John Hancock Funds
Sovereign
U.S. Government
Income
Fund
ANNUAL REPORT
May 31, 1997
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
INDEPENDENT AUDITORS
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the
year. Stocks began 1997 on the high wires, bolstered by a near-
perfect "Goldilocks" economy -- not too hot, not too cold. In almost
a straight shot, the Dow Jones Industrial Average soared through the
7000 level for the first time in early March. Just days later, stocks
lost their footing and staged a month-long free-fall in a nervous
reaction to rising interest rates and data that showed the economy
was picking up steam. Stocks gave back all of their year's gain and
suffered their worst decline since 1990 during this period. No sooner
had real fears begun to beset investors than they were gone, erased
in a euphoric rally caused by strong earnings and no signs of
inflation. By the end of May, the Dow had risen by 14.6% and the
broader Standard & Poor's 500 Stock Index by 15.4% -- levels not many
thought the market would reach all year, let alone in five months.
Bondholders have not enjoyed the same bounty, as the bond market has
mostly stayed worried about the strength of the economy, the direction
of interest rates, and the Federal Reserve's next moves to pre-empt
inflation.
But the stock market's latest advance has amazed many analysts and
left them pondering their valuation models, since the market is now
more expensive than it has been in decades. It's impossible to know
what will happen next in the markets. But whether it's another strong
move forward or a retreat, we recommend keeping a long-term
perspective, rather than over-focusing on the market's daily twists
and turns. While the economic backdrop seems to remain near perfect,
the one thing we believe investors should be prepared for is more
market volatility. It also makes sense to do something we've always
advocated: set realistic expectations, since, as we've also seen this
year, markets can move down as fast as they go up.
Use this time of heightened volatility as an opportunity to review
your portfolio's asset allocations with your investment professional.
After such a strong advance in equities over the last two and a half
years, it could be time to rebalance your portfolio, if you haven't
already, to maintain your desired targets of diversification. As part
of that process, make sure that your investment strategies still
reflect your individual time horizons, objectives and risk tolerance.
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
A 1" x 1 1/4" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.
BY BARRY EVANS, PORTFOLIO MANAGER
John Hancock
Sovereign U.S.
Government Income Fund
Bond market seesaws on economic news,
but stays on narrow path
Recently John Hancock Sovereign U.S. Government Income Fund's fiscal
year end changed from October to May. What follows is a discussion
of the Fund's performance for the 12-month period ended May 31, 1997.
Three legs marked the bond market's journey this past year. First,
the economy grew at a stronger-than-expected pace last summer.
Investors grew concerned that this would lead to wage increases and,
in turn, higher prices on finished goods. As fears mounted, yields on
the 10-year Treasury rose to 7.06% in June 1996, up from 6.85% at the
end of May. Yields stayed near their highs until mid-September, when
the economy began weakening. Then bond prices started climbing, with
yields on the 10-year Treasury bottoming at 6.04% in late November.
Finally, starting in December, the economy began strengthening.
Yields climbed well ahead of the Federal Reserve's move in March to
raise short-term interest rates one-quarter percentage point. With
reports in April of the economy's first quarter blistering pace,
yields continued rising through mid-April, then slid on news of
weaker second quarter growth. Yields on the 10-year Treasury ended
May at 6.66% -- not far from where they were a year earlier.
"In this
climate of
controlled
volatility,
the Fund
held its
own."
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 Fund Management team members Roger Hamilton (center) and Seth
Robbins (right)."
Pie chart with heading "Portfolio Diversification" at top of left hand
column. The pie is divided into four sections. From top going clockwise:
Short-Term Investments 2%; Mortgage-backed Securities & CMOs 64%, U.S.
Government Agencies 16%; and U.S. Treasuries 18%. A footnote below
reads: "As a percentage of net assets on May 31, 1997."
In this climate of controlled volatility, the Fund held its own. For
the year ended May 31, 1997, John Hancock Sovereign U.S. Government
Income Fund's Class A and Class B shares had total returns of 6.91%
and 6.30%, respectively, at net asset value. These returns slightly
lagged the 7.03% return of the average general U.S. government fund,
according to Lipper Analytical Services, Inc. 1 During the same
period, the Lehman Brothers Government Bond Index returned 7.58%.
Please see pages six and seven for longer-term Fund performance
information.
"Throughout
the period,
"spread"
securities...
led the
market."
The "spread" story
Throughout the period, "spread" securities -- such as mortgage bonds
and U.S. government agencies -- led the market. Spread refers to the
difference in yield between mortgage bonds, for example, and U.S.
Treasuries. Any yield advantage was especially attractive this past
year, when there was little chance that interest rates would drop
dramatically and bond prices would move much higher. The more spread
investors owned, the better they did.
Fortunately, we significantly boosted our stake in spread securities
to 80% of the Fund's assets, up from 47% a year earlier. Our biggest
focus was on traditional mortgage-backed securities, both fixed-rate
and adjustable-rate. These did so well that in March we decided to
take some profits, ending the year with a 36% stake. We would have,
however, done slightly better by holding on, as mortgages continued
to outpace Treasuries. We also bought collateralized mortgage
obligations (CMOs), doubling our stake to 28% during the period. CMOs
take the cash flows from mortgage pools and separate them into
different classes of various maturities. The conservative type of
CMOs we bought yield less than traditional mortgage-backed
securities. But they also entail less risk because they're less
sensitive to changes in prepayments (the rate at which homeowners pay
off their mortgages). All our CMOs did well until late in the period,
when they lagged traditional mortgage bonds. Our biggest shift was
the addition of U.S. government agencies. Last summer, agencies
started looking like a good buy even though their yields were
slightly lower than traditional mortgage bonds. By the end of the
period, we had accumulated a 16% stake in agencies.
As we built our investment in spread securities, we took our Treasury
stake to 18%, down from 53% at the start of the period. We mostly
sold Treasuries with similar maturities to maintain the same duration
(or sensitivity to interest rates) in the Fund. But at three
different times during the year, we bought or sold Treasuries of
differing maturities so we could make slight adjustments to the
Fund's duration. In October, we lengthened duration to 5.2 years, up
from 4.8. With a longer duration, bond prices rise more as interest
rates fall (and fall more as interest rates rise). This helped the
Fund in the fall rally, but hurt it later when interest rates were
rising. In late February and early March, we shortened back to 4.8
years. Then, in April, we moved the duration back to our peer group
average of 5.0 years, where it stayed.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the 12 months ended May 31,
1997." 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 6.91% total return for John
Hancock Sovereign U.S. Government Income Fund: Class A. The second
represents the 6.30% total return for John Hancock Sovereign U.S.
Government Income Fund: Class B. The third represents the -7.03%
total return for the Average general U.S. government 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 U.S. government fund is tracked by Lipper
Analytical Services. (1) See the following two pages for historical
performance information."
More of same
Once we think the Fed is nearly done raising interest rates, we'll
want to add duration. But until then, we'll probably keep the Fund
where it is. We're staying put because, for now, we expect bond
yields to continue bouncing around on the same narrow path. Auto
strikes, floods in the Midwest and a cool spring have all contributed
to slower consumer spending in the first part of the second quarter.
But unemployment is low, the stock market is strong and housing
prices are rising. So we think consumer spending will stay healthy,
and the economy will pick up again. We'll be watching certain
indicators to see where it's headed. These include the benefits
component of the employment cost index, vendor delivery time from the
purchasing managers' survey, retail sales and the stock market.
Strong gains in any could prompt the Fed to raise rates again.
Longer-term, the bond market's outlook is more favorable. With yields
way above inflation, bond prices look cheap. If the economy slowed
and interest rates fell, investors would collect above-average income
along with potentially huge price gains. In addition, demand is
strong, especially from foreign investors who are attracted to higher
U.S. yields. Meanwhile, as the Federal government moves toward a
balanced budget and lowers spending, it will issue fewer bonds -- a
plus for prices. Finally, we expect inflation to stay low as the
labor force's growth slows and baby boomers start saving more. All
told, we believe there could be good times ahead for bond investors.
"...we expect
inflation to
stay low..."
- --------------------------------------------------------------------
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.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Sovereign U.S.
Government 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. 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.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1997
MOST
ONE FIVE 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%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1997
MOST
ONE FIVE 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%
YIELDS
As of May 31, 1997
SEC 30-Day
YIELD
----------
John Hancock Sovereign
U.S. Government Income
Fund: Class A 5.74%
John Hancock Sovereign
U.S. Government Income
Fund: Class B 5.31%
Notes to Performance
(1) Class A shares commenced operations on January 3, 1992.
WHAT HAPPENED TO A $10,000 INVESTMENT...
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
May 31, 1997, assuming you had invested on the day each class of
shares started 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.
Sovereign U.S. Government Fund
Class A shares
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 $13,786 as of May
31, 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 $13,528 as of May 31, 1997. The third
line represents the Sovereign U.S. Government Fund, after sales charge, and
is equal to $12,919 as of May 31, 1997.
Sovereign U.S. Government Fund
Class B shares
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 the Lehman Government Bond Index and is equal to $21,501 as of May 31,
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 May 31, 1987, and is equal to $20,931 as of May 31, 1997.
*No contingent deferred sales charge applicable.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
May 31, 1997
- ----------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
United States government and agencies securities
(cost - $392,592,613) $ 392,783,651
Joint repurchase agreement (cost - $6,955,000) 6,955,000
Corporate savings account 18,016
-------------
399,756,667
Receivable for shares sold 18,511
Interest receivable 4,625,134
Other assets 33,977
-------------
Total Assets 404,434,289
- ----------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased on a when-issued basis 4,796,027
Payable for shares repurchased 84,020
Dividend payable 137,182
Payable for futures variation margin - Note A 54,136
Payable to John Hancock Advisers, Inc. and affiliates - Note B 312,490
Accounts payable and accrued expenses 111,811
-------------
Total Liabilities 5,495,666
- ----------------------------------------------------------------------------------
Net Assets:
Capital paid-in 448,659,464
Accumulated net realized loss on investments and
financial futures contracts ( 49,693,714)
Net unrealized appreciation of investments and
financial futures contracts 125,498
Distributions in excess of net investment income ( 152,625)
-------------
Net Assets $ 398,938,623
==================================================================================
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 - $302,589,327/31,642,154 $ 9.56
==================================================================================
Class B - $96,349,296/10,075,370 $ 9.56
==================================================================================
Maximum Offering Price Per Share*
Class A - ($9.56 x 104.71%) $ 10.01
==================================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet
and shows the value of what the Fund owns, is due and owes on
May 31, 1997. You'll also find the net asset value and the maximum
offering price per share as of that date.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
- ---------------------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 TO
OCTOBER 31, 1996 MAY 31, 1997(1)
------------------ -------------------
<S> <C> <C>
Investment Income:
Interest $36,271,266 $19,148,619
----------- -----------
Expenses:
Investment management fee - Note B 2,346,755 1,218,973
Distribution and service fee - Note B
Class A 1,044,278 550,525
Class B 1,171,384 598,879
Transfer agent fee - Note B 1,231,688 633,380
Custodian fee 97,585 61,435
Printing 72,233 26,529
Trustees' fees 68,257 33,600
Legal fees 45,791 2,201
Auditing fee 42,572 34,663
Registration and filing fees 39,721 51,258
Financial services fee - Note B 28,344 45,712
Miscellaneous 23,987 6,789
----------- -----------
Total Expenses 6,212,595 3,263,944
- --------------------------------------------------------------------------------------------
Net Investment Income 30,058,671 15,884,675
- --------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized loss on investments sold ( 3,593,442) ( 1,723,636)
Net realized gain on financial futures contracts 1,188,952 852,768
Change in net unrealized appreciation/depreciation
of investments ( 11,886,333) ( 6,682,731)
Change in net unrealized appreciation/depreciation
of financial futures contracts 1,104,844 ( 542,812)
----------- -----------
Net Realized and Unrealized Loss on Investments
and Financial Futures Contracts ( 13,185,979) ( 8,096,411)
- --------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations $16,872,692 $ 7,788,264
============================================================================================
(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
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 periods stated.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD FROM
------------------------------- NOVEMBER 1, 1996 TO
1995 1996 MAY 31, 1997(1)
-------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 33,146,878 $ 30,058,671 $ 15,884,675
Net realized loss on investments sold and financial futures contracts ( 30,917,795) ( 2,404,490) ( 870,868)
Change in net unrealized appreciation/depreciation of investments and
financial futures contracts 71,309,862 ( 10,781,489) ( 7,225,543)
------------ ------------ -------------
Net Increase in Net Assets Resulting from Operations 73,538,945 16,872,692 7,788,264
------------ ------------ -------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6504, $0.6445, and $0.3584 per share, respectively) ( 22,638,537) ( 22,888,998) ( 11,731,116)
Class B - ($0.5970, $0.5788, and $0.3201 per share, respectively) ( 10,503,561) ( 7,168,399) ( 3,452,330)
Distributions from capital paid-in
Class A - (none, none and $0.0148 per share, respectively) -- -- ( 483,787)
Class B - (none, none and $0.0143 per share, respectively) -- -- ( 154,046)
----------- ------------ ------------
Total Distributions to Shareholders ( 33,142,098) ( 30,057,397) ( 15,821,279)
------------ ------------ ------------
From Fund Share Transactions - Net*: ( 50,878,110) ( 46,215,732) ( 35,417,657)
------------ ------------- ------------
Net Assets:
Beginning of period 512,270,995 501,789,732 442,389,295
------------ ------------ ------------
End of period (including distributions in excess of net investment income
of $82,189, $80,915, and $152,625, respectively) $501,789,732 $442,389,295 $398,938,623
============ ============ ============
* Analysis of Fund Share Transactions:
YEAR ENDED OCTOBER 31, PERIOD FROM
-------------------------------------------------------- NOVEMBER 1, 1996 TO
1995 1996 TO MAY 31, 1997(1)
-------------------------- ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ----------- --------- -----------
CLASS A
Shares sold 7,317,218 $72,500,554 2,701,311 $26,773,125 710,972 $ 6,795,126
Shares issued to shareholders in
reinvestment of distributions 2,046,427 19,655,465 1,861,397 18,201,055 1,011,535 9,744,947
---------- ----------- --------- ----------- --------- -----------
9,363,645 92,156,019 4,562,708 44,974,180 1,722,507 16,540,073
Less shares repurchased ( 6,449,531) ( 62,018,777) (7,742,610) ( 76,053,085) (3,949,720) ( 38,081,860)
---------- ----------- --------- ----------- --------- -----------
Net increase (decrease) 2,914,114 $30,137,242 (3,179,902) ($31,078,905) (2,227,213) ($21,541,787)
========== =========== ========= =========== ========= ===========
CLASS B
Shares sold 1,566,023 $15,058,524 1,137,893 $11,221,296 412,878 $ 4,053,805
Shares issued to shareholders in
reinvestment of distributions 622,218 5,939,906 397,229 3,883,010 204,335 1,968,833
---------- ----------- --------- ----------- --------- -----------
2,188,241 20,998,430 1,535,122 15,104,306 617,213 6,022,638
Less shares repurchased (10,444,168) (102,013,782) (3,092,548) ( 30,241,133) (2,064,737) ( 19,898,508)
---------- ----------- --------- ----------- --------- -----------
Net decrease ( 8,255,927) ($81,015,352) (1,557,426) ($15,136,827) (1,447,524) ($13,875,870)
========== =========== ========= =========== ========= ===========
(1) Effective May 31, 1997, the fiscal period end changed from
October 31 to May 31.
The Statement of Changes in Net Assets shows how the value of the Fund's
net assets has changed since the end of the previous periods. 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 three periods, along with the corresponding
dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
as follows:
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD FROM
------------------------------------------------------- NOVEMBER 1, 1996
1992(1) 1993 1994 1995 1996 TO MAY 31, 1997(6)
-------- -------- -------- -------- -------- ------------------
<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) 0.37(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial Futures
Contracts ( 0.22) 0.61 ( 1.34) 0.77 ( 0.26) ( 0.19)
-------- -------- -------- -------- -------- --------
Total from Investment Operations 0.42 1.29 ( 0.69) 1.42 0.38 0.18
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.64) ( 0.68) ( 0.65) ( 0.65) ( 0.64) ( 0.36)
Distributions from Net Realized Gain
on Investments Sold -- ( 0.01) ( 0.31) -- -- --
Distributions from Capital Paid-In -- -- -- -- -- ( 0.01)
-------- -------- -------- -------- -------- --------
Total Distributions ( 0.64) ( 0.69) ( 0.96) ( 0.65) ( 0.64) ( 0.37)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.75 $ 9.56
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset
Value(3) 5.33%(4) 12.89% ( 6.66%) 15.90% 4.02% 1.92%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $350,907 $375,416 $315,372 $370,966 $330,162 $302,589
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% 6.69%(5)
Portfolio Turnover Rate 140% 273% 127% 94% 143% 88%
The Financial Highlights summarizes the impact of the following factors
on a single share for each 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.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD FROM
---------------------------------------------------------- NOVEMBER 1, 1996
1992 1993 1994 1995 1996 TO MAY 31, 1997(6)
-------- -------- -------- -------- -------- ------------------
<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) 0.33(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial Futures
Contracts -- 0.61 ( 1.34) 0.77 ( 0.26) ( 0.18)
-------- -------- -------- -------- -------- --------
Total from Investment Operations 0.76 1.27 ( 0.73) 1.37 0.32 0.15
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.77) ( 0.66) ( 0.61) ( 0.60) ( 0.58) ( 0.32)
Distributions from Net Realized Gain
on Investments Sold -- ( 0.01) ( 0.31) -- -- --
Distributions from Capital Paid-In -- -- -- -- -- ( 0.01)
-------- -------- -------- -------- -------- --------
Total Distributions ( 0.77) ( 0.67) ( 0.92) ( 0.60) ( 0.58) ( 0.33)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.28 $ 10.88 $ 9.23 $ 10.00 $ 9.74 $ 9.56
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3) 7.58% 12.66% ( 7.05%) 15.27% 3.33% 1.61%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $197,032 $244,133 $196,899 $130,824 $112,228 $96,349
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% 5.99%(5)
Portfolio Turnover Rate 140% 273% 127% 94% 143% 88%
(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.
(6) Effective May 31, 1997, the fiscal period end changed from
October 31 to May 31.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by Sovereign U.S. Government Income Fund on May 31, 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.
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ---------------------------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
U.S.GOVERNMENT AND AGENCIES SECURITIES
Governmental -- U.S. (18.03%)
United States Treasury,
Bond 10.750% 08-15-05 $12,085 $ 15,157,249
Bond 12.750 11-15-10 6,000 8,283,720
Bond 12.000 08-15-13 9,400 13,130,578
Bond* 9.250 02-15-16 26,450 32,682,149
Bond 8.125 08-15-19 2,365 2,659,513
------------
71,913,209
------------
Governmental -- U.S. Agencies (80.43%)
Federal Farm Credit Bank,
Bond 11.900 10-20-97 7,350 7,519,932
Federal Home Loan Bank,
Bond 6.770 01-29-02 5,000 4,971,850
Bond 12.500 09-10-97 10,000 10,185,900
Federal Home Loan Mortgage Corp.,
10 Yr Pass Thru Ctf 6.875 11-22-01 5,000 4,878,900
15 Yr Pass Thru Ctf 10.500 02-01-03 4,772 5,004,469
30 Yr Pass Thru Ctf 9.500 08-01-16 12,770 13,749,270
CMO REMIC 34-C 9.000 11-15-19 5,800 5,937,389
CMO REMIC 1142-H 7.950 12-15-20 10,000 10,203,100
CMO REMIC 1603-K 6.500 10-15-23 5,000 4,593,750
CMO REMIC 1608-L 6.500 09-15-23 5,000 4,573,400
CMO REMIC 1617-PM 6.500 11-15-23 10,000 9,253,100
CMO REMIC 1727-I 6.500 05-15-24 5,000 4,562,500
CMO REMIC 1866-G 7.000 07-15-26 5,686 5,375,033
CMO REMIC 1876-PG 7.000 08-15-26 8,000 7,562,500
CMO REMIC 1910-AK 7.000 11-15-26 11,859 11,191,931
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf 9.550 12-10-97 1,020 1,040,400
10 Yr Pass Thru Ctf 9.050 04-10-00 10,000 10,659,400
10 Yr Pass Thru Ctf 8.900 06-12-00 5,000 5,324,200
10 Yr SF Pass Thru Ctf 9.150 04-10-98 5,000 5,116,400
15 Yr Pass Thru Ctf 9.000 02-01-10 6,943 7,236,700
15 Yr Pass Thru Ctf 7.500 06-01-11 7,267 7,354,415
15 Yr Pass Thru Ctf 7.500 06-01-11 4,571 4,617,247
15 Yr Pass Thru Ctf 7.500 07-01-11 4,599 4,654,594
30 Yr Pass Thru Ctf 8.000 10-01-24 7,462 7,606,729
CMO REMIC 1989-78-G 9.050 12-25-18 7,381 7,581,227
CMO REMIC 1991-76-M 9.000 07-25-06 3,191 3,245,351
CMO REMIC 1994-60-PJ 7.000 04-25-24 6,100 5,768,282
CMO REMIC 1994-75-K 7.000 04-25-24 3,100 2,952,750
CMO REMIC 1996-28-PK 6.500 07-25-25 7,589 6,818,455
CMO REMIC 1996-63-PD 7.500 01-18-22 10,000 9,775,000
CMO REMIC G-8-E 9.000 04-25-21 6,000 6,300,000
CMO REMIC X-225C-TK 6.500 12-25-23 5,032 4,634,120
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage 6.875 10-20-22 to 15,305 15,695,310
10-20-23
30 Yr SF Pass Thru Ctf++ 7.000 12-01-99 to 12,975 12,634,048
03-15-26
30 Yr SF Pass Thru Ctf 7.500 01-15-23 to 19,213 19,249,997
02-15-26
30 Yr SF Pass Thru Ctf 8.000 07-15-24 to 30,828 31,452,028
09-15-26
30 Yr SF Pass Thru Ctf 9.000 08-15-16 to 9,262 9,921,906
12-15-17
Small Business Administration,
Bond 97-B 7.100 02-01-17 5,000 4,971,875
Bond 97-D 7.500 04-01-17 5,000 5,060,937
Pass Thru Ctf Ser 1997-20E 7.300 05-01-17 2,500 2,507,812
Tennessee Valley Authority,
Bond 8.250 04-15-42 8,500 9,128,235
------------
320,870,442
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $392,592,613) ( 98.46%) 392,783,651
------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.74%)
Investment in a joint repurchase agreement transaction with
Swiss Bank, Dated 5-30-97, Due 6-02-97 (secured by
U.S. Treasury Notes, 6.375% Due 5-15-99, and U.S. Treasury
Bonds, 6.25% thru 11.25%, Due 11-15-08 thru 8-15-23) Note A 5.560 06-02-97 6,955 6,955,000
------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company Daily Interest Savings Account
Current Rate 4.950% 18,016
------------
TOTAL SHORT-TERM INVESTMENTS ( 1.75%) 6,973,016
------- ------------
TOTAL INVESTMENTS (100.21%) $399,756,667
======= ============
* U.S. Treasury Bonds with a value of $950,443 owned by the Fund were
designated as margin deposits for future contracts at May 31, 1997.
++ A portion of these securities having an aggregate value of $4,795,522
or 1.20% of the Fund's net assets has been purchased on a when-issued
basis. The purchase price and the interest rate of such securities are
fixed at trade date, although the Fund does not earn any interest on
such securities until settlement date. The Fund has instructed its
Custodian Bank to segregate assets with a current value at least equal
to the amount of its when-issued commitments. Accordingly, the market
values of $6,984,350 of U.S. Treasury Bond, 12.000%, 08-15-13 have been
segregated to cover the when-issued commitments.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
See notes to financial statements.
</TABLE>
Notes to Financial Statements
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management
investment company registered under the Investment Company Act of
1940. The Trust consists of 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. On May 21, 1996 the Trustees voted to approve a change in
the fiscal period from October 31 to May 31. This change is effective
May 31, 1997. 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 obli-
gations 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 investments, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $48,876,888 of a capital
loss carryforward available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent that such
carryforward is used by the Fund, no capital gain distributions will
be made. The carryforward expires as follows: May 31, 1998 -
$282,637, May 31, 2002 - $16,549,431, May 31, 2003 - $26,193,155, May
31, 2004 - $3,597,046 and May 31, 2005 - $2,254,619. The Fund's tax
year end is May 31. 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. Interest income on
investment securities is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid
by the Fund with respect to each class of shares will be calculated in
the same manner, at the same time and will be in the same amount,
except for the effect of expenses that may be applied differently to
each class.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or the date of purchase over
the life of the security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are determined at the Fund level and allocated daily to
each class of shares based on the relative 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.
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.
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 ended
May 31, 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 May 31, 1997 there were the following open positions in financial
futures contracts:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- ---------- ------------
JUN 1997 35 TREASURY BOND SHORT ($47,655)
SEP 1997 30 TREASURY BOND SHORT ($20,626)
------------
($68,281)
============
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 ("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 May 31,
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 May 31,
1997, net sales charges received on sales of Class A shares of the
Fund amounted to $162,187. Of this amount, $18,811 was retained and
used for printing prospectuses, advertising, sales literature and
other purposes, $29,293 was paid as sales commissions to unrelated
broker-dealers and $114,083 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 May 31, 1997 the contingent
deferred sales charges received by JH Funds amounted to $160,058.
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 to exceed 0.30% of Class A average daily net assets
and 1.00% of Class B average daily net assets to reimburse JH Funds
for its distribution and service costs. Up to a maximum of 0.25% of
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. In
order to comply with this rule, the 12b-1 fee on Class B ranged from
0.95% to 1.00% of average daily net assets throughout the period.
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 Group of Funds Deferred Compensation Plan. The
Fund makes investments into other John Hancock funds, as applicable,
to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the
Fund's books as an other asset. The deferred compensation liability
and the related other asset are always equal and are marked to market
on a periodic basis to reflect any income earned by the investment as
well as any unrealized gains or losses. At May 31, 1997, the Fund's
investments to cover the deferred compensation liability had
unrealized appreciation of $2,741.
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 May 31, 1997 aggregated $372,920,197 and
$399,834,790, respectively.
The cost of investments owned at May 31, 1997, for federal income tax
purposes was $392,659,962. Gross unrealized appreciation and
depreciation of investments aggregated $2,858,513 and $2,734,824,
respectively, resulting in net unrealized appreciation of $123,689.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the period ended May 31, 1997, the Fund has reclassified
amounts to reflect a decrease in accumulated net realized loss on
investments of $1,331,507, an increase in distributions in excess of
net investment income of $135,106 and a decrease in capital paid-in of
$1,196,401. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as
of May 31, 1997. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to the
treatment of foreign currency transactions in the computation of
distributable income and capital gains under federal tax rules versus
generally accepted accounting principles. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Sovereign U.S. Government Income
Fund and the Trustees of John Hancock Strategic Series, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
John Hancock Sovereign U.S. Government Income Fund (the "Fund") (a
portfolio of John Hancock Strategic Series, Inc.) at May 31, 1997, and
the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and the significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of securities at May 31, 1997 by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 11, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is
furnished with respect to the dividends of the Fund paid during its
taxable year ended May 31, 1997.
All of the dividends paid for the fiscal year are taxable as ordinary
income. None of the dividends qualify for the dividends received
deduction available to corporations.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-
DIV in January 1998. This will reflect the total of all distributions
that are taxable for calendar year 1997.
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
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in lower right. A tag line below reads: "A Global Investment
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Permit No. 75
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,
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7/97
John Hancock Funds
Strategic
Income
Fund
ANNUAL REPORT
May 31, 1997
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
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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the
year. Stocks began 1997 on the high wires, bolstered by a near-perfect
"Goldilocks" economy -- not too hot, not too cold. In almost a straight
shot, the Dow Jones Industrial Average soared through the 7000 level for
the first time in early March. Just days later, stocks lost their
footing and staged a month-long free-fall in a nervous reaction to
rising interest rates and data that showed the economy was picking up
steam. Stocks gave back all of their year's gain and suffered their
worst decline since 1990 during this period. No sooner had real fears
begun to beset investors than they were gone, erased in a euphoric rally
caused by strong earnings and no signs of inflation. By the end of May,
the Dow had risen by 14.6% and the broader Standard & Poor's 500 Stock
Index by 15.4% -- levels not many thought the market would reach all
year, let alone in five months. Bondholders have not enjoyed the same
bounty, as the bond market has mostly stayed worried about the strength
of the economy, the direction of interest rates, and the Federal
Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left
them pondering their valuation models, since the market is now more
expensive than it has been in decades. It's impossible to know what will
happen next in the markets. But whether it's another strong move forward
or a retreat, we recommend keeping a long-term perspective, rather than
over-focusing on the market's daily twists and turns. While the economic
backdrop seems to remain near perfect, the one thing we believe
investors should be prepared for is more market volatility. It also
makes sense to do something we've always advocated: set realistic
expectations, since, as we've also seen this year, markets can move down
as fast as they go up.
Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After
such a strong advance in equities over the last two and a half years, it
could be time to rebalance your portfolio, if you haven't already, to
maintain your desired targets of diversification. As part of that
process, make sure that your investment strategies still reflect your
individual time horizons, objectives and risk tolerance. 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
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
BY FREDERICK CAVANAUGH, PORTFOLIO MANAGER
John Hancock
Strategic Income Fund
While foreign and domestic government bonds seesaw, high-yield
corporate bonds shrug off a volatile interest-rate environment
U.S. and global interest rates reversed course during the past year,
providing a volatile backdrop for government bonds issued in nearly all
parts of the world. In the first half of the Fund's fiscal year, falling
rates provided a relatively healthy environment for both domestic and
international bonds. But the second half proved to be more difficult.
Signs that the U.S. economy was improving at a quicker-than-expected
pace caused investors to worry that inflation would flare up and, as a
result, that the Federal Reserve would be forced to fight it with higher
interest rates. In anticipation of rate hikes, investors slowly bid bond
yields higher beginning late last year and -- because they move in the
opposite direction of yields -- bond prices lower. As expected, the Fed
did raise rates in March, which sent bond yields higher still and bond
prices lower. However, signs that the economy was slowing allowed for a
bond rally late in the period.
Meanwhile, high-yield bonds -- those issued by companies with below
investment-grade credit ratings -- were able to shrug off the bond
market's volatility and sustain their advance throughout the entire
fiscal year. The strong U.S. economy translated into quite good earnings
for many high-yield companies and helped to keep the number of defaults
among high-yield companies negligible. Further boosting high-yield
bonds' progress was demand: 1996 turned out to be a record year for net
new cash coming into high-yield mutual funds, and demand continued to be
strong during the first five months of 1997.
"...high-yield
bonds...were
able to shrug
off the bond
market's
volatility..."
A 2" x 3 1/2" photo of Strategic Income Fund management team at bottom
center. Caption reads: "Fred Cavanaugh (left) and Fund management team
members (l-r) Linda Carter, Jamie Kellogg and Aurthur Calavatrinos."
Chart with heading "Top Five Bond Sectors" at top left hand column. The
chart lists five holdings: 1) U.S. Treasury & Government Agencies 19% 2)
Foreign Governments 17% 3) Telecommunications 11% 4) Media 8% 5) Leisure
7%. Footnote below reads: "As a percentage of net assets on May 31,
1997."
"...we
continued to
maintain a
fairly steady
weighting in
foreign
government
bonds..."
For the year ended May 31, 1997, John Hancock Strategic Income Fund's
Class A and Class B shares returned 12.99% and 12.21%, respectively, at
net asset value. Those returns beat the average multi-sector income
fund's return of 12.06%, according to Lipper Analytical Services, Inc.1
Please see pages six and seven for longer-term performance information.
Wind behind the backs of high-yield bonds
As you know, 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 broad categories -- higher-
yielding, lower-rated corporate bonds, foreign bonds and U.S. government
securities. During the bulk of the 12-month period, we kept a larger
weighting -- about 40% of the Fund -- in high-yield bonds issued in the
U.S. and abroad than in any other sector. That decision helped our
performance, since the high-yield sector was the best performing sector
among the three broad categories. We had very good success with Nextel,
a telecommunications company that provides a unit with paging, cellular
and dispatch capabilities. The company experienced very strong
subscriber growth and moved closer to having a national presence. Other
winners included Showboat Marina, which operates a gambling boat in
Indiana, and energy company Falcon Drilling. But the good fortunes of
the high-yield market didn't cancel out other market trends. Recurring
sell-offs in technology stocks throughout the year spilled over to the
high-yield bonds of Computervision and hurt its performance.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investment"; the header for the right column is
"Recent performance ... and what's behind the numbers." The first
listing is Nextel followed by an up arrow and the phrase "Fast-growing
demand for paging/cellular/dispatch device." The second listing is
Communicacion Cellular followed by an up arrow and the phrase "Filling
Columbia's Telecom void." The third listing is Computervision followed
by a down arrow and the phrase "Caught in tech sell-off." Footnote
below reads: "See "Schedule of Investments." Investment holdings are
subject to change."
During the year we found some attractive opportunities in high-yield
bonds issued by foreign companies, who often turn to the U.S. high-yield
market for their debt financing needs. Many of these companies are high-
quality companies that, were they located in the U.S., would likely
carry an investment-grade rating. However, credit rating protocol puts
somewhat of an artificial rating ceiling on them because they can't have
a higher credit rating than the country in which they are located. A
good example of this is Mexican holding Pepsi-Gemex, one of the world's
largest Pepsi bottlers. We also added Colombian cellular company
Comunicacion Celular, which has seen very strong subscriber growth. We
continued to hold onto the bulk of our U.K. cable companies including
Telewest and Comcast U.K., which have benefited from their growing
telephone businesses, creating a dual stream of revenue from that and
their cable businesses.
Foreign governments
Through the past year we continued to maintain a fairly steady weighting
in foreign government bonds, although we've made some recent
adjustments. We eliminated our holdings in some Western European bonds,
namely Denmark, Ireland, Norway and Spain. Our reasons for doing so were
two-fold. First, the yield advantage these bonds offered over other
areas of the world diminished. Second, we are concerned about the effect
a unified European currency would have on these countries. On the other
hand, we added to our holdings in the United Kingdom, which we believe
still offers value and which has no near-term plans to take part in a
unified currency. We also increased our stake in dollar-bloc countries
including Australia, Canada and New Zealand, and doubled our stake in
dollar-denominated debt from emerging markets, primarily with
investments in Argentina, Brazil and Mexico. As always, we manage the
Fund to have an average credit rating of investment-grade. So to offset
some of the risk inherent with emerging-market debt, we increased our
holdings in U.S. Treasury and agency bonds to 19% by the end of May.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1997."
The chart is scaled in increments of 5% from bottom to top, with 15% at
the top and 0% at the bottom. Within the chart, there are three solid
bars. The first represents the 12.99% total return for John Hancock
Strategic Income Fund: Class A. The second represents the 12.21% total
return for John Hancock Strategic Income Fund: Class B. The third
represents the 12.06% 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."
Outlook
We're optimistic about the prospects of the high-yield market, but with
a tinge of caution. A continued strong economy should help keep earnings
growing and cash flow improving. From a technical standpoint, the market
looks strong with demand quite good and supply stable. Our one caveat is
that the "spread" -- which is the difference in yield between high-yield
bonds and Treasuries -- is quite tight, especially when viewed on a
historical basis. When spreads are this tight, the market can be more
vulnerable to negative developments. As far as Europe goes, we think
it's more likely that yields will head higher than it is that they will
go lower. And with uncertainty about a unified European currency hanging
over the region, we'll probably continue to avoid most continental
countries. Rather, we'll continue to favor the U.K. and dollar-bloc
countries, as well as emerging markets where we feel the rewards are
attractive enough to warrant their added risk.
"...we'll
continue to
favor the
U.K. and
dollar-bloc
countries..."
- ---------------------------------------------------------------------
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, Inc. include reinvested
dividends and do not take into account sales charges. Actual load-
adjusted performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Strategic Income Fund.
Total return is a performance measure that equals the sum of all income
and capital gain distributions, assuming reinvestment of these
distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 4.50%
for Class A shares. Different sales charge schedules for Class A shares
were in effect prior to September 28, 1989 and are not reflected in the
performance information. The effect of the maximum contingent deferred
sales charge for Class B shares (maximum 5% and declining to 0% over six
years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will
perform in the future. Also, keep in mind that the total return and
share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost,
depending on when you sell them. Please see the prospectus for a
discussion of risks associated with international investing and high-
yield bonds.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1997
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
------ ------ ------------
John Hancock
Strategic Income Fund:
Class A 5.57% 44.36% 101.38%
John Hancock
Strategic Income Fund:
Class B(1) 4.74% 26.58% N/A
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1997
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
------ ------ ------------
John Hancock
Strategic Income Fund:
Class A 5.57% 7.62% 7.25%
John Hancock
Strategic Income Fund:
Class B(1) 4.74% 6.98% N/A
YIELDS
As of May 31, 1997
SEC 30-DAY
YIELD
-----------
John Hancock
Strategic Income Fund: Class A 7.74%
John Hancock
Strategic Income Fund: Class B 7.40%
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 May 31, 1997. 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 most recent ten
years. Within the chart are three lines. The first line represents the
value of the Lehman Government/Corporate Bond Index and is equal to
$22,780 as of May 31, 1997. The second line represents the value of the
hypothetical $10,000 investment made in the Strategic Income Fund on May 31,
1987, before sales charge, and is equal to $22,473 as of May 31, 1997. The
third line represents the Strategic Income Fund, after sales charge, and
is equal to $21,462 as of May 31, 1997.
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, on October 4,
1993, and is equal to $13,455 as of May 31, 1997. The second line
represents the value of the hypothetical $10,000 investment made in the
Strategic Income Fund, after sales charge, and is equal to $13,155 as of
November 30, 1996. The third line represents the value of the Lehman
Government/Corporate Bond Index, and is equal to $11,985 as of May 31,
1997.
<TABLE>
<CAPTION>
The Statement of Assets and Liabilities is the Fund's balance sheet
and shows the value of what the Fund owns, is due and owes on May 31, 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
May 31, 1997
- ---------------------------------------------------------------------
<S> <C>
Assets:
Investments at value -- Note C:
Bonds (cost -- $651,156,081) $663,822,437
Common and preferred stocks and
warrants (cost -- $46,338,221) 53,105,608
Joint repurchase agreement (cost -- $19,851,000) 19,851,000
--------------
736,779,045
Receivable for investments sold 9,971,593
Receivable for shares sold 1,077,144
Dividends receivable 80,155
Interest receivable 13,548,287
Other assets 20,201
--------------
Total Assets 761,476,425
- ---------------------------------------------------------------------
Liabilities:
Payable for investments purchased 14,924,073
Payable for shares repurchased 163,883
Payable for foreign currency exchange
contracts sold -- Note A 135,512
Dividend payable 129,802
Payable to John Hancock Advisers, Inc.
and affiliates -- Note B 398,566
Accounts payable and accrued expenses 322,089
--------------
Total Liabilities 16,073,925
- ---------------------------------------------------------------------
Net Assets:
Capital paid-in 749,190,398
Accumulated net realized loss on investments,foreign
currency transactions and financial futures contracts (30,049,881)
Net unrealized appreciation of investments
and foreign currency transactions 19,290,758
Undistributed net investment income 6,971,225
--------------
Net Assets $745,402,500
=====================================================================
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 -- $416,915,602/55,271,453 $7.54
=====================================================================
Class B -- $328,486,898/43,548,258 $7.54
=====================================================================
Maximum Offering Price Per Share*
Class A -- ($7.54 x 104.71%) $7.90
=====================================================================
* On single retail sales of less than $100,000. On sales of $100,000
or more and on group sales the offering price is reduced.
</TABLE>
<TABLE>
<CAPTION
The Statement of Operations summarizes the Fund's investment income earned
and expenses incurred in operating the Fund. It also shows net gains (losses)
for the period stated.
Statement of Operations
Year ended May 31, 1997
- ---------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (net of foreign withholding taxes of $11,242) $61,650,327
Dividends 1,755,545
--------------
63,405,872
--------------
Expenses:
Investment management fee -- Note B 2,830,885
Distribution and service fee -- Note B
Class A 1,175,999
Class B 2,682,961
Transfer agent fee -- Note B 979,264
Custodian fee 327,997
Registration and filing fees 140,187
Financial services fee -- Note B 132,910
Trustees' fees 68,059
Auditing fee 45,472
Printing 40,014
Legal fees 26,919
Miscellaneous 16,684
--------------
Total Expenses 8,467,351
- ---------------------------------------------------------------------
Net Investment Income 54,938,521
- ---------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
on Investments, Foreign Currency Transactions
and Financial Futures Contracts:
Net realized gain on investments sold 6,704,214
Net realized loss on financial futures contracts (631,925)
Net realized gain foreign currency transactions 6,297,112
Change in net unrealized appreciation/depreciation
of investments 12,833,314
Change in net unrealized appreciation/depreciation
of foreign currency transactions (1,388,407)
--------------
Net Realized and Unrealized
Gain on Investments 23,814,308
- ---------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $78,752,829
=====================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
YEAR ENDED MAY 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $45,468,202 $54,938,521
Net realized gain on investments sold, foreign currency
transactions, and financial futures contracts 8,472,925 12,369,401
Change in net unrealized appreciation/depreciation of
investments, foreign currency transactions and financial
futures contracts (567,646) 11,444,907
------------- -------------
Net Increase in Net Assets Resulting from
Operations 53,373,481 78,752,829
------------- -------------
Distributions to Shareholders:
Dividends from net investment income
Class A -- ($0.6643 and $0.6371 per share,
respectively) (31,814,278) (33,759,527)
Class B -- ($0.6138 and $0.5854 per share,
respectively) (13,654,321) (21,178,937)
------------- -------------
Total Distributions to Shareholders (45,468,599) (54,938,464)
------------- -------------
From Fund Share Transactions -- Net*: 105,570,421 145,710,146
------------- -------------
Net Assets:
Beginning of period 462,402,686 575,877,989
------------- -------------
End of period (including undistributed net
investment income of $1,748,001 and $6,971,225,
respectively) $575,877,989 $745,402,500
============= =============
*Analysis of Fund Share Transactions:
YEAR ENDED MAY 31,
----------------------------------------------------------
1996 1997
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
CLASS A
Shares sold 13,814,860 $100,644,593 25,714,330 $191,363,563
Shares issued to shareholders in reinvestment
of distributions 2,783,247 20,217,302 2,756,450 20,478,423
------------- ------------- ------------- -------------
16,598,107 120,861,895 28,470,780 211,841,986
Less shares repurchased (11,730,367) (85,419,278) (23,946,698) (178,382,670)
------------- ------------- ------------- -------------
Net increase 4,867,740 $35,442,617 4,524,082 $33,459,316
============= ============= ============= =============
CLASS B
Shares sold 15,428,983 $112,410,866 26,203,914 $194,709,218
Shares issued to shareholders in reinvestment
of distributions 904,705 6,576,391 1,314,586 9,776,167
------------- ------------- ------------- -------------
16,333,688 118,987,257 27,518,500 204,485,385
Less shares repurchased (6,733,353) (48,859,453) (12,396,576) (92,234,555)
------------- ------------- ------------- -------------
Net increase 9,600,335 $70,127,804 15,121,924 $112,250,830
============= ============= ============= =============
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.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the period
indicated, investment returns, key ratios and supplemental data are listed as follows:
YEAR ENDED MAY 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $7.78 $7.55 $7.17 $7.15 $7.27
-------- -------- -------- -------- --------
Net Investment Income 0.71 0.68 0.64 0.66(2) 0.64(2)
Net Realized and Unrealized Gain (Loss) on
Investments, Foreign Currency Transactions and
Financial Futures Contracts (0.22) (0.33) (0.02) 0.12 0.27
-------- -------- -------- -------- --------
Total from Investment Operations 0.49 0.35 0.62 0.78 0.91
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.72) (0.58) (0.55) (0.66) (0.64)
Distributions in Excess of Net Investment Inco -- (0.05) -- -- --
Distributions from Capital Paid-In -- (0.10) (0.09) -- --
-------- -------- -------- -------- --------
Total Distributions (0.72) (0.73) (0.64) (0.66) (0.64)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $7.55 $7.17 $7.15 $7.27 $7.54
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) 6.81% 4.54% 9.33% 11.37% 12.99%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $262,137 $335,261 $327,876 $369,127 $416,916
Ratio of Expenses to Average Net Assets 1.58% 1.32% 1.09% 1.03% 1.00%
Ratio of Net Investment Income to Average Net 9.63% 8.71% 9.24% 9.13% 8.61%
Portfolio Turnover Rate 97% 91% 55% 78% 132%
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.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
YEAR ENDED MAY 31,
PERIOD ENDED ----------------------------------
MAY 31, 1994(1) 1995 1996 1997
-------------- -------- -------- --------
<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) 0.59
Net Realized and Unrealized Gain (Loss) on
Investments, Foreign Currency Transactions and
Financial Futures Contracts (0.41) (0.02) 0.12 0.27
-------- -------- -------- --------
Total from Investment Operations (0.01) 0.58 0.73 0.86
-------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.32) (0.52) (0.61) (0.59)
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) (0.59)
-------- -------- -------- --------
Net Asset Value, End of Period $7.17 $7.15 $7.27 $7.54
======== ======== ======== ========
Total Investment Return at Net Asset Value (3) (0.22%)(4) 8.58% 10.61% 12.21%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) $77,691 $134,527 $206,751 $328,487
Ratio of Expenses to Average Net Assets 1.91%(5) 1.76% 1.73% 1.70%
Ratio of Net Investment Income to Average Net Assets 8.12%(5) 8.55% 8.42% 7.90%
Portfolio Turnover Rate 91% 55% 78% 132%
(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) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) Annualized.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
May 31, 1997
The Schedule of Investments is a complete list of all securities owned by Strategic Income
Fund on May 31, 1997. It has 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 bonds owned by the Fund. Short-term investments,
which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST S&P (000s MARKET
ISSUER, DESCRIPTION RATE RATING OMITTED) VALUE
- -------------------------------------------------- --------- ------ ---------- --------------
<S> <C> <C> <C> <C>
BONDS
Advertising (1.10%)
Outdoor Systems, Inc., Sr Sub Note 10-15-06 9.375% B $4,000 $4,040,000
Universal Outdoor Inc., Sr Sub Note Ser B 10-15-06 9.750 B 4,000 4,130,000
--------------
8,170,000
--------------
Aerospace (0.23%)
Jet Equipment Trust, Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910 BBB- 1,500 1,739,055
--------------
Banks -- Foreign (0.96%)
Landeskreditbank Baden -- Wuerttemberg, Sub Note (Germany) 02-01-23 (Y) 7.625 AAA 7,000 7,173,950
--------------
Beverages (0.28%)
Pepsi-Gemex, S.A. de C.V., Bond (Mexico) 03-30-04 (R), (Y) 9.750 BB 2,000 2,057,500
--------------
Business Services -- Misc (0.44%)
Pierce Leahy Corp., Sr Sub Note 07-15-06 11.125 B- 3,000 3,292,500
--------------
Chemicals (0.54%)
OPP Petroquimica S.A., Bond (Brazil) 10-29-04 (R), (Y) 11.000 B 4,000 4,050,000
--------------
Computers (1.25%)
Computervision Corp., Sr Sub Note 08-15-99 11.375 B- 4,000 3,920,000
Unisys Corp., Sr Note 10-15-04 11.750 B+ 5,000 5,375,000
--------------
9,295,000
--------------
Containers (2.85%)
AMTROL Inc., Sr Sub Note 12-31-06 10.625 B- 3,825 3,978,000
Berry Plastics Corp., Sr Sub Note 04-15-04 12.250 B- 2,000 2,195,000
Gaylord Container Corp., Sr Sub Disc Deb 05-15-05 12.750 B- 5,000 5,475,000
Riverwood International Corp., Gtd Sr Sub Note 04-01-08 10.875 B- 6,000 5,460,000
Stone Container Corp., Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 12.250 B- 4,000 4,100,000
--------------
21,208,000
--------------
Diversified Operations (0.84%)
Derlan Manufacturing, Sr Note 01-15-07 (R) 10.000 B+ 1,000 1,020,000
Euramax International Plc, Sr Sub Note (United Kingdom) 10-01-06 (Y) 11.250 B 3,150 3,323,250
Intertek Finance Plc, Sr Sub Note (United Kingdom) 11-01-06 (Y) 10.250 B2 1,850 1,914,750
--------------
6,258,000
--------------
Electronics (0.84%)
Cablevision Systems Corp., Sr Sub Deb 02-15-13 9.875 B 4,000 4,010,000
Fairchild Semiconductor Corp., Sr Sub Note 03-15-07 (R) 10.125 B 2,200 2,282,500
--------------
6,292,500
--------------
Energy (0.17%)
AES China Generating Co. Ltd., Note (Bermuda) 12-15-06 (Y) 10.125 BB- 1,200 1,278,000
--------------
Finance (1.37%)
CEI Citicorp Holdings, Bond (Argentina) 02-14-07 (R), (Y) 9.750 BB- 3,000 3,030,000
Maxxam Group Holdings, Inc., Sr Sec Note Ser B 08-01-03 12.000 CCC+ 3,000 3,090,000
Polysindo International Finance Co. B.V., Gtd Sr Sec Note (Netherlands)
06-15-06 (Y) 11.375 BB 3,750 4,078,125
--------------
10,198,125
--------------
Food (0.70%)
Americold Corp., Sr Sub Note 05-01-08 12.875 B- 4,000 4,240,000
Arisco Produtos Alimenticios S.A., Bond (Brazil) 05-22-05 (R), (Y) 10.750 B 1,000 1,002,500
--------------
5,242,500
--------------
Glass Products (0.35%)
VICAP S.A. de C.V., Gtd Sr Note (Mexico) 05-15-07 (R), (Y) 11.375 B+ 2,500 2,596,750
--------------
Government -- Foreign (17.06%)
Argentina, Republic of,
Government Bond (Argentina) 03-31-23 (Y) 5.250 BB- 5,000 3,384,375
Sr Unsub Note (Argentina) 10-09-06 (Y) 11.000 BB 2,000 2,178,750
Australia, Commonwealth of,
Government Bond (Australia) 03-15-02# 9.750 AAA 8,000 6,818,199
Government Bond (Australia) 08-15-03# 9.500 AAA 15,000 12,775,674
Government Bond (Australia) 07-15-05# 7.500 AA+ 23,000 17,641,425
Brazil, Federative Republic of,
Government Bond (Brazil) (Floating Rate Note) 09-15-07 (R), (Y) 6.563 B+ 3,882 3,532,365
Canada, Government of,
Government Bond (Canada) 06-01-23# 8.000 AAA 7,000 5,655,475
Treasury Bond (Canada) 06-01-25# 9.000 AAA 20,000 17,921,692
Croatia, Republic of, Sr Note (Croatia) 02-27-02 (R), (Y) 7.000 BBB- 5,000 4,862,650
Moscow, City of, Unsub Deb (Russia) 05-31-00 (R), (Y)= 9.500 B 6,000 6,030,000
New Zealand, Government of, Government Bond (New Zealand) 02-15-01# 8.000 AAA 10,000 7,060,726
Poland, Republic of, Government Bond (Poland) 10-27-24 (Y) 2.750 BBB- 13,000 7,280,000
South Africa, Republic of,
Government Bond (South Africa) 02-28-05# 12.000 BBB+ 20,000 3,898,377
Government Bond (South Africa) 10-17-06 (Y) 8.375 BB+ 2,500 2,522,500
United Kingdom of Great Britain Treasury Gilts
Government Bond (United Kingdom) 06-07-02# 7.000 AAA 3,000 4,898,017
Government Bond (United Kingdom) 12-07-06# 7.500 AAA 6,000 10,016,604
United Mexican States, Government Bond (Mexico) 09-15-16 (Y) 11.375 BB 2,750 3,011,250
Venezuela, Republic of, Government Bond (Venezuela) 03-31-20# 6.750 B 10,000 7,625,000
--------------
127,113,079
--------------
Government -- U.S. (15.84%)
United States Treasury,
Bond 08-15-05 10.750 AAA 10,000 12,542,200
Bond 02-15-16 9.250 AAA 11,000 13,591,820
Bond 08-15-19 8.125 AAA 20,500 23,052,865
Note 11-15-97 8.875 AAA 20,000 20,284,400
Note 08-15-97 8.625 AAA 28,400 28,599,652
Note 05-15-01 8.000 AAA 19,000 20,003,390
--------------
118,074,327
--------------
Government -- U.S. Agencies (3.16%)
Federal Home Loan Mortgage Assn., Remic 44-E 11-15-19 9.000 AAA 926 962,241
Federal National Mortgage Association, Global Bond 06-07-02 6.875 AAA 5,000 8,079,803
Government National Mortgage Assn., 30 Yr Pass Thru Ctf 05-15-26 7.500 AAA 14,600 14,540,454
--------------
23,582,498
--------------
Leasing Companies (0.59%)
DVI, Inc., Sr Note 02-01-04 9.875 B 3,000 3,018,750
Ryder TRS Inc., Sr Sub Note 12-01-06 10.000 B+ 1,350 1,387,125
--------------
4,405,875
--------------
Leisure (6.68%)
Casino America, Inc., Sr Sec Note 08-01-03 12.500 B 5,000 5,087,500
Cinemark USA, Inc., Sr Sub Note Ser B 08-01-08 9.625 B 4,000 4,060,000
Eldorado Resorts LLC, Sr Sub Note 08-15-06 10.500 B 4,000 4,250,000
GB Property Funding Corp., 1st Mtg 01-15-04 10.875 B 3,000 2,655,000
Mohegan Tribal Gaming Authority, Sr Sec Note Ser B 11-15-02 13.500 BB+ 5,900 7,758,500
Players International, Inc., Sr Note 04-15-05 10.875 BB- 5,000 5,225,000
Showboat Marina Casino Partnership/Finance Corp., 1st Mtg Note Ser B 03-15-03 13.500 B 5,000 5,750,000
Showboat, Inc., Sr Sub Note 08-01-09 13.000 B 3,000 3,480,000
Station Casinos, Inc., Sr Sub Note 03-15-06 10.125 B+ 3,000 3,007,500
Sun International Hotels, Sr Sub Note (Bahamas) 03-15-07 (Y) 9.000 B+ 3,000 3,015,000
Waterford Gaming LLC, Sr Note 11-15-03 (R) 12.750 B 5,000 5,475,000
--------------
49,763,500
--------------
Machinery (0.28%)
Clark Material Handling Co., Gtd Sr Note 11-15-06 10.750 B+ 2,000 2,105,000
--------------
Manufacturing (0.78%)
Coty Inc., Sr Sub Note 05-01-05 10.250 B+ 4,000 4,240,000
Syratech Corp., Sr Note 04-15-07 11.000 B 1,500 1,590,000
--------------
5,830,000
--------------
Media (8.18%)
American Telecasting, Inc.,Sr Disc Note Ser B,
Step Coupon (14.50%, 08-15-00) 08-15-05 (A) Zero CCC+ 6,000 1,860,000
Australis Media Ltd., Unit (Sr Sub Disc Note & Warrant),
Step Coupon (15.75%, 05-15-00) (Australia) 05-15-03 (A), (Y) Zero B 3,000 1,860,000
Bell Cablemedia Plc, Sr Discount Note,
Step Coupon (11.95%, 07-15-99) (United Kingdom) 07-15-04 (A), (Y) Zero BB- 4,000 3,570,000
Caspar Broadcasting Partners, Inc., Sr Disc Note,
Step Coupon (12.75%, 02-01-02) 02-01-09 (A), (R) Zero B 2,750 1,650,000
CF Cable TV Inc., Sr Note (Canada) 02-15-05 (Y) 11.625 BBB- 2,000 2,280,000
Chancellor Radio Broadcasting Co., Sr Sub Note 10-01-04 12.500 B- 1,125 1,303,594
Comcast Corp., Sr Sub Deb 01-15-08 9.500 BB+ 4,000 4,150,000
Comcast UK Cable, Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(Bermuda) 11-15-07 (A), (Y) Zero B- 4,000 2,970,000
Diamond Cable Communications Plc, Sr Disc Note,
Step Coupon (13.25%, 09-30-99) (United Kingdom) 09-30-04 (A), (Y) Zero B- 3,000 2,460,000
Galaxy Telecom L.P., Sr Sub Note 10-01-05 12.375 B- 5,000 5,275,000
Intermedia Capital Partners, Sr Note 08-01-06 11.250 B 4,000 4,240,000
Katz Media Corp., Sr Sub 01-15-07 10.500 B 2,000 1,895,000
Le Groupe Videotron Ltee, Sr Note (Canada) 02-15-05 (Y) 10.625 BBB- 1,250 1,381,250
Marcus Cable Co., L.P., Sr Disc Note, Step Coupon (14.25%, 6-15-00) 12-15-05 (A) Zero B 4,000 3,040,000
People's Choice TV Corp., Unit (Sr Disc Note & Warrant),
Step Coupon (13.125%, 06-01-00) 06-01-04 (A) Zero CCC+ 2,000 730,000
Radio One Inc., Sr Sub Note, Step Coupon (12.00%, 05-15-00) 05-15-04 (A), (R) 7.000 B 2,000 1,765,000
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 BB+ 3,000 3,217,500
Sr Sec Deb (Canada) 01-15-14# 9.650 BB+ 2,000 1,434,315
Scandinavian Broadcasting System S.A., Sub Deb (Luxembourg) 08-01-05 (Y) 7.250 B 2,390 2,366,100
STC Broadcasting, Inc., Sr Sub Note 03-15-07 (R) 11.000 B3 1,500 1,582,500
Sullivan Broadcasting, Sr Sub Note 12-15-05 10.250 B- 3,000 3,060,000
TeleWest Communications Plc, Sr Disc Deb,
Step Coupon (11.00%, 10-01-00) (United Kingdom) 10-01-07 (A), (Y) Zero B+ 4,000 2,780,000
TV Azteca, S.A. de C.V.,
Gtd Sr Note (Mexico) 02-15-04 (R), (Y) 10.125 B 5,000 5,081,250
Gtd Sr Note (Mexico) 02-15-04 (R), (Y) 10.125 B 1,000 1,016,250
--------------
60,967,759
--------------
Metal (0.82%)
Falcon Holdings Group LP, Sr Sub Note 09-15-03 11.000 B 4,365 3,939,097
GS Technologies Operating Co., Sr Note 10-01-05 12.250 B 2,000 2,180,000
--------------
6,119,097
--------------
Office (0.30%)
United Stationer Supply, Sr Sub Note 05-01-05 12.750 B- 2,000 2,240,000
--------------
Oil & Gas (3.76%)
Cliffs Drilling Co., Gtd Sr Sec Note 05-15-03 10.250 B 2,250 2,362,500
Comp Nav Perez Companc, Bond (Argentina) 01-30-04 (R), (Y) 9.000 BBB- 3,000 3,067,500
Costilla Energy Inc., Sr Note 10-01-06 10.250 B 5,000 5,150,000
Falcon Drilling Co.,
Sr Note Ser B 03-15-03 8.875 B+ 1,500 1,522,500
Sr Sub Note Ser B 03-15-05 12.500 B- 1,500 1,650,000
Forcenergy Inc., Sr Sub Note 02-15-07 8.500 B 2,000 1,945,000
HS Resources, Inc., Sr Sub Note 11-15-06 9.250 B 2,000 1,990,000
Kelly Oil & Gas Partners Ltd., Deb 04-01-00 8.500 B- 1,100 1,056,000
Parker Drilling Co., Gtd Sr Note 11-15-06 9.750 B+ 1,000 1,040,000
Petroleum Heat & Power Co., Inc., Sub Deb 02-01-05 12.250 B+ 2,500 2,631,250
Vintage Petroleum Inc., Sr Sub Note 12-15-05 9.000 B+ 3,000 3,060,000
Wainoco Oil Corp., Sr Note 08-01-02 12.000 B- 2,500 2,575,000
--------------
28,049,750
--------------
Paper & Paper Products (1.58%)
American Pad & Paper Co., Sr Sub Note Ser B 11-15-05 13.000 B- 1,170 1,330,875
APP Finance II Mauritius Ltd., Bond (Indonesia) 12-29-49 (R), (Y) 12.000 B+ 5,000 4,987,500
Copamex Industrias, S.A. de C.V., Bond (Mexico) 04-30-04 (R), (Y) 11.375 B1 1,950 2,069,438
Indah Kiat International Finance Co., Gtd Sec Bond Ser C (Indonesia) 06-15-06 (Y) 12.500 BB 3,000 3,375,000
--------------
11,762,813
--------------
Printing -- Commercial (0.64%)
Goss Graphic Systems, Inc., Sr Sub Note 10-15-06 12.000 B 1,600 1,744,000
Sullivan Graphics, Inc., Sr Sub Note 08-01-05 12.750 Caa 3,000 3,045,000
--------------
4,789,000
--------------
Retail (1.30%)
Pueblo Xtra International, Inc., Sr Note Ser B 08-01-03 (R) 9.500 B- 2,000 1,915,000
Specialty Retailers, Inc., Sr Sub Note Ser B 08-15-03 (R) 11.000 B 3,000 3,281,250
Speedy Muffler King, Inc., Gtd Sr Note (Canada) 10-01-06 (Y) 10.875 B+ 3,000 3,135,000
Supermercados Norte, Bond (Argentina) 02-09-04 (R), (Y) 10.875 B1 1,300 1,342,250
--------------
9,673,500
--------------
Steel (2.57%)
Acindar Industria Argentina de Aceros S.A., Bond (Argentina) 02-15-04 (Y) 11.250 B+ 1,250 1,303,125
Acme Metals, Inc., Sr Sec Note 08-01-02 12.500 B 3,000 3,270,000
Altos Hornos de Mexico S.A., Bond (Mexico) 04-30-04 (R), (Y) 11.875 B1 1,500 1,595,625
Gulf States Steel, Inc. of Alabama, 1st Mtg 04-15-03 13.500 B- 4,000 3,890,000
Haynes International, Inc., Sr Note 09-01-04 11.625 B- 2,500 2,687,500
IVACO Inc., Sr Note (Canada) 09-15-05 (Y) 11.500 B+ 3,525 3,793,781
Republic Engineered Steels, Inc., 1st Mtg 12-15-01 9.875 CCC+ 688 646,720
Wheeling-Pittsburgh Corp., Sr Note 11-15-03 9.375 BB- 2,000 1,940,000
--------------
19,126,751
--------------
Telecommunications (11.44%)
Advanced Radio Telecom Corp., Unit (Sr Note & Warrants) 02-15-07 14.000 CCC+ 4,000 4,200,000
Brooks Fiber Properties, Inc., Sr Discount Note,
Step Coupon (10.875%, 03-01-01) 03-01-06 (A) Zero B 5,000 3,400,000
CANTV Finance Ltd., Gtd Note (Venezuela) 02-01-02 (Y) 8.875 B+ 850 859,563
Colt Telecom Group Plc, Unit (Sr Disc Note & Warrant), Step Coupon (12.00%,
12-15-01) (United Kingdom) 12-15-06 (A), (Y) Zero B 500 3,175,000
Comunicacion Celular S.A., Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A), (Y) Zero B+ 5,000 3,575,000
Fonorola, Inc., Gtd Sr Sec Note (Canada) 08-15-02 (Y) 12.500 B+ 3,000 3,300,000
Globo Communicacoes e Participacoes Ltda., Bond (Brazil) 12-20-06 (R), (Y) 10.500 BB- 2,500 2,593,750
Impsat Corp., Gtd Sr Sec Note 07-15-03 12.125 BB- 1,770 1,893,900
Innova S de R.L., Sr Note (Mexico) 04-01-07 (R), (Y) 12.875 B- 3,000 3,135,000
Intercel, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon (12.00%, 02-01-01) 02-01-06 (A) Zero B 900 531,000
Unit (Sr Discount Note, Step Coupon (12.00%, 02-01-01) 02-01-06 (A) Zero B 2,100 1,270,500
Intermedia Communications Inc., Sr Disc Note,
Step Coupon (12.50%, 05-15-01) 05-15-06 (A) Zero B- 3,000 2,070,000
International Wireless Communication Holdings, Inc., Sr Disc Note 08-15-01 (A) Zero B 3,000 1,650,000
Ionica Plc, Sr Note (United Kingdom) 08-15-06 (Y) 13.500 B 3,000 3,135,000
McCaw International Ltd., Unit (Sr Disc Note & Warrant),
Step Coupon (13.00%, 04-15-02) 04-15-07 (A), (R) Zero B 7,000 3,430,000
McLeod, Inc., Sr Disc Note, Step Coupon (10.50%, 03-02-02) 03-01-07 (A), (R) Zero B 3,000 1,792,500
Net Sat Servicos Ltda., Sr Note (Brazil) 08-05-04 (Y) 12.750 B 4,000 4,180,000
Nextel Communications, Inc., Sr Disc Note, Step Coupon (9.75%, 02-15-99)
08-15-04 (A) Zero CCC- 8,000 6,080,000
Occidente Y Caribe Cellular SA, Sr Disc Note,
Step Coupon (14.00%, 03-15-01) (Colombia) 03-15-04 (A), (Y) Zero B 4,000 2,920,000
Omnipoint Corp., Sr Note Ser A 08-15-06 11.625 CCC+ 2,000 1,770,000
Orion Network Systems, Inc., Unit (Sr Note & Warrants) 01-15-07 11.250 B 5,000 5,225,000
Paging Network Do Brasil, Unit (Sr Note) (Brazil) 06-06-05 (Y)+ 13.500 B1 3,000 3,000,000
Paging Network, Inc., Sr Sub Note 10-15-08 10.000 B 6,000 5,670,000
Rogers Cantel, Inc., Sr Note (Canada) 06-01-06 10.500 BB+ 2,000 1,579,195
Shared Technologies Fairchild, Inc., Sr Sub Disc Note,
Step Coupon (12.25%, 03-01-99) 03-01-06 (A) Zero Caa 2,400 2,088,000
Sprint Spectrum L.P., Sr Note 08-15-06 11.000 B+ 3,750 4,143,750
Teleport Communications Group, Inc., Sr Disc Note,
Step Coupon (11.125%, 07-01-01) 07-01-07 (A) Zero B 4,000 2,810,000
Videotron Holdings Plc, Sr Disc Note,
Step Coupon (11.125% 07-01-99) (United Kingdom) 07-01-04 (A), (Y) Zero B+ 4,000 3,570,000
Winstar Communications, Inc.,
Conv Sr Disc Note, Step Coupon (14.00%, 10-15-00) 10-15-05 (A) Zero CCC+ 1,300 741,000
Sr Disc Note, Step Coupon (14.00%, 10-15-00) 10-15-05 (A) Zero CCC+ 2,600 1,456,000
--------------
85,244,158
--------------
Textile (0.28%)
Dan River Inc., Sr Sub Note 12-15-03 10.125 B 2,000 2,090,000
--------------
Transport (0.46%)
Greyhound Lines, Inc., Sr Note 04-15-07 (R) 11.500 B- 2,000 2,110,000
Northwest Airlines, Inc., Sr Note 12-31-00 12.092 BB- 1,302 1,340,803
--------------
3,450,803
--------------
Utilities (1.42%)
Calpine Corp., Sr Note 02-01-04 9.250 B+ 2,000 2,045,000
CE Casecnan Water & Energy Co., Inc., Sr Note Ser A (Philippines) 11-15-05 (Y) 11.450 BB 2,000 2,192,500
Midland Cogeneration Venture, Deb 07-23-02 10.330 BB 1,472 1,575,187
Midland Funding Corp. II, Deb Ser B 07-23-06 13.250 B 4,000 4,769,960
--------------
10,582,647
--------------
TOTAL BONDS
(Cost $651,156,081) (89.06%) 663,822,437
------- --------------
<CAPTION>
NUMBER OF
SHARES MARKET
ISSUER, DESCRIPTION OR WARRANT VALUE
- --------------------------------------------------------- ---------- ----------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
American Radio Systems Corp., 11.375%, Preferred Stock (R) 46,066 4,882,996
American Telecasting, Inc., Warrant** 4,000 400
AVI Holdings, Inc., Warrant (R)** 1,500 7,500
California Federal Bank, 10.625%, Ser B, Preferred Stock 6,667 726,703
California Federal Bank, 11.50%, Preferred Stock 5,000 556,250
Chancellor Broadcasting, 7.00%, Preferred Stock (R) 20,000 1,225,000
Chancellor Radio Broadcasting, 12.00%, Preferred Stock (R) 10,000 1,080,000
Comunicacion Celular S.A., Warrant** (Colombia) (Y) 50,000 375,000
Credit Lyonnais Capital S.C.A., American Depositary Receipt (ADR),
9.50% Ser DTC Preferred Stock (Luxemburg) (R), (Y) 100,000 2,525,000
Decorative Home Accents, Inc., Common Stock** 1,000 10
Earthwatch, Inc., 12.00% Ser C Conv Preferred Stock (R) 200,000 2,000,000
Finlay Enterprises, Inc., Common Stock** 4,000 66,000
Granite Broadcasting Corp., 12.75%, Preferred Stock (R) 40,000 3,800,000
ICF Kaiser International Inc., Warrant (r)** 12,000 6,000
ICG Holdings, Inc.,14.00%, Preferred Stock (R) 2,000 2,050,000
Intermedia Communications, Inc., 13.50%, Preferred Stock (R) 1,500 1,560,000
Intermedia Communications, Inc., Common Stock** 15,000 451,875
International Wireless Inc., Warrant** 3,000 30
Ionica Plc, Warrant**(United Kingdom) (R), (Y) 4,000 740,000
IRT Property Co., Real Estate Investment Trust (REIT) 75,000 871,875
K-III Communications Corp., $2.875 Sr Exch Preferred Stock 60,000 1,605,000
Kelley Oil & Gas Corp, $2.625, Preferred Stock 40,000 930,000
Lasmo Plc, 10.00%, Ser A, American Depositary Shares (ADS),
Preferred Stock (United Kingdom) (Y) 50,000 1,293,750
Maxus Energy Corp., $2.50, Preferred Stock 40,000 1,040,000
Nextlink Communications, 14.00%, Preferred Stock (R) 31,061 1,553,050
Northwest Airlines Corp. (Class A), Common Stock** 140,000 5,792,500
Panamsat Corp., 12.75%, Preferred Stock 2,243 2,781,320
Qantas Airways Ltd., (ADS), Common Stock (Australia) (R), (Y) 13,800 292,045
Qualcomm Financial Trust, 5.75%, Preferred Stock (R) 60,000 2,910,000
Renaissance Cosmetics, Warrant** 4,000 200,000
Rite Aid Corp., Common Stock 7,410 344,565
SFX Broadcasting, Inc., 6.50%, Ser D Conv Preferred Stock (R) 25,000 1,053,125
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock 9,000 963,000
St Johnsbury Trucking Co. Inc., Common Stock (r)** 47,224 472
Station Casinos, Inc., 7.00%, Conv Preferred Stock 5,000 223,750
Sun Carriers, Inc., Common Stock (r)** 195,600 1,956
Time Warner, Inc., 10.25%, Series M Preferred Stock 3,307 3,645,959
TLC Beatrice International Holdings (Class A), Common Stock (r)** 20,000 535,000
TransAmerican Refining Corp., Warrant** 33,670 151,515
TransTexas Gas Corp., Common Stock** 10,000 165,000
UAL Corp., Common Stock** 38,308 2,988,024
Valero Energy Corp., Common Stock 46,250 1,653,438
Western Pacific Airlines, Inc., Common Stock** 10,000 57,500
--------------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $46,338,221) (7.12%) 53,105,608
------- --------------
<CAPTION>
PAR VALUE
INTEREST (000'S MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ---------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.66%)
Investment in a joint repurchase agreement transaction
with Swiss Bank Corp. Dated 5-30-97, Due 6-02-97
(Secured by U.S.Treasury Notes, 6.375%, Due 5-15-99
and U.S.Treasury Bonds, 6.25% thru 11.25%, Due
11-15-08 thru 8-15-23) Note A 5.560% $19,851 $19,851,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $19,851,000) (2.66%) 19,851,000
------- --------------
TOTAL INVESTMENTS (98.84%) $736,779,045
====== ==============
* Credit Ratings are unaudited and 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.
+ These securities having an aggregate market value of $9,030,000 or 1.21% of the Fund's
net assets have been purchased on a when-issued basis. The purchase price and the
interest rate of such securities are fixed at trade date, although the Fund does not
earn any interest on such securities until settlement date. The Fund has instructed its
custodian bank to segregate assets with a current value at least equivalent to the
amount of when-issued commitments. Accordingly, the market value of $9,415,770 of a U.S.
Treasury Note, 8.625%, due 8-15-97 and U.S. Treasury Bond, 8.125%, due 8-15-19 have been
segregated to cover the when-issued commitment.
(A) Cash interest will be paid on this obligation at the stated rate beginning on the stated
date.
(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 $105,771,849 as
of May 31, 1997.
(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:
<CAPTION>
MARKET
VALUE AS A
PERCENTAGE MARKET
ACQUISITION OF FUND'S VALUE AT
ISSUER, DESCRIPTION DATE COSTS NET ASSETS MAY 31, 1997
- ----------------------------------------------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
ICF Kaiser International, Inc., Warrant 01-04-94 $15,000 0.00% $6,000
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
TLC Beatrice International Holdings (Class A), Common Stock 11-25-87 1,006,000 0.07 535,000
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>
Portfolio Concentration
May 31, 1997 (Unaudited)
- ------------------------------------------------------------------
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------------
Argentina 1.92%
Australia 5.28
Bahamas 0.40
Bermuda 0.57
Brazil 2.46
Canada 5.86
Colombia 0.92
Croatia 0.65
Germany 0.96
Indonesia 1.67
Luxembourg 0.66
Mexico 2.76
New Zealand 0.95
Philippines 0.29
Poland 0.98
Russia 0.81
South Africa 0.86
United Kingdom 5.48
United States 64.22
Venezuela 1.14
---------
TOTAL INVESTMENTS 98.84%
=========
QUALITY DISTRIBUTION
- -----------------------------------------------------------
AAA 28.71%
AA 2.37
BBB 3.29
BB 8.50
B 42.74
CCC 3.45
---------
TOTAL BONDS 89.06%
=========
Notes to Financial Statements
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940.
The Trust consists of 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 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 $29,587,682 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, 1999 - $8,553,157, May 31, 2002 - $454,810, May 31,
2003 - $20,312,807 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.
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.
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.
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.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues and expenses of the Fund. Actual results
could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. The Fund had no borrowing activity for the period ended May
31, 1997.
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
not offset by the currency amount of the underlying transaction.
Open foreign currency forward contracts at May 31, 1997 were as follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- ---------- ------------------- ---------- -------------
SELLS
AUSTRALIAN DOLLAR 49,400,000 JUL 97 $217,755
CANADIAN DOLLAR 37,029,000 JUN 97 (239,666)
BRITISH POUND
STERLING 3,115,000 JUN 97 (59,507)
NEW ZEALAND
DOLLAR 10,188,000 AUG 97 (54,094)
------------
($135,512)
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 May 31, 1997, there were no open positions 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 May 31,
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) 0.60% 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
May 31, 1997, net sales charges received with regard to sales of Class A
shares amounted to $2,275,918. Out of this amount, $266,508 was retained
and used for printing prospectuses, advertising, sales literature and
other purposes, $998,379 was paid as sales commissions to unrelated
broker-dealers and $1,011,031 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 ("JHMLICo"), is the indirect sole
shareholder of Distributors and until November 29, 1996 was the indirect
shareholder of 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 May 31, 1997, contingent deferred sales
charges paid to JH Funds amounted to $630,932.
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"), 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., Mr. Richard S. Scipione, and Ms. Anne C.
Hodsdon are trustees and/or officers of the Adviser and/or its
affiliates, as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The
Fund 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 May 31, 1997, the Fund's investments
to cover the deferred compensation liability had unrealized appreciation
of $3,543.
NOTE C --
INVESTMENT TRANSACTIONS:
Purchases and proceeds from sales of securities, other than obligations
of the U.S. government and its agencies and short-term securities,
during the period ended May 31, 1997, aggregated $735,394,911 and
$662,874,033, respectively. Purchases and proceeds from sales of
obligations of the U.S. government and its agencies aggregated
$254,148,391 and $165,409,021, respectively, during the period ended May
31, 1997.
The cost of investments owned at May 31, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $717,706,679.
Gross unrealized appreciation and depreciation of investments aggregated
$30,133,456 and $11,061,090, respectively, resulting in net unrealized
appreciation of $19,072,366.
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended May 31, 1997, the Fund has reclassified $5,223,167
from accumulated net realized loss on investments to undistributed net
investment income. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary
differences, as of May 31, 1997. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no
impact on the net asset value of the Fund, are primarily attributable to
foreign currency transactions in the computation of distributable income
and capital gains under federal tax rules versus generally accepted
accounting principles. The calculation of net investment income per
share in the financial highlights excludes these adjustments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Strategic Income Fund
and the Trustees of John Hancock Strategic Series
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for S&P ratings), and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of John Hancock Strategic Income Fund (the "Fund") (a
portfolio of John Hancock Strategic Series) at May 31, 1997, the results
of its operations for the year then ended, and the changes in its net
assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and the significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 11, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished
with respect to the dividends of the Fund paid during its taxable year
ended May 31, 1997.
All of the dividends paid for the fiscal year are taxable as ordinary
income. With respect to the dividends paid by the fund for the fiscal
year ended May 31, 1997, 2.70% qualify for the corporate dividends
received deduction.
Shareholders will be mailed a 1997 U.S. Treasury Department Form 1099-
DIV in January 1998. This will reflect the total of all distributions
which are taxable for calendar year 1997.
Notes
John Hancock Funds - Strategic Income Fund
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