Equity Fund: Class
B. The third represents the 25.24% total return for the average growth
and income fund. Footnote below reads: "The total returns for John
Hancock Independence Equity Fund are at net asset value with all
distributions reinvested. The average growth and income fund is tracked
by Lipper Analytical Services (1). See following page for
historical performance information."
Top performers; technology rebounds
Two of the Fund's energy holdings, Mobil Corp. and Phillips Petroleum,
were among its top performers during the period. Both benefited from a
run-up in energy prices caused by a particularly long, harsh winter. The
increased demand put undue pressure on already low fuel inventories and
forced oil companies to produce heating oil for longer than usual,
preventing them from switching to gasoline production. The weather
imbalance, combined with a lack of oil production by Iraq, caused a
spike in energy prices earlier in the year. Even though Iraq recently
returned to production and the weather moderated, we're staying with
these companies for now because they are still benefiting from higher
prices and earnings.
During the last 12 months, technology stocks started out as the leaders,
then became the laggards in the latter part of 1995 and early this year,
particularly semiconductor companies which suffered as supply began to
catch up to demand. They ended the period rebounding and we continue to
believe that there is room for tremendous growth among technology
companies. The key, as always, will be in applying our analysis to
determine those companies that are not only well positioned for earnings
growth, but also those with the most attractive stock prices. After
reducing our tech holdings last year, we added some recently, including
Analog Devices, a specialized semiconductor company with strong
fundamentals, and IBM.
"For the rest of this year, we expect volatility to be the stock
market's watchword..."
Looking forward
For the rest of this year, we expect volatility to be the stock market's
watchword as politics and interest-rate moves leave their mark. Any
positive steps toward resolving the budget deficit could help interest
rates fall, which would benefit both bonds and stocks. But if interest
rates go up more and corporate profits don't keep up, we could see
market weakness. For now, we can live with the current economic
environment. In our view, interest rates are still low enough to
generate decent economic growth -- a good recipe for corporate earnings
growth and stock prices. And despite occasional monthly scares,
inflation appears to be staying in check. Any changes in the economy or
interest rates would certainly cause us to adjust our earnings estimates
and rebalance the portfolio accordingly. But, no matter what moves the
market or the economy make, we'll stick to our disciplined investment
strategy. We'll continue to maintain our highly diversified portfolio of
companies whose earnings are improving and whose stocks are attractively
valued.
This commentary reflects the views of the portfolio managers through the
end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Independence Equity
Fund. Total return is a performance measure that equals the sum of all
income and capital gain distributions, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 5%
for Class A shares. The effect of the maximum contingent deferred sales
charge for Class B shares (maximum 5% and declining to 0% over six
years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will
perform in the future. Also, keep in mind that the total return and
share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost,
depending on when you sell them.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1996
One Life of
Year Fund
------- --------
John Hancock Independence Equity Fund: Class A(1) 26.53% 85.74%
John Hancock Independence Equity Fund: Class B(2) N/A 9.31%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1996
One Life of
Year Fund
------- --------
John Hancock Independence Equity Fund: Class A(1) 26.53% 13.74%
John Hancock Independence Equity Fund: Class B(2) N/A N/A
Notes to Performance
(1)Class A shares started on June 10, 1991.
(2)Class B shares started on September 7, 1995.
(3)Effective September 1, 1995, the Adviser has undertaken to limit the
Fund's expenses to 1.30% and 2.00% attributable to Class A and Class B
shares, respectively, of the Fund's daily net asset value. Prior to
September 1, 1995, and the creation of Class B shares, the limitation of
expenses was 0.70% of the Fund's daily net asset value. Without the
limitation of expenses, the average annualized total returns for the
one-year period and since inception for Class A shares would have been
26.33% and 12.79%, respectively. Without the limitation of expenses,
the average annualized total returns for the one-year period for Class B
shares would have been 8.61%.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Independence Equity Fund would be worth on May 31, 1996,
assuming you had invested on the day each class of shares started and
have reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Standard & Poor's 500 Stock Index -- an
unmanaged index that includes 500 widely traded common stocks and is a
commonly used measure of stock market performance.
Independence Equity Fund
Class A shares
Line chart with the heading Independence Equity 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 Independence Equity Fund on June 10, 1991, before
sales charge, and is equal to $20,292 as of May 31, 1996. The second
line represents the value of the Standard & Poor's 500 Stock Index and
is equal to $19,714 as of May 31, 1996. The third line represents the
Independence Equity Fund after sales charge and is equal to $19,270 as
of May 31, 1996.
Independence Equity Fund
Class B shares
Line chart with the heading Independence Equity 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 Standard & Poor's 500 Stock
Index and is equal to $12,117 as of May 31, 1996. The second line
represents the value of the hypothetical $10,000 investment made in the
Independence Equity Fund on September 7, 1995, before contingent
deferred sales charge, and is equal to $11,846 as of May 31, 1996. The
third line represents the Independence Equity Fund after contingent
deferred sales charge and is equal to $11,346 as of May 31, 1996.
<TABLE>
<CAPTION>
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, 1996. You'll also find the net asset value
and the maximum offering price per share as of that date.
Statement of Assets and Liabilities
May 31, 1996
- -------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common stocks (cost - $26,841,037) $28,728,972
Short-term investments (cost - $2,122,000) 2,112,000
Corporate savings account 31,083
----------
30,872,055
Receivable for shares sold 98,766
Dividends receivable 78,432
Interest receivable 415
Receivable from John Hancock Advisers, Inc. - Note B 37,294
Other assets 2,468
----------
Total Assets 31,089,430
- -------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 1,022,857
Payable to John Hancock Advisers, Inc. and affiliates -
Note B 35,393
Accounts payable and accrued expenses 28,145
----------
Total Liabilities 1,086,395
- -------------------------------------------------------------------------
Net Assets:
Capital paid-in 27,575,804
Accumulated net realized gain on investments and
foreign currency transactions 532,506
Net unrealized appreciation of investments 1,888,283
Undistributed net investment income 6,442
----------
Net Assets $30,003,035
=========================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of
beneficial interest outstanding - unlimited
number of shares authorized with no par
value, respectively)
Class A - $14,878,179 / 827,523 $17.98
=========================================================================
Class B** - $15,124,856 / 842,134 $17.96
=========================================================================
Maximum Offering Price Per Share*
Class A - ($17.98 x 105.26%) $18.93
=========================================================================
* On single retail sales of less than $50,000. On sales of $50,000 or
more and on group sales the offering price is reduced.
** Class B shares commenced operations on September 7, 1995.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows net
gains (losses) for the period stated.
Statement of Operations
Year ended May 31, 1996
- -------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of foreign withholding taxes
of $2,200) $368,769
Interest 50,869
----------
419,638
----------
Expenses:
Investment management fee - Note B 104,018
Distribution/service fee - Note B
Class A 14,596
Class B 39,156
Custodian fee 42,821
Registration and filing fees 36,075
Transfer agent fee - Note B 29,987
Auditing fee 21,924
Printing 17,803
Legal fees 11,195
Organization expense - Note A 3,316
Financial services fee - Note B 1,429
Trustees' fees 683
Miscellaneous 492
----------
Total Expenses 323,495
Less expense reduction by
John Hancock Advisers, Inc. -
Note B (128,138)
- -------------------------------------------------------------------------
Net Expenses 195,357
- -------------------------------------------------------------------------
Net Investment Income 224,281
- -------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain on investments sold 13,818,303
Change in net unrealized appreciation/depreciation
of investments (9,915,169)
----------
Net Realized and Unrealized
Gain on Investments 3,903,134
- -------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $4,127,415
=========================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31,
---------------------------
1996 1995
----------- ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $224,281 $2,222,325
Net realized gain on investments sold and
foreign currency transactions 13,818,303 2,252,968
Change in net unrealized appreciation/
depreciation of investments (9,915,169) 12,046,702
----------- ------------
Net Increase in Net Assets Resulting from Operations 4,127,415 16,521,995
----------- ------------
Distributions to Shareholders:
Distributions from net investment income
Class A -- ($0.2181 and $0.2834
per share, respectively) (468,668) (2,008,180)
Class B** -- ($0.0934 and none
per share, respectively) (13,068) --
Distributions from net realized gain
on investments sold
Class A -- ($0.2907 and $0.0849
per share, respectively) (2,049,001) (608,472)
----------- ------------
Total Distributions to Shareholders (2,530,737) (2,616,652)
----------- ------------
From Fund Share Transactions - Net* (73,011,934) 20,901,056
----------- ------------
Net Assets:
Beginning of period 101,418,291 66,611,892
----------- ------------
End of period (including undistributed
net investment income of
$6,442 and $422,416, respectively) $30,003,035 $101,418,291
=========== ============
* Analysis of Fund Share Transactions:
YEAR ENDED MAY 31,
----------------------------------------------------------
1996 1995
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -----------
CLASS A
Shares sold 950,002 $15,689,378 3,969,193 $50,176,705
Shares issued to shareholders in
reinvestment of distributions 176,962 2,504,943 205,957 2,611,824
---------- ------------ ---------- -----------
1,126,964 18,194,321 4,175,150 52,788,529
Less shares repurchased (7,336,631) (105,475,141) (2,389,312) (31,887,473)
---------- ------------ ---------- -----------
Net increase (decrease) (6,209,667) $(87,280,820) 1,785,838 20,901,056
========== ============ ========== ===========
CLASS B**
Shares sold 904,689 $15,323,273
Shares issued to shareholders in
reinvestment of distributions 1,324 21,802
---------- -----------
906,013 15,345,075
Less shares repurchased (63,879) (1,076,189)
---------- -----------
Net increase 842,134 $14,268,886
========== ===========
** Class B shares commenced operations on September 7, 1995.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout
the period indicated, investment returns, key ratios and supplemental data are listed as follows:
are listed as follows:
- ------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
JUNE 10, 1991
(COMMENCEMENT OF
YEAR ENDED MAY 31, OPERATIONS) TO
--------------------------------------------- MAY 31,
1996 1995 1994 1993 1992
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $14.41 $12.68 $12.16 $10.98 $10.00
-------- -------- ------- -------- -------
Net Investment Income 0.20(b) 0.32(b) 0.28(b) 0.22 0.15
Net Realized and Unrealized Gain on Investments 3.88 1.77 0.52 1.25 0.94
-------- -------- ------- -------- -------
Total from Investment Operations 4.08 2.09 0.80 1.47 1.09
Less Distributions:
Dividends from Net Investment Income (0.22) (0.28) (0.23) (0.23) (0.11)
Distributions from Net Realized Gain on Investments Sold (0.29) (0.08) (0.05) (0.06) --
-------- -------- ------- -------- -------
Total Distributions (0.51) (0.36) (0.28) (0.29) (0.11)
-------- -------- ------- -------- -------
Net Asset Value, End of Period $17.98 $14.41 $12.68 $12.16 $10.98
======== ======== ======= ======== =======
Total Investment Return at Net Asset Value (f) 29.12% 16.98% 6.60% 13.58% 10.95%(e)
Total Adjusted Investment Return at Net Asset Value (a)(c) 28.47% 16.94% 6.15% 11.40% 9.23%(e)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $14,878 $101,418 $66,612 $12,488 $2,622
Ratio of Expenses to Average Net Assets 0.94% 0.70% 0.70% 0.76% 1.66%*
Ratio of Adjusted Expenses to Average Net Assets (a) 1.59% 0.74% 1.15% 2.94% 3.38%*
Ratio of Net Investment Income to Average Net Assets 1.55% 2.43% 2.20% 2.36% 1.77%*
Ratio of Adjusted Net Investment Income to Average
Net Assets (a) 0.90% 2.39% 1.75% 0.18% 0.05%*
Portfolio Turnover Rate 157% 71% 43% 53% 53%
** Fee Reduction Per Share $0.08 $0.005(b) $0.06(b) $0.20 $0.15
The Financial Highlights summarizes the impact of the following factors on a single share for the period indicated:
net investment income, gains (losses), dividends and total investment return of the Fund. It shows how the Fund's
net asset value for a share has changed since the end of the previous period. Additionally, important relationships
between some items presented in the financial statements are expressed in ratio form.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ---------------------------------------------------------------------------
FOR THE PERIOD
SEPTEMBER 7, 1995
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31, 1996
---------
<S> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $15.25
-------
Net Investment Loss 0.09(b)
Net Realized and Unrealized Gain on Investments 2.71(d)
-------
Total from Investment Operations 2.80
-------
Less Distributions:
Dividends from Net Investment Income (0.09)
-------
Total Distributions (0.09)
-------
Net Asset Value, End of Period $17.96
=======
Total Investment Return at Net Asset Value (f) 18.46%(e)
Total Adjusted Investment Return at Net Asset Value (a)(c) 17.59%(e)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $15,125
Ratio of Expenses to Average Net Assets 2.00%*
Ratio of Adjusted Expenses to Average Net Assets (a) 3.21%*
Ratio of Net Investment Income to Average Net Assets 0.78%*
Ratio of Adjusted Net Investment Income to Average Net Assets (a) (0.43%)*
Portfolio Turnover Rate 157%
** Fee Reduction Per Share $0.13
* On an annualized basis.
(a) On an unreimbursed basis without fee reduction.
(b) On average month end shares outstanding.
(c) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(d) May not accord to amounts shown elsewhere in the financial statements.
(e) Not annualized.
(f) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1996
- -----------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities
owned by the Independence Equity Fund on May 31, 1996. It's divided
into two main categories: common stocks and short-term investments.
Common stocks are further broken down by industry group. Short-term
investments, which represent the Fund's "cash" position,
are listed last.
INTEREST NUMBER OF MARKET
ISSUER, DESCRIPTION RATE SHARES VALUE
- -------------------------------- --------- --------- ---------
COMMON STOCK
<S> <C> <C> <C>
Aerospace (3.77%)
Boeing Co. 2,500 $213,125
Raytheon Co. 7,600 404,700
United Technologies Corp. 4,700 514,062
-----------
1,131,887
-----------
Automobile / Trucks (3.63%)
Chrysler Corp. 6,200 413,075
Ford Motor Co. 10,700 390,550
General Motors Corp. 5,200 286,650
-----------
1,090,275
-----------
Banks - United States (7.21%)
Banc One Corp. 9,500 351,500
BankAmerica Corp. 3,100 233,275
Chase Manhattan Corp. 3,000 210,000
First Bank System, Inc. 2,800 169,050
First Chicago NBD Corp. 5,400 235,575
First Union Corp. 800 48,900
Fleet Financial Group, Inc. 6,000 264,750
J.P. Morgan & Co., Inc. 6,000 521,250
NationsBank Corp. 1,600 129,800
-----------
2,164,100
-----------
Beverages (2.61%)
Coca-Cola Co. (The) 800 36,800
PepsiCo, Inc. 22,400 744,800
-----------
781,600
-----------
Chemicals (3.59%)
Hercules, Inc. 3,400 192,950
Monsanto Co. 3,800 577,125
Morton International, Inc. 8,100 307,800
-----------
1,077,875
-----------
Computers (2.36%)
Cisco Systems, Inc.* 3,000 164,250
Compaq Computer Corp.* 3,200 155,600
Digital Equipment Corp. * 900 $46,913
International Business Machines Corp. 300 32,025
Komag, Inc. * 1,700 58,863
Mentor Graphics Corp. * 4,700 84,013
Microsoft Corp.* 1,400 166,250
-----------
707,914
-----------
Cosmetics & Personal Care (0.49%)
Avon Products, Inc. 1,600 148,000
-----------
Diversified Operations (3.71%)
Allied-Signal, Inc. 3,300 180,675
Dial Corp. 2,800 80,500
Lockheed Martin Corp. 5,272 442,189
Minnesota Mining & Manufacturing Co. 2,400 163,800
Tenneco, Inc. 2,700 145,125
Textron, Inc. 1,200 101,700
-----------
1,113,989
-----------
Electronics (6.03%)
Analog Devices, Inc.* 1,900 52,488
Applied Materials, Inc.* 3,000 111,750
General Electric Co. 9,000 744,750
General Signal Corp. 1,500 57,375
Intel Corp. 3,700 279,350
Lam Research Corp.* 700 27,825
Maxim Intergrated Products, Inc. * 4,000 136,000
Millipore Corp. 5,800 254,475
Tektronix, Inc. 1,300 49,400
Teradyne, Inc. * 4,800 96,600
-----------
1,810,013
-----------
Finance (3.09%)
American Express Co. 4,300 196,725
Dean Witter Discover & Co. 4,500 266,625
Federal National Mortgage Association 5,100 157,463
Morgan Stanley Group, Inc 6,200 306,900
-----------
927,713
-----------
Food (2.04%)
CPC International, Inc. 1,300 89,863
General Mills, Inc. 1,600 91,800
Sara Lee Corp. 2,800 93,450
Unilever N.V. American Depository
Receipts (ADR) (Netherlands) 2,500 337,188
-----------
612,301
-----------
Insurance (4.42%)
Allstate Corp. 3,900 $164,775
Cigna Corp. 4,500 516,937
ITT Hartford Group, Inc. 3,900 201,825
Lincoln National Corp. 4,000 188,000
Marsh & McLennan Cos., Inc. 2,700 252,788
-----------
1,324,325
-----------
Leisure (1.22%)
Eastman Kodak Co. 4,900 364,438
-----------
Machinery (0.44%)
Dover Corp. 2,800 133,000
-----------
Media (1.49%)
McGraw-Hill Cos., Inc. 9,500 445,313
-----------
Medical (11.19%)
Abbott Laboratories 9,500 409,688
Baxter International, Inc. 6,000 265,500
Bristol-Myers Squibb Co. 10,400 887,900
Johnson & Johnson 4,000 389,500
Eli Lilly & Co. 5,900 379,075
Medtronic, Inc. 5,800 326,250
Merck & Co., Inc. 4,800 310,200
Schering-Plough Corp. 1,800 105,525
United Healthcare Corp 3,600 197,550
Vencor, Inc. * 2,700 85,388
-----------
3,356,576
-----------
Metal (0.76%)
Aluminum Co. Of America 3,700 228,013
-----------
Office (4.74%)
Pitney-Bowes, Inc. 7,400 367,225
Xerox Corp. 6,700 1,054,412
-----------
1,421,637
-----------
Oil & Gas (10.04%)
Amoco Corp. 2,200 159,500
Atlantic Richfield Co. 2,200 263,175
British Petroleum Co. PLC, (ADR)
(United Kingdom) 1,500 158,063
Exxon Corp. 2,400 203,400
Kerr-McGee Corp. 7,200 423,000
Mobil Corp. 1,500 169,313
PanEnergy Corp. 3,500 112,438
Phillips Petroleum Co. 18,000 747,000
Texaco, Inc. 5,700 477,375
Unocal Corp. 9,200 299,000
-----------
3,012,264
-----------
Paper & Paper Products (0.90%)
Kimberly-Clark Corp. 3,700 $269,638
-----------
Retail (6.94%)
Albertson's, Inc. 11,600 462,550
Darden Restaurants, Inc 4,600 54,625
Federated Department Stores, Inc. * 3,000 103,875
Home Depot, Inc. 6,600 337,425
Lowe's Cos., Inc. 4,200 143,850
Price/Costco, Inc.* 3,000 60,000
Safeway, Inc.* 3,400 114,750
Staples, Inc. * 3,150 63,000
Toys "R" Us, Inc.* 4,400 127,600
Wal-Mart Stores, Inc. 23,700 613,237
-----------
2,080,912
-----------
Rubber - Tires & Misc (0.62%)
Goodyear Tire & Rubber Co. (The) 3,700 186,850
-----------
Soap & Cleaning Preparations (0.47%)
Colgate-Palmolive Co. 1,800 141,750
-----------
Steel (0.25%)
British Steel PLC (ADR)
(United Kingdom) 2,800 75,250
-----------
Telecommunications (4.85%)
A T & T Corp. 18,500 1,153,937
MCI Communications Corp. 5,200 151,450
Sprint Corp. 3,500 148,313
-----------
1,453,700
-----------
Tobacco (2.63%)
Philip Morris Cos., Inc. 5,100 506,813
UST, Inc. 8,500 280,500
-----------
787,313
-----------
Transport (1.94%)
Conrail, Inc. 1,100 77,275
CSX Corp. 8,500 420,750
Dana Corp. 800 26,800
Delta Air Lines, Inc. 700 58,013
-----------
582,838
-----------
Utilities (4.33%)
Bell Atlantic Corp. 600 37,425
Entergy Corp. 14,000 367,500
GTE Corp. 8,400 359,100
Texas Utilities Co. 13,100 535,463
-----------
1,299,488
-----------
TOTAL COMMON STOCK
(Cost $26,841,037) (95.76%) 28,728,972
-----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (7.04%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion, Inc. --
Dated 05-31-96, Due
06-03-96 (secured by U.S.
Treasury Notes, 5.375% --
8.750%, Due 10-15-97 thru
5-31-98) Note A 5.33% $2,112 $2,112,000
------- -----------
Corporate Savings Account (0.10%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 31,083
-----------
TOTAL SHORT-TERM INVESTMENTS (7.14%) $2,143,083
------- -----------
TOTAL INVESTMENTS (102.90%) $30,872,055
======= ===========
* Non-income producing security.
The percentage shown for each investment category is the total
value of that category as a percentage of the net assets of the Fund.
</TABLE>
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust"), is an open-end management
investment company, registered under the Investment Company Act of 1940.
The Trust consists of three series portfolios: John Hancock Independence
Equity Fund (the "Fund"), John Hancock Utilities Fund and John Hancock
Strategic Income Fund. Prior to June 3, 1996, the Fund was known as John
Hancock Independence Diversified Core Equity Fund. The investment
objective of the Fund is to seek above-average total return, consisting
of capital appreciation and income.
The Trustees, at a meeting held May 1, 1995, approved actions which
became effective September 1, 1995, which changed the marketing focus of
the Fund. The Trustees determined that the Fund's minimum initial
investment should be reduced to $1,000 and that shares of the Fund be
marketed to retail investors. The Trustees also approved the activation
of the Fund's existing Rule 12b-1 distribution plan for Class A shares
and established a second class (Class B) of shares of the Fund and
adopted a Rule 12b-1 distribution plan for this class of shares.
During the year, the size of the Fund has greatly fluctuated, due to the
movement of institutional investors from the Fund to a similar fund that
is part of a recently established institutional family of funds managed
by John Hancock Advisers, Inc. ("the Adviser"), a wholly-owned subsidiary of
The Berkeley Financial Group.
The Trustees have authorized the issuance of two 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. Shareholders of a
class which bears distribution/ service expenses under the terms of a
distribution plan, have exclusive voting rights regarding such
distribution plan. On September 7, 1995, Class B shares of beneficial
interest were sold to commence investment activity. Significant 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
the Adviser, may participate in joint repurchase agreement
transactions. 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. It will not be subject to Federal income
tax on taxable earnings which are distributed to shareholders.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date. 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.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are determined at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees, if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
may differ from these estimates.
DEFERRED ORGANIZATION EXPENSES Expenses incurred in connection with the
organization of the Fund have been capitalized and are being charged to
the Fund's operations ratably over a five-year period that commenced
with the investment operations of the Fund.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.
London time, on the date of any determination of the net asset value of
the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates
prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain
or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference
between the amounts of dividends, interest, and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains
and losses arise from changes in the value of assets and liabilities
other than investments in securities resulting from changes in the
exchange rate.
NOTE B --
MANAGEMENT FEE, AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Effective September 1, 1995, the Fund pays a monthly management fee to
the Adviser, for a continuous investment program equivalent, on an
annual basis, to the sum of (a) 0.75% of the first $750,000,000 of the
Fund's average daily net asset value and (b) 0.70% of the Fund's average
daily net asset value in excess of $750,000,000. Prior to September 1,
1995, the investment management fee was 0.50% of the Fund's average
daily net asset value.
The Fund and the Adviser have a sub-investment management contract with
Independence Investment Associates, Inc. (the "Sub-Adviser"), a wholly-
owned subsidiary of John Hancock Asset Management, under which the Sub-
Adviser provides the Fund with investment research and portfolio
management services. The Adviser pays the Sub-Adviser a quarterly fee at
an annual rate of 55% of the investment management fee paid by the Fund
to the Adviser for the preceding three months. The Fund is not
responsible for payment of the Sub-Adviser's fee. Prior to September 1,
1995, the Sub-Adviser provided services pursuant to a contract that
provided for different compensation. Effective July 1, 1995, the sub-
adviser has waived its fee until further notice.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent
of such excess and the Adviser will make additional arrangements
necessary to eliminate any remaining excess expenses. The current limits
are 2.5% of the first $30,000,000 of the Fund's average daily net asset
value, 2.0% of the next $70,000,000, and 1.5% of the remaining Fund's
average daily net asset value.
In addition, as of September 1, 1995, the Adviser has undertaken to
limit the Fund's expenses, to 1.30% and 2.00% attributable to Class A
and Class B shares, respectively, of the Fund's average daily net
assets. The Adviser reserves the right to terminate this fee reduction
in the future. Prior to September 1, 1995, and the creation of Class B
shares, the Adviser had undertaken to limit the Fund's expenses further
to the extent required to prevent expenses from exceeding 0.70% of the
Fund's average daily net asset value. Accordingly, for the period ended
May 31, 1996, the reduction in the Adviser's fee collectively with any
additional amounts not borne by the Fund by virtue of the expense limit
amounted to $128,138.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. As of September 1,
1995, a maximum sales charge of 5.00% was added to sales of Class A
shares. Prior to September 1, 1995, all sales of shares of beneficial
interest were sold at net asset value. For the period September 1, 1995
through May 31, 1996, JH Funds received net sales charges of $177,489
with regard to sales of Class A shares. Out of this amount, $24,154 was
retained and used for printing of prospectuses, advertising, sales
literature and other purposes, $44,283 was paid as sales commissions and
service fees to unrelated broker-dealers and $109,052 was paid as sales
commissions and service fees to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated
("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of which are
broker-dealers. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company, is the indirect sole shareholder of Distributors and
John Hancock Freedom Securities Corporation and its subsidiaries, which
include, Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period September 1, 1995 through May 31, 1996,
contingent deferred sales charges received by JH Funds amounted to
$9,357.
In addition, as of September 1, 1995, to compensate JH Funds for the
services it provides as distributor of shares of the Fund, the Fund has
activated an existing Rule 12b-1 Distribution Plan with respect to Class
A shares and adopted a Distribution Plan with respect to Class B shares
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 the Fund's
average daily net assets attributable to Class A shares and 1.00% of
the Fund's average daily net assets attributable to Class B shares, to
compensate JH Funds for its distribution/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. There were no payments under any Distribution Plan prior
to August 31, 1995.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly owned subsidiary of
The Berkeley Financial Group. The Fund pays transfer agent fees based on
the number of shareholder accounts and certain out-of-pocket expenses.
On March 26, 1996, the Board of Directors approved retroactively to
January 1, 1996, an agreement with the Adviser to reimburse the Adviser for
compensation and related expenses incurred in connection with tax and
financial management services for the Fund.
Messrs. Edward J. Boudreau and Richard S. Scipione and Ms. Anne C.
Hodsdon are directors and officers of the Adviser and its affiliates, as
well as Trustees of the Fund. The compensation of unaffiliated Trustees
is borne by the Fund. Effective with the fees paid for 1995, the
unaffiliated Trustees may elect to defer for tax purposes their receipt
of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock
funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. At
May 31, 1996, the Fund's investment to cover the deferred compensation
had unrealized appreciation of $348.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities during the period ended
May 31, 1996 aggregated $28,758,531 and $104,061,600 respectively.
The cost of investments owned at May 31, 1996 (excluding the corporate
saving account) for Federal income tax purposes was $28,956,948. Gross
unrealized appreciation and depreciation of investments aggregated
$2,132,149 and $248,125, respectively, resulting in net unrealized
appreciation of $1,884,024.
NOTE D--
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the period ended May 31, 1996, the Fund has reclassified amounts
to reflect an increase in capital paid-in of $13,431,535, a decrease in
accumulated realized gain on investments sold of $13,273,016 and a
decrease in undistributed net investment income of $158,519. This
represents the cumulative amount necessary to report these balances on a
tax basis, excluding certain temporary differences, as of May 31, 1996.
Additional adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of
the Fund, are attributable to the Fund's use of the tax accounting
practice known as equalization.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Independence Equity Fund and the
Trustees of John Hancock Strategic Series, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of John
Hancock Independence Equity Fund, formerly the John Hancock Independence
Diversified Core Equity Fund (the "Fund") (a portfolio of John Hancock
Strategic Series, Inc.) at May 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at May 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
July 15, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished
with respect to the distributions of the Fund for its fiscal year ended
May 31, 1996.
The Fund distributed to shareholders of record December 22, 1995 and
payable December 28, 1995 a long-term capital gain dividend of $772,692.
This amount was reported on the 1995 U.S. Treasury Department Form 1099-
DIV. In addition, the Fund hereby designates $5,149,651 of the proceeds
on redemptions paid during the fiscal year as long-term captial gain
dividends. With respect to the Fund's ordinary taxable income for the
fiscal year ended May 31, 1996, 4.27% qualified for the corporate
dividends received deduction available to corporations.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-DIV
in January of 1997. This will reflect the total of all distributions
which are taxable for the calendar year 1996.
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page.
A box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."
John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 582
This report is for the information of shareholders of the John Hancock
Independence Equity 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."
Printed on Recycled Paper 2500A 5/96
7/96
