SEMIANNUAL REPORT
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[GRAPHIC OMITTED]
Sovereign
U.S. Government
Income Fund
NOVEMBER 30, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Managment Firm
<PAGE>
---------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and
Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 have been anything but dull. Bond investors have
enjoyed the benefits of a strong economy with no inflation. Stock investors have
been treated to record-breaking performance by the Dow Jones Industrial Average,
but with record-breaking volatility. After two years of strong advances with
relatively minor swings, the stock market's recent sharp drops and enormous
rebounds have caused a fair share of investor concern.
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.]
The latest round came in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY BARRY EVANS, PORTFOLIO MANAGER
John Hancock Sovereign U.S. Government Income Fund
Low inflation and shrinking deficit boost U.S. bond prices
A number of events set the stage for strong performance in the U.S. bond market
this past summer and fall. Inflation hovered around 2% and seemed likely to stay
in check. Even as economic growth was strong, commodity prices weakened and the
dollar strengthened compared to foreign currencies. Tax revenues also came in
higher than anticipated in 1997, helping to shrink the government's deficit and
lower issuance of U.S. Treasury bonds. As the Asian currency and credit crisis
spread, many investors moved into U.S. government bonds, which offered higher
yields than some other Western industrialized nations.
All these forces caused bond yields to fall and prices to rise. Long-term
bonds were the biggest gainers with yields on 10-year Treasuries dropping to
5.87%, down from 6.66% on May 31, 1997. Long-term yields reacted to lower
inflation expectations, while yields on short-term bonds stalled once it became
clear the Federal Reserve had no plans to lower short-term interest rates.
In this environment, John Hancock Sovereign U.S. Government Income Fund
fared well. For the six months ended November 30, 1997, the Fund's Class A and
Class B shares had total returns of 6.65% and 6.28%, respectively, at net asset
value. By comparison, the average general U.S. government income fund had a
total
"Interest-sensitive U.S. Treasuries turned in the best performance..."
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads:Barry Evans
(seated) and Fund management team members: Roger Hamilton (center) and Seth
Robbins."]
3
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John Hancock Funds - Sovereign U.S. Government Income Fund
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PORTFOLIO DIVERSIFICATION
[Pie chart with the heading `Portfolio Diversification" at top of left hand
column. The chart is divided into three sections. Going from top left to right:
U.S. Treasuries 47%, U.S. Government Agencies 41%, Short-Term Investments &
Other 2%. Footnote below reads: "As a percentage of net assets on November 30,
1997."]
As a percentage of net assets on November 30, 1997
- --------------------------------------------------------------------------------
return of 6.44%, according to Lipper Analytical Services, Inc.1 During the same
period, the Lehman Brothers Government Bond Index returned 6.87%. For
longer-term Fund performance information, please see pages six and seven.
Cutting "spread," adding Treasuries
Interest-sensitive U.S. Treasuries turned in the best performance for the period
with the Lehman Brothers Treasury Index returning 6.90%. By contrast, "spread"
securities -- including mortgage bonds and U.S. government agencies -- did not
do quite as well. "Spread" securities offer investors a yield advantage over
Treasuries to compensate them for taking on additional risk. Mortgage bonds in
particular carry prepayment risk -- or the risk that homeowners will prepay
their mortgages before they're due so they can refinance at lower rates. When
interest rates are falling, these added risks cause "spread" securities to lag
Treasuries.
During the period, we repositioned the Fund to make it more sensitive to
falling interest rates. In July, we extended the Fund's duration to 5.4 years,
up from 5.0 years. Duration measures how sensitive a bond's price is to changes
in interest rates. The longer a bond's duration, the more its price will rise as
interest rates fall -- or fall as interest rates rise. At the time, we
lengthened duration to offset the possibility that the durations on our mortgage
bonds would shorten as prepayment fears increased. Unfortunately, a strong
employment report in early August sent interest rates higher for a few weeks,
forcing us to shorten duration temporarily. By month's end, it was back at 5.4
years.
In July, we also began to cut our stake in "spread" securities. We
lightened up on traditional, fixed-rate mortgage bonds, particularly those with
the highest prepayment risk. In October, when we were fully convinced that
interest rates were coming down, we sold more of these traditional mortgage
bonds, as well as some longer-term collateralized mortgage obligations (CMOs)
and callable U.S. government agencies. CMOs take the cash flows from mortgage
pools and separate them into different classes with varied maturities and
prepayment risk. We owned mainly CMOs that are less sensitive to prepayments.
When interest rates are falling, they tend to do better than traditional
mortgage bonds, but still lag Treasuries. We sold some of these CMOs, but kept a
healthy chunk. At the end of November, we had 45% of our investments in
mortgages, down from 65% at the end of May. We also halved our stake in other
U.S. government agency bonds to 6%, selling mostly long callable bonds. Like
mortgage bonds, these securities run the risk of being "called" or paid off when
the issuer can save money by refinancing at a lower rate.
We added longer-term Treasuries with maturities over 10 years. By the end
of November, the Fund had 39% of its assets in Treasury bonds, up
"...we repositioned the Fund to make it more sensitive to falling interest
rates."
4
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John Hancock Funds - Sovereign U.S. Government Income Fund
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FUND PERFORMANCE
For the six months ended November 30, 1997
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended November 30, 1997." The chart is
scaled in increments of 2% from bottom to top, with 8% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
6.65% total return for the John Hancock Sovereign U.S. Government Income Fund:
Class A. The second represents the 6.28% total return for John Hancock Sovereign
U.S. Government Income Fund: Class B. The third represents the 6.44% total
return for the average general U.S. government income fund. A footnote below
reads: "Total returns for John Hancock Sovereign U.S. Government Income Fund are
at net asset value with all distributions reinvested. The average general U.S.
government income fund is tracked by Lipper Analytical Services, Inc. (1) See
following two pages for historical performance information.]
Total returns for John Hancock Sovereign U.S. Government Income Fund are at net
asset value with all distributions reinvested. The average general U.S.
government fund is tracked by Lipper Analytical Services, Inc.(1) See the
following two pages for historical performance information.
- --------------------------------------------------------------------------------
from 19% at the end of May. We also put some money in short-term securities with
maturities under one year. This gave the Fund more of a barbell structure --
with investments at either end of the maturity spectrum. The barbell structure
tends to do better than any other when interest rates are falling.
Positive prospects
Going forward, we plan to keep a slightly longer-than-average duration, a light
stake in mortgages, and a barbell structure. We're staying put because we
believe interest rates will probably decline a bit more and the economy will
eventually grow at a more moderate pace. As long as interest rates are falling,
prepayment risk will continue to be a concern and mortgage bonds will continue
to lag Treasuries. Only when the market reaches a trading range, where yields
are bouncing around in the same area, would we add to our mortgage stake.
There's also a possibility that the U.S. economy could stay strong longer
than we think. A lot depends on how long the Asian crisis takes to play out and
what kind of effect it has on markets like ours. To determine the economy's
direction, we'll keep a close eye on retail sales and the purchasing managers'
survey, as well as the Japanese economy. Even if the U.S. economy stays strong
longer than we think, we believe it will be temporary and that interest rates
will eventually head back down.
While the bond market would benefit from falling interest rates, there are
other reasons to expect the good times to continue. Continued strong tax
revenues would again lower the deficit and shrink Treasury issuance. Inflation
expectations are low, and usually don't change quickly. Plus, the United States
offers strong prospects compared to other foreign markets. A stable democracy,
healthy economic growth, and low inflation are all attractions, as are bond
yields that are higher than some other Western industrialized nations. Taking
these factors into consideration, we're optimistic about the bond market's
future.
"...we believe interest rates will probably decline a bit more ..."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
(1)Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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John Hancock Funds - Sovereign U.S. Government Income Fund
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A LOOK AT PERFORMANCE
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The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Sovereign U.S. Government Income Fund. Total
return measures the change in value of an investment from the beginning to the
end of a period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%.
Class B performance reflects a maximum contingent deferred sales charge (maximum
5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.
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CLASS A
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For the period ended September 30, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (1/3/92)
--------- --------- ---------
Cumulative Total Returns 3.84% 27.42% 34.95%
Average Annual Total Returns 3.84% 4.97% 5.36%
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CLASS B
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For the period ended September 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
--------- --------- ---------
Cumulative Total Returns 3.10% 28.41% 125.82%
Average Annual Total Returns 3.10% 5.13% 8.49%
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YIELDS
- --------------------------------------------------------------------------------
As of November 30, 1997
SEC 30-DAY
YIELD
--------------
John Hancock Sovereign U.S. Government Income Fund:
Class A 5.10%
John Hancock Sovereign U.S. Government Income Fund:
Class B 4.63%
6
<PAGE>
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John Hancock Funds - Sovereign U.S. Government Income Fund
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Sovereign U.S. Government Income Fund would be worth, assuming all distributions
were reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Government Bond Index -- an unmanaged
index that measures the performance of U.S. Treasury bonds and U.S. government
agency bonds. Past performance is not indicative of future results.
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 $14,458 as of November 30,
1997. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign U.S. Government Fund on January 3, 1992, before
sales charge, and is equal to $14,428 as of November 30, 1997. The third line
represents the Sovereign U.S. Government Fund, after sales charge, and is equal
to $13,779 as of November 30, 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
theLehman Government Bond Index and is equal to $22,588 as of November 30, 1997.
The second line represents the value of the hypothetical $10,000 investment made
in the Sovereign U.S. Government Fund, before sales charge, on May 31, 1987, and
is equal to $22,246 as of November 30, 1997.]
*No contingent deferred sales charge applicable.
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign U.S. Government Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on November 30, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
United State government and agencies securities
(cost - $372,542,209) ...................................... $382,647,618
Joint repurchase agreement (cost - $1,763,000) .............. 1,763,000
Corporate savings account ................................... 961
-------------
384,411,579
Receivable for investments sold ............................. 630,613
Receivable for shares sold .................................. 16,994
Interest receivable ......................................... 4,791,103
Other assets ................................................ 33,978
-------------
Total Assets .............................. 389,884,267
-----------------------------------------------------------
Liabilities:
Payable for shares repurchased .............................. 72,091
Dividend payable ............................................ 331,073
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 357,447
Accounts payable and accrued expenses ....................... 92,448
-------------
Total Liabilities ......................... 853,059
-----------------------------------------------------------
Net Assets:
Capital paid-in ............................................. 426,269,564
Accumulated net realized loss on investments and
financial future contracts ................................. (47,127,839)
Net unrealized appreciation of investments and
financial future contracts ................................. 10,104,399
Distributions in excess of net investment income ............ (214,916)
-------------
Net Assets ................................ $389,031,208
===========================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value)
Class A - $300,091,679/30,403,598 ........................... $9.87
=============================================================================
Class B - $88,939,529/9,010,852 ............................. $9.87
=============================================================================
Maximum Offering Price Per Share*
Class A - ($9.87 x 104.71%) ................................. $10.34
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the periods stated.
Statement of Operations
Six months ended November 30, 1997 (Unaudited)
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Investment Income:
Interest .................................................... $15,176,849
-------------
Expenses:
Investment management fee - Note B ......................... 992,001
Distribution and service fee - Note B
Class A .................................................. 454,964
Class B .................................................. 463,406
Transfer agent fee - Note B ................................ 547,820
Custodian fee .............................................. 50,260
Financial services fee - Note B ............................ 35,423
Auditing fee ............................................... 26,164
Printing ................................................... 19,251
Registration and filing fees ............................... 17,117
Trustees' fees ............................................. 13,216
Miscellaneous .............................................. 3,440
Legal fees ................................................. 3,382
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Total Expenses ............................ 2,626,444
-----------------------------------------------------------
Net Investment Income ..................... 12,550,405
-----------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Future Contracts:
Net realized gain on investments sold ....................... 2,775,781
Net realized loss on financial futures contracts ............ (209,906)
Change in net unrealized appreciation/depreciation
of investments ............................................. 9,914,370
Change in net unrealized appreciation/depreciation
of financial futures contracts ............................. 64,531
-------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ............... 12,544,776
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ................. $25,095,181
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED NOVEMBER 1, 1996 TO NOVEMBER 30, 1997
OCTOBER 31, 1996 MAY 31, 1997(1) (UNAUDITED)
------------------ ------------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ............................................... $30,058,671 $15,884,675 $12,550,405
Net realized gain (loss) on investments sold and financial
futures contracts .................................................. (2,404,490) (870,868) 2,565,875
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts ........................ (10,781,489) (7,225,543) 9,978,901
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ................ 16,872,692 7,788,264 25,095,181
------------ ------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6445, $0.3584, and $0.3116 per share, respectively) .. (22,888,998) (11,731,116) (9,889,229)
Class B - ($0.5788, $0.3201, and $0.2784 per share, respectively) .. (7,168,399) (3,452,330) (2,723,467)
Distributions from capital paid-in
Class A - (none, $0.0148, and none per share, respectively) ........ -- (483,787) --
Class B - (none, $0.0143, and none per share, respectively) ........ -- (154,046) --
------------ ------------ ------------
Total Distributions to Shareholders ............................. (30,057,397) (15,821,279) (12,612,696)
------------ ------------ ------------
From Fund Share Transactions - Net:* .................................. (46,215,732) (35,417,657) (22,389,900)
------------ ------------ ------------
Net Assets:
Beginning of period ................................................. 501,789,732 442,389,295 398,938,623
------------ ------------ ------------
End of period (including distributions in excess of net
investment income of $80,915, $152,625,
and $214,916, respectively) ........................................ $442,389,295 $398,938,623 $389,031,208
============ ============ ============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED NOVEMBER 1, 1996 TO NOVEMBER 30, 1997
OCTOBER 31, 1996 MAY 31, 1997(1) (UNAUDITED)
----------------------- ----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold .......................... 2,701,311 $26,773,125 710,972 $6,795,126 734,156 $7,167,807
Shares issued to shareholders
in reinvestment of distributions ... 1,861,397 18,201,055 1,011,535 9,744,947 791,302 7,742,487
--------- ----------- --------- ----------- --------- -----------
4,562,708 44,974,180 1,722,507 16,540,073 1,525,458 14,910,294
Less shares repurchased .............. (7,742,610) (76,053,085) (3,949,720) (38,081,860) (2,764,014) (26,934,428)
--------- ----------- --------- ----------- --------- -----------
Net increase (decrease) .............. (3,179,902) ($31,078,905) (2,227,213) ($21,541,787) (1,238,556) ($12,024,134)
========= =========== ========= =========== ========= ===========
CLASS B
Shares sold .......................... 1,137,893 $11,221,296 412,878 $4,053,805 306,68 $2,998,093
Shares issued to shareholders
in reinvestment of distributions ... 397,229 3,883,010 204,335 1,968,833 146,703 1,435,349
--------- ----------- --------- ----------- --------- -----------
1,535,122 15,104,306 617,213 6,022,638 453,389 4,433,442
Less shares repurchased .............. (3,092,548) (30,241,133) (2,064,737) (19,898,508) (1,517,907) (14,799,208)
--------- ----------- --------- ----------- --------- -----------
Net decrease ......................... (1,557,426) ($15,136,827) (1,447,524) ($13,875,870) (1,064,518) ($10,365,766)
========= =========== ========= =========== ========= ===========
</TABLE>
(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 period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last three periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign U.S. Government Income Fund
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1992(1) 1993 1994 1995 1996
-------------------------------------------------------------
<S> <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
-------- -------- -------- -------- --------
Net Investment Income ......................... 0.64 0.68(2) 0.65 0.65 0.64(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts.. (0.22) 0.61 (1.34) 0.77 (0.26)
-------- -------- -------- -------- --------
Total from Investment Operations .......... 0.42 1.29 (0.69) 1.42 0.38
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ........ (0.64) (0.68) (0.65) (0.65) (0.64)
Distributions from Net Realized Gain on
Investments Sold .......................... -- (0.01) (0.31) -- --
Distributions from Capital Paid-In .......... -- -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ....................... (0.64) (0.69) (0.96) (0.65) (0.64)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ................ $10.29 $10.89 $9.24 $10.01 $9.75
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3).. 5.33%(4) 12.89% (6.66%) 15.90% 4.02%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...... $350,907 $375,416 $315,372 $370,966 $330,162
Ratio of Expenses to Average Net Assets ....... 1.06%(5) 1.30% 1.23% 1.17% 1.15%
Ratio of Net Investment Income to Average
Net Assets .................................. 7.11%(5) 6.47% 6.62% 6.76% 6.58%
Portfolio Turnover Rate ....................... 140% 273% 127% 94% 143%
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
NOVEMBER 1, 1996 NOVEMBER 30, 1997
TO MAY 31, 1997(6) (UNAUDITED)
----------------- -----------------
<S> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........... $9.75 $9.56
-------- --------
Net Investment Income .......................... 0.37(2) 0.31(2)
Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts .. (0.19) 0.31
-------- --------
Total from Investment Operations ........... 0.18 0.62
-------- --------
Less Distributions:
Dividends from Net Investment Income ......... (0.36) (0.31)
Distributions from Net Realized Gain on
Investments Sold ........................... -- --
Distributions from Capital Paid-In ........... (0.01) --
-------- --------
Total Distributions ........................ (0.37) (0.31)
-------- --------
Net Asset Value, End of Period ................. $9.56 $9.87
======== ========
Total Investment Return at Net Asset Value(3) .. 1.92%(4) 6.65%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ....... $302,589 $300,092
Ratio of Expenses to Average Net Assets ........ 1.17%(5) 1.16%(5)
Ratio of Net Investment Income to Average
Net Assets ................................... 6.69%(5) 6.49%(5)
Portfolio Turnover Rate ........................ 88% 71%
</TABLE>
The Financial Highlights summarize 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.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign U.S. Government Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
1992(1) 1993 1994 1995 1996
-----------------------------------------------------------
<S> <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
-------- -------- -------- -------- --------
Net Investment Income ......................... 0.76 0.66(2) 0.61 0.60 0.58(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial
Futures Contracts ........................... -- 0.61 (1.34) 0.77 (0.26)
-------- -------- -------- -------- --------
Total from Investment Operations .......... 0.76 1.27 (0.73) 1.37 0.32
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ........ (0.77) (0.66) (0.61) (0.60) (0.58)
Distributions from Net Realized Gain on
Investments Sold ........................... -- (0.01) (0.31) -- --
Distributions from Capital Paid-In .......... -- -- -- -- --
-------- -------- -------- -------- --------
Total Distributions ....................... (0.77) (0.67) (0.92) (0.60) (0.58)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ................ $10.28 $10.88 $9.23 $10.00 $9.74
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3).. 7.58% 12.66% (7.05%) 15.27% 3.33%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...... $197,032 $244,133 $196,899 $130,824 $112,228
Ratio of Expenses to Average Net Assets ....... 1.55% 1.51% 1.64% 1.72% 1.82%
Ratio of Net Investment Income to Average
Net Assets .................................. 7.35% 6.23% 6.19% 6.24% 5.91%
Portfolio Turnover Rate ....................... 140% 273% 127% 94% 143%
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
NOVEMBER 1, 1996 NOVEMBER 30, 1997
TO MAY 31, 1997(6) (UNAUDITED)
----------------- -----------------
<S> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .......... $9.74 $9.56
------- -------
Net Investment Income ......................... 0.33(2) 0.28(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial
Futures Contracts ........................... (0.18) 0.31
------- -------
Total from Investment Operations .......... 0.15 (0.59)
------- -------
Less Distributions:
Dividends from Net Investment Income ........ (0.32) (0.28)
Distributions from Net Realized Gain on
Investments Sold ........................... -- --
Distributions from Capital Paid-In .......... (0.01) --
------- -------
Total Distributions ....................... (0.33) (0.28)
------- -------
Net Asset Value, End of Period ................ $9.56 $9.87
======= =======
Total Investment Return at Net Asset Value(3).. 1.61%(4) 6.28%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...... $96,349 $88,940
Ratio of Expenses to Average Net Assets ....... 1.86%(5) 1.85%(5)
Ratio of Net Investment Income to Average
Net Assets .................................. 5.99%(5) 5.80%(5)
Portfolio Turnover Rate ....................... 88% 71%
</TABLE>
(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
November 30.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign U.S. Government Income Fund
Schedule of Investments
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Sovereign U.S. Government Income Fund on November 30, 1997. It's divided into
two main categories: U.S. government and agencies securities and short-term
investments. Short-term investments, which represent the Fund's "cash" position,
are listed last.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---------- ---------- ---------- ----------
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (47.03%)
United States Treasury,
<S> <C> <C> <C> <C>
Bond ........................................................... 15.750% 11-15-01 $15,000 $20,165,625
Bond ........................................................... 10.750 08-15-05 12,085 15,636,902
Bond ........................................................... 12.750 11-15-10 6,000 8,532,180
Bond ........................................................... 12.000 08-15-13 23,900 34,968,568
Bond* .......................................................... 9.250 02-15-16 24,450 32,831,705
Bond ........................................................... 8.125 08-15-19 2,015 2,491,991
Bond ........................................................... 6.375 08-15-27 25,550 26,567,912
Bond ........................................................... 6.125 11-15-27 10,350 10,466,438
Note ........................................................... 9.125 05-15-99 10,500 10,983,945
Note ........................................................... 8.500 02-15-00 6,000 6,329,040
Note ........................................................... 5.875 09-30-02 9,000 9,005,580
Note ........................................................... 5.750 10-31-02 5,000 4,978,900
------------
182,958,786
------------
Government - U.S. Agencies (51.33%)
Federal Home Loan Bank,
Bond ........................................................... 6.770 01-29-02 5,000 5,032,800
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf ............................................ 10.500 02-01-03 3,781 3,913,877
30 Yr Pass Thru Ctf ............................................ 9.500 08-01-16 11,463 12,329,191
CMO REMIC 34-C ................................................. 9.000 11-15-19 4,464 4,599,058
CMO REMIC 1142-H ............................................... 7.950 12-15-20 10,000 10,268,700
CMO REMIC 1603-K ............................................... 6.500 10-15-23 5,000 4,884,350
CMO REMIC 1608-L ............................................... 6.500 09-15-23 5,000 4,867,150
CMO REMIC 1617-PM .............................................. 6.500 11-15-23 10,000 9,843,700
CMO REMIC 1727-I ............................................... 6.500 05-15-24 5,000 4,840,600
Deb ............................................................ 6.875 11-22-06 5,000 5,060,150
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf ............................................ 9.050 04-10-00 13,000 13,832,780
10 Yr Pass Thru Ctf ............................................ 8.900 06-12-00 5,000 5,305,450
15 Yr Pass Thru Ctf ............................................ 9.000 02-01-10 6,031 6,312,085
15 Yr Pass Thru Ctf ............................................ 7.500 07-01-11 4,252 4,355,550
CMO REMIC 1989-78-G ............................................ 9.050 12-25-18 5,296 5,404,842
CMO REMIC 1991-76-M ............................................ 9.000 07-25-06 1,859 1,870,172
CMO REMIC 1994-60-PJ ........................................... 7.000 04-25-24 6,100 6,122,875
CMO REMIC 1994-75-K ............................................ 7.000 04-25-24 3,100 3,145,508
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Sovereign U.S. Government Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- ------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
CMO REMIC 1996-28-PK ............................................... 6.500% 07-25-25 $7,589 $7,318,893
CMO REMIC G-8-E .................................................... 9.000 04-25-21 5,967 6,428,952
CMO REMIC X-225C-TK ................................................ 6.500 12-25-23 5,032 4,932,920
Medium Term Note ................................................... 9.500 07-01-17 5,000 6,712,500
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage ..................................... 6.875# 10-20-22 to 13,995 14,368,701
10-20-23
30 Yr Pass Thru Ctf ................................................ 7.500 01-15-23 to 17,725 18,141,017
02-15-26
30 Yr Pass Thru Ctf ................................................ 8.000 01-15-25 7,730 8,036,493
30 Yr Pass Thru Ctf ................................................ 9.000 08-15-16 to 8,270 8,967,266
12-15-17
Small Business Administration,
Pass Thru Ctf Ser 97-B ............................................. 7.100 02-01-17 4,931 5,091,455
Pass Thru Ctf Ser 97-D ............................................. 7.500 04-01-17 4,929 5,151,129
Pass Thru Ctf Ser 97-E ............................................. 7.300 05-01-17 2,465 2,550,668
------------
199,688,832
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $372,542,209) (98.36%) 382,647,618
------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.45%)
Investment in a joint repurchase agreement
transaction with Swiss Bank Corp., Dated
11-28-97, Due 12-1-97 (secured by U.S. Treasury
Note, 7.75%, Due 12-31-99 and U.S. Treasury
Bonds, 6.50% thru 11.25%, Due 2-15-15 thru 11-15-26) ............... 5.670 1,763 1,763,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company Daily Interest Savings
Account Current Rate 4.950% ........................................ 961
------------
TOTAL SHORT-TERM INVESTMENTS (0.45%) 1,763,961
------- ------------
TOTAL INVESTMENTS (98.81%) $384,411,579
======= ============
</TABLE>
# Represents rate in effect on November 30, 1997.
* U.S. Treasury Bonds with a value of $36,927 owned by the Fund were designated
as margin deposits for futures contracts as of November 30, 1997.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Sovereign U.S. Government Income Fund
(UNAUDITED)
NOTE A -
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management investment
company registered under the Investment Company Act of 1940. The Trust consists
of two series: John Hancock Sovereign U.S. Government Income Fund (the "Fund"),
and John Hancock Strategic Income Fund. The other series of the Trust is
reported in separate financial statements. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-term total
return by investing in securities issued, guaranteed or otherwise backed by the
United States government, its agencies or instrumentalities.
The Trustees have authorized the issuance of multiple classes of shares of
the Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $48,876,888 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. To the extent that such carryforwards are
used by the Fund, no capital gains distributions will be made. The carryforwards
expire as follows: May 31, 1998 -- $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.
14
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Sovereign U.S. Government Income Fund
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. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the period ended November 30, 1997.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure to
the underlying instrument or hedge other Fund instruments. At the time the Fund
enters into a financial futures contract, it will be required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at the
official settlement price on the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market," will be recorded by the Fund as unrealized gains or
losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At November 30, 1997 there was the following open position in financial
futures contracts:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
MAR 98 20 TREASURY NOTE SHORT $3,750
============
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
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Sovereign U.S. Government Income Fund
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 November
30, 1997.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.50% of the first $500,000,000 of the Fund's
average daily net asset value, and (b) 0.45% of the Fund's average daily net
asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-Distributors for
shares of the Fund. For the period ended November 30, 1997, net sales charges
received on sales of Class A shares of the Fund amounted to $102,389. Of this
amount, $11,803 was retained and used for printing prospectuses, advertising,
sales literature, and other purposes, $20,508 was paid as sales commissions to
unrelated broker-dealers and $70,078 was paid as sales commissions to sales
personnel of John Hancock Distributors, Inc. ("Distributors"), a related
broker-dealer. The Adviser's indirect parent, John Hancock Mutual Life Insurance
Company ("JHMLICo"), is the indirect sole shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% 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 November 30,
1997 the contingent deferred sales charges received by JH Funds amounted to
$105,361.
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
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 less than 0.02% of the average net
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Sovereign U.S. Government Income Fund
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 November 30, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $2,740.
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 November 30, 1997 aggregated $274,162,294 and $296,791,806, respectively.
The cost of investments owned at November 30, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $374,305,209. Gross
unrealized appreciation and depreciation of investments aggregated $10,890,156
and $784,747, respectively, resulting in net unrealized appreciation of
$10,105,409.
17
<PAGE>
=====================================NOTES======================================
John Hancock Funds - Sovereign U.S. Government Income Fund
18
<PAGE>
=====================================NOTES======================================
John Hancock Funds - Sovereign U.S. Government Income Fund
19
<PAGE>
================================================================================
----------------
JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Managment Firm U.S. Postage
PAID
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
INTERNET: www.jhancock.com/funds ----------------
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Sovereign U.S. Government Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
020SA 11/97
1/98
<PAGE>
SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Strategic
Income Fund
NOVEMBER 30, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
---------------------------------------
TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
DOUGLAS M. COSTLE*
LELAND O. ERDAHL*
RICHARD A. FARRELL*
GAIL D. FOSLER*
WILLIAM F. GLAVIN*
ANNE C. HODSDON
DR. JOHN A. MOORE*
PATTI MCGILL PETERSON*
JOHN W. PRATT*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
Second Vice President and Compliance Officer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
TRANSFER AGENT
JOHN HANCOCK SIGNATURE SERVICES, INC.
1 JOHN HANCOCK WAY, SUITE 1000
BOSTON, MASSACHUSETTS 02217-1000
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109-1803
---------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 have been anything but dull. Bond investors have
enjoyed the benefits of a strong economy with no inflation. Stock investors have
been treated to record-breaking performance by the Dow Jones Industrial Average,
but with record-breaking volatility. After two years of strong advances with
relatively minor swings, the stock market's recent sharp drops and enormous
rebounds have caused a fair share of investor concern.
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The latest round came in October and was largely due to uncertainty in foreign
markets. Southeast Asia sneezed and the rest of the world caught a cold. On
October 27, the Dow experienced its largest one-day point decline, dropping 554
points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had stabilized, yet many markets remained edgy as investors sorted
out the Asian turmoil and its implications on economic growth, interest rates
and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
BY FREDERICK CAVANAUGH, PORTFOLIO MANAGER
John Hancock
Strategic Income Fund
U.S. Treasury bonds rally, while emerging-market bonds stumble
There was good news and bad news for the global bond markets during the past six
months. The good news was that absent inflationary pressures, U.S. interest
rates fell steadily and U.S. Treasury bonds staged an impressive rally. The U.S.
high-yield corporate market -- made up of companies with below-investment-grade
credit ratings -- also performed well. The continued strength of the nation's
economy translated into improving earnings and cash flows for many high-yield
companies. Furthermore, the demand for high-yield bonds was exceptionally strong
throughout the period.
Outside the U.S. the news was mixed. Government bonds issued by so-called
"dollar bloc" countries --including Canada and New Zealand -- enjoyed gains as
intermediate- and long-term interest rates in their respective countries
declined. Many European bonds posted gains when yields were forced lower as the
continent struggled to meet the economic and fiscal conditions required to join
the European Economic and Monetary Union. Meanwhile, debt issued by companies
and governments in less developed emerging markets experienced a cruel twist of
fate. After soaring and leading their global counterparts throughout the summer,
emerging-market bonds suffered a serious jolt in the fall. In light of currency
and economic instability in Southeast Asia, investors punished nearly every
emerging market by withdrawing their investment dollars and seeking "safe
havens" elsewhere.
Performance review
Against a mixed and changing backdrop, we're pleased with John Hancock Strategic
Income
"...U.S. interest rates fell steadily..."
[A 2 1/4" x 3 1/2" photo of portfolio management team at bottom right. Caption
reads: Fred Cavanaugh (left) and Fund management team members (l-r): Linda
Carter, Jamie Kellogg and Arthur Calavritinos."]
3
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
TOP FIVE BOND SECTORS
[Chart with heading "Top Five Bond Sectors" at top left hand column. The chart
lists five sectors: 1) U.S. Treasury & Government Agencies 21%, 2)
Telecommunications 15%, 3) Foreign Governments 10%, 4) Media 8%, 5) Leisure 7%.
Footnote below states "As a percentage of net assets on November 30, 1997."]
- --------------------------------------------------------------------------------
Fund's performance. For the six-month period ended November 30, 1997, the Fund's
Class A and Class B shares posted total returns of 7.15% and 6.78%,
respectively, at net asset value. Those returns outpaced the average
multi-sector income fund, which returned 5.06% for the same six-month period,
according to Lipper Analytical Services, Inc.(1) Please see pages six and seven
for longer-term performance information.
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 us
to invest in three broad categories - higher-yielding, lower-rated corporate
bonds; foreign bonds; and U.S. government bonds. The primary reason for our
better-than-average performance was our relatively large stake in high-yield
corporate bonds, which outperformed everything but longer-term U.S. government
securities. Among the Fund's top performers in this area were our media and
telecommunications holdings. Capstar Broadcasting Partners benefited from
consolidation in the radio industry and better advertising revenues, while
telecommunications leader Nextel Communications continued to benefit from rising
subscriber growth. That said, we had a few small positions that turned out to be
laggards during the period. U.K.-based telecommunications provider Ionica
stumbled on questions about the company's subscriber growth and the quality of
its technology. With the cloud of uncertainty hanging over emerging markets,
Brazilian telecommunications concern Globo Communicacoes also faltered.
Strategic changes
Throughout the period, we reduced our foreign bond holdings to 30% of
investments at the end of the period from 37% six months earlier. Part of that
reduction came from selling about half of our stake in Canadian bonds. As
Canadian interest rates dropped, we enjoyed solid performance from these
holdings. But given our view that most of their gains were behind them, we cut
back our holdings. We also made some adjustments in our emerging-market
holdings. Our stake in emerging-market corporate and government bonds stood at
about 19% in early June, which proved rewarding when these bonds enjoyed
impressive gains throughout the summer. But by early October, we became
concerned that currency problems experienced earlier by Thailand in mid-summer
could bode ominously for other emerging markets. In light of our concerns, we
sold many of our government holdings, reducing our emerging markets position to
14% of investments by mid-October. While this helped us sidestep some of the
wreckage from problems that surfaced in Southeast Asia during the last week of
October, we
"Throughout the period, we reduced our foreign bond holdings..."
Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Investment" the header for the right column is "Recent
performance...and what's behind the numbers." The first listing is "Nextel
Communications" followed by an up arrow and the phrase "Cellular/paging/dispatch
device demand grows". The second listing is "Capstar Broadcasting Partners"
followed by an up arrow and the phrase "Rising radio advertising revenues". The
third listing is "Globo Communicacoes." followed by a down arrow and the phrase
"Tarnished by cloud over emerging-market bonds". Footnote below reads: "See
"Schedule of Investments." Investment holdings are subject to change."
4
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
FUND PERFORMANCE
For the six months ended November 30, 1997
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote "For the six months ended November 30, 1997." The chart
is scaled in increments of 2% from top to bottom with 8% at the top and 0% at
the bottom. Within the chart, there are three solid bars. The first represents
the 7.15% total return for John Hancock Strategic Income Fund: Class A. The
second represents the 6.78% total return for John Hancock Strategic Income Fund:
Class B. The third represents the 5.06% 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,
Inc. (1) See the following two pages for historical performance information.]
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, Inc.(1) See the following two pages for historical
performance information.
- --------------------------------------------------------------------------------
were unable to sell some securities at prices we thought were reasonable.
To help mitigate the effects of further turmoil, we bought U.S. Treasury
futures, because it's our view that another round of currency turmoil is likely.
That, in turn, could incite a further flight to quality, with the U.S. Treasury
market as the prime beneficiary. Under that scenario, the prices of our futures
contracts could rise and offset some potential losses in our remaining
emerging-market holdings. We also increased our position in U.S. Treasury bonds
to roughly 16% of investments by the end of the period. In addition to U.S.
bonds' holding "safe-haven" status, U.S. interest rates are high compared to the
rest of the world. We believe there's a good chance that the U.S. economy could
start to slow in 1998, so interest rates could fall further and bonds could
continue to rally.
As far as Europe goes, we maintained our focus on U.K. bonds, which we think
offer both attractive yields and the potential for price appreciation as
interest rates in that country fall. Meanwhile, we continued to avoid the rest
of Western Europe based on the uncertainty surrounding the move towards a
unified European currency.
Outlook
In our view, 1998 is shaping up to be an interesting year for global bonds. We
believe that there could be continued volatility arising from further currency
problems in emerging markets. As a result, we're likely to keep our stake there
relatively low until we think that the currency crises are behind us.
Furthermore, there's a good chance that recent and future devaluations of
emerging-market currencies will be the catalyst for slower worldwide economic
growth. Even though we expect the U.S. economy to slow as well, we believe our
economy will remain in positive territory. Our view is that high-yield U.S.
corporate bonds could post solid performance again next year. Granted, we don't
expect to see a lot of capital appreciation from high-yield bonds, and expect
that most of their total return will be generated from their interest payments.
Against a slower economic backdrop in the United States, we also believe
interest rates could continue to decline.
"...1998 is shaping up to be an interesting year for global bonds."
- --------------------------------------------------------------------------------
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.
5
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
A LOOK AT FUND 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 measures
the change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Prior to September 28, 1989, different sales charge schedules
were in effect for Class A shares and are not reflected in the performance
information.
Class B performance reflects a maximum contingent deferred sales charge (maximum
5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. For a discussion of risks
associated with international investing and high-yield bonds, please see the
Fund's prospectus.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
ONE FIVE TEN
YEAR YEARS YEARS
--------- --------- ---------
Cumulative Total Returns 10.66% 55.85% 130.27%
Average Annual Total Returns 10.66% 9.28% 8.70%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended September 30, 1997
SINCE
ONE INCEPTION
YEAR (10/4/93)
----------- -----------
Cumulative Total Returns 10.08% 41.24%
Average Annual Total Returns 10.08% 9.04%
- --------------------------------------------------------------------------------
YIELDS
- --------------------------------------------------------------------------------
As of November 30, 1997
SEC 30-DAY
YIELD
--------------
John Hancock Strategic Income Fund: Class A 7.50%
John Hancock Strategic Income Fund: Class B 7.15%
6
<PAGE>
================================================================================
John Hancock Funds - Strategic Income Fund
- --------------------------------------------------------------------------------
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, assuming all distributions were reinvested
for the period indicated. For comparison, we've shown the same $10,000
investment in the Lehman Brothers Government/Corporate Bond Index -- an
unmanaged index that measures the performance of U.S. government bonds, U.S.
corporate bonds, and Yankee bonds. Past performance is not indicative of future
results.
Strategic Income Fund
Class A shares
[Line chart with the heading Strategic Income Fund :Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Lehman
Government/Corporate Bond Index and is equal to $24,585 as of November 30, 1997.
The second line represents the value of the hypothetical $10,000 investment made
in the Strategic Income Fund on May 30, 1987, before sales charge, and is equal
to $24,081 as of November 30, 1997. The third line represents the Strategic
Income Fund, after sales charge, and is equal to $22,998 as of November 30,
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, and is equal to $14,367 as of November 30,
1997. The second line represents the value of the hypothetical $10,000
investment made in the Strategic Income Fund, after sales charge, on October 4,
1993, and is equal to $14,167 as of November 30, 1997. The third line represents
the value of the Lehman Government/Corporate Bond Index, and is equal to $12,823
as of November 30, 1997.]
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on November 30, 1997. You'll
also find the net asset value and the maximum offering price per share as of
that date.
Statement of Assets and Liabilities
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Bonds (cost - $725,992,141) ............................... $740,623,867
Common and preferred stocks and warrants
(cost - $56,495,485) .................................... 67,758,612
Joint repurchase agreement (cost - $1,371,000) ............ 1,371,000
Corporate savings account ................................. 58,611
-------------
809,812,090
Foreign currency, at value (cost - $3,243,730) ............. 3,234,821
Receivable for investments sold ............................ 39,888,363
Receivable for shares sold ................................. 1,850,669
Receivable for foreign currency exchange contracts
purchased - Note A ........................................ 104,941
Receivable for foreign currency exchange contracts
sold - Note A ............................................. 2,505,271
Dividends receivable ....................................... 88,945
Interest receivable ........................................ 14,685,027
Tax reclaim receivable ..................................... 617
Receivable for variation margin - Note A ................... 100,000
Other assets ............................................... 20,576
-------------
Total Assets ............................. 872,291,320
-----------------------------------------------------------
Liabilities:
Payable for investments purchased .......................... 43,094,283
Payable for foreign currency exchange contracts
sold - Note A ............................................. 1,716,028
Payable for shares repurchased ............................. 328,419
Dividend payable ........................................... 822,269
Payable to John Hancock Advisers, Inc. .....................
and affiliates - Note B ................................... 499,066
Accounts payable and accrued expenses ...................... 176,700
-------------
Total Liabilities ........................ 46,636,765
-----------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 809,245,857
Accumulated net realized loss on investments, foreign
currency transactions and financial futures contracts ..... (17,646,181)
Net unrealized appreciation of investments, foreign
currency transactions and financial futures contracts ..... 27,083,654
Undistributed net investment income ........................ 6,971,225
-------------
Net Assets ............................... $825,654,555
===========================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial interest outstanding -
unlimited number of shares authorized with no par value)
Class A - $440,805,863/56,891,768 .......................... $7.75
=============================================================================
Class B - $384,848,692/49,669,763 .......................... $7.75
=============================================================================
Maximum Offering Price Per Share*
Class A - ($7.75 x 104.71%) ................................ $8.12
=============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest (net of foreign withholding taxes of $636) .......... $34,714,205
Dividends .................................................... 2,321,138
-------------
37,035,343
-------------
Expenses:
Investment management fee - Note B .......................... 1,629,441
Distribution and service fee - Note B
Class A ................................................... 657,054
Class B ................................................... 1,812,974
Transfer agent fee - Note B ................................. 575,073
Custodian fee ............................................... 125,962
Registration and filing fees ................................ 74,005
Financial services fee - Note B ............................. 71,429
Trustees' fees .............................................. 28,774
Printing .................................................... 24,566
Auditing fee ................................................ 18,702
Miscellaneous ............................................... 9,660
Legal fees .................................................. 5,058
-------------
Total Expenses ............................ 5,032,698
-----------------------------------------------------------
Net Investment Income ...................... 32,002,645
-----------------------------------------------------------
Realized and Unrealized Gain on Investments,
Financial Futures Contracts and
Foreign Currency Transactions:
Net realized gain on investments sold ........................ 7,564,041
Net realized gain on financial futures contracts ............. 387,957
Net realized gain on foreign currency transactions ........... 4,451,702
Change in net unrealized appreciation/depreciation
of investments .............................................. 6,835,841
Change in net unrealized appreciation/depreciation
of foreign currency transactions ............................ 957,055
-------------
Net Realized and Unrealized
Gain on Investments ........................ 20,196,596
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .................. $52,199,241
===========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1997
MAY 31, 1997 (UNAUDITED)
--------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ......................................................... 938,521 $32,002,645
Net realized gain on investments sold, foreign
currency transactions, and financial futures contracts ...................... 12,369,401 12,403,700
Change in net unrealized appreciation/depreciation
of investments and foreign currency transactions ............................ 11,444,907 7,792,896
------------ ------------
Net Increase in Net Assets
Resulting from Operations ................................................... 78,752,829 52,199,241
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6371 and $0.3181 per share, respectively) ..................... (33,759,527) (18,216,962)
Class B - ($0.5854 and $0.2913 per share, respectively) ..................... (21,178,937) (13,785,683)
------------ ------------
Total Distributions to Shareholders ......................................... (54,938,464) (32,002,645)
------------ ------------
From Fund Share Transactions - Net:* ............................................. 145,710,146 60,055,459
------------ ------------
Net Assets:
Beginning of period ........................................................... 575,877,989 745,402,500
------------ ------------
End of period (including undistributed net investment
income of $6,971,225 and $6,971,225, respectively) .......................... $745,402,500 $825,654,555
============ ============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1997
MAY 31, 1996 (UNAUDITED)
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ..................................... 25,714,330 $191,363,563 6,120,128 $47,474,785
Shares issued to shareholders
in reinvestment of distributions .............. 2,756,450 20,478,423 1,429,381 11,099,841
---------- ------------ --------- -----------
28,470,780 211,841,986 7,549,509 58,574,626
Less shares repurchased ......................... (23,946,698) (178,382,670) (5,929,194) (46,012,769)
---------- ------------ --------- -----------
Net increase .................................... 4,524,082 $33,459,316 1,620,315 $12,561,857
========== ============ ========= ===========
CLASS B
Shares sold ..................................... 26,203,914 $194,709,218 9,511,004 $73,800,666
Shares issued to shareholders
in reinvestment of distributions .............. 1,314,586 9,776,167 807,633 6,274,396
---------- ------------ --------- -----------
27,518,500 204,485,385 10,318,637 80,075,062
Less shares repurchased ......................... (12,396,576) (92,234,555) (4,197,132) (32,581,460)
---------- ------------ --------- -----------
Net increase .................................... 15,121,924 $112,250,830 6,121,505 $47,493,602
========== ============ ========= ===========
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding dollar
value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, SIX MONTHS ENDED
------------------------------------------------------------ NOVEMBER 30, 1997
1993 1994 1995 1996 1997 (UNAUDITED)
-------- -------- -------- -------- -------- -----------
<S> <C> <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 $7.54
-------- -------- -------- -------- -------- --------
Net Investment Income ................. 0.71 0.68 0.64 0.66(2) 0.64(2) 0.32(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 0.21
-------- -------- -------- -------- -------- --------
Total from Investment Operations ...... 0.49 0.35 0.62 0.78 0.91 0.53
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.72) (0.58) (0.55) (0.66) (0.64) (0.32)
Distributions in Excess of Net
Investment Income ................. -- (0.05) -- -- -- --
Distributions from Capital Paid-In .. -- (0.10) (0.09) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions ................... (0.72) (0.73) (0.64) (0.66) (0.64) (0.32)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ........ $7.55 $7.17 $7.15 $7.27 $7.54 $7.75
======== ======== ======== ======== ======== ========
Total Investment Return at Net
Asset Value (3) ..................... 6.81% 4.54% 9.33% 11.37% 12.99% 7.15%(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) ...................... $262,137 $335,261 $327,876 $369,127 $416,916 $440,806
Ratio of Expenses to Average Net
Assets .............................. 1.58% 1.32% 1.09% 1.03% 1.00% 0.94%(5)
Ratio of Net Investment Income to
Average Net Assets .................. 9.63% 8.71% 9.24% 9.13% 8.61% 8.32%(5)
Portfolio Turnover Rate ............... 97% 91% 55% 78% 132% 69%
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment 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.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, SIX MONTHS ENDED
PERIOD ENDED ---------------------------------- NOVEMBER 30, 1997
MAY 31, 1994(1) 1995 1996 1997 (UNAUDITED)
--------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ....................... $7.58 $7.17 $7.15 $7.27 $7.54
------- -------- -------- -------- --------
Net Investment Income ...................................... 0.40 0.60(2) 0.61(2) 0.59 0.29(2)
Net Realized and Unrealized Gain (Loss) on Investments,
Foreign Currency Transactions and Financial Futures
Contracts .............................................. (0.41) (0.02) 0.12 0.27 0.21
------- -------- -------- -------- --------
Total from Investment Operations ......................... (0.01) 0.58 0.73 0.86 0.51
------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ....................... (0.32) (0.52) (0.61) (0.59) (0.29)
Distributions in Excess of Net Investment Income ........... (0.03) -- -- -- --
Distributions from Capital Paid-in ......................... (0.05) (0.08) -- -- --
------- -------- -------- -------- --------
Total Distributions ...................................... (0.40) (0.60) (0.61) (0.59) (0.30)
------- -------- -------- -------- --------
Net Asset Value, End of Period ............................. $7.17 $7.15 $7.27 $7.54 $7.75
======= ======== ======== ======== ========
Total Investment Return at Net Asset Value (3) ............. (0.22%)(4) 8.58% 10.61% 12.21% 6.78%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................... $77,691 $134,527 $206,751 $328,487 $384,849
Ratio of Expenses to Average Net Assets .................... 1.91%(5) 1.76% 1.73% 1.70% 1.64%(5)
Ratio of Net Investment Income to Average Net Assets ....... 8.12%(5) 8.55% 8.42% 7.90% 7.60%(5)
Portfolio Turnover Rate .................................... 91% 55% 78% 132% 69%
</TABLE>
(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.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Schedule of Investments
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Strategic Income Fund on November 30, 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.
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
BONDS
Advertising (1.05%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 .......................................................... 9.375% B1 $4,000 $4,230,000
Universal Outdoor, Inc.,
Sr Sub Note Ser B 10-15-06 .................................................... 9.750 B1 4,000 4,480,000
-----------
8,710,000
-----------
Aerospace (0.23%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) .................................... 10.910 BBB- 1,500 1,906,245
-----------
Agricultural Operations (0.37%)
Iowa Select Farms L.P./ISF Finance Inc.,
Sr Sub Note 12-01-05 (R) ...................................................... 10.750 B3 3,000 3,041,250
-----------
Banks - Foreign (2.32%)
International Bank for Reconstruction & Development,
Sr Note (South Africa) 07-21-98 # ............................................. 15.000 AAA 32,000 6,546,877
Sr Note (New Zealand) 08-20-07 # .............................................. Zero AAA 15,000 4,789,372
Landeskreditbank Baden - Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) ............................................... 7.625 AAA 7,000 7,827,120
-----------
19,163,369
-----------
Banks - United States (0.29%)
CSBI Capital Trust I,
Sec Co. Gtd. Bond 06-06-27 (R) ................................................ 11.750 B- 2,340 2,410,200
-----------
Beverages (0.25%)
Pepsi-Gemex, S.A. de C.V.,
Sr Note Ser B (Mexico) 03-30-04 (Y) ........................................... 9.750 BB 2,000 2,050,000
-----------
Building (0.12%)
Koppers Industries, Inc.,
Sr Sub Note 12-01-07 (R) ...................................................... 9.875 B- 1,000 1,015,000
-----------
Chemicals (1.71%)
AEP Industries, Inc.,
Sr Sub Note 11-15-07 (R) ...................................................... 9.875 B 4,000 4,040,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Chemicals (continued)
OPP Petroquimica S.A.,
Bond (Brazil) 10-29-04 (R), (Y) ................................................ 11.000% B+ $4,000 $3,720,000
PCI Chemicals Canada, Inc.,
Sr Sec Note (Canada) 10-15-07 (R), (Y) ......................................... 9.250 B+ 2,000 1,970,000
Trikem S.A.,
Bond (Brazil) 07-24-07 (R), (Y) ................................................ 10.625 BB- 5,000 4,350,000
-----------
14,080,000
-----------
Computers (1.00%)
Unisys Corp.,
Sr Note 10-15-04 ............................................................... 11.750 B+ 7,250 8,246,875
-----------
Containers (2.52%)
Berry Plastics Corp.,
Sr Sub Note 04-15-04 ........................................................... 12.250 BB 3,000 3,300,000
Gaylord Container Corp.,
Sr Sub Disc Deb 05-15-05 ....................................................... 12.750 B- 6,000 6,465,000
Riverwood International Corp.,
Gtd Sr Sub Note 04-01-08 ....................................................... 10.875 CCC+ 6,000 5,880,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 ........................ 12.250 B- 5,000 5,200,000
-----------
20,845,000
-----------
Diversified Operations (0.76%)
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y) ...................................... 11.250 B 4,000 4,330,000
Intertek Finance Plc,
Sr Sub Note, Ser B (United Kingdom) 11-01-06 (Y) ............................... 10.250 B 1,850 1,937,875
-----------
6,267,875
-----------
Electronics (2.15%)
Cablevision Systems Corp.,
Sr Sub Deb 02-15-13 ............................................................ 9.875 BB- 4,000 4,340,000
Communications Instruments, Inc.,
Sr Sub Note 09-15-04 (R) ....................................................... 10.000 B- 1,500 1,492,500
Fairchild Semiconductor Corp.,
Sr Sub Note 03-15-07 ........................................................... 10.125 B 2,200 2,321,000
Flextronics International Ltd.,
Sr Sub Note 10-15-07 (R) ....................................................... 8.750 B 5,000 4,975,000
Teletrac, Inc.,
Unit (Sr Note & Warrant) 08-01-07 (r) .......................................... 14.000 B- 2,000 2,070,000
Viasystems, Inc.,
Sr Sub Note 06-01-07 (R) ....................................................... 9.750 B3 2,500 2,581,250
-----------
17,779,750
-----------
Energy (0.15%)
AES China Generating Co. Ltd.,
Note (China) 12-15-06 (Y) ...................................................... 10.125 BB- 1,200 1,218,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance (1.05%)
AEI Holding Co.,
Sr Note 11-15-07 (R) ...................................................... 10.000% B- $2,500 $2,537,500
CEI Citicorp Holdings,
Bond (Argentina) 02-14-07 (R), (Y) ........................................ 9.750 BB- 3,000 2,910,000
Maxxam Group Holdings, Inc.,
Sr Sec Note Ser B 08-01-03 ................................................ 12.000 B3 3,000 3,240,000
-----------
8,687,500
-----------
Food (1.33%)
Americold Corp.,
Sr Sub Note 05-01-08 ...................................................... 12.875 B- 4,000 4,920,000
Archibald Candy Corp.,
Sr Sec Note 07-01-04 ...................................................... 10.250 B 2,000 2,095,000
Arisco Produtos Alimenticios S.A.,
Bond (Brazil) 05-22-05 (R), (Y) ........................................... 10.750 BB- 1,000 930,000
Tom's Foods, Inc.,
Sr Sec Note 11-01-04 (R) .................................................. 10.500 B 3,000 3,033,750
-----------
10,978,750
-----------
Glass Products (0.33%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R), (Y) .................................... 11.375 B+ 2,500 2,712,500
-----------
Government - Foreign (10.13%)
Australia, Commonwealth of,
Government Bond (Australia) 07-15-05# ..................................... 7.500 AAA 15,000 11,095,022
Government Bond (Australia) 10-15-07# ..................................... 10.000 AAA 21,000 18,303,778
Canada, Government of,
Global Bond (New Zealand) 10-03-07# ....................................... 6.625 AA+ 10,000 5,926,967
Croatia, Republic of,
Government Bond (Croatia) 02-27-02 (R), (Y) ............................... 7.000 BBB- 5,000 4,990,625
New Zealand, Government of,
Government Bond (New Zealand) 04-15-04# ................................... 8.000 AAA 10,000 6,537,612
Treasury Bill (New Zealand ) 03-11-98# .................................... Zero AAA 6,000 3,629,117
South Africa, Republic of,
Government Bond (South Africa) 06-23-17 (Y) ............................... 8.500 Baa3 7,000 6,790,000
Government Bond (South Africa) 10-17-06 (Y) ............................... 8.375 BB+ 2,500 2,500,000
United Kingdom of Great Britain Treasury Gilts
Government Bond (United Kingdom) 07-16-07# ................................ 8.500 Aaa 8,000 15,352,378
Government Bond (United Kingdom) 11-06-01# ................................ 7.000 Aaa 5,000 8,470,769
-----------
83,596,268
-----------
Government - U.S. (15.65%)
United States Treasury,
Bond 02-15-16*** .......................................................... 9.250 Aaa 11,000 14,770,910
Bond 08-15-19 ............................................................. 8.125 Aaa 41,500 51,323,880
Bond 02-15-27 ............................................................. 6.625 Aaa 15,000 16,061,700
Note 08-15-05 ............................................................. 10.750 Aaa 10,000 12,939,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Government - U.S. (continued)
Note 05-15-98 ............................................................... 9.000% Aaa $13,600 $13,810,392
Note 05-15-01 ............................................................... 8.000 Aaa 19,000 20,255,710
------------
129,161,692
------------
Government - U.S. Agencies (5.00%)
Federal Home Loan Mortgage Corp.,
REMIC 44-E 11-15-19 ......................................................... 9.000 AAA 791 824,090
Federal National Mortgage Assn.,
Global Bond (United Kingdom) 06-07-02## ..................................... 6.875 Aaa 5,000 8,354,765
Global Bond (Australia) 07-10-02## .......................................... 6.500 Aaa 10,000 7,006,707
Global Bond (New Zealand) 09-26-00## ........................................ 7.000 Aaa 10,000 6,095,710
Global Bond (New Zealand) 06-20-02## ........................................ 7.250 Aaa 7,000 4,404,588
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 ................................................ 7.500 AAA 14,330 14,616,639
------------
41,302,499
------------
Leisure (7.06%)
Casino America, Inc.,
Sr Sec Note 08-01-03 ........................................................ 12.500 B 5,000 5,418,750
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 .................................................. 9.625 B 4,000 4,120,000
Sr Sub Note Ser D 08-01-08 .................................................. 9.625 B2 1,000 1,030,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 ........................................................ 10.500 B1 4,000 4,370,000
GB Property Funding Corp.,
1st Mtg 01-15-04 ............................................................ 10.875 CCC+ 3,000 2,580,000
Grand Casinos Inc.,
Sr Note 10-15-04 (R) ........................................................ 9.000 B+ 3,000 2,935,014
Hedstrom Corp.,
Sr Sub Note 06-01-07 (R) .................................................... 10.000 B- 4,000 4,010,000
Horseshoe Gaming LLC,
Gtd Sr Sub Note Ser B 06-15-07 .............................................. 9.375 B3 2,500 2,578,125
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 .................................................. 13.500 BB+ 5,900 7,581,500
Riddell Sports, Inc.,
Gtd Sr Note 07-15-07 ........................................................ 10.500 B2 4,000 4,120,000
Showboat Marina Casino Partnership/Finance Corp.,
1st Mtg Note Ser B 03-15-03 ................................................. 13.500 B 5,000 5,712,500
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+ 5,000 5,137,500
Waterford Gaming LLC,
Sr Note 11-15-03 ............................................................ 12.750 B 4,729 5,249,190
------------
58,322,579
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Machinery (0.26%)
Clark Material Handling Co.,
Gtd Sr Note 11-15-06 ............................................................. 10.750% B+ $2,000 $2,110,000
----------
Manufacturing (1.01%)
Coty, Inc.,
Sr Sub Note 05-01-05 ............................................................. 10.250 B+ 4,000 4,270,000
Scovill Fasteners, Inc.,
Sr Note 11-30-07 (R) ............................................................. 11.250 B 4,000 4,030,000
----------
8,300,000
----------
Media (8.27%)
Adelphia Communications Corp.,
Sr Note 10-01-02 ................................................................. 9.250 B3 3,500 3,491,250
American Telecasting, Inc.,
Sr Disc Note Ser B, Step Coupon (14.50%, 08-15-00) 08-15-05 (A) .................. Zero CCC+ 6,000 1,950,000
Australis Media Ltd.,
Unit (Sr Sub Disc Note & Warrant), Step Coupon (15.75% 05-15-00)
(Australia) 05-15-03 (A), (Y) .................................................... Zero C 2,000 600,000
Capstar Broadcasting Partners, Inc.,
Sr Disc Note, Step Coupon (12.75%, 02-01-02) 02-01-09 (A) ........................ Zero B- 2,750 1,980,000
CF Cable TV, Inc.,
Sr Note (Canada) 02-15-05 (Y) .................................................... 11.625 BBB- 2,000 2,269,140
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 (R) ......................................................... 10.250 B- 2,000 2,140,000
Comcast Corp.,
Sr Sub Deb 01-15-08 .............................................................. 9.500 BB+ 4,000 4,235,240
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(United Kingdom) 11-15-07 (A), (Y) ............................................... Zero B- 4,000 3,190,000
Digital Television Services, Inc.,
Gtd Sr Sub Note 08-01-07 (R) .................................................... 12.500 CCC 3,000 3,360,000
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 ............................................................. 12.375 B- 5,000 5,412,500
Garden State Newspapers, Inc.,
Sr Sub Note 10-01-09 (R) ......................................................... 8.750 B+ 3,500 3,447,500
Intermedia Capital Partners,
Sr Note 08-01-06 ................................................................. 11.250 B2 5,048 5,590,660
Katz Media Corp.,
Gtd Sr Sub Note 01-15-07 ......................................................... 10.500 B2 3,000 3,307,500
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) .................................................... 10.625 Ba3 1,250 1,375,737
Marcus Cable Co., L.P.,
Sr Disc Note, Step Coupon (14.25%, 6-15-00) 12-15-05 (A) ......................... Zero Caa1 4,000 3,380,000
Net Sat Servicos Ltda.,
Sr Note (Brazil) 08-05-04 (Y) .................................................... 12.750 B2 4,000 3,400,000
People's Choice TV Corp.,
Unit (Sr Disc Note & Warrant), Step Coupon
(13.125%, 06-01-00) 06-01-04 (A) ................................................ Zero CCC+ 2,000 780,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Media (continued)
Radio One, Inc.,
Sr Sub Note Ser B, Step Coupon (12.00%, 05-15-00) 05-15-04 (A) ................. 7.000% B $2,000 $1,980,000
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) ............................................ 10.000 BB+ 3,000 3,285,000
Sr Sec Deb (Canada) 01-15-14# .................................................. 9.650 BB+ 2,000 1,488,503
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) .............................................. 7.250 B 2,390 2,407,925
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ........................................................... 11.000 B3 2,785 2,993,875
Sullivan Broadcasting,
Sr Sub Note 12-15-05 ........................................................... 10.250 B- 3,000 3,195,000
TeleWest Communications Plc,
Sr Disc Deb, Step Coupon (11.00%, 10-01-01)
(United Kingdom) 10-01-07 (A), (Y) ............................................. Zero B+ 4,000 3,050,000
-----------
68,309,830
-----------
Metal (1.60%)
Centaur Mining & Exploration Ltd.,
Gtd Sr Note (Australia) 12-01-07 (R), (Y) ...................................... 11.000 B+ 2,500 2,528,125
Falcon Holdings Group LP,
Sr Sub Note 09-15-03 ........................................................... 11.000 B 4,605 4,834,941
GS Technologies Operating Co.,
Sr Note 10-01-05 ............................................................... 12.250 B 2,000 2,240,000
Kaiser Aluminum & Chemical Corp.,
Sr Sub Note 02-01-03 ........................................................... 12.750 CCC+ 3,388 3,625,160
-----------
13,228,226
-----------
Office (0.18%)
United Stationer Supply,
Sr Sub Note 05-01-05 ........................................................... 12.750 B- 1,334 1,517,425
-----------
Oil & Gas (2.69%)
Canadian Forest Oil Ltd.,
Sr Sub Note (Canada) 09-15-07 (R), (Y) ......................................... 8.750 B 2,900 2,907,250
Cliffs Drilling Co.,
Gtd Sr Sec Note Ser B, 05-15-03 ................................................ 10.250 B 2,250 2,435,625
Comp Nav Perez Companc,
Bond (Argentina) 01-30-04 (R), (Y) ............................................. 9.000 Ba3 3,000 3,000,000
Cross Timbers Oil Co.,
Sr Sub Note 11-01-09 (R) ....................................................... 8.750 B 1,500 1,515,000
Dailey International, Inc.,
Gtd Sr Note 08-15-07 (R) ....................................................... 9.750 B+ 1,000 1,040,000
Falcon Drilling Co.,
Sr Sub Note Ser B 03-15-05 ..................................................... 12.500 B3 1,500 1,725,000
HS Resources, Inc.,
Sr Sub Note 11-15-06 ........................................................... 9.250 B 2,000 2,040,000
Kelly Oil & Gas Partners Ltd.,
Deb 04-01-00 ................................................................... 8.500 B- 1,100 1,084,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Oil & Gas (continued)
Parker Drilling Corp.,
Gtd Sr Note Ser B 11-15-06 ......................................... 9.750% B1 $1,000 $1,075,000
Petroleos Mexicanos,
Bond (Mexico) 09-15-07 (Y) ......................................... 8.850 Ba2 1,000 980,000
Vintage Petroleum, Inc.,
Sr Sub Note 12-15-05 ............................................... 9.000 B+ 3,000 3,105,000
Wainoco Oil Corp.,
Sr Note 08-01-02 ................................................... 12.000 B- 1,272 1,329,240
-----------
22,236,990
-----------
Paper & Paper Products (0.93%)
Copamex Industrias, S.A. de C.V.,
Sr Note Ser B (Mexico) 04-30-04 (Y) ................................ 11.375 B1 1,950 2,096,250
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 ......................................... 12.000 B+ 5,000 5,600,000
-----------
7,696,250
-----------
Printing - Commercial (0.78%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 ............................................... 12.000 B 3,000 3,382,500
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 ............................................... 12.750 Caa1 3,000 3,060,000
-----------
6,442,500
-----------
Retail (0.72%)
Friendly Ice Cream Corp.,
Sr Note 12-01-07 ................................................... 10.500 B 1,250 1,251,919
Kevco, Inc.,
Sr Sub Note 12-07-07 (R) ........................................... 10.375 B- 2,000 2,000,850
Southern Foods Group L.P.,
Sr Sub Note 09-01-07 (R) ........................................... 9.875 B 1,400 1,456,000
Supermercados Norte,
Bond (Argentina) 02-09-04 (R), (Y) ................................. 10.875 B1 1,300 1,228,500
-----------
5,937,269
-----------
Steel (2.01%)
CSN Iron, S.A.,
Gtd Note (Brazil) 06-01-07 (R), (Y) ................................ 9.125 B1 4,000 3,340,000
Gulf States Steel, Inc. of Alabama,
1st Mtg 04-15-03 ................................................... 13.500 B1 4,000 4,020,000
Haynes International, Inc.,
Sr Note 09-01-04 ................................................... 11.625 B- 2,500 2,862,500
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) ...................................... 11.500 B+ 3,525 3,851,063
Republic Engineered Steels, Inc.,
1st Mtg 12-15-01 ................................................... 9.875 CCC+ 688 660,480
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Steel (continued)
Sheffield Steel Corp,
1st Mtg 12-01-05 (R) .................................................... 11.500% B- $1,875 $1,875,000
-----------
16,609,043
-----------
Telecommunications (15.45%)
Advanced Radio Telecom Corp.,
Unit (Sr Note & Warrants) 02-15-07 ...................................... 14.000 Caa2 4,000 3,800,000
American Communications Services, Inc.,
Sr Note 07-15-07 (R) .................................................... 13.750 B
6,000 6,840,000
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 5,000 3,812,500
Sr Note (United Kingdom) 11-30-07# ...................................... 10.125 B 1,425 2,411,914
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A), (Y) ............................................ Zero B3 5,000 3,762,500
Crown Castle International Corp.,
Sr Disc Note, Step Coupon
(10.625%, 11-01-02) 11-15-07 (A), (R) ................................... Zero B 2,800 1,677,236
Echostar DBS Corp.,
Gtd Sr Sec Note 07-01-00 (R) ............................................ 12.500 B- 5,000 5,325,000
Fonorola, Inc.,
Gtd Sr Sec Note (Canada) 08-15-02 (Y) ................................... 12.500 BB- 4,000 4,500,000
Globalstar L.P./Globalstar Capital Corp.,
Sr Note 02-15-04 ........................................................ 11.375 B 5,100 5,138,250
Globo Communicacoes e Participacoes Ltda.,
Bond (Brazil) 12-20-06 (R), (Y) ......................................... 10.500 BB- 1,500 1,365,000
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 .................................................... 13.250 B 5,000 5,750,000
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 (Y) ........................................... 12.875 B- 3,000 2,910,000
Intercel, Inc.,
Unit (Sr Discount Note & Warrant), Step Coupon
(12.00%, 02-01-01) 02-01-06 (A) ......................................... Zero B 4,100 2,952,000
Intermedia Communications, Inc.,
Sr Disc Note, Ser B, Step Coupon (11.25%, 07-01-02) 07-15-07 (A) ........ Zero B 3,000 2,055,000
Sr Disc Note, Step Coupon (12.50%, 05-15-01) 05-15-06 (A) ............... Zero B 3,000 2,325,000
International Wireless Communications, Inc.,
Sr Sec Disc Note 08-15-01 ............................................... Zero B- 3,000 1,650,000
Ionica, Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A), (Y) ...................................... Zero B 6,000 2,280,000
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 .............................................. 13.000 B- 4,150 4,268,769
McCaw International Ltd.,
Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) ............... Zero CCC 7,000 4,060,000
Mcleodusa, Inc.,
Sr Note 07-15-07 (R) .................................................... 9.250 B3 3,000 3,060,000
Metronet Communications Corp.,
Sr Disc Note, Step Coupon (10.75%, 11-01-02)
(Canada) 11-01-07 (A), (R), (Y) ......................................... Zero B 3,000 1,755,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Telecommunications (continued)
Unit (Sr Note & Warrant) (Canada) 08-15-07 (r), (Y) ............................ 12.000% B $2,250 $2,542,500
Microcell Telecommunications, Inc.,
Sr Disc Note, Step Coupon (11.125%, 10-01-02)
(Canada) 10-15-07 (A), (R)# .................................................... Zero B- 2,500 925,926
Netia Holdings B.V.,
Gtd Sr Note (Poland) 11-01-07 (R), (Y) ......................................... 10.250 B 1,750 1,658,125
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%, 02-15-99) 08-15-04 (A) ....................... Zero CCC 8,000 6,900,000
Nextlink Communications, Inc.,
Sr Note 10-01-07 ............................................................... 9.625 B 1,500 1,507,500
Occidente Y Caribe Cellular SA,
Sr Disc Note Ser B, Step Coupon (14.00%, 03-15-01)
(Colombia) 03-15-04 (A), (Y) ................................................... Zero B3 4,000 2,880,000
Orion Network Systems, Inc.,
Sr Note 01-15-07 ............................................................... 11.250 B2 5,000 5,650,000
Paging Network Do Brasil,
Unit (Sr Note & Non-Voting Class B Member Int)
(Brazil) 06-06-05 (R), (Y) ..................................................... 13.500 B 3,000 2,610,000
PanAmSat International Systems, Inc.,
Deb 04-15-05 ................................................................... 12.750 BBB+ 2,376 2,899,015
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 ......................................................... 10.875 B+ 4,410 4,961,250
RCN Corp.,
Sr Note 10-15-07 (R) ........................................................... 10.000 B3 4,600 4,611,500
Sprint Spectrum L.P.,
Sr Note 08-15-06 ............................................................... 11.000 B+ 3,750 4,218,750
Teleport Communications Group, Inc.,
Sr Disc Note, Step Coupon (11.125%, 07-01-01) 07-01-07 (A) ..................... Zero B+ 4,000 3,170,000
Teligent, Inc.,
Sr Note 12-01-07 ............................................................... 11.500 CCC 2,650 2,636,538
Videotron Holdings Plc,
Sr Disc Note, Step Coupon (11.125% 07-01-99)
(United Kingdom) 07-01-04 (A), (Y) ............................................. Zero B+ 4,000 3,780,880
Winstar Communications, Inc.,
Conv Sr Disc Note, Step Coupon (14.00%, 10-15-00) 10-15-05 (A) ................. Zero Caa3 1,300 1,365,000
Sr Disc Note, Step Coupon (14.00%, 10-15-00) 10-15-05 (A) ...................... Zero Caa1 2,600 1,950,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 .......................................................... 12.500 B3 1,400 1,526,000
------------
127,491,153
------------
Transport (0.62%)
Greater Beijing First Expressways Ltd.,
Sr Note (China) 06-15-04 (R), (Y) .............................................. 9.250 BB 2,500 2,237,500
MRS Logistica S.A.,
Bond Ser B (Brazil) 08-15-05 (R), (Y) .......................................... 10.625 B 2,000 1,845,000
Northwest Airlines, Inc.,
Sr Note 12-31-00 ............................................................... 12.092 BB- 1,028 1,049,009
------------
5,131,509
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Utilities (1.71%)
Calpine Corp.,
Sr Note 02-01-04 ........................................................ 9.250% BB- $2,000 $2,050,000
CE Casecnan Water & Energy Co., Inc.,
Sr Note Ser A (Philippines) 11-15-05 (Y) ................................ 11.450 BB 2,000 2,060,000
Espirito Santo - Escelsa,
Sr Note (Brazil) 07-15-07 (R), (Y) ...................................... 10.000 BB- 2,750 2,502,500
Midland Funding Corp. II,
Deb Ser A 07-23-05 ...................................................... 11.750 B 2,000 2,391,060
Deb Ser B 07-23-06 ...................................................... 13.250 B 4,000 5,114,760
-----------
14,118,320
-----------
TOTAL BONDS
(Cost $725,992,141) (89.70%) $740,623,867
------- ------------
<CAPTION>
NUMBER OF
SHARES MARKET
ISSUER, DESCRIPTION OR WARRANTS VALUE
- ------------------- ----------- ---------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS
Advanced Radio Telecom Corp., Warrant** ................................................... 60,000 769,200
American Radio Systems Corp., 11.375%, Ser B, Preferred Stock ............................. 47,376 5,685,120
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 .................................... 6,667 721,703
California Federal Bank 11.50%, Preferred Stock ........................................... 5,000 565,625
Capstar Broadcasting Partners, Inc., 12.00%, Preferred Stock .............................. 13,400 1,366,800
Chancellor Media Corp., 12.00%, Preferred Stock ........................................... 10,588 1,244,090
Chancellor Media Corp., 7.00%, Convertible, Preferred Stock ............................... 20,000 1,750,000
Comunicacion Celular S.A. Warrant (Colombia) (Y)** ........................................ 50,000 300,000
Core Cap, Inc., Common Stock** ............................................................ 45,000 900,000
Core Cap, Inc., Preferred Stock ........................................................... 45,000 1,125,000
Credit Lyonnais Capital S.C.A., American Depositary Receipt (ADR),
9.50% Ser DTC Preferred Stock (France) (R),(Y) .......................................... 100,000 2,625,000
Decorative Home Accents, Inc., Common Stock** ............................................. 1,000 10
Earthwatch, Inc., 12.00% Ser C Conv Preferred Stock (R) ................................... 200,000 2,000,000
EchoStar Communications Corp., 12.125%, Preferred Stock (R) ............................... 1,000 1,025,000
Finlay Enterprises, Inc., Common Stock** .................................................. 4,000 86,000
Granite Broadcasting Corp., 12.75%, Preferred Stock ....................................... 42,550 4,372,013
ICF Kaiser International Inc., Warrant (r)** .............................................. 12,000 6,000
ICG Holdings, Inc., 14.00% Preferred Stock ................................................ 2,143 2,432,305
Intermedia Communications, Inc., 13.50%, Ser B, Preferred Stock ........................... 1,617 1,923,974
Intermedia Communications, Inc., Common Stock** ........................................... 15,000 744,375
International Wireless Inc., Warrant** .................................................... 3,000 30
Ionica, Plc, Warrant (United Kingdom)# ** ................................................. 6,000 0
Ionica, Plc, Warrant (United Kingdom) (R)# ** ............................................. 8,500 977,500
IRT Property Co., Real Estate Investment Trust (REIT) ..................................... 75,000 904,688
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
ISSUER, DESCRIPTION OR WARRANTS VALUE
- ------------------- ----------- ---------
<S> <C> <C>
COMMON AND PREFERRED STOCKS AND WARRANTS (continued)
Kelley Oil & Gas Corp., $2.625, Preferred Stock ................................................ 40,000 $900,000
Lasmo Plc, 10.00%, Ser A, American Depositary Shares (ADS),
Preferred Stock (United Kingdom) (Y) ......................................................... 50,000 1,328,100
Maxus Energy Corp., $2.50, Preferred Stock ..................................................... 40,000 1,022,480
McCaw International Ltd., Warrant** ............................................................ 7,000 8,750
Nextel Communications Inc., 13.00%, Preferred Stock (R) ........................................ 2,060 2,276,300
Nextel Communications, Inc. (Class A), Common Stock** .......................................... 12,394 312,948
Nextlink Communications, Inc., Warrant (R)** .................................................. 30,000 0
Nextlink Communications Inc., 14.00%, Preferred Stock .......................................... 93,819 5,629,140
Northwest Airlines Corp. (Class A), Common Stock** ............................................. 140,000 5,810,000
NTL, Inc., 13.00%, Ser B, Preferred Stock ...................................................... 3,164 3,575,320
Orion Network Systems, Inc., Warrant** ......................................................... 5,000 50,000
PG&E Corp., Common Stock ....................................................................... 25,622 723,821
Powertel, Inc., Warrant** ...................................................................... 2,880 17,280
Qualcomm Financial Trust, 5.75%, Preferred Stock ............................................... 60,000 3,337,500
Quantas Airways Ltd., (ADS), Common Stock (Australia) (R), (Y) ................................. 13,800 254,003
RCN Corp., Common Stock** ...................................................................... 20,000 645,000
Renaissance Cosmetics, Warrant** ............................................................... 4,000 80,000
Rite Aid Corp., Common Stock ................................................................... 7,410 487,207
SFX Broadcasting, Inc., 6.50% Ser D Conv Preferred Stock (R) ................................... 25,000 2,059,375
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock ........................................ 9,000 1,053,000
Station Casinos, Inc., 7.00% Conv Preferred Stock .............................................. 5,000 202,500
Time Warner, Inc., 10.25% Series M Preferred Stock ............................................. 3,476 3,962,461
TLC Beatrice International Holdings, (Class A), Common Stock (r)** ............................. 20,000 1,040,000
Valero Energy Corp., Common Stock .............................................................. 46,250 1,451,094
----------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $56,495,485) (8.21%) 67,758,612
------ ----------
<CAPTION>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMITTED) VALUE
- ------------------- ---------- ---------- ---------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.17%)
Investment in a joint repurchase agreement transaction with Swiss Bank Corp.
Dated 11-28-97, Due 12-01-97 (Secured by U.S. Treasury Note, 7.75%, Due
12-31-99 and U.S. Treasury Bonds, 6.50% thru 11.25%, Due 02-15-15 thru
11-15-26) Note A .................................................................. 5.670% $1,371 $1,371,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account Current Rate 4.95% ................................. 58,611
------------
TOTAL SHORT-TERM INVESTMENTS (0.17%) 1,429,611
------------ ------------
TOTAL INVESTMENTS (98.08%) $809,812,090
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
NOTES TO THE SCHEDULE OF INVESTMENTS
# Par value of foreign bonds and shares outstanding of common shares are
expressed in local currency, as shown parenthetically in security
description.
## Parenthetical disclosure of a foreign country in the security description
represents country of local currency; par value is expressed in local
currency.
(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.
See Note A of the Notes to Financial Statements for valuation policy. Rule
144A securities amounted to $137,066,524 or 16.60% of the Fund's net
assets as of November 30, 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:
<TABLE>
<CAPTION>
MARKET
VALUE AS A
PERCENTAGE MARKET
ACQUISITION ACQUISITION OF FUND'S VALUE AT
DATE COSTS NET ASSETS NOVEMBER 30, 1997
------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
ICF Kaiser International Inc., Warrant ............................... 01-04-94 $15,000 0.00% $6,000
TLC Beatrice International Holdings (Class A), Common Stock .......... 11-25-87 1,006,000 0.13 1,040,000
Metronet Communications Corp., Unit (Sr Note & Warrant) .............. 07-18-97 2,250,000 0.31 2,542,500
Teletrac, Inc., Unit (Sr Note & Warrant) ............................. 07-31-97 2,025,000 0.25 2,070,000
</TABLE>
* Credit Ratings are unaudited and rated by Moody's Investor Service or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
** Non-income producing security.
*** U.S. Treasury Bonds with a value of $2,685,620 owned by the fund were
segregated as margin deposits for future contracts at November 30, 1997.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the fund.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Portfolio Concentration
November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Strategic Income Fund invests primarily in securities issued in the United
States of America. The performance of this Fund is closely tied to the economic
and financial conditions of the countries within which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the Schedule of Investments.
In addition, concentration of investments can be aggregated by various
countries. The table below shows the percentages of the Fund's investments at
November 30, 1997 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- --------------
Argentina ...................................................... 0.86%
Australia ...................................................... 4.82
Brazil ......................................................... 2.91
Canada ......................................................... 3.25
China .......................................................... 0.42
Colombia ....................................................... 0.84
Croatia ........................................................ 0.60
France ......................................................... 0.32
Germany ........................................................ 0.95
Luxembourg ..................................................... 0.29
Mexico ......................................................... 1.30
New Zealand .................................................... 3.80
Philippines .................................................... 0.25
Poland ......................................................... 0.20
South Africa ................................................... 1.92
United Kingdom ................................................. 7.18
United States .................................................. 68.17
------
TOTAL INVESTMENTS 98.08%
======
Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- -------------------- --------------
AAA ............................................................ 30.64%
AA ............................................................. 0.72
BBB ............................................................ 2.28
BB ............................................................. 7.18
B .............................................................. 43.24
CCC ............................................................ 5.57
C .............................................................. 0.07
------
TOTAL BONDS 89.70%
======
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
(UNAUDITED)
NOTE A -
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series of portfolios: John Hancock Strategic Income Fund (the "Fund") and
John Hancock Sovereign U.S. Government Income Fund. The investment objective of
the Fund is 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 distribu-
25
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
tions 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. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permit borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the period ended November 30, 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.
26
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
These contracts involve market or credit risk in excess of the unrealized
gain or loss reflected in the Fund's Statement of Assets and Liabilities. The
Fund may also purchase and sell forward contracts to facilitate the settlement
of foreign currency denominated portfolio transactions, under which it intends
to take delivery of the foreign currency. Such contracts normally involve no
market risk other than that offset by the currency amount of the underlying
transaction.
Open foreign currency forward contracts at November 30, 1997 were as follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ----- --------------
BUYS
DEUTSCHE MARK 42,447,000 DEC 97 $104,941
==========
SELLS
AUSTRALIAN DOLLAR 81,480,000 DEC 97 $1,909,865
BRITISH POUND STERLING 14,736,000 DEC 97 (1,145,629)
DEUTSCHE MARK 42,447,000 DEC 97 (570,399)
NEW ZEALAND DOLLAR 28,427,000 JAN 98 595,406
----------
$789,243
==========
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure to
the underlying instrument or hedge other Fund instruments. At the time the Fund
enters into a financial futures contract, it will be required to deposit with
its custodian a specified amount of cash or U.S. government securities, known as
"initial margin," equal to a certain percentage of the value of the financial
futures contract being traded. Each day, the futures contract is valued at the
official settlement price on the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments, known as "variation margin," to and from
the broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market," will be recorded by the Fund as unrealized gains or
losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At November 30, 1997, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
MAR 98 800 U.S. TREASURY BONDS LONG $374,750
========
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
27
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms, or if the Fund is unable to offset a contract with a counterparty on a
timely basis ("liquidity risk"). Exchange-traded options have minimal credit
risk as the exchanges act as counterparties to each transaction, and only
present liquidity risk in highly unusual market conditions. To minimize credit
and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended November 30,
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 November
30, 1997, net sales charges received with regard to sales of Class A shares
amounted to $962,509. Out of this amount, $113,792 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$454,003 was paid as sales commissions to unrelated broker-dealers and $394,714
was paid as sales commissions to sales personnel of John Hancock Distributors,
Inc. ("Distributors"), a related broker-dealer. The Adviser's indirect parent,
John Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from CDSC are paid to JH Funds and are used in whole or in part to defray its
expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended November 30,
1997, contingent deferred sales charges paid to JH Funds amounted to $405,981.
In addition, to reimburse 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 a
transfer agent fee 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 less than 0.02% 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
28
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
its liability for the deferred compensation. Investments to cover the Fund's
deferred compensation liability are recorded on the Fund's books as an other
asset. The deferred compensation liability and the related other asset are
always equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. At November
30, 1997, the Fund's investments to cover the deferred compensation liability
had unrealized appreciation of $3,524.
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 November 30, 1997, aggregated $491,502,973 and $384,273,626, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $116,867,055 and $151,529,344, respectively, during the
period ended November 30, 1997.
The cost of investments owned at November 30, 1997 (including the joint
repurchase agreement) for federal income tax purposes was $783,858,626. Gross
unrealized appreciation and depreciation of investments aggregated $42,508,638
and $16,613,785, respectively, resulting in net unrealized appreciation of
$25,894,853.
29
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Strategic Income Fund
30
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Strategic Income Fund
31
<PAGE>
================================================================================
----------------
JOHN HANCOCK FUNDS Bulk Rate
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This report is for the information of shareholders of the John Hancock
Sovereign U.S. Government Income Fund. It may be used as sales literature when
preceded or accompanied by the current prospectus, which details charges,
investment objectives and operating policies.
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm." A recycled logo in lower left hand corner
with caption "Printed on Recycled Paper."]
910SA 11/97
1/98
