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John Hancock Funds
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Sovereign
U.S.
Government Income
Fund
SEMI-ANNUAL REPORT
April 30, 1997
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TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore*
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
After two years of spectacular performance, the stock market in 1997 has given
investors its starkest reminder in a while of one of investing's basic tenets:
markets move down as well as up. It's understandable if investors had lost sight
of that fact. The bull market that began six years ago has given investors
annual double-digit returns and more modest price declines than usual. And in
the two years encompassing 1995 and 1996, the S&P 500 Index gained more than
50%. This Pollyanna environment has tracked along with a sustained economic
recovery, now in its seventh year, that has been marked by moderate growth, low
interest rates and tame inflation.
But recently, many have begun to wonder about this bull market. Since
reaching new highs in early March, the Dow Jones Industrial Average tumbled by
more than 7% at the end of March and wiped out nearly all it had gained since
the start of the year. It was the worst decline that the market had seen since
1990. In early April, the Dow was down by 9.8%, within shouting distance of a
10% correction. By the end of the month, it had bounced back into record
territory again.
[A 1" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
As the market continues to fret over interest rates and inflation,
investors should be prepared for more volatility. It also makes sense to do
something we've always advocated: set realistic expectations. Keep in mind that
the stock market's historic yearly average has been about 10%, not the 20%-plus
annual average of the last two years or even the 16% annual average over the
last 10 years. Remember that the kind of market volatility we've seen lately is
more like the way the market really works. Fluctuations go with the territory.
And market corrections can be healthy, serving to bring inflated stock prices
down to more reasonable levels, thereby reducing some of the market's risk.
Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. Make sure that
your investment strategies reflect your individual time horizons, objectives and
risk tolerance, and that they are based upon your needs. Despite turbulence, one
thing remains constant. A well-constructed plan and a cool head can be the best
tools for reaching your financial goals.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Barry Evans, CFA, Portfolio Manager
John Hancock
Sovereign
U.S. Government
Income Fund
Economy's strength puts a damper on bond returns
When bond investors saw signs that the economy was slowing last fall, they
breathed a sigh of relief. Inflation -- which can erode the value of a bond's
fixed-interest payments -- was under control. Bond prices rallied, with yields
on the 10-year Treasury falling from 6.34% to 6.04% in November. But the rally
was short-lived. By December, the slowdown seemed over. In the first quarter of
1997, consumer spending picked up. More important, the gross domestic product --
which measures the economy's output of goods and services -- grew at its fastest
rate in nine years. Concerned that inflation was on the rise and that the
Federal Reserve would raise short-term interest rates, bond investors gradually
pushed yields up and prices down. On March 25, the Federal Reserve did increase
short-term interest rates one-quarter percentage point. By mid-April, yields on
the 10-year Treasury had peaked at 6.97%, closing the month at 6.72%.
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"Investors focused largely on bonds with a yield advantage over U.S.
Treasuries."
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[A 2 1/4" x 3 3/4" photo of the Sovereign U.S. Government Income Fund Portfolio
Management Team. Caption reads: "Barry H. Evans (seated) and management team
members (l-r) Roger Hamilton and Seth Robbins.]
3
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John Hancock Funds - Sovereign U.S. Government Income Fund
[Pie chart with the heading "Portfolio Diversification" at top of left hand
column. The chart is divided into two sections. Going from top left to right:
Short-Term Investments and Other 1%; U.S. Treasury Bonds 19%; U.S. Government
Agency Bonds 80%. A footnote below states "As a percentage of net assets on
April 30, 1997.]
The Fund focused on mortgages during the last six months.
Despite falling prices, money continued to flow into the bond market.
Investors focused largely on bonds with a yield advantage over U.S. Treasuries.
These included mortgage bonds and government agency bonds, both of which provide
added income to compensate investors for taking on additional risk. For the six
months ended April 30, 1997, these higher-yielding securities came out ahead of
interest-sensitive Treasuries. Their yields simply rose less -- and their prices
fell less -- than Treasuries.
John Hancock Sovereign U.S. Government Income Fund was well-positioned as
we favored mortgage bonds over Treasuries. For the six months ended April 30,
1997, the Fund's Class A and Class B shares had total returns of 1.24% and
1.00%, respectively, at net asset value. This compared to the 1.11% return of
the average general U.S. government fund, according to Lipper Analytical
Services, Inc.1 Please see pages six and seven for longer-term performance
information.
Mortgage bonds tip the scales
We began the period with our heaviest concentration -- about 48% of assets -- in
the mortgage sector. In December and early January, we sold some Treasuries and
increased our mortgage stake by another 10 percentage points. We bought GNMAs
with coupons of 7%, 7-1/2% and 9%. Their prices relative to Treasuries had
fallen near year end, as demand had dropped off. After the first of the year,
demand picked up and prices rebounded nicely. We also bought GNMA
adjustable-rate mortgages, which were the cheapest short-maturity mortgage bonds
we could find.
Throughout the period, we added to our stake in collateralized mortgage
obligations (CMOs). CMOs separate the cash flows of mortgage pools into
different classes of various maturities. We bought primarily PACs, which are a
type of higher-quality CMO with a lower probability of prepayment. PACs had not
done as well as other mortgage bonds in early 1996, which made them attractive
buys. Our long-term PACs, which accounted for nearly 20% of the Fund's
investments, did exceptionally well and had the biggest single impact on
performance. By the end of April, 65% of the Fund's assets were in mortgages
(including CMOs) and only 19% in Treasuries. The remaining 15% of our
investments were in government agency bonds, which did better than Treasuries
but lagged mortgages.
As we shifted our asset allocation late in the period, we also made a few
adjustments to the Fund's duration. Duration measures how sensitive a bond's
price is to changes in interest rates. The shorter a bond's duration, the less
its price will fall as interest rates rise (or rise as rates fall). We began the
period with a duration of 5.2 years -- about average at the time for our peer
group. This neither helped nor hurt the Fund's performance. Once interest rates
began climbing again
4
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John Hancock Funds - Sovereign U.S. Government Income Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the six months ended April 30, 1997." The chart is
scaled in increments of 1% from top to bottom, with 2.00% at the top and 0.00%
at the bottom. Within the chart, there are three solid bars. The first
represents the 1.24% total return for John Hancock Sovereign U.S. Government
Income Fund: Class A. The second represents the 1.00% total return for John
Hancock Sovereign U.S. Government Income Fund: Class B. The third represents the
1.11% total return for the average general U.S. government income fund. Footnote
below reads: "Total returns for John Hancock Sovereign U.S. Government Income
Fund are at net asset value with all distributions reinvested. The average
general U.S. government fund is tracked by Lipper Analytical Services.(1) See
the following two pages for historical performance information."]
in late February and early March, we decided to shorten duration to 4.8 years.
We did this by selling long-term Treasury bonds and GNMAs, which had appreciated
nicely. The Fund benefited from a shorter duration, as interest rates continued
rising in March and early April. We closed the period with a neutral duration of
5.0 years.
Wait and see
We'll be looking to add duration sometime before what we believe will be
the Fed's final interest rate increase. That's because recent history shows that
yields may actually begin falling before the Fed's last move. It's unclear,
however, whether the Fed will have to raise rates one or two more times to
temper economic growth. In April, the economy appeared to be slowing quickly,
after a strong first quarter. But we still expect it to grow at 2-1/2% or higher
for awhile. We don't think this is the beginning of a sustained economic
slowdown. Instead, we believe temporary factors are affecting the economy's
second quarter pace -- auto strikes, flooding and a mild winter followed by a
cool spring (which stepped up first quarter consumer spending while holding back
spring spending).
"We believe bonds offer good value."
We'll be watching certain signs to determine the Fed's next move. These include
a rise in the benefits component of the employment cost index, an increase in
vendor delivery time from the purchasing managers' survey, strong retail sales
or a strong stock market. All would point to the need for the Fed to raise
interest rates again in order to put the brakes on the economy. In the meantime,
we plan to keep our 80% stake in mortgages and government agency bonds. Even
though mortgage yield premiums over Treasuries are small, we believe strong
demand will continue. Within the mortgage sector, we may, however, change
allocations depending on where the best opportunities are.
We believe bonds offer good value. With inflation between 2% and 3% and the
30-year Treasury at 6.94%, investors are earning at least 4% over the rate of
inflation. Historically, that's high. Bonds may also have better potential for
price gains than stocks, which have had a great run for years. If yields dropped
to 6%, investors would enjoy huge price gains along with good income. While we
don't expect rates to fall this low anytime soon, we're optimistic for the
longer term.
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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A LOOK AT PERFORMANCE
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The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Sovereign U.S. Government Income Fund. Total
return is a performance measure that equals the sum of all dividends and capital
gains, assuming reinvestment of these distributions and the change in the price
of the Fund's shares, expressed as a percentage of the Fund's average net
assets. Performance figures include the maximum applicable sales charge of 4.50%
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.
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CUMULATIVE TOTAL RETURNS
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For the period ended March 31, 1997
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---- ----- ---------
John Hancock Sovereign U.S. Government
Income Fund: Class A (1.09%) 27.48% 26.36%(1)
John Hancock Sovereign U.S. Government
Income Fund: Class B (2.06%) 28.43% 96.51%
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended March 31, 1997
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---- ----- ---------
John Hancock Sovereign U.S. Government
Income Fund: Class A (1.09%) 4.98% 4.57%(1)
John Hancock Sovereign U.S. Government
Income Fund: Class B (2.06%) 5.13% 6.99%
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YEILDS
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As of April 30, 1997
SEC
30-DAY
YIELD
-----
John Hancock Sovereign U.S. Government
Income Fund: Class A(1) 5.92%
John Hancock Sovereign U.S. Government
Income Fund: Class B 5.50%
Notes to Performance
(1) Class A shares commenced on January 3, 1992.
6
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Sovereign U.S. Government Income Fund would be worth on April 30, 1997, assuming
you had invested on the day each class of shares started or have been invested
for the most recent ten years and reinvested all distributions. For comparison,
we've shown the same $10,000 investment in the Lehman Government Bond Index --
an unmanaged index that measures the performance of U.S. Treasury bonds and U.S.
Government Agency bonds.
[Line chart with the heading Sovereign U.S. Government 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 $13,680 as of April 30,
1997. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign U.S. Government Fund on January 3, 1992, before
sales charge, and is equal to $13,438 as of April 30, 1997 The third line
represents the Sovereign U.S. Government Fund, after sales charge, and is equal
to $12,833 as of April 30, 1997.]
[Line chart with the heading Sovereign U.S. Government Fund Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are two lines. The first line represents the value of
theLehman Government Bond Index and is equal to $21,501 as of April 30, 1997.
The second line represents the value of the hypothetical $10,000 investment made
in the Sovereign U.S. Government Fund, before sales charge, on October 31, 1986,
and is equal to $20,008 as of April 30, 1997.]
* No contingent-deferred sales charge applicable.
7
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on April 30, 1997. You'll also
find the net asset value and the maximum offering price per share as of that
date.
Statement of Assets and Liabilities
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
United States government and agencies securities
(cost - $398,337,578) ...................................... $397,604,476
Short-term investments (cost - $888,000) ................... 888,000
Corporate savings account .................................. 8,769
------------
398,501,245
Receivable for shares sold ................................... 168,644
Interest receivable .......................................... 4,115,916
Other assets ................................................. 31,525
------------
Total Assets ..................... 402,817,330
-------------------------------------------------
Liabilities:
Dividend payable ............................................. 66,746
Payable for shares repurchased ............................... 475,152
Payable for futures variation margin - Note A ................ 45,140
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 319,856
Accounts payable and accrued expenses ........................ 83,817
------------
Total Liabilities ................ 990,711
-------------------------------------------------
Net Assets:
Capital paid-in .............................................. 453,271,255
Accumulated net realized loss on investments and
financial futures contracts ................................ ( 50,500,379)
Net unrealized depreciation of investments
and financial futures contracts ............................ ( 856,031)
Distributions in excess of net investment income ............. ( 88,226)
------------
Net Assets ....................... $401,826,619
=================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $304,828,970 / 31,917,780 .......................... $ 9.55
=============================================================================
Class B - $96,997,649 / 10,156,350 ........................... $ 9.55
=============================================================================
Maximum Offering Price Per Share:*
Class A - ($9.55 x 104.71%) .................................. $ 10.00
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended April 30, 1997 (Unaudited)
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Investment Income:
Interest ..................................................... $16,446,800
-----------
Expenses:
Investment management fee - Note B ......................... 1,049,283
Distribution and service fee - Note B
Class A .................................................. 473,313
Class B .................................................. 516,872
Transfer agent fee - Note B ................................ 560,273
Custodian fee .............................................. 54,944
Registration and filing fees ............................... 41,493
Financial services fee - Note B ............................ 39,348
Auditing fee ............................................... 29,146
Trustees' fees ............................................. 27,984
Printing ................................................... 19,349
Legal fees ................................................. 1,615
Miscellaneous .............................................. 1,551
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Total Expenses ................... 2,815,171
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Net Investment Income ............ 13,631,629
-------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized loss on investments sold ........................ ( 1,365,217)
Net realized gain on financial futures contracts ............. 1,019,191
Change in net unrealized appreciation/depreciation
of investments ............................................. ( 7,608,135)
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................. ( 598,937)
-----------
Net Realized and Unrealized
Loss on Investments and
Financial Futures Contracts ...... ( 8,553,098)
--------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........ $ 5,078,531
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1997
OCTOBER 31, 1996 (UNAUDITED)
---------------- -----------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ....................................................... $ 30,058,671 $ 13,631,629
Net realized loss on investments sold, and financial futures contracts ...... ( 2,404,490) ( 346,026)
Change in net unrealized appreciation/depreciation of investments
and financial futures contracts ........................................... ( 10,781,489) ( 8,207,072)
Net Increase in Net Assets Resulting from Operations ...................... 16,872,692 5,078,531
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6445 and $0.3197 per share, respectively) ................... ( 22,888,998) ( 10,525,955)
Class B - ($0.5788 and $0.2866 per share, respectively) ................... ( 7,168,399) ( 3,112,985)
Total Distributions to Shareholders ....................................... ( 30,057,397) ( 13,638,940)
From Fund Share Transactions - Net* ........................................... ( 46,215,732) ( 32,002,267)
Net Assets:
Beginning of period ....................................................... 501,789,732 442,389,295
End of period (including distributions in excess of net investment
income of $80,915 and $88,226, respectively) ............................ $442,389,295 $401,826,619
* Analysis of Fund Share Transactions:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, 1997
OCTOBER 31, 1996 (UNAUDITED)
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ......................................................... 2,701,311 $26,773,125 618,294 $ 5,909,314
Shares issued to shareholders in reinvestment of distributions ...... 1,861,397 18,201,055 873,593 8,430,357
--------- ----------- --------- -----------
4,562,708 44,974,180 1,491,887 14,339,671
Less shares repurchased ............................................. (7,742,610) ( 76,053,085) (3,443,474) ( 33,241,245)
--------- ----------- --------- -----------
Net Decrease ........................................................ (3,179,902) ($31,078,905) (1,951,587) ($18,901,574)
========= =========== ========= ===========
CLASS B
Shares sold ......................................................... 1,137,893 $11,221,296 324,038 $ 3,202,673
Shares issued to shareholders in reinvestment of distributions ...... 397,229 3,883,010 177,904 1,716,948
--------- ----------- --------- -----------
1,535,122 15,104,306 501,942 4,919,621
Less shares repurchased ............................................. (3,092,548) ( 30,241,133) (1,868,486) ( 18,020,314)
--------- ----------- --------- -----------
Net Decrease ........................................................ (1,557,426) ($15,136,827) (1,366,544) ($13,100,693)
========= =========== ========= ===========
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED
-------------------------------------------------------- APRIL 30, 1997
1992(1) 1993 1994 1995 1996 (UNAUDITED)
--------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .................. $ 10.51 $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.75
-------- -------- -------- -------- -------- --------
Net Investment Income ................................. 0.64 0.68(2) 0.65 0.65 0.64(2) 0.32(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ......... ( 0.22) 0.61 ( 1.34) 0.77 ( 0.26) ( 0.20)
-------- -------- -------- -------- -------- --------
Total from Investment Operations .................. 0.42 1.29 ( 0.69) 1.42 0.38 0.12
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ................ ( 0.64) ( 0.68) ( 0.65) ( 0.65) ( 0.64) ( 0.32)
Distributions from Net Realized Gain on
Investments Sold .................................. -- ( 0.01) ( 0.31) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ............................... ( 0.64) ( 0.69) ( 0.96) ( 0.65) ( 0.64) ( 0.32)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........................ $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.75 $ 9.55
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3) ......... 5.33%(4) 12.89% ( 6.66%) 15.90% 4.02% 1.24%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .............. $350,907 $375,416 $315,372 $370,966 $330,162 $304,829
Ratio of Expenses to Average Net Assets ............... 1.06%(5) 1.30% 1.23% 1.17% 1.15% 1.17%(5)
Ratio of Net Investment Income to Average Net Assets .. 7.11%(5) 6.47% 6.62% 6.76% 6.58% 6.67%(5)
Portfolio Turnover Rate ............................... 140% 273% 127% 94% 143% 84%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for the period indicated: the net investment income, net realized
and unrealized gains (losses), distributions and total investment return of the
Fund. It shows how the Fund's net asset value for a share has changed since the
end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED
-------------------------------------------------------- APRIL 30, 1997
1992(1) 1993 1994 1995 1996 (UNAUDITED)
--------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .................. $ 10.29 $ 10.28 $ 10.88 $ 9.23 $ 10.00 $ 9.74
-------- -------- -------- -------- -------- --------
Net Investment Income ................................. 0.76 0.66(2) 0.61 0.60 0.58(2) 0.29(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts ......... -- 0.61 ( 1.34) 0.77 ( 0.26) ( 0.19)
-------- -------- -------- -------- -------- --------
Total from Investment Operations .................. 0.76 1.27 ( 0.73) 1.37 0.32 0.10
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ................ ( 0.77) ( 0.66) ( 0.61) ( 0.60) ( 0.58) ( 0.29)
Distributions from Net Realized Gain on
Investments Sold .................................. -- ( 0.01) ( 0.31) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ............................... ( 0.77) ( 0.67) ( 0.92) ( 0.60) ( 0.58) ( 0.29)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........................ $ 10.28 $ 10.88 $ 9.23 $ 10.00 $ 9.74 $ 9.55
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3) ......... 7.58% 12.66% ( 7.05%) 15.27% 3.33% 1.00%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............. $197,032 $244,133 $196,899 $130,824 $112,228 $ 96,998
Ratio of Expenses to Average Net Assets ............... 1.55% 1.51% 1.64% 1.72% 1.82% 1.86%(5)
Ratio of Net Investment Income to Average Net Assets .. 7.35% 6.23% 6.19% 6.24% 5.91% 5.97%(5)
Portfolio Turnover Rate ............................... 140% 273% 127% 94% 143% 84%
(1) Class A shares commenced operations on January 3, 1992.
(2) Based on the average of shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Schedule of Investments
April 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Sovereign U.S. Government Income Fund on April 30, 1997. It's divided into two
main categories: U.S. government and agencies securities and short-term
investments. Short-term investments, which represent the Fund's "cash" position,
are listed last.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (19.15%)
United States Treasury,
Bond ................................................ 10.750% 08-15-05 $12,085 $15,111,930
Bond ................................................ 12.750 11-15-10 6,000 8,268,720
Bond ................................................ 12.000 08-15-13 10,900 15,188,495
Bond* ............................................... 9.250 02-15-16 26,450 32,541,700
Bond ................................................ 8.125 08-15-19 5,000 5,594,550
Bond ................................................ 6.500 11-15-26 250 234,805
-----------
76,940,200
-----------
Government - U.S. Agencies (79.80%)
Federal Farm Credit Bank,
Bond ................................................ 11.900 10-20-97 7,350 7,549,846
Federal Home Loan Bank,
Bond ................................................ 6.770 01-29-02 5,000 4,961,700
Bond ................................................ 12.500 09-10-97 10,000 10,235,900
Federal Home Loan Mortgage Corp.,
10 Yr Pass Thru Ctf ................................. 6.875 11-22-06 5,000 4,867,200
15 Yr Pass Thru Ctf ................................. 10.500 02-01-03 4,919 5,219,004
30 Yr Pass Thru Ctf ................................. 9.500 08-01-16 13,444 14,507,860
CMO REMIC 34-C ...................................... 9.000 11-15-19 5,962 6,137,507
CMO REMIC 1142-H .................................... 7.950 12-15-20 10,000 10,175,000
CMO REMIC 1603-K .................................... 6.500 10-15-23 5,000 4,610,900
CMO REMIC 1608-L .................................... 6.500 09-15-23 5,000 4,617,150
CMO REMIC 1617-PM ................................... 6.500 11-15-23 10,000 9,259,300
CMO REMIC 1727-I .................................... 6.500 05-15-24 5,000 4,546,850
CMO REMIC 1866-G .................................... 7.000 07-15-26 5,686 5,415,915
CMO REMIC 1876-PG ................................... 7.000 08-15-26 8,000 7,472,160
CMO REMIC 1910-AK ................................... 7.000 11-15-26 11,859 11,177,108
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf ................................. 9.550 12-10-97 1,020 1,042,307
10 Yr Pass Thru Ctf ................................. 9.050 04-10-00 10,000 10,657,800
10 Yr Pass Thru Ctf ................................. 8.900 06-12-00 5,000 5,321,850
10 Yr Pass Thru Ctf ................................. 9.150 04-10-98 5,000 5,119,550
15 Yr Pass Thru Ctf ................................. 9.000 02-01-10 7,105 7,403,434
15 Yr Pass Thru Ctf ................................. 7.500 06-01-11 11,970 12,071,526
15 Yr Pass Thru Ctf ................................. 7.500 07-01-11 4,643 4,685,387
30 Yr Pass Thru Ctf ................................. 8.000 10-01-24 7,530 7,649,909
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---- ---- -------- -----
CMO REMIC 1989-78-G ................................. 9.050% 12-25-18 $7,608 $ 7,819,687
CMO REMIC 1991-76-M ................................. 9.000 07-25-06 3,370 3,422,708
CMO REMIC 1994-60-PJ ................................ 7.000 04-25-24 6,100 5,806,407
CMO REMIC 1994-75-K ................................. 7.000 04-25-24 3,100 2,993,422
CMO REMIC 1996-28-PK ................................ 6.500 07-25-25 7,589 6,839,857
CMO REMIC 1996-63-PD ................................ 7.500 01-18-27 10,000 9,862,500
CMO REMIC G-8-E ..................................... 9.000 04-25-21 6,000 6,283,080
CMO REMIC X-225C-TK ................................. 6.500 12-25-23 5,032 4,640,410
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage ...................... 6.875 10-20-22 to 10-20-23 15,487 15,856,714
30 Yr Pass Thru Ctf ................................. 7.000 03-15-26 to 11-15-26 13,049 12,629,782
30 Yr Pass Thru Ctf ................................. 7.500 01-15-23 to 02-15-26 19,384 19,334,249
30 Yr Pass Thru Ctf ................................. 8.000 07-15-24 to 09-15-26 31,021 31,527,336
30 Yr Pass Thru Ctf ................................. 9.000 08-15-16 to 12-15-17 9,431 10,051,720
Small Business Administation,
Bond 97-B ........................................... 7.100 02-01-17 5,000 4,810,950
Bond 97-D ........................................... 7.500 04-01-17 5,000 5,057,031
Tennessee Valley Authority,
Bond ................................................ 8.250 04-15-42 8,500 9,023,260
------------
320,664,276
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $398,337,578) (98.95%) 397,604,476
------ ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.22%)
Investment in joint repurchase agreement transaction
with Aubrey G. Lanston & Co.- Dated 4-30-97,
Due 5-01-97 (Secured by U.S. Treasury Bills, 5.37%
thru 5.78% Due 8-21-97 thru 3-05-98, U.S. Treasury
Bonds, 7.125% thru 11.25% Due 2-15-15 thru 2-15-23,
U.S. Treasury Notes, 5.125% thru 7.75%, Due 8-31-98
thru 5-15-05) - Note A 5.375 05-01-97 888 888,000
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account Current Rate 4.950% 8,769
------------
TOTAL SHORT-TERM INVESTMENT ( 0.22%) 896,769
------ ------------
TOTAL INVESTMENTS (99.17%) $398,501,245
====== ============
</TABLE>
* U.S. Treasury Bonds with a value of $1,171,870 owned by the Fund were
designated as margin deposits for future contracts at April 30, 1997.
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.
13
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government 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: John Hancock Sovereign U.S. Government Income Fund (the "Fund")
and John Hancock Strategic Income Fund. The other series of the Trust is
reported in separate financial statements. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-term total
return by investing in securities issued, guaranteed or otherwise backed by the
United States government, it agencies or instrumentalities.
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.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $47,195,214 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gains distribution will be made. The carryforwards expire as follows:
October 31, 1998 - $282,637, October 31, 2002 - $16,549,431, October 31, 2003 -
$26,193,155 and October 31, 2004 - $4,169,991.
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. 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.
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.
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 relative net assets of the respec-
14
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
tive 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.
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 manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The fund had no borrowing
activity for the period ending April 30, 1997.
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 April 30, 1997 there were the following open positions in financial
futures contracts:
OPEN UNREALIZED
EXPIRATION CONTRACTS POSITION DEPRECIATION
- ---------- --------- ------------- ------------
JUN 1997 99 TREASURY SHORT ($124,406)
NOTE
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 bond 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.
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), 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 April 30,
1997.
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) 0.50% of the first $500,000,000 of the Fund's
average daily net asset value, and (b) 0.45% of the Fund's average daily net
asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-Distributors for
shares of the Fund. For the period ended April 30, 1997, net sales charges
received on sales of Class A shares of the Fund amounted to $144,270. Of this
amount, $15,772 was retained and used for printing prospectuses, advertising,
sales literature and other purposes, $27,000 was paid as sales commissions to
unrelated broker-dealers and $101,498 was paid as sales commissions to sales
personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony,
Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of which
are broker-dealers. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Distributors
and was the indirect sole shareholder until November 29, 1996 of John Hancock
Freedom Securities Corporation and its subsidiaries, which include FDC, 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 for providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended April 30, 1997
the contingent deferred sales charges received by JH Funds amounted to $141,773.
In addition, to reimburse JH Funds for the services it provides 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 JH Funds for
distribution and service expenses, at an annual rate not 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 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"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of 0.01875% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione
are trustees and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock
16
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
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 April 30, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $1,477.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of the U.S.
government and its agencies, other than short-term securities, during the period
ended April 30, 1997 aggregated $360,479,341 and $382,020,549, respectively.
The cost of investments owned at April 30, 1997, for federal income tax
purposes was $398,337,578. Gross unrealized appreciation and depreciation of
investments aggregated $2,671,961 and $3,405,063, respectively, resulting in net
unrealized depreciation of $733,102.
17
<PAGE>
================================================================================
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
18
<PAGE>
================================================================================
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
19
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 Huntington Avenue, Boston, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
Internet: www.jhancock.com/funds
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock Sovereign
U.S. Government Income Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 020SA 4/97
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