John Hancock Funds
Strategic
Income
Fund
SEMI-ANNUAL REPORT
November 30, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John Moore*
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Signature Services, Inc.
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
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:
Since late 1994, prospectus simplification has been a major topic in
the mutual fund industry. At that time, Securities and Exchange
Commission Chairman Arthur Levitt called on fund companies to
make their prospectuses more user-friendly. He noted that prospectuses
are often overloaded with technical detail and are hard for most
investors to understand. Many industry observers agreed, and rightly so.
So it is my pleasure to let you know that after being under development
for a year, John Hancock Funds has introduced new simplified and
consolidated prospectuses. The prospectuses feature shorter, clearer
language with a streamlined design, and they incorporate several funds
with similar investment objectives into one document. They cover our
income, growth, growth and income, tax-free income, international/global
and money market funds. We are gratified at the favorable reviews that
our new prospectuses have received from shareholders, financial
advisers, industry analysts and the press. We believe they are a bold
but sensible step forward. And while they are easier to read, they still
comply with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-page
spread highlighting each fund's goals and investment strategy, the types
of securities it buys, its portfolio management and risk factors, all in
plainer language. Fund expenses and financial highlights are now found
here, too, as is a new bar chart that shows year-to-year volatility for
each fund. Other features include a better presentation of fund
services, a new glossary of investment risks and a discussion about how
funds are organized, including a diagram showing the connection of the
various players that provide services to your Hancock fund(s).
We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in the
end, we did it for you, our shareholders.
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
U.S. and foreign high-yield corporate bonds perform well;
Outlook calls for more selectivity
U.S. interest rates moved lower during the past six months, providing a
healthy backdrop for most types of domestic bonds. U.S. Treasury and
government agency bond prices rose on indications that the economy
wasn't in any danger of overheating and that inflation appeared to be
manageable. As a result, bond yields -- which move in the opposite
direction of bond prices -- fell during the period: the yield on the
benchmark 10-year U.S. Treasury bond dropped to 6.05% on November 30,
1996, from 6.85% on May 31, 1996. Meanwhile, demand for high-yield U.S.
corporate bonds was quite strong, allowing these bonds to become the
best performers among U.S. fixed-income investments. In many other areas
of the world -- specifically Europe and many emerging countries --
falling interest rates boosted bonds issued by corporations and
governments alike.
Performance and strategy review
For the six-month period ended November 30, 1996, John Hancock Strategic
Income Fund's Class A and Class B shares posted total returns of 8.90%
and 8.50%, respectively, at net asset value. That performance slightly
lagged the average multi-sector income fund, which returned 9.16% for
the same six-month period, according to Lipper Analytical Services,
Inc.1 Please see pages six and seven for longer-term performance
information. Our hedging strategy accounted for the Fund's lag.
Generally speaking, we believe that the Fund's European holdings should
be hedged most of the time. We hedge our currency risk in an effort to
smooth out the volatility of the Fund's share price, rather than to add
value through currency gains. However, during this period our decision
to hedge our European holdings with the German mark cost us when the
mark appreciated relative to other European currencies.
"U.S. interest
rates moved
lower during
the past six
months..."
A 2 1/4" x 3 1/2" photo of portfolio management team at bottom right.
Caption reads: Fred Cavanaugh (seated) and Strategic Income Fund
management team members (l-r): Tom Huggins, Arthur Calavritinos, Linda
Carter."
Chart with heading "Top Five Bond Sectors" at top left hand column. The
chart lists five sectors: 1) Foreign Governments-26%, 2) U.S. Treasury &
Government Agencies-11%, 3) Broadcasting/Cable TV-10%, 4)
Telecommunications-9%, 5) Leisure & Recreation-7%. Footnote below states
"As a percentage of net assets on November 30, 1996."
"Among the
Fund's top
performers...
were radio
broadcasting
companies..."
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. That said, what follows
is a discussion of how each category performed during the most recent
six-month period and the strategic changes we made within those
categories.
Table entitled "Scorecard" at bottom 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 "Videotron " followed by an up arrow and the phrase "Acquired by Bell
Cable Media". The second listing is "Emerging market bonds" followed by
an up arrow and the phrase "Falling interest rates in many emerging
countries". The third listing is "Showboat, Inc." followed by a down
arrow and the phrase "Weakness in Atlantic City". Footnote below reads:
"See '"Schedule of Investments." Investment holdings are subject to
change."
High yield bonds post strong gains
Our stake in high-yield U.S. corporate bonds was 41% of investments as
of November 30, 1996, roughly the same level as when the period began.
Among the Fund's top performers in this area were radio broadcasting
companies such SFX Broadcasting and Chancellor Broadcasting, which rose
as the industry experienced a rash of mergers and acquisitions. Many of
our energy holdings -- including Vintage Petroleum and Falcon Drilling -
- - also performed well as the price of oil rose. Unfortunately, the
rising tide that buoyed the overall high-yield market did not lift all
boats, and the period did hold a disappointment or two. One was Showboat
Inc., which suffered from weak gambling trends in Atlantic City.
However, our other casino holdings -- such as Station Casinos and
Mohegan Tribal Gaming Authority -- performed well during the period.
Shift in foreign government bonds; status quo in U.S. governments
Throughout the past six months we continued to maintain a fairly steady
weighting in foreign bonds at about 38%. Among the Fund's best
performers during the period were our U.K. cable companies. The
acquisition of Videotron by Bell Cablemedia caused the bond prices of
both companies to rise. In addition, the trend toward consolidation
boosted the prices of many of our other U.K. cable companies, including
Telewest and Comcast U.K., as investors began to anticipate further
merger and acquisition activity down the road.
Among our foreign government holdings, we've made some recent
adjustments, specifically by reducing our holdings in some European
bonds. While these -- namely Sweden, Spain and Ireland -- previously had
been strong performers for the Fund, we began to worry about how they
would fare during the process of converting to a single European
currency by 1999. On the other hand, we increased our holdings in the
United Kingdom, which won't be a part of the single European currency,
and in dollar bloc countries including Australia, Canada and New
Zealand. Also, we increased our stake in emerging market holdings --
some of our best foreign performers during the period -- to roughly 11%
at the end of November. In particular we added to our holdings in
Mexico, Argentina, Brazil and Poland.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote "For the six months ended November 30,
1996." The chart is scaled in increments of 2% from top to bottom with
10% at the top and 0% at the bottom. Within the chart, there are three
solid bars. The first represents the 8.90% total return for John
Hancock Strategic Income Fund: Class A. The second represents the 8.50%
total return for John Hancock Strategic Income Fund: Class B. The third
represents the 9.16% total return for the 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 multi-sector income fund is tracked by Lipper Analytical
Services. (1) See the following two pages for historical performance
information.
We maintained a relatively light weighting in U.S. Treasury and agency
holdings over the past six months, primarily because their yields
weren't that attractive relative to other opportunities in the market.
Outlook and strategy
From an interest-rate perspective, we think that 1997 will bring more of
the same. In our view, global economic growth will remain sluggish and,
as a result, inflation won't be much of a problem. Our forecast calls
for interest rates to remain in roughly the same range that they did in
1996. We'll be watching cash flow trends in the U.S. high-yield market
because we believe that's been one of the primary factors contributing
to its impressive rise over the past year. At the end of the period, the
amount of cash flowing into the high-yield market showed no signs of
waning. But from a fundamental standpoint, a sluggish economy and low
inflation aren't ideal conditions for high-yield bonds. If the
technicals of the high-yield market change, meaning that investors
reverse course and stop putting cash into it, we'll likely look for
high-yielding opportunities elsewhere.
As far as foreign investments go, we believe that selectivity will be
key. As Europe moves closer to a single currency and union, there will
be clear winners and losers. And while there is tremendous opportunity
in emerging markets, we're concerned about their volatility. So we'll
continue to take a cautious approach with regard to emerging-market
investments.
"From an
interest-rate
perspective,
we think
1997 will
bring more
of the
same."
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.
International investing involves special risks such as political and
currency risks and differences in accounting standards and financial
reporting.
1 Figures 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 September 30, 1996
One Five Most Recent
Year Years Ten Years
------- ------- ----------
John Hancock Strategic Income
Fund: Class A 7.15% 49.15% 108.00%
John Hancock Strategic Income
Fund: Class B 6.36% 22.35%(1) N/A
AVERAGE ANNUAL TOTAL RETURNS
For the period ended September 30, 1996
One Five Most Recent
Year Years Ten Years
------- ------- ----------
John Hancock Strategic Income
Fund: Class A 7.15% 8.32% 7.60%
John Hancock Strategic Income
Fund: Class B 6.36% 6.97%(1) N/A
YIELDS
As of November 30, 1996
SEC 30-Day
Yield
-----------
John Hancock Strategic Income Fund: Class A 7.63%
John Hancock Strategic Income Fund: Class B 7.29%
Notes to Performance
(1) 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 November 30, 1996. They
assume that you either had invested on the day each class of shares started,
or that you have been invested for the most recent 10 years. In either case,
they also assume that you 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 Corporate Bond Index and is equal to
$22,691 as of November 30, 1996. The second line represents the value
of the hypothetical $10,000 investment made in the Strategic Income Fund
on November 30, 1986, before sales charge, and is equal to $22,455 as of
November 30, 1996. The third line represents the Strategic Income Fund,
after sales charge, and is equal to $21,454 as of November 30, 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 Strategic Income Fund, before sales charge, and is equal to
$12,999 as of November 30, 1996. The second line represents the value
of the hypothetical $10,000 investment made in the Strategic Income
Fund, after sales charge, on October 4, 1993, and is equal to $12,799 as
of November 30, 1996. The third line represents the value of the
Lehman Government Corporate Bond Index, and is equal to $11,938 as of
November 30, 1996.
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
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<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 November 30, 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
November 30, 1996 (Unaudited)
- -----------------------------------------------------------------------------
<C> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $572,048,979) $ 593,899,888
Common and preferred stocks and
warrants (cost - $28,095,337) 33,570,403
Joint repurchase agreement (cost - $36,284,000) 36,284,000
Corporate savings account 91,120
-------------
663,845,411
Receivable for shares sold 1,490,205
Receivable for investments sold 2,799,022
Receivable for forward foreign currency
exchange contracts sold - Note A 1,549,603
Interest receivable 12,167,240
Dividends receivable 179,545
Foreign tax receivable 270,297
Other assets 17,342
-------------
Total Assets 682,318,665
- -----------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased 147,186
Payable for investments purchased 4,729,100
Payable for forward foreign currency exchange
contracts bought - Note A 349,905
Dividend payable 279,866
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 358,220
Accounts payable and accrued expenses 284,019
-------------
Total Liabilities 6,148,296
- -----------------------------------------------------------------------------
Net Assets:
Capital paid-in 676,822,325
Accumulated net realized loss on investments,
foreign currency transactions, and
financial futures contracts ( 31,022,754)
Net unrealized appreciation of investments
and foreign currency transactions 28,622,797
Undistributed net investment income 1,748,001
-------------
Net Assets $ 676,170,369
=============================================================================
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 - $400,737,918 / 52,840,487 $ 7.58
=============================================================================
Class B - $275,432,451 / 36,322,950 $ 7.58
=============================================================================
Maximum Offering Price Per Share*
Class A - ($7.58 x 104.71%) $ 7.94
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
See notes to financial statements.
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The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended November 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (net of foreign withholding
taxes of $11,348) $29,321,640
Dividends 613,342
-----------
29,934,982
-----------
Expenses:
Investment management fee - Note B 1,338,070
Distribution/service fee - Note B
Class A 568,722
Class B 1,180,983
Transfer agent fee - Note B 464,057
Custodian fee 161,539
Financial services fee - Note B 66,794
Registration and filing fees 45,458
Printing 30,971
Trustees' fees 25,261
Auditing fee 21,675
Legal fees 15,720
Miscellaneous 6,919
-----------
Total Expenses 3,926,169
- ------------------------------------------------------------------------------
Net Investment Income 26,008,813
- ------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Foreign Currency Transactions and Financial Futures Contracts
Net realized gain on investments sold 7,723,122
Net realized loss on financial futures contracts ( 631,925)
Net realized loss on foreign currency transactions ( 917,836)
Change in net unrealized appreciation/depreciation
of investments 20,723,668
Change in net unrealized appreciation/depreciation
of foreign currency transactions 53,278
-----------
Net Realized and Unrealized
Gain on Investments,
Foreign Currency Transactions
and Financial Futures
Contracts 26,950,307
- ------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $52,959,120
==============================================================================
See notes to financial statements.
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<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1996
MAY 31, 1996 (UNAUDITED)
------------- -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 45,468,202 $ 26,008,813
Net realized gain on investments sold, foreign currency transactions
and financial futures contracts 8,472,925 6,173,361
Change in net unrealized appreciation/depreciation of investments, foreign currency
transactions and financial futures contracts (567,646) 20,776,946
------------ ------------
Net Increase in Net Assets Resulting from Operations 53,373,481 52,959,120
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6643 and $0.3165 per share, respectively) ( 31,814,278) ( 16,540,898)
Class B - ($0.6138 and $0.2910 per share, respectively) ( 13,654,321) ( 9,467,915)
------------ ------------
Total Distributions to Shareholders ( 45,468,599) ( 26,008,813)
------------ ------------
From Fund Share Transactions - Net* 105,570,421 73,342,073
------------ ------------
Net Assets:
Beginning of period 462,402,686 575,877,989
------------ ------------
End of period (including distributions
in excess of net investment income of
$1,748,001 for both periods presented) $575,877,989 $676,170,369
============ ============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1996
MAY 31, 1996 (UNAUDITED)
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------ ------------
CLASS A
Shares sold 13,814,860 $100,644,593 11,901,158 $ 87,783,610
Shares issued to shareholders in reinvestment
of distributions 2,783,247 20,217,302 1,343,647 9,883,659
---------- ------------ ---------- ------------
16,598,107 120,861,895 13,244,805 97,667,269
Less shares repurchased (11,730,367) ( 85,419,278) (11,151,689) ( 82,334,488)
---------- ------------ ---------- ------------
Net increase 4,867,740 $ 35,442,617 2,093,116 $ 15,332,781
========== ============ ========== ============
CLASS B
Shares sold 15,428,983 $112,410,866 13,919,992 $102,478,456
Shares issued to shareholders in reinvestment
of distributions 904,705 6,576,391 587,747 4,326,561
---------- ------------ ---------- ------------
16,333,688 118,987,257 14,507,739 106,805,017
Less shares repurchased ( 6,733,353) ( 48,859,453) ( 6,611,123) ( 48,795,725)
---------- ------------ ---------- ------------
Net increase 9,600,335 $ 70,127,804 7,896,616 $ 58,009,292
========== ============ ========== ============
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous
period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses, distributions
paid to shareholders, and any increase or decrease in money shareholders invested in the Fund. The footnote illustrates the
number of Fund shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value.
See notes to financial statements.
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Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the period indicated, investment returns, key ratios
and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, SIX MONTHS ENDED
---------------------------------------------------------- NOVEMBER 30, 1996
1992 1993 1994 1995 1996 (UNAUDITED)
------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 7.20 $ 7.78 $ 7.55 $ 7.17 $ 7.15 $ 7.27
------- ------- ------- ------- ------- -------
Net Investment Income 0.80 0.71 0.68 0.64 0.66(2) 0.32(2)
Net Realized and Unrealized Gain (Loss)
on Investments, Foreign Currency
Transactions and Financial Futures
Contracts 0.52 ( 0.22) ( 0.33) ( 0.02) 0.12 0.31
------- ------- ------- ------- ------- -------
Total from Investment Operations 1.32 0.49 0.35 0.62 0.78 0.63
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ( 0.74)(3) ( 0.72) ( 0.58)(3) ( 0.55) ( 0.66) ( 0.32)
Distributions in Excess of Net Investment
Income -- -- ( 0.05) -- -- --
Distributions from Capital Paid-In -- -- ( 0.10) ( 0.09) -- --
------- ------- ------- ------- ------- -------
Total Distributions ( 0.74) ( 0.72) ( 0.73) ( 0.64) ( 0.66) ( 0.32)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 7.78 $ 7.55 $ 7.17 $ 7.15 $ 7.27 $ 7.58
======= ======= ======= ======= ======= =======
Total Investment Return
at Net Asset Value (4) 19.92% 6.81% 4.54% 9.33% 11.37% 8.90%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $153,568 $262,137 $335,261 $327,876 $369,127 $400,738
Ratio of Expenses to Average Net Assets 1.69% 1.58% 1.32% 1.09% 1.03% 1.01%(6)
Ratio of Net Investment Income
to Average Net Assets 10.64% 9.63% 8.71% 9.24% 9.13% 8.73%(6)
Portfolio Turnover Rate 80% 97% 91% 55% 78% 77%
The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated:
net investment income, gains (losses), dividends and total investment 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.
See notes to financial statements.
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<CAPTION>
Financial Highlights (continued)
- ------------------------------------------------------------------------------------------------------------------------
PERIOD YEAR ENDED MAY 31, SIX MONTHS ENDED
ENDED ----------------------- NOVEMBER 30, 1996
MAY 31, 1994(1) 1995 1996 (UNAUDITED)
--------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 7.58 $ 7.17 $ 7.15 $ 7.27
------- ------- ------- -------
Net Investment Income 0.40 0.60(2) 0.61(2) 0.29(2)
Net Realized and Unrealized Gain (Loss)
on Investments, Foreign Currency Transactions
and Financial Futures Contracts ( 0.41) ( 0.02) 0.12 0.31
------- ------- ------- -------
Total from Investment Operations ( 0.01) 0.58 0.73 0.60
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ( 0.32) ( 0.52) ( 0.61) ( 0.29)
Distributions in Excess of Net Investment Income ( 0.03) -- -- --
Distributions from Capital Paid-in ( 0.05) ( 0.08) -- --
------- ------- ------- -------
Total Distributions ( 0.40) ( 0.60) ( 0.61) ( 0.29)
------- ------- ------- -------
Net Asset Value, End of Period $ 7.17 $ 7.15 $ 7.27 $ 7.58
======= ======= ======= =======
Total Investment Return at Net Asset Value (4) ( 0.22%)(5) 8.58% 10.61% 8.50%(5)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $77,691 $134,527 $206,751 $275,432
Ratio of Expenses to Average Net Assets 1.91%(6) 1.76% 1.73% 1.71%(6)
Ratio of Net Investment Income to Average Net Assets 8.12%(6) 8.55% 8.42% 8.02%(6)
Portfolio Turnover Rate 91% 55% 78% 77%
(1) Class B shares commenced operations on October 4, 1993.
(2) Based on the average of the shares outstanding at the end of each month.
(3) The dividend policy of the Fund was changed, effective August 1, 1991, from one that utilized daily dividend
declarations to one that 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.
(4) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(5) Not annualized.
(6) Annualized.
See notes to financial statements.
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<CAPTION>
Schedule of Investments
November 30, 1996 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Strategic Income Fund on November 30, 1996. It's divided
into three main categories: 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.
PAR VALUE
INTEREST S&P (000'S MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ---------
<S> <C> <C> <C> <C>
BONDS
Advertising (0.83%)
Outdoor Systems, Inc., Sr Sub Note 10-15-06 9.375% B $ 2,500 $ 2,518,750
Universal Outdoor Inc., Sr Sub Note 10-15-06 9.750 B 3,000 3,067,500
------------
5,586,250
------------
Aerospace (0.25%)
Jet Equipment Trust, Equipment Trust Ser 95B2 08-15-14 (R) 10.910 BB+ 1,500 1,723,050
------------
Automobile / Trucks (1.39%)
Am General Corp., Sr Note Ser B 05-01-02 12.875 B- 3,000 2,820,000
Fruehauf Trailer Corp., Sr Note Ser B 04-30-02 (A) 14.750 D 2,518 2,077,350
Ryder TRS Inc., Sr Sub Note 12-01-06 (R) 10.000 B+ 1,350 1,373,625
Speedy Muffler King, Inc., (Canada), Company Guaranty 10-01-06 (Y) 10.875 B+ 3,000 3,150,000
------------
9,420,975
------------
Banks (1.61%)
First Nationwide Holdings, Inc., Sr Note 04-15-03 12.500 B 3,000 3,285,000
Landeskreditbank Baden - Wurttemberg, (Germany)
Sub Note 02-01-23 (Y) 7.625 AAA 7,000 7,613,200
------------
10,898,200
------------
Broadcasting (2.34%)
Australis Media Ltd., (Australia),
Unit (Sr Sub Discount Note, Step Coupon (14.00% 05/15/00),
05-15-03 & Warrant) (Y) Zero B 3,000 1,740,000
CBS, Inc., Deb 06-01-22 8.875 BB 4,000 4,032,360
Chancellor Broadcasting Co.,
Sr Sub Note 10-01-04 9.375 B- 1,000 997,500
Sr Sub Note 10-01-04 12.500 B- 1,125 1,269,844
Scandinavian Broadcasting System, (Luxembourg),
Conv Sub Deb 08-01-05 (Y) 7.250 B 1,390 1,358,725
SFX Broadcasting, Inc., Sr Sub Note 05-15-06 10.750 B- 2,000 2,100,000
Sullivan Broadcasting, Sr Sub Note 12-15-05 10.250 B- 3,000 3,015,000
Young Broadcasting, Inc., Sr Sub Note 01-15-06 9.000 B 1,400 1,316,000
------------
15,829,429
------------
Building Products (0.69%)
Amtrol Acquistion Inc., Sr Sub Note 12-31-06 (R) 10.625 B- 1,875 1,907,812
Peters (JM) Co., Sr Note 05-01-02 12.750 B- 2,900 2,755,000
------------
4,662,812
------------
Business Services - Misc (0.49%)
Pierce Leahy Corp., Sr Sub Note 07-15-06 11.125 B- 3,000 3,300,000
------------
Cable TV (7.29%)
American Telecasting, Inc.,
Sr Disc Note Ser B, Step Coupon (14.50%, 08/15/00), 08-15-05 Zero CCC+ 6,000 3,300,000
Bell Cablemedia PLC, (United Kingdom),
Sr Discount Note, Step Coupon (11.95%,
07-15-99), 07-15-04 (Y) Zero BB- 4,000 3,420,000
Cablevision Systems Corp., Sr Sub Deb 04-01-23 9.875 B 4,000 3,800,000
CF Cable TV, Inc., (Canada), Sr Note 02-15-05 (Y) 11.625 BB+ 2,000 2,320,000
Comcast Corp., Sr Sub Deb 01-15-08 9.500 BB- 2,000 2,060,000
Comcast UK Cable, (Bermuda),
Deb, Step Coupon (11.20%, 11-15-00) 11-15-07, (Y) Zero B 4,000 2,730,000
Diamond Cable Communications PLC, (United Kingdom),
Sr Discount Note, Step Coupon (13.25%, 09-30-99),
09-30-04 (Y) Zero B- 3,000 2,430,000
Falcon Holdings Group, L.P., Payment-In-Kind Sr Sub Note 09-15-03 11.000 B 4,137 3,682,028
Galaxy Telecom L.P., Sr Sub Note 10-01-05 12.375 B- 5,000 5,212,500
Intermedia Capital Partners, Sr Note 08-01-06 (R) 11.250 B 4,000 4,075,000
Le Groupe Videotron Ltee, (Canada), Sr Note 02-15-05 (Y) 10.625 BB+ 1,250 1,375,000
Marcus Cable Co., L.P.,
Sr Discount Note, Step Coupon (14.25%, 6-15-00), 12-15-05 Zero B 2,000 1,370,000
Net Sat Servicos Ltd., (Brazil), Sr Note 08-05-04 (R), (Y) 12.750 B 4,000 4,190,000
Rogers Cablesystems, (Canada), Sr Note Ser B 03-15-05 (Y) 10.000 BB+ 3,000 3,202,500
TeleWest Communication PLC, (United Kingdom), Sr Discount Deb,
Step Coupon (11.00%, 10-01-00), 10-01-07 (Y) Zero BB 4,000 2,710,000
Videotron Holdings PLC, (United Kingdom),
Sr Discount Note, Step Coupon (11.125%, 07-01-99),
07-01-04 (Y) Zero B+ 4,000 3,440,000
------------
49,317,028
------------
Chemicals (0.30%)
ISP Holdings Inc., Sr Note 10-15-03 (R) 9.000 B+ 2,000 2,030,000
------------
Computers (1.39%)
Computervision Corp., Sr Sub Note 08-15-99 11.375 B- 4,000 4,180,000
Unisys Corp., Sr Note 10-15-04 11.750 B+ 5,000 5,225,000
------------
9,405,000
------------
Containers (0.33%)
Berry Plastics Corp., Sr Sub Note 04-15-04 12.250 B- 2,000 2,200,000
------------
Cosmetics & Toiletries (0.97%)
Renaissance Cosmetics, Sr Note Ser B 08-15-01 13.750 B 2,000 2,330,000
Coty Inc., Sr Sub Note 05-01-05 10.250 B+ 4,000 4,240,000
------------
6,570,000
------------
Finance (0.28%)
Intertek Finance PLC, (United Kingdom),
Sr Sub Note 11-01-06 (R), (Y) 10.250 B2 1,850 1,905,500
------------
Government - Foreign (25.56%)
Commonwealth of Australia, (Australia),
Government Bond 01-15-98# 12.500 AAA 6,000 5,200,359
Government Bond 08-15-03# 9.500 AAA 20,000 18,414,805
Government Bond 11-15-06# 6.750 AAA 8,000 6,307,917
Federative Republic of Brazil, (Brazil),
Government Bond (Floating Rate Note) 04-15-24 (Y) 5.000 B+ 10,000 6,262,500
Government Bond (Floating Rate Note) 09-15-07 (R), (Y) 6.688 B+ 4,000 3,415,000
Government of Canada, (Canada),
Government Bond 06-01-23# 8.000 AAA 7,000 6,022,483
Treasury Bond 06-01-25# 9.000 AAA 20,000 19,041,330
Kingdom of Denmark, (Denmark),
Government Bond-Bullet 11-15-98# 9.000 AAA 30,000 5,539,127
Government Bond-Bullet 11-15-07# 7.000 AAA 70,000 12,080,971
Government Bond-Bullet 11-10-24# 7.000 AAA 65,000 10,428,026
Kingdom of Spain, (Spain),
Government Bond 02-28-01# 10.100 AAA 760,000 6,701,189
Government of New Zealand, (New Zealand )
Treasury Bills 01-08-97# Zero AAA 18,000 12,679,366
Kingdom of Norway, (Norway)
Government Bond 01-31-99# 9.000 AAA 55,000 9,326,392
Republic of Argentina, (Argentina),
Sr Unsub Note 10-09-06 (Y) 11.000 B1 2,000 1,947,500
Deb 03-31-23 (Y) 5.250 BB- 5,000 3,218,750
Republic of Ireland Treasury Gilts, (Ireland),
Government Bond 10-18-00# 8.000 AAA 6,000 11,119,365
Republic of Poland, (Poland), Government Bond,
Step Coupon (3.5%, 10-01-99),
10-27-24 (Y) 3.000 BBB- 13,000 7,215,000
Republic of South Africa, (South Africa),
Notes 10-17-06 (Y) 8.375 BB+ 2,500 2,531,250
United Kingdom of Great Britain Treasury Gilts,
(United Kingdom),
Government Bond 08-27-02# 9.750 AAA 4,000 7,492,122
Government Bond 12-07-06# 7.500 AAA 3,000 5,099,374
Government Bond 11-06-01# 7.000 AAA 3,000 5,017,208
Government Bond 08-10-99# 6.000 AAA 3,000 4,944,619
United Mexican States, (Mexico), Government Bond 09-15-16 (Y) 11.375 BB 2,750 2,839,375
------------
172,844,028
------------
Government - U.S. (8.47%)
United States Treasury,
Bond 02-15-16 9.250 AAA 11,000 14,392,840
Bond 08-15-19 8.125 AAA 5,500 6,560,455
Note 08-15-05 10.750 AAA 10,000 13,132,800
Note 05-15-97 8.500 AAA 2,500 2,535,925
Note 05-15-01 8.000 AAA 19,000 20,620,890
------------
57,242,910
------------
Government - U.S. Agencies (2.41%)
Federal Home Loan Mortgage Corp., Remic 44-E 11-15-19 9.000 AAA 1,015 1,065,831
Government National Mortgage Association, 30 Yr Pass
thru Ctf 05-15-26 7.500 AAA 14,992 15,207,657
------------
16,273,488
------------
Industrial Equipment (0.30%)
Clarke Material Handling Co., Sr Note 11-15-06 (R) 10.750 B+ 2,000 2,045,000
------------
Leisure (7.28%)
Agrosy Gaming Co., 1st Mtg Note 06-01-04 13.250 B+ 3,000 2,790,000
Casino America, Inc., Sr Note 08-01-03 12.500 B 4,000 3,890,000
Cinemark USA, Inc., Sr Sub Note 08-01-08 (R) 9.625 B 4,000 4,030,000
Coast Hotels & Casinos, Inc., 1st Mtg Note 12-15-02 13.000 B 2,000 2,150,000
Eldorado Resorts Co., Sr Sub Note 08-15-06 (R) 10.500 B 4,000 4,200,000
GB Property Funding, 1st Mtg Note 01-15-04 10.875 B 3,000 2,580,000
Mohegan Tribal Gaming Authority, Sr Note 11-15-02 13.500 BB+ 5,900 7,581,500
Muzak L.P./Muzak Capital Corp., Company Guaranty 10-01-03 10.000 B+ 2,000 2,040,000
Players International, Inc., Sr Note 04-15-05 10.875 BB 3,200 3,168,000
Showboat Marina Casino Partnership / Financing Corp.,
1st Mtg Note 03-15-03 13.500 B 5,000 5,375,000
Showboat, Inc., Sr Sub Note 08-01-09 13.000 B 3,000 3,285,000
Station Casinos, Inc., Sr Sub Note 03-15-06 10.125 B+ 3,000 2,962,500
Waterford Gaming LLC, Sr Note 11-15-03 (R) 12.750 B 5,000 5,175,000
------------
49,227,000
------------
Metal (0.83%)
Easco Corp., Sr Note 03-15-01 10.000 B- 3,000 3,030,000
Haynes International, Inc., Sr Note 09-01-04 11.625 B- 2,500 2,612,500
------------
5,642,500
------------
Office Equipment & Supplies (0.33%)
United Stationer Supply, Sr Sub Note 05-01-05 12.750 B- 2,000 2,207,500
------------
Oil & Gas (4.15%)
Cliffs Drilling Co., Company Guaranty 05-15-03 10.250 B1 2,250 2,368,125
Costilla Energy Inc., Sr Note 10-01-06 10.250 B 2,500 2,587,500
Falcon Drilling Co.,
Sr Note Ser B 03-15-03 8.875 B+ 1,500 1,515,000
Sr Sub Note Ser B 03-15-05 12.500 B- 1,500 1,665,000
HS Resources, Inc., Sr Sub Note 11-15-06 (R) 9.250 B 2,000 2,030,000
Kelly Oil & Gas Corp., Conv Deb 04-01-00 8.500 B- 1,100 1,050,500
Mobil North Sea, PLC, (United Kingdom),
Company Guaranty 07-15-99# 9.625 AA 1,000 1,770,616
OPP Petroquimica S.A., (Brazil), Bond 10-29-04 (R), (Y) 11.000 B 4,000 4,010,000
Parker Drilling Co., Company Guaranty 11-15-06 (R) 9.750 B+ 1,000 1,035,000
Petroleum Heat & Power Co., Inc., Sub Deb 02-01-05 12.250 B+ 2,500 2,800,000
TransAmerican Refining Corp., 1st Mtg Note, Variable
(18.50%, 02-15-98), 02-15-02 Zero CCC+ 2,000 1,625,000
Vintage Petroleum Inc., Sr Sub Note 12-15-05 9.000 B+ 3,000 3,075,000
Wainoco Oil Corp., Sr Note 08-01-02 12.000 B- 2,500 2,562,500
------------
28,094,241
------------
Paper (1.80%)
American Pad & Paper Co., Sr Sub Note Ser B 11-15-05 13.000 B- 1,170 1,363,050
Indah Kiat International Finance, (Indonesia),
Company Guaranty 06-15-06 (Y) 12.500 BB 3,000 3,285,000
Riverwood International USA, Inc., Sr Sub Note 04-01-08 10.875 B 6,000 5,400,000
Stone Container Corp., Sr Note 10-01-04 11.500 B+ 2,000 2,080,000
------------
12,128,050
------------
Printing (0.66%)
Goss Graphic Systems Inc., Sr Sub Note 10-15-06 12.000 B 1,600 1,612,000
Sullivan Graphics, Inc., Sr Sub Note 08-01-05 12.750 Caa 3,000 2,880,000
------------
4,492,000
------------
Retail (2.50%)
Apparel Ventures, Inc., Sr Note Ser B 12-31-00 12.250 B- 1,350 1,026,000
Di Giorgio Corp., Sr Note 02-15-03 12.000 B 3,000 3,030,000
International Home Foods Inc., Sr Sub Note 11-01-06 (R) 10.375 B- 4,000 4,090,000
Petro PSC Properties, L.P., Sr Note 06-01-02 12.500 B 2,500 2,575,000
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 3,042,000
------------
16,883,000
------------
Steel (2.82%)
Acme Metals, Inc., Sr Sec Note 08-01-02 12.500 B 3,000 3,210,000
Euramax International PLC, (United Kingdom),
Sr Sub Note 10-01-06 (R), (Y) 11.250 B 3,150 3,220,875
Gulf States Steel Inc., 1st Mtg Note 04-15-03 13.500 B 4,000 3,790,000
GS Technologies Operating Co., Inc., Sr Note 10-01-05 12.250 B 2,000 2,090,000
Weirton Steel Corp.,
Sr Note 07-01-04 11.375 B 1,400 1,372,000
Sr Note 06-01-05 10.750 B 3,650 3,467,500
Wheeling-Pittsburgh Corp., Sr Note 11-15-03 9.375 BB- 2,000 1,930,000
------------
19,080,375
------------
Telecommunications (9.08%)
Brooks Fiber Properties, Inc., Sr Discount Note, Step Coupon
(10.875%, 03-01-01), 03-01-06 Zero B 5,000 3,275,000
Comunicacion Cellular SA, (Colombia), Sr Deferred
Coupon Bond, Step Coupon (13.125%, 11-15-00),
11-15-03 (Y) Zero B+ 3,250 2,071,875
Fonorola, Inc., (Canada), Sr Sec Note 08-15-02 (Y) 12.500 B+ 3,000 3,262,500
Impsat Corp., Company Guaranty 07-15-03 (R) 12.125 BB- 3,350 3,542,625
Intercel, Inc., Unit (Sr Discount Note, Step Coupon
(12.00%, 02-01-01), 02-01-06 & Warrant) Zero B- 900 540,000
Intercel, Inc., Unit (Sr Discount Note,
Step Coupon (12.00%, 02-01-01),
02-01-06 & Warrant) Zero B- 2,100 1,270,500
Intermedia Communications Inc., Sr Discount Note, Step Coupon
(12.50%, 05-15-01) 05-15-06 Zero B- 3,000 1,957,500
International CableTel, Inc., Sr Note, Step Coupon
(11.50%, 02-01-01), 02-01-06 Zero B 1,750 1,120,000
International Wireless Communication Inc.,
Sr Discount Note 08-15-01 (R) Zero B 3,000 1,635,000
Telecommunications (continued)
MFS Communications Co., Inc., Sr Discount Note, Step Coupon
(9.375%, 01-15-99), 01-15-04 Zero B 4,000 3,460,000
Mobile Telecommunication Technologies Corp., Sr Note 12-15-02 13.500 B- 4,000 4,140,000
Nextel Communications, Inc., Sr Discount Note, Step Coupon
(9.75%, 02-15-99), 08-15-04 Zero CCC- 8,000 5,290,000
Occidente Y Caribe Cellular SA, (Colombia), Unit
(Sr Discount Note, Step Coupon (14.00%, 03-15-01),
03-15-04 & Warrant) (R), (Y) Zero B 4,000 2,000,000
Omnipoint Corp., Sr Note 08-15-06 (R) 11.625 CCC+ 4,000 4,220,000
Paging Network Inc., Sr Sub Note 10-15-08 (R) 10.000 B 3,500 3,500,000
Rogers Cantel, Inc., (Canada), Sr Note 06-01-06# 10.500 BB+ 4,000 3,324,182
Shared Technologies Fairchild, Inc.,
Sr Discount Note, Step Coupon (12.25%, 03-01-99), 03-01-06 Zero Caa 2,400 1,974,000
Sprint Spectrum L.P., Sr Note 08-15-06 11.000 B+ 4,000 4,230,000
Teleport Communications Group, Inc.,
Sr Discount Note, Step Coupon (11.125%, 07-01-01), 07-01-07 Zero B 4,000 2,710,000
Total Access Communication PLC, (Thailand),
Bonds 11-04-06 (R), (Y) 8.375 BBB- 4,000 4,046,440
Vanguard Cellular System, Deb 04-15-06 9.375 B+ 1,500 1,511,250
Winstar Communications, Inc.,
Conv Sr Discount Note, Step Coupon (14.00%, 10-15-00),
10-15-05 (R) Zero B 1,300 786,500
Sr Discount Note, Step Coupon (14.00%, 10-15-00), 10-15-05 Zero B 2,600 1,501,500
------------
61,368,872
------------
Textile (0.89%)
Dan River, Inc., Sr Sub Note 12-15-03 10.125 B 2,000 2,000,000
Polysindo International Finance Co., B.V., (Indonesia),
Company Guaranty 06-15-06 (Y) 11.375 BB 3,750 4,031,250
------------
6,031,250
------------
Transport (1.02%)
Northwest Airlines, Sr Note 12-31-00 12.092 BB- 2,204 2,267,276
TNT Transport PLC/TNT USA, Inc., (United Kingdom),
Sr Note 04-15-04 (Y) 11.500 B+ 4,000 4,640,000
------------
6,907,276
------------
Utilities (1.57%)
Calpine Corp., Sr Note 02-01-04 9.250 B+ 2,000 1,965,000
CE Casecnan Water & Energy Co., Inc. (Philippines),
Sr Note Ser A 11-15-05 (Y) 11.450 BB 2,000 2,247,500
Midland Cogeneration Venture, Deb 07-23-02 10.330 BB- 1,552 1,648,614
Midland Funding Corp. II, Deb 07-23-06 13.250 B- 4,000 4,723,040
------------
10,584,154
------------
TOTAL BONDS
(Cost $572,048,979) ( 87.83%) 593,899,888
----- ------------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR MARKET
ISSUER, DESCRIPTION WARRANTS VALUE
- ------------------- --------------- ----------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
American Telecasting, Warrant** 4,000 $ 14,000
AVI Holdings, Inc., Warrant (R)** 1,500 7,500
Buckhead America Corp., Common Stock 536 3,216
Cablevision Systems Corp., 11.125% Ser L Payment-In-Kind
Pref Stock ** (R) 32,143 2,828,585
California Federal Bank, 10.625% Ser B Pref Stock 6,667 731,703
Comunicacion Celular SA, Warrant** (Colombia) (Y) 32,500 243,750
Credit Lyonnais Capital S.C.A., American Depositary Shares,
9.50% Ser DTC Pref Stock ** (Luxembourg) (R), (Y) 100,000 2,462,500
Decorative Home Accents, Inc., Common Stock** 1,000 6,000
Earthwatch, Inc., 12.00% Ser C Conv Pref Stock (R) 200,000 2,000,000
Echostar Communications Corp., (Class A) Common Stock** 18,000 481,500
Finlay Enterprises, Inc., Common Stock** 4,000 59,000
First Nationwide Bank, 11.50% Pref Stock** 5,000 567,500
ICF Kaiser International Inc., Warrant (r)** 12,000 6,000
IRT Property Co., Common Stock 75,000 806,250
Intermedia Communications, Inc., Common Stock** 15,000 446,250
International Wireless Inc., Warrant** 3,000 30
K-III Communications Corp., $2.875 Sr Exch Pref Stock 60,000 1,612,500
Lasmo PLC, 10.00% Ser A Pref Stock (United Kingdom) (Y) 50,000 1,300,000
Maxus Energy Corp., $2.50 Pref Stock 40,000 1,035,000
Northwest Airlines Corp. (Class A), Common Stock** 140,000 5,652,500
Panamsat Corp., 12.75% Pref Stock 2,106 2,590,826
Petro PSC Properties, L.P., Warrant (r)** 2,000 100,000
Qantas Airways Ltd., American Depositary Shares (Australia) (R) 13,800 214,662
Renaissance Cosmetics, Warrant** 4,000 200,000
SFX Broadcasting, Inc., 6.50% Ser D Conv Pref Stock (R) 25,000 1,375,000
St. Johnsbury Trucking Co., Inc, Common Stock (r)** 47,224 472
Station Casinos, Inc., 7.00% Conv Pref Stock 5,000 250,000
Sun Carriers, Inc., Common Stock (r)** 195,600 1,956
Thrifty Payless Holdings, Inc. (Class B), Common Stock (r)** 11,400 292,125
Time Warner, Inc., 10.25% Ser K Exch Pref Stock ** (R) 3,066 3,322,778
TLC Beatrice International Holdings (Class A), Common Stock (r) 20,000 1,000,000
TransAmerican Refining Corp., Warrant** 33,670 67,340
TransTexas Gas Corp., Common Stock** 10,000 135,000
UAL Corp., Common Stock** 38,308 2,202,710
Valero Energy Corp., $3.125 Conv Pref Stock 25,000 1,468,750
Western Pacific Airlines, Inc., Common Stock** 10,000 85,000
-------------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $28,095,337) (4.97%) $ 33,570,403
---- -------------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
INTEREST (000'S MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.37%)
Investment in a joint repurchase agreement
transaction withSwiss Bank Inc. Dated
11-29-96, Due 12-02-96 (secured by U.S.
Treasury Bonds, 7.25% thru 11.25%,
due 2-15-15 thru 2-15-20) Note A 5.680% $ 36,284 $ 36,284,000
------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 91,120
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $36,284,000) ( 5.38%) 36,375,120
------------
TOTAL INVESTMENTS ( 98.18%) $663,845,411
===== ============
* 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.
# Par value of foreign bonds is expressed in local currency, as shown parenthetically
in security description.
(A) Non-income producing - issuer filed for protection under the Federal Bankruptcy Code.
(R) These securities are exempt from registration under rule 144A of the Securities Act of 1933.
Such securities may be resold, normally to qualified institutional buyers, in transactions
exempt from registration. Rule 144A securities amounted to $82,397,452 as of November 30, 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 at fair value 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.
Additional information on each restricted security is as follows:
MARKET
VALUE AS A
PERCENTAGE
OF FUND'S MARKET
ACQUISITION ACQUISITION NET VALUE AT
ISSUER, DESCRIPTION DATE COSTS ASSETS NOVEMBER 29, 1996
- ------------------- ----------- ----------- ------ ------------------
ICF Kaiser International Inc., Warrant 01-04-94 $ 15,000 0.00% $ 6,000
Petro PSC Properties, L.P., Warrant 05-17-94 73,140 0.01% 100,000
St. Johnsbury Trucking Co., Inc.,
Common Stock 01-19-93 1,301,659 0.00% 472
Sun Carriers, Inc., Common Stock 11-23-88 218,247 0.00% 1,956
Thrifty Payless Holdings, Inc. (Class B),
Common Stock 07-22-94 213,334 0.04% 292,125
TLC Beatrice International Holdings
(Class A), Common Stock 11-25-87 1,006,000 0.15% 1,000,000
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>
<TABLE>
<CAPTION>
Portfolio Concentration (Unaudited)
- -------------------------------------------------------------------------------------------
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 November 30, 1996 assigned to
country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ---------------
<S> <C>
Argentina 0.76%
Australia 5.40
Bermuda 0.40
Brazil 2.64
Canada 6.17
Colombia 0.64
Denmark 4.15
Germany 1.13
Indonesia 1.08
Ireland 1.64
Luxembourg 0.57
Mexico 0.42
New Zealand 1.88
Norway 1.38
Philippines 0.33
Poland 1.07
South Africa 0.37
Spain 0.99
Thailand 0.60
United Kingdom 6.32
United States 60.24
-----
TOTAL INVESTMENTS 98.18%
=====
Additionally, the concentration of investments can be aggregated by the
quality rating for each debt security.
QUALITY DISTRIBUTION
- --------------------
AAA 33.50%
AA 0.26
BBB 1.67
BB 9.24
B 40.01
CCC 2.13
C 0.72
D 0.30
-----
TOTAL BONDS 87.83%
=====
See notes to financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
(UNAUDITED)
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 two series of portfolios: John Hancock Strategic
Income Fund (the "Fund") and John Hancock Sovereign U.S. Government
Income Fund. The investment objective of the Fund is to seek a high
level of current income.
The Trustees have authorized the issuance of multiple 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 and service expenses under terms of a
distribution plan have exclusive voting rights to that 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 large 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. 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.
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 and service fees, if any, are
calculated daily at the class level based on the appropriate net assets
of each class and the specific expense rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
could differ from these estimates.
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.
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 contracts at November 30, 1996 were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- ---------- -------------------- ------------ --------------
SELLS
GERMAN MARK 11,895,396 DEC 96 $ 399,916
GERMAN MARK 40,363,053 JAN 97 373,740
GERMAN MARK 47,256,163 FEB 97 775,947
--------------
$ 1,549,603
--------------
BUYS
GERMAN MARK 17,870,873 JAN 97 ($349,905)
==============
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. Buying futures tends to increase the Fund's exposure
to the underlying instrument. Selling futures tends to decrease the
Fund's exposure to the underlying instrument or hedge other Fund
instruments. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified
amount of cash or U.S. government securities, known as "initial margin",
equal to a certain percentage of the value of the financial futures
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 on which it trades. Subsequent payments, known as "variation
margin", to and from the broker are made on a daily basis as the market
price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", 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 fluctuation 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 November 30, 1996, there were no open position in financial futures
contracts.
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
contract's 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 November
30, 1996.
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.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended
November 30, 1996, net sales charges received with regard to sales of
Class A shares amounted to $1,193,888. Out of this amount, $139,785 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $469,350 was paid as sales commissions to
unrelated broker-dealers and $584,753 was paid as sales commissions to
sales personnel of John Hancock Distributors, Inc. ("Distributors"),
Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro & Co.,
("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 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 November 30, 1996, contingent deferred
sales charges paid to JH Funds amounted to $236,356.
In addition, to reimburse the JH Funds for the services they provide as
distributors of shares of the Fund, the Fund has adopted Distribution
Plans with respect to Class A and Class B pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Accordingly, the Fund will make
payments to the 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 the JH Funds for
their distribution and service costs. Up to a maximum of 0.25% of such
payments may be service fees as defined by the amended Rules of Fair
Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's
12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), 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.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for 1996 is
estimated to be at an annual rate of 0.01875% of the average net assets
of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione, and Ms. Anne C.
Hodsdon 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 will make investments into other
John Hancock funds, as applicable, to cover its liability for the
deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other
asset. The deferred compensation liability and the related other asset
are always equal and are marked to market on a periodic basis to reflect
any income earned by the investment as well as any unrealized gains or
losses. At November 30, 1996, the Fund's investments to cover the
deferred compensation liability had unrealized appreciation of $1,665.
NOTE C --
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities, other then obligations
of the U.S. government and its agencies and short-term securities,
during the period ended November 30, 1996, aggregated $414,626,758 and
$353,027,467, respectively. Purchases and proceeds from sales
of obligations of the U.S. government and its agencies aggregated
$106,815,860 and $92,718,808, respectively, during the period ended
November 30, 1996.
The cost of investments owned at November 30, 1996 (including the joint
repurchase agreement) for Federal income tax purposes was $636,428,316.
Gross unrealized appreciation and depreciation of investments aggregated
$34,656,971 and $7,330,996, respectively, resulting in net unrealized
appreciation of $27,325,975.
John Hancock Funds - Strategic Income Fund
SHAREHOLDER MEETING (UNAUDITED)
On June 26, 1996, a special meeting of John Hancock Strategic Income
Fund (the "Fund") was held.
The shareholders elected the following Trustees with the votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- ---------------- ------------ ---------------
Dennis S. Aronowitz 50,425,749 1,040,219
Edward J. Boudreau, Jr. 50,423,686 1,042,282
Richard P. Chapman, Jr. 50,435,521 1,030,447
William J. Cosgrove 50,433,444 1,032,524
Douglas M. Costle 50,398,373 1,067,595
Leland O. Erdahl 50,422,375 1,043,593
Gail D. Fosler 50,429,415 1,036,553
William F. Glavin 50,390,296 1,075,672
Anne C. Hodsdon 50,440,255 1,025,713
Dr. John A. Moore 50,416,342 1,049,626
Patti McGill Peterson 50,427,391 1,038,577
John W. Pratt 50,403,249 1,062,719
Richard S. Scipione 50,338,300 1,127,668
Edward J. Spellman 50,438,992 1,026,975
NOTES
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