SEMIANNUAL REPORT
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[GRAPHIC OMITTED]
Strategic
Income Fund
NOVEMBER 30, 1998
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
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TRUSTEES
EDWARD J. BOUDREAU, JR.
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE
DOUGLAS M. COSTLE
LELAND O. ERDAHL
RICHARD A. FARRELL
GAIL D. FOSLER
WILLIAM F. GLAVIN
ANNE C. HODSDON
DR. JOHN A. MOORE
PATTI MCGILL PETERSON
JOHN W. PRATT*
RICHARD S. SCIPIONE
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ANNE C. HODSDON
President, Chief Operating Officer
and Chief Investment Officer
OSBERT M. HOOD
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Secretary
JAMES J. STOKOWSKI
Vice President and Treasurer
THOMAS H. CONNORS
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
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===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
An often-used analogy for stock market performance over the short term is a
roller coaster. That is because, while long-term history suggests the market's
general direction is up, its swings over the short term can be dramatic and, at
times, violent. In 1998, the market gave us several stark examples of this
phenomenon. From the new highs set in mid-July, the major indices plunged by 19%
through the end of August. It was the worst such fall since 1990. Seeking safety
in a world of global economic uncertainties, investors everywhere converged on
U.S. Treasury bonds and pushed their yields to historic lows.
Then in early October, the stock market began a remarkable rebound that was
sparked by the Federal Reserve's moves to lower interest rates. The Dow Jones
Industrial Average reached a new high and ended November actually up by 17%
year-to-date.
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[A 1" x 1 1/4" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right next to second paragraph.]
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Investors have been understandably shaken by these dramatic twists and turns,
but we are pleased to report that most individual investors did not panic, and
we hope that means they've taken our words to heart. Over the long term, markets
do not move up or down in a straight line. That's why after watching the market
charge ahead almost uninterrupted for so many years, we have been striking a
more cautionary stance in this space over the last several months.
Analysts are still pondering the implications of global turmoil and the
potential for slower U.S. economic and corporate earnings growth. While we don't
make a practice of opining on what the market will do next, we continue to
believe it would be wise for investors to set more realistic expectations. Over
the long term, the market's historical results have been more in the 10% per
year range, which is still a solid result, considering it has been produced
despite wars, depressions and other social upheavals along the way.
There is no doubt, however, that the market's heightened volatility and
recent dramatic moves have been cause for concern. In these uncertain times, it
becomes even harder to remember to "stay the course" and stick to your long-term
investment plan. But this remains the essential tenet of successful investing.
Now could also be a good time to review your asset allocation with your
investment professional, keeping in mind that the divergence in performance of
stocks and high-quality bonds earlier this year is a perfect example of why all
your eggs shouldn't be in one basket.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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BY FREDERICK CAVANAUGH, MANAGEMENT TEAM LEADER, AND
ARTHUR N. CALAVRITINOS, CFA, PORTFOLIO MANAGER
John Hancock
Strategic Income Fund
Treasuries post significant gains at expense of
high-yield corporates and foreign bonds
In a classic flight to safety, investors gravitated toward high-quality U.S.
Treasury and Western European bonds during the last six months amid growing
concerns about the strength of the world's economy. Emerging-market bonds came
under the most pressure as investors headed for the exits in Asia, Latin America
and Eastern Europe. The crisis-plagued Asian economies continued their slide in
large part because of Japan's inability to make the structural and banking
reforms necessary to pull the region out of its worst recession since World War
II. Fear later spread to Latin American bonds, which suffered on worries that
economic problems in Brazil -- the region's largest economy -- would multiply.
The near-collapse of Russia when it devalued the ruble and defaulted on its
domestic debt only served to compound emerging markets' troubles.
High-yield corporate bonds, meanwhile, suffered from fears that the weight of
the world's problems would eventually bear down on the U.S. and cut into
corporate profitability. Despite the fact that high-yield companies continued to
show good financial results, and that the default rate remained under its
historic average, the demand for high-yield bonds declined dramatically from
July through October. By mid-October, however, high-yield corporate
"Emerging-market bonds came under the most pressure..."
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[A 3 1/2 " x 2 1/2 " photo of fund management team members under second column.
(l-r): "Lee Crockett, Roger Hamilton, Fred Cavanaugh, Arthur Calavritinos and
Carolee Bongiovi."]
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3
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John Hancock Funds - Strategic Income Fund
"One area we continued to favor was the telecommunications sector..."
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[Table at top left hand column entitled "Top Five Bond Sectors." The first
listing is U.S. Treasury and Government Agencies 31%, the second is
Telecommunications 17%, the third Foreign Governments 13%, the fourth Media 8%
and the fifth Leisure 6%. A note below the table reads "As a percentage of net
assets on November 30, 1998."]
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bonds began to rally in response to interest-rate cuts and a stronger stock
market. High-yield bonds continued to show strength through the end of the
period, although they weren't able to recoup all of their earlier losses.
The primary beneficiaries of investors' aversion to riskier bonds were U.S.
Treasury securities and Western European bonds. The burgeoning demand for them,
coupled with interest-rate cuts in the U.S. and eventually Europe, drove
Treasury and European bond yields lower and their prices higher.
Performance and strategy review
In this environment, many bond funds had a difficult time posting positive
results. With our flexible investment strategy, however, we managed to
outperform our peers. For the six-month period ended November 30, 1998, John
Hancock Strategic Income Fund's Class A, Class B and Class C shares had total
returns of 0.59%, 0.24% and 0.23%, respectively, at net asset value. The Fund's
returns were better than the average multi-sector income fund, which returned
- -1.62% for the same six-month period, according to Lipper Analytical Services,
Inc.(1) Keep in mind that your net asset value return will be different from the
Fund's performance if you were not invested in the Fund for the entire period
and did not reinvest all distributions. Please see pages six and seven for
longer-term performance information.
Amid the weakening global economic landscape, we increased our focus on
high-quality, more defensive investments, a move that helped our performance
relative to our competitors. Our stake in U.S. Treasury and U.S. government
agency bonds, for example, grew to 31% of investments by the end of the period,
up from 22%. We also continued to avoid economically sensitive areas of the
high-yield corporate market, such as paper, steel and other commodity-based
companies, in favor of sectors we feel can continue to grow even under somewhat
weaker economic conditions. One area we continued to favor was the
telecommunications sector, which is powered less by economic conditions and more
by technological advances and demand for new products and services.
Growing uncertainty about the prospects for emerging markets prompted us to
pare back our holdings in those markets to less than 2% of the Fund's net assets
at the end of the period. Over the past several months, we sold some Latin
American corporate bonds when short-term rallies afforded us relatively
attractive opportunities to do so.
Outside of U.S. Treasuries, our government bond holdings were mostly limited
to high-quality bonds from Canada and the United Kingdom,
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[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is U.S.
Treasuries followed by an up arrow with the phrase "Flight to quality, interest
rate cuts." The second listing is Nextel Communications followed by an up arrow
with the phrase "Strong growth in subscriber base." The third listing is South
African bonds followed by a down arrow with the phrase "Worries over emerging
markets." A note below the table reads "See `Schedule of Investments.'
Investment holdings are subject to change."]
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4
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John Hancock Funds - Strategic Income Fund
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[Bar chart at top of left hand column with the heading "Fund Performance". Under
the heading is a note that reads "For the six months ended November 30, 1998".
The chart is scaled in increments of 1% with -2% at the bottom and 1% at the
top. The first bar represents the 0.59% total return for John Hancock Strategic
Income Fund Class A. The second bar represents the 0.24% total return for John
Hancock Strategic Income Fund Class B. The third bar represents 0.23% total
return for John Hancock Strategic Income Fund Class C and the fourth bar
represents the -1.62% total return for Average multi-sector income fund. A note
below the chart 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. See the following two
pages for historical performance information.
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both of which offered attractive yields in excess of U.S. Treasuries, with the
potential for gains generated from expected interest rate cuts. We avoided most
of Western Europe in large part because of its relatively low yields and the
uncertainty surrounding the introduction of a single European currency in 1999.
Leaders and laggards
The Fund's performance was helped by its stake in long-term Treasury holdings,
which posted bigger gains than their shorter-term counterparts during the
Treasury market rally. Our holdings in U.K. government bonds also posted good
performance as interest rates fell in that country. And despite the challenges
experienced by the high-yield market, some of our holdings in that sector
performed quite well. Billboard company Outdoor Systems and Canadian
broadcasting company Rogers Cablesystems benefited from strong advertising
spending. Nextel Communications, a combination cellular/ paging/dispatch
company, continued to experience strong subscriber growth. That said, the
high-yield market severely punished companies that disappointed it. Our holdings
in Advanced Radio Telecom Corp. failed to meet projected new customer goals and
its bonds suffered as a result. We also lost ground with our holdings in U.S.
dollar-denominated South African government bonds, which suffered along with
other emerging market bonds.
Outlook
We believe that high-quality government bonds should remain attractive over the
near term. Although many of the problems emerging markets experienced seem to be
behind them, disruptions could continue to occur. Eventually, select emerging
markets could offer attractive opportunities, although we believe that
possibility is still quite a way off. So for now, we're likely to concentrate
our government bond holdings in U.S. Treasuries and other high-quality foreign
markets that we think will benefit from lower interest rates. We're becoming
increasingly optimistic about the high-yield corporate market. At its worst in
late summer, high-yield bonds were priced with a worst-case economic scenario in
mind. We believe, however, that conditions are fairly favorable going into 1999.
Global fears have eased and the low interest-rate environment provides solid
ground for continued economic growth, even if it's at a slower pace.
"...high-quality government bonds should remain attractive over the near term."
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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.
International investing involves special risks such as political, economic 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
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John Hancock Funds - Strategic 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 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).
Class C shares performance includes a contingent deferred sales charge of 1%
declining to 0% after one year.
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.
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CLASS A
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For the period ended September 30, 1998
ONE FIVE TEN
YEAR YEARS YEARS
-------- --------- ---------
Cumulative Total Returns (0.33%) 46.91% 115.21%
Average Annual Total Returns (0.33%) 8.00% 7.97%
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CLASS B
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For the period ended September 30, 1998
SINCE
ONE INCEPTION
YEAR (10/4/93)
--------- ----------
Cumulative Total Returns (1.16%) 47.48%
Average Annual Total Returns (1.16%) 8.10%
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CLASS C
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For the period ended September 30, 1998
SINCE
INCEPTION
(5/1/98)
----------
Cumulative Total Returns (2.09%)
Average Annual Total Returns(1) (2.09%)
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YIELDS
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As of November 30, 1998
SEC 30-DAY
YIELD
----------
John Hancock Strategic Income Fund: Class A 6.98%
John Hancock Strategic Income Fund: Class B 6.61%
John Hancock Strategic Income Fund: Class C 6.59%
Note to Performance
(1) Not annualized.
6
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John Hancock Funds - Strategic 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
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.
Assuming all distributions were re-invested for the period indicated, a $10,000
investment in the Fund's Class C shares at inception on May 1, 1998, would be
worth $10,043 without sales charge and $9,943 with maximum sales charge as of
November 30, 1998. For comparison, the same $10,000 investment in the Lehman
Brothers Government/Corporate Bond Index would be worth $10,704. Past
performance is not indicative of future results.
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Line chart with the heading John Hancock 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 Lehman
Brothers Government/Corporate Bond Index and is equal to $25,609 as of November
30, 1998. The second line represents the value of the hypothetical $10,000
investment made in the John Hancock Strategic Income Fund on May 31, 1998,
before sales charge, and is equal to $23,833 as of November 30, 1988. The third
line represents the value of the same hypothetical investment made in the John
Hancock Strategic Income Fund, after sales charge, and is equal to $22,750 as of
November 30, 1998.
Line chart with the heading John Hancock Strategic Income Fund Class B,
representing the growth of a hypothetical $10,000 investment over the life of
the fund. Within the chart are three lines. The first line represents the value
of the hypothetical $10,000 investment made in the John Hancock Strategic Income
Fund on October 4, 1993, before sales charge, and is equal to $15,183 as of
November 30, 1998. The second line represents the value of the same hypothetical
investment made in the John Hancock Strategic Income Fund, after sales charge,
and is equal to $15,083 as of November 30, 1998. The third line represents the
Lehman Brothers Government/Corporate Bond Index and is equal to $14,150 as of
November 30, 1998.
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7
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==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Statement of Assets and Liabilities
November 30, 1998 (Unaudited)
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<TABLE>
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $956,071,921) ................................................................................. $964,899,484
Common and preferred stocks and warrants (cost - $61,780,120) ............................................... 61,458,541
Joint repurchase agreement (cost - $31,619,000) ............................................................. 31,619,000
Corporate savings account ................................................................................... 509
---------------
1,057,977,534
Receivable for investments sold .............................................................................. 26,783
Receivable for foreign currency exchange contracts purchased - Note A ........................................ 121,358
Receivable for foreign currency exchange contracts sold - Note A ............................................. 964,365
Receivable for shares sold ................................................................................... 1,883,697
Dividends receivable ......................................................................................... 78,688
Interest receivable .......................................................................................... 19,539,761
Receivable for futures variation margin - Note A ............................................................. 365,625
Other assets ................................................................................................. 35,625
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Total Assets ............................................................................... 1,080,993,436
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Liabilities:
Payable for investments purchased ............................................................................ 2,919,802
Payable for shares repurchased ............................................................................... 389,422
Dividend payable ............................................................................................. 484,299
Foreign tax payable .......................................................................................... 102,574
Payable to John Hancock Advisers, Inc. and affiliates - Note B ............................................... 558,967
Accounts payable and accrued expenses ........................................................................ 77,521
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Total Liabilities .......................................................................... 4,532,585
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Net Assets:
Capital paid-in .............................................................................................. 1,083,622,928
Accumulated net realized loss on investments, financial futures contracts and foreign currency transactions .. (20,609,135)
Net unrealized appreciation of investments, financial futures contracts and foreign currency transactions .... 10,091,754
Undistributed net investment income .......................................................................... 3,355,304
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Net Assets ................................................................................. $1,076,460,851
===============================================================================================================
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 - $505,719,403/66,709,595 ............................................................................ $7.58
=================================================================================================================================
Class B - $560,999,544/74,001,615 ............................................................................ $7.58
=================================================================================================================================
Class C - $9,741,904/1,285,057 ............................................................................... $7.58
=================================================================================================================================
Maximum Offering Price Per Share*
Class A - ($7.58 x 104.71%) .................................................................................. $7.94
=================================================================================================================================
</TABLE>
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on November 30, 1998. You'll
also find the net asset value and the maximum offering price per share as of
that date.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Statement of Operations
Six months ended November 30, 1998 (Unaudited)
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<TABLE>
<S> <C>
Investment Income:
Interest ..................................................................................... $41,525,960
Dividends (net of foreign withholding taxes of $15,535) ...................................... 2,933,915
------------
44,459,875
------------
Expenses:
Investment management fee - Note B .......................................................... 1,953,704
Distribution and service fee - Note B
Class A ................................................................................... 747,674
Class B ................................................................................... 2,573,885
Class C ................................................................................... 25,648
Transfer agent fee - Note B ................................................................. 638,330
Custodian fee ............................................................................... 121,906
Financial services fee - Note B ............................................................. 75,987
Registration and filing fees ................................................................ 57,717
Trustees' fees .............................................................................. 23,684
Auditing fee ................................................................................ 21,580
Printing .................................................................................... 21,221
Miscellaneous ............................................................................... 13,570
Legal fees .................................................................................. 2,991
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Total Expenses ............................................................. 6,277,897
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Net Investment Income ...................................................... 38,181,978
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Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions:
Net realized gain on investments sold ........................................................ 882,942
Net realized gain on financial futures contracts ............................................. 812,013
Net realized loss on foreign currency transactions ........................................... (738,873)
Change in net unrealized appreciation/depreciation of investments ............................ (33,472,586)
Change in net unrealized appreciation/depreciation of financial futures contracts ............ 583,837
Change in net unrealized appreciation/depreciation of foreign currency transactions .......... (1,020,997)
------------
Net Realized and Unrealized Loss on Investments, Financial Futures Contracts
and Foreign Currency Transactions ....................................... (32,953,664)
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Net Increase in Net Assets Resulting from Operations ....................... $5,228,314
===========================================================================================
</TABLE>
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1998
MAY 31, 1998 (UNAUDITED)
------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................................................. $66,376,619 $38,181,978
Net realized gain on investments sold, financial futures contracts and foreign
currency transactions ............................................................... 9,166,775 956,082
Change in net unrealized appreciation/depreciation of investments, financial
futures contracts and foreign currency transactions ................................. 24,710,742 (33,909,746)
------------- --------------
Net Increase in Net Assets Resulting from Operations ................................ 100,254,136 5,228,314
------------- --------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6408 and $0.2992 per share, respectively) ............................. (36,925,773) (19,603,561)
Class B - ($0.5860 and $0.2724 per share, respectively) ............................. (29,451,246) (18,399,339)
Class C - ($0.0477 and $0.2715 per share, respectively) ............................. (1,205) (179,078)
Distributions from net realized gain on investments sold
Class A - ($0.0400 and none per share, respectively) ................................ (2,270,669) --
Class B - ($0.0400 and none per share, respectively) ................................ (2,027,424) --
------------- --------------
Total Distributions to Shareholders ................................................. (70,676,317) (38,181,978)
------------- --------------
From Fund Share Transactions - Net:* ..................................................... 188,423,596 146,010,600
------------- --------------
Net Assets:
Beginning of period ................................................................... 745,402,500 963,403,915
------------- --------------
End of period (including undistributed net investment income of $3,355,304
and $3,355,304, respectively) ....................................................... $963,403,915 $1,076,460,851
============= ==============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1998
MAY 31, 1998 (UNAUDITED)
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ................................................. 16,444,399 $128,645,376 12,453,832 $94,948,898
Shares issued to shareholders in reinvestment of
distributions ............................................. 3,159,528 24,637,005 1,608,878 12,229,704
------------- ------------- ------------- -------------
19,603,927 153,282,381 14,062,710 107,178,602
Less shares repurchased ..................................... (12,444,274) (97,186,849) (9,784,221) (74,371,571)
------------- ------------- ------------- -------------
Net increase ................................................ 7,159,653 $56,095,532 4,278,489 $32,807,031
============= ============= ============= =============
CLASS B
Shares sold ................................................. 24,192,186 $189,153,319 20,054,597 $152,772,579
Shares issued to shareholders in reinvestment of
distributions ............................................. 1,943,551 15,161,471 1,165,528 8,850,039
------------- ------------- ------------- -------------
26,135,737 204,314,790 21,220,125 161,622,618
Less shares repurchased ..................................... (9,287,224) (72,587,321) (7,615,281) (57,620,919)
------------- ------------- ------------- -------------
Net increase ................................................ 16,848,513 $131,727,469 13,604,844 $104,001,699
============= ============= ============= =============
CLASS C
Shares sold ................................................. 76,535 $599,897 1,252,943 $9,535,696
Shares issued to shareholders in reinvestment of
distributions ............................................. 89 698 13,112 98,958
------------- ------------- ------------- -------------
76,624 600,595 1,266,055 9,634,654
Less shares repurchased ..................................... -- -- (57,622) (432,784)
------------- ------------- ------------- -------------
Net increase ................................................ 76,624 $600,595 1,208,433 $9,201,870
============= ============= ============= =============
</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.
10
<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:
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<TABLE>
<CAPTION>
YEAR ENDED MAY 31, SIX MONTHS ENDED
-------------------------------------------------------NOVEMBER 30, 1998
1994 1995 1996 1997 1998 (UNAUDITED)
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ................... $7.55 $7.17 $7.15 $7.27 $7.54 $7.84
-------- -------- -------- -------- -------- --------
Net Investment Income .................................. 0.68 0.64 0.66(2) 0.64(2) 0.64(2) 0.30(2)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency
Transactions ......................................... (0.33) (0.02) 0.12 0.27 0.34 (0.26)
-------- -------- -------- -------- -------- --------
Total from Investment Operations ..................... 0.35 0.62 0.78 0.91 0.98 0.04
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ................. (0.58) (0.55) (0.66) (0.64) (0.64) (0.30)
Distributions in Excess of Net Investment Income ..... (0.05) -- -- -- -- --
Distributions from Net Realized Gain on Investments
Sold ............................................... -- -- -- -- (0.04) --
Distributions from Capital Paid-In ................... (0.10) (0.09) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions .................................. (0.73) (0.64) (0.66) (0.64) (0.68) (0.30)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ......................... $7.17 $7.15 $7.27 $7.54 $7.84 $7.58
======== ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3) .......... 4.54% 9.33% 11.37% 12.99% 13.43% 0.59%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............... $335,261 $327,876 $369,127 $416,916 $489,375 $505,719
Ratio of Expenses to Average Net Assets ................ 1.32% 1.09% 1.03% 1.00% 0.92% 0.88%(5)
Ratio of Net Investment Income to Average Net Assets ... 8.71% 9.24% 9.13% 8.61% 8.20% 7.87%(5)
Portfolio Turnover Rate ................................ 91% 55% 78% 132% 112% 35%
</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.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MAY 31, NOVEMBER 30,
-------------------------------------------------------------- 1998
1994 1995 1996 1997 1998 (UNAUDITED)
------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period ............ $7.58 $7.17 $7.15 $7.27 $7.54 $7.84
------- -------- -------- -------- -------- --------
Net Investment Income ........................... 0.40 0.60(2) 0.61(2) 0.59 0.59(2) 0.27(2)
Net Realized and Unrealized Gain (Loss) on
Investments, Financial Futures Contracts and
Foreign Currency Transactions ................. (0.41) (0.02) 0.12 0.27 0.34 (0.26)
------- -------- -------- -------- -------- --------
Total from Investment Operations .............. (0.01) 0.58 0.73 0.86 0.93 0.01
------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .......... (0.32) (0.52) (0.61) (0.59) (0.59) (0.27)
Distributions in Excess of Net Investment
Income ...................................... (0.03) -- -- -- -- --
Distributions from Net Realized Gain on
Investments Sold ............................ -- -- -- -- (0.04) --
Distributions from Capital Paid-in ............ (0.05) (0.08) -- -- -- --
------- -------- -------- -------- -------- --------
Total Distributions ........................... (0.40) (0.60) (0.61) (0.59) (0.63) (0.27)
------- -------- -------- -------- -------- --------
Net Asset Value, End of Period .................. $7.17 $7.15 $7.27 $7.54 $7.84 $7.58
======= ======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(3) ... (0.22%)(4) 8.58% 10.61% 12.21% 12.64% 0.24%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........ $77,691 $134,527 $206,751 $328,487 $473,428 $561,000
Ratio of Expenses to Average Net Assets ......... 1.91%(5) 1.76% 1.73% 1.70% 1.62% 1.58%(5)
Ratio of Net Investment Income to Average Net
Assets ........................................ 8.12%(5) 8.55% 8.42% 7.90% 7.50% 7.15%(5)
Portfolio Turnover Rate ......................... 91% 55% 78% 132% 112% 35%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF SIX MONTHS ENDED
OPERATIONS) TO NOVEMBER30, 1998
MAY 31, 1998 (UNAUDITED)
------------ -----------
<S> <C> <C>
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $7.87 $7.84
--------- ---------
Net Investment Income(2) ...................................... 0.05 0.27
Net Realized and Unrealized Loss on Investments,
Financial Futures Contracts and Foreign Currency
Transactions ................................................ (0.03)(6) (0.26)
--------- ---------
Total from Investment Operations ............................ 0.02 0.01
--------- ---------
Less Distributions:
Dividends from Net Investment Income ........................ (0.05) (0.27)
--------- ---------
Net Asset Value, End of Period ................................ $7.84 $7.58
========= =========
Total Investment Return at Net Asset Value (3) ................ 0.23%(4) 0.23%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $601 $9,742
Ratio of Expenses to Average Net Assets ....................... 1.62%(5) 1.58%(5)
Ratio of Net Investment Income to Average Net Assets .......... 7.34%(5) 6.98%(5)
Portfolio Turnover Rate ....................................... 112% 35%
</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.
(6) The amount shown for a share outstanding does not correspond with the
aggregate net gain/(loss) on investments for the period ended May 31,
1998, due to the timing of purchases and redemptions of Fund shares in
relation to fluctuating market values of the investments of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Schedule of Investments
November 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
Strategic Income Fund on November 30, 1998. 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 (0.40%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 ......................................................... 9.375% B $4,000 $4,300,000
------------
Aerospace (0.17%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) ................................... 10.910 BBB- 1,500 1,881,300
------------
Banks - United States (0.23%)
CSBI Capital Trust I,
Sec Co. Gtd Bond Ser A 06-06-27 .............................................. 11.750 B- 2,340 2,457,000
------------
Building (0.17%)
Kevco, Inc.,
Gtd Sr Sub Note 12-01-07 ..................................................... 10.375 B- 2,000 1,870,000
------------
Business Services - Misc. (0.50%)
United Rentals, Inc.,
Sr Sub Note 08-15-08 (R) ..................................................... 8.800 BB- 3,900 3,900,000
Wesco International, Inc.
Sr Dis Note, Step Coupon (11.125%, 06-01-03) 06-01-08 (A) (R) ................ Zero B 2,500 1,487,500
------------
5,387,500
------------
Chemicals (0.52%)
AEP Industries, Inc.,
Sr Sub Note 11-15-07 ......................................................... 9.875 B 4,000 4,000,000
PCI Chemcials Canada, Inc.,
Sec Note (Canada) 10-15-07 (Y) ............................................... 9.250 B+ 2,000 1,600,000
------------
5,600,000
------------
Computers (1.06%)
PSINet, Inc.,
Sr Note 11-01-08 (R) ......................................................... 11.500 B- 4,900 5,194,000
Unisys Corp.,
Sr Note 10-15-04 ............................................................. 11.750 BB- 4,075 4,665,875
Verio, Inc.,
Sr Note 12-01-08 (R) ......................................................... 11.250 B- 1,450 1,497,125
------------
11,357,000
------------
</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>
Consumer Products - Misc. (0.09%)
Diamond Brands Operating Corp.,
Sr Sub Note 04-15-08 (R) ..................................................... 10.125% CCC+ $1,000 $930,000
------------
Containers (0.85%)
Berry Plastics Corp.,
Sr Sub Note 04-15-04 ......................................................... 12.250 B3 4,000 4,160,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 ...................... 12.250 B- 5,000 5,037,500
------------
9,197,500
------------
Diversified Operations (0.37%)
Euramax International PLC,
Sr Sub Note (United Kingdom) 10-01-06 (Y) .................................... 11.250 B 4,000 3,980,000
------------
Electronics (0.93%)
Communications Instruments, Inc.,
Gtd Sr Sub Note Ser B 09-15-04 ............................................... 10.000 B- 2,900 2,668,000
Fisher Scientific International, Inc.,
Sr Sub Note 02-01-08 (R) ..................................................... 9.000 B- 650 650,000
Intertek Finance PLC,
Sr Sub Note, Ser B (United Kingdom) 11-01-06 (Y) ............................. 10.250 B 1,850 1,813,000
Viasystems, Inc.,
Sr Sub Note 06-01-07 ......................................................... 9.750 B- 2,500 2,487,500
Zilog, Inc.,
Gtd Sr Sec Note Ser B 03-01-05 ............................................... 9.500 B- 3,150 2,394,000
------------
10,012,500
------------
Energy (0.80%)
AEI Holding Co.,
Sr Note 11-15-07 (R) ......................................................... 10.000 B 4,130 4,212,600
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) ..................................................... 9.625 B 4,300 4,386,000
------------
8,598,600
------------
Finance (0.28%)
Maxxam Group Holdings, Inc.,
Sr Sec Note Ser B 08-01-03 ................................................... 12.000 CCC+ 3,000 3,030,000
------------
Food (0.42%)
Archibald Candy Corp.,
Sr Sec Note 07-01-04 ......................................................... 10.250 B 2,000 2,035,000
Agrilink Foods, Inc.,
Sr Sub Note 11-01-08 (R) ..................................................... 11.875 B 2,400 2,496,000
------------
4,531,000
------------
</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>
Government - Foreign (12.70%)
Australia, Commonwealth of,
Government Bond (Australia) 10-15-07 # ....................................... 10.000% AAA $11,646 $9,915,529
Government Bond (Australia) 10-15-07 # ....................................... 7.500 AAA 31,000 22,329,337
Government of Canada,
Government Bond (Canada) 03-15-00 # .......................................... 5.000 AAA 15,000 9,830,769
Government Bond (Canada) 03-01-01 # .......................................... 7.500 AAA 15,000 10,345,336
Government Bond (Canada) 06-01-08 # .......................................... 6.000 AAA 15,000 10,542,717
South Africa, Republic of,
Government Bond (South Africa) 06-23-17 (Y) .................................. 8.500 Baa3 7,000 5,250,000
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 08-10-99 # .................................. 6.000 AAA 6,000 9,897,000
Government Bond (United Kingdom) 12-07-00 # .................................. 8.000 AAA 5,500 9,549,450
Government Bond (United Kingdom) 11-06-01 # .................................. 7.000 AAA 5,000 8,793,485
Government Bond (United Kingdom) 06-07-02 # .................................. 7.000 AAA 7,000 12,462,137
Government Bond (United Kingdom) 06-10-03 # .................................. 8.000 AAA 6,000 11,156,888
Government Bond (United Kingdom) 07-16-07 # .................................. 8.500 AAA 8,000 16,648,074
------------
136,720,722
------------
Government - U.S. (28.74%)
United States Treasury,
Bond 08-15-05 ................................................................ 10.750 AAA 14,000 18,731,580
Bond 08-15-05 ................................................................ 6.500 AAA 16,000 17,622,560
Bond 02-15-16 ................................................................ 9.250 AAA 12,000 17,428,080
Bond 08-15-19 ................................................................ 8.125 AAA 74,500 100,225,595
Bond 08-15-23 ................................................................ 6.250 AAA 39,000 43,935,840
Bond 02-15-27 ................................................................ 6.625 AAA 22,000 26,180,000
Note 08-31-02 ................................................................ 6.250 AAA 40,000 42,137,600
Note 08-15-04 ................................................................ 7.250 AAA 16,000 18,002,560
Note 08-15-07 ................................................................ 6.125 AAA 23,000 25,091,620
------------
309,355,435
------------
Government - U.S. Agencies (1.91%)
Federal Home Loan Mortgage Corp.,
REMIC 44-E 11-15-19 .......................................................... 9.000 AAA 498 512,495
Federal National Mortgage Assn.,
Global Bond (United Kingdom) 06-07-02 # ...................................... 6.875 AAA 5,000 8,611,850
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 ................................................. 7.500 AAA 11,079 11,438,741
------------
20,563,086
------------
Leisure (6.33%)
Casino America, Inc.,
Sr Sec Note 08-01-03 ......................................................... 12.500 B+ 5,000 5,525,000
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 ................................................... 9.625 B 4,000 4,200,000
Sr Sub Note Ser D 08-01-08 ................................................... 9.625 B 1,000 1,047,500
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 ......................................................... 10.500 B 4,000 4,200,000
</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>
Leisure (continued)
Empress Entertainment, Inc.,
Sr Sub Note 07-01-06 ......................................................... 8.125% B+ $3,000 $3,015,000
Grand Casinos, Inc.,
Gtd Sr Note Ser B 10-15-04 ................................................... 9.000 B+ 3,000 3,375,000
Hedstrom Corp.,
Gtd Sr Sub Note 06-01-07 ..................................................... 10.000 B- 4,000 3,440,000
HMH Properties, Inc.,
Gtd Sr Sec Note 08-01-08 ..................................................... 7.875 BB 7,900 7,702,500
Horseshoe Gaming LLC,
Gtd Sr Sub Note Ser B 06-15-07 ............................................... 9.375 B+ 2,500 2,562,500
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 ................................................... 13.500 BB+ 5,900 7,242,250
Production Resource Group LLC,
Sr Sub Note 01-15-08 ......................................................... 11.500 B- 3,000 2,940,000
SFX Entertainment, Inc.,
Gtd Sr Sub Note Ser B 02-01-08 ............................................... 9.125 B- 5,000 5,012,500
Sr Sub Note 12-01-08 (R) ..................................................... 9.125 B- 2,000 2,010,000
Showboat Marina Casino Partnership / Finance Corp.,
1st Mtg Note Ser B 03-15-03 .................................................. 13.500 BB- 5,000 5,650,000
Sun International Hotels, Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07 (Y) ....................................... 8.625 B+ 2,000 2,065,000
Waterford Gaming LLC,
Sr Note 11-15-03 ............................................................. 12.750 B+ 4,729 5,060,030
William Hill Finance PLC,
Sr Sub Note (United Kingdom) 04-30-08 # ...................................... 10.625 B- 2,000 3,035,080
------------
68,082,360
------------
Machinery (0.45%)
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 ......................................................... 8.500 B 5,000 4,837,500
------------
Manufacturing (0.20%)
Globe Manufacturing Corp.,
Sr Sub Note 08-01-08 (R) ..................................................... 10.000 B2 2,400 2,112,000
------------
Media (7.67%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 ....................................................... 9.250 B+ 3,500 3,683,750
Capstar Broadcasting Partners, Inc.,
Sr Disc Note, Step Coupon (12.75%, 02-01-02) 02-01-09 (A) .................... Zero B- 2,750 2,048,750
CBS Radio, Inc.,
Sub Deb 01-15-09 ............................................................. 11.375 BB+ 4,738 5,531,148
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) ............................................... 9.750 BB- 3,000 2,655,000
CF Cable TV, Inc.,
Sr Note (Canada) 02-15-05 (Y) ................................................ 11.625 BBB- 2,000 2,219,320
CSC Holdings, Inc.,
Sr Sub Deb 02-15-13 .......................................................... 9.875 BB- 4,000 4,440,000
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07 ..................................................... 10.500 Ba3 3,000 3,150,000
</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>
Media (continued)
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 ......................................................... 10.250% B- $2,000 $2,175,000
Sr Sub Note 11-15-08 (R) ..................................................... 9.250 B- 1,900 1,971,250
Comcast Corp.,
Sr Sub Note 01-15-08 ......................................................... 9.500 BB+ 4,000 4,177,760
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00) (United Kingdom) 11-15-07 (A)(Y).. Zero B- 4,000 3,460,000
Cumulus Media, Inc.,
Gtd Sr Sub Note 07-01-08 ..................................................... 10.375 CCC+ 2,550 2,728,500
Digital Television Services, Inc.,
Gtd Sr Sub Note Ser B 08-01-07 ............................................... 12.500 CCC 3,000 3,247,500
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants), Step Coupon (12.625%, 03-01-03)
03-01-08 (A)(R) ............................................................. Zero B- 5,165 1,549,500
Falcon Holdings Group L.P. / Falcon Funding Corp.,
Sr Deb Ser B 04-15-10 ........................................................ 8.375 B 5,000 5,175,000
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 ......................................................... 12.375 B- 5,000 5,500,000
Garden State Newspapers, Inc.,
Sr Sub Note Ser B 10-01-09 ................................................... 8.750 B+ 3,500 3,430,000
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 ......................................................... 8.875 B- 2,000 1,840,000
Intermedia Capital Partners,
Sr Note 08-01-06 ............................................................. 11.250 B 5,048 5,540,180
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ................................................ 10.625 BBB- 1,250 1,357,412
Radio One, Inc.,
Gtd Sr Sub Note Ser B, Step Coupon (12.00%, 05-15-00) 05-15-04 (A) *** ....... 7.000 CCC+ 2,000 1,980,000
Regional Independent Media Group PLC,
Sr Disc Note (United Kingdom) 07-01-08 (R) (Y) ............................... 12.875 B- 3,750 3,525,806
Sr Note (United Kingdom) 07-01-08 (R) (Y) .................................... 10.500 B- 1,000 1,035,000
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) .......................................... 10.000 BB+ 3,000 3,375,000
Sr Sec Deb (Canada) 01-15-14 # ............................................... 9.650 BB+ 2,000 1,400,890
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) ............................................ 7.250 B 2,390 2,372,075
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ......................................................... 11.000 B- 2,785 2,966,025
------------
82,534,866
------------
Medical (0.23%)
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security 02-01-08 ........................................ 7.875 B+ 2,600 2,528,500
------------
Metal (1.00%)
Centaur Mining & Exploration Ltd.,
Gtd Sr Note (Australia) 12-01-07 (Y) ......................................... 11.000 B+ 2,500 2,281,250
</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>
Metal (continued)
Great Central Mines Ltd.,
Sr Note (Australia) 04-01-08 (Y) ............................................. 8.875% BB $5,100 $5,151,000
Haynes International, Inc.,
Sr Note 09-01-04 ............................................................. 11.625 B- 2,500 2,387,500
Koppers Industries, Inc.,
Gtd Sr Sub Note 12-01-07 ..................................................... 9.875 B- 1,000 960,000
------------
10,779,750
------------
Oil & Gas (1.16%)
Cliffs Drilling Co.,
Gtd Sr Sec Note Ser B 05-15-03 ............................................... 10.250 BBB- 2,250 2,396,250
Great Lakes Carbon Corp.,
Sr Sub Note Ser B 05-15-08 ................................................... 10.250 B- 1,800 1,818,000
Kelly Oil & Gas Partners Ltd.,
Deb 04-01-00 ................................................................. 8.500 B- 1,100 880,000
Key Energy Group, Inc.,
Bridge Loan Agreement ........................................................ 11.909 B- 5,000 4,900,000
Parker Drilling Co.,
Gtd Sr Note Ser D 11-15-06 ................................................... 9.750 B+ 1,000 960,000
Universal Compression, Inc.,
Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) .................... Zero B 2,650 1,563,500
------------
12,517,750
------------
Paper & Paper Products (0.50%)
S.D. Warren Co.,
Sr Sub Note Ser B 12-15-04 ................................................... 12.000 B+ 5,000 5,400,000
------------
Printing - Commercial (0.28%)
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 ......................................................... 12.750 B- 3,000 3,060,000
------------
Retail (0.44%)
Spin Cycle, Inc.,
Unit (Sr Disc Note & Warrants) 05-01-05 ...................................... Zero CCC+ 3,625 1,703,750
United Stationer, Inc.,
Sr Sub Note 05-01-05 ......................................................... 12.750 B 1,334 1,487,410
Sr Sub Note 04-15-08 ......................................................... 8.375 B 1,500 1,507,500
------------
4,698,660
------------
Steel (0.17%)
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 .................................................. 11.500 B- 2,375 1,781,250
------------
Telecommunications (17.26%)
Advanced Radio Telecom Corp.,
Unit (Sr Note & Warrants) 02-15-07 ........................................... 14.000 CCC 5,000 3,750,000
Allegiance Telecom, Inc.,
Sr Disc Note, Ser B, Step Coupon (11.75%, 02-15-03) 02-15-08 (A) ............ Zero B- 3,500 1,715,000
</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)
AMSC Acquisition Co., Inc.,
Gtd Sr Note Ser B 04-01-08 ................................................... 12.250% B- $3,000 $1,980,000
Axia, Inc.,
Sr Sub Note 07-15-08 (R) ..................................................... 10.750 B- 900 909,000
Call-Net Enterprises, Inc.,
Sr Note (Canada) 08-15-08 (Y) ................................................ 8.000 BB- 1,900 1,843,000
Cellular Communications International, Inc.,
Sr Disc Note, Step Coupon (9.50%, 04-01-03) 04-01-05 (A)(R) .................. Zero B2 4,750 3,910,582
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.40%, 05-15-03) (Canada) 05-15-08 # ............ Zero B3 6,500 2,297,872
COLT Telecom Group PLC,
Sr Note (United Kingdom) 07-31-08 (Y) ........................................ 7.625 B 20,000 11,742,145
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00) (Colombia) 11-15-03 (A)(Y) ............. Zero B3 5,000 3,000,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) ................... Zero B 5,000 3,475,000
Dolphin Telecom PLC,
Sr Disc Note, Step Coupon (11.50%, 06-01-03) (United Kingdom)
06-01-08 (A)(R)(Y) .......................................................... Zero B- 6,000 2,400,000
DTI Holdings, Inc.,
Sr Disc Note Step Coupon (12.50%, 03-01-03) (A) .............................. Zero B- 3,600 972,000
e.spire Communications, Inc.,
Sr Note 07-15-07 ............................................................. 13.750 B- 6,000 6,450,000
Echostar DBS Corp.,
Gtd Sr Sec Note 07-01-02 ..................................................... 12.500 B- 5,000 5,650,000
Espirit Telecom Group PLC,
Sr Note (United Kingdom) 12-15-07 (Y) ........................................ 11.500 B- 1,550 1,526,750
Sr Note (Deutsche Mark) 06-15-08 # ........................................... 11.000 B- 4,050 2,312,067
Facilicom International, Inc.,
Sr Note 01-15-08 ............................................................. 10.500 B- 4,350 3,588,750
FLAG Ltd.,
Sr Note (Bermuda) 01-30-08 (Y) ............................................... 8.250 B+ 4,000 4,020,000
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 (R) ......................................................... 9.625 B 1,500 1,601,250
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 ......................................................... 13.250 B 5,000 5,150,000
Hermes Europe Railtel B.V.,
Sr Note (Netherlands) 08-15-07 (Y) ........................................... 11.500 B 3,750 4,106,250
Intercel, Inc.,
Unit (Sr Discount Note & Warrant) Step Coupon (12.00%, 02-01-01)
02-01-06 (A) ................................................................ Zero B 4,100 3,013,500
Intermedia Communications, Inc.,
Sr Disc Note, Step Coupon (12.50%, 05-15-01) 05-15-06 (A) .................... Zero B 6,000 4,770,000
International Wireless Communications, Inc.,
Sr Sec Disc Note 08-15-01 .................................................... Zero B- 3,000 300,000
</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>
Telecommunications (continued)
Ionica PLC,
Sr Disc Note, Step Coupon (15.00%, 05-01-02) (United Kingdom)
05-01-07 (A)(Y) ............................................................. Zero% Ca $6,000 $90,000
IXC Communications, Inc.,
Sr Sub Note 04-15-08 ......................................................... 9.000 CCC+ 3,000 3,030,000
Level 3 Communications, Inc.,
Sr Note 05-01-08 ............................................................. 9.125 B 6,900 6,882,750
McCaw International, Ltd.,
Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) .................... Zero CCC+ 7,000 3,780,000
McLeodUSA, Inc.,
Sr Note 07-15-07 ............................................................. 9.250 B+ 4,250 4,462,500
Sr Note 11-01-08 (R) ......................................................... 9.500 B+ 1,000 1,065,000
Metromedia Fiber Network, Inc.,
Sr Note 11-15-08 (R) ......................................................... 10.000 B 900 929,250
MetroNet Communications Corp.,
Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A)(Y) .... Zero B 4,400 2,904,000
Sr Note (Canada) 08-15-07 (Y) ................................................ 12.000 B 4,000 4,480,000
Microcell Telecommunications, Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%, 10-15-02) (Canada) 10-15-07 (A)# ... Zero B- 2,500 924,714
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%, 02-15-99) 08-15-04 (A) ..................... Zero CCC+ 5,075 4,973,500
Sr Disc Note, Step Coupon (9.95%, 02-15-03) 02-15-08 (A) ..................... Zero CCC+ 8,875 5,502,500
NEXTLINK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%, 04-15-03) 04-15-08 (A) ..................... Zero B3 4,000 2,360,000
Sr Note 10-01-07 ............................................................. 9.625 B 1,500 1,485,000
Sr Note 11-15-08 (R) ......................................................... 10.750 B 2,900 2,994,250
NorthEast Optic Network, Inc.,
Sr Note 08-15-08 ............................................................. 12.750 B- 2,250 2,205,000
NTL, Inc.,
Sr Note, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) (R) .................... Zero B- 4,500 2,902,500
Sr Unsub Note 04-01-08 (R) ................................................... 9.500 B- 1,680 2,549,467
Sr Note 10-01-08 (R) ......................................................... 11.500 B- 6,300 7,024,500
Occidente Y Caribe Celular S.A.,
Sr Disc Note Ser B, Step Coupon (14.00%, 03-15-04) (Colombia)
03-15-04 (Y)(A) ............................................................ Zero B 4,000 2,800,000
Orange PLC,
Sr Note (United Kingdom) 08-01-08 (Y) ........................................ 8.000 B+ 6,000 6,090,000
Orion Network Systems,
Sr Note 01-15-07 ............................................................. 11.250 B+ 5,000 5,000,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 ....................................................... 10.875 BB+ 4,410 5,093,550
RCN Corp.,
Sr Disc Note, Step Coupon (11.125%, 10-15-02) 10-15-07 (A) ................... Zero B3 5,000 2,875,000
Sr Note 10-15-07 ............................................................. 10.000 B3 4,600 4,347,000
Sprint Spectrum L.P.,
Sr Note 08-15-06 ............................................................. 11.000 A- 3,750 4,312,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<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)
Teletrac, Inc.,
Sr Note Ser B 08-01-07 ....................................................... 14.000% CCC+ $2,000 $900,000
Teligent, Inc.,
Sr Note 12-01-07 ............................................................. 11.500 CCC 5,000 4,775,000
Time Warner Telecom LLC,
Sr Note 07-15-08 ............................................................. 9.750 B- 1,250 1,318,750
VersaTel Telecom B.V.,
Sr Note (Netherlands) 05-15-08 (R) (Y) ....................................... 13.250 B- 2,400 2,395,200
Viatel, Inc.,
Sr Note 04-15-08 ............................................................. 11.250 Caa1 1,500 1,500,000
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon (14.00%, 10-15-00) 10-15-05 (A) .................... Zero Caa1 2,600 1,898,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 ........................................................ 12.500 CCC+ 1,400 1,456,000
------------
185,789,097
------------
Transport (0.55%)
Fine Air Services, Inc.,
Gtd. Sub Note 06-01-08 ....................................................... 9.875 B 3,900 3,471,000
Pacific & Atlantic Holding, Inc.,
1st Mtg Note (Greece) 05-30-08 (R) (Y) ....................................... 11.500 B 3,000 2,497,500
------------
5,968,500
------------
Utilities (3.25%)
CalEnergy Co., Inc.,
Sr Note 10-15-07 ............................................................. 7.630 BB+ 5,000 5,065,700
Sr Note 09-15-08 ............................................................. 7.520 BB+ 9,900 10,315,305
Calpine Corp.,
Sr Note 02-01-04 ............................................................. 9.250 BB- 2,000 2,075,000
Sr Note 04-01-08 ............................................................. 7.875 BB- 2,000 2,010,000
Connecticut Light & Power / West Mass Electric,
Sec Note 06-05-03 (R) ........................................................ 8.590 B+ 2,300 2,372,763
Midland Funding Corp. II,
Deb Ser A 07-23-05 ........................................................... 11.750 B 4,000 4,648,080
Deb Ser B 07-23-06 ........................................................... 13.250 B 4,000 5,107,760
Monterrey Power S.A. de C.V.,
Sec Bond (Mexico) 11-15-09 (R) (Y) ........................................... 9.625 BB 2,900 2,378,000
Niagara Mohawk Power Corp.,
Sr Note Ser G 10-01-08 ....................................................... 7.750 BB- 1,000 1,065,000
------------
35,037,608
------------
TOTAL BONDS
(Cost $956,071,921) (89.63%) 964,899,484
------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<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
Advanced Radio Telecom Corp., Warrant ** ........................................... 60,000 $235,800
Allegiance Telecom, Inc., Warrant ** ............................................... 3,500 31,500
American Mobile Satellite Corp., Warrant (R) ....................................... 3,000 --
American Telecasting, Inc., Warrant ** ............................................. 4,000 800
AVI Holdings, Inc., Warrant (R) ** ................................................. 1,500 9,000
Capstar Broadcasting Partners, Inc., 12.00%, Preferred Stock ....................... 15,121 1,489,418
Chancellor Media Corp., 7.00%, Conv Preferred Stock ................................ 20,000 1,800,000
COLT Telecom PLC, Warrant (United Kingdom) (R) ** .................................. 5,000 1,750,000
Comunicacion Celular S.A., Warrant (Colombia) (Y) ** ............................... 50,000 250,000
Core Cap, Inc., Common Stock (r) ** ................................................ 45,000 585,000
Core Cap, Inc. Ser A/I, 10.00%, Preferred Stock (r) ................................ 45,000 1,070,550
Credit Lyonnais Capital S.C.A., American Depositary Receipt (ADR),
9.50% Ser DTC Preferred Stock (France) (R) (Y) .................................... 100,000 2,400,000
Decorative Home Accents, Inc., Common Stock ** ..................................... 1,000 1
DTI Holdings, Inc., Warrant ........................................................ 18,000 900
Earthwatch, Inc., 12.00% Ser C, Conv Preferred Stock (R) ........................... 200,000 1,000,000
EchoStar Communications Corp., 12.125%, Ser B, Preferred Stock ..................... 1,126 1,238,928
Finlay Enterprises, Inc., Common Stock ** .......................................... 4,000 31,750
Granite Broadcasting Corp., 12.75%, Preferred Stock ................................ 48,147 4,573,965
Hyperion Telecommunications, Inc., 12.875%, Ser B, Preferred Stock ................. 3,298 2,638,400
ICF Kaiser international, Inc., Warrant (r) ** ..................................... 12,000 1,200
ICG Holdings, Inc., 14.00%, Preferred Stock ........................................ 2,548 2,357,057
Intermedia Communications, Inc., 13.50%, Ser B, Preferred Stock .................... 1,846 1,901,342
Intermedia Communications, Inc., Common Stock ** ................................... 30,000 517,500
International Wireless, Inc., Warrant ** ........................................... 3,000 30
Ionica PLC, Warrant (United Kingdom) (R) # ** ...................................... 8,500 85
Kelley Oil & Gas Corp., $2.625, Preferred Stock .................................... 40,000 600,000
KLM Royal Dutch Airlines N.V., Common Stock (Netherlands) .......................... 25,893 731,477
Lasmo PLC, 10.00%, Ser A, ADS, Preferred Stock (United Kingdom) (Y) ................ 50,000 1,221,875
Loral Space & Communications Ltd., Warrant ** ...................................... 5,000 50,000
Maxus Energy Corp., $2.50, Preferred Stock ......................................... 40,000 1,000,000
McCaw International Ltd., Warrant ** ............................................... 7,000 17,500
MetroNet Communications Corp., Warrant (Canada) (R) ** ............................. 2,250 103,500
Nextel Communications, Inc., 13.00%, Ser D, Preferred Stock ........................ 2,339 2,432,560
Nextel Communications, Inc., 11.125%, Ser E, Preferred Stock ....................... 1,814 1,641,670
Nextel Communications, Inc. (Class A), Common Stock ** ............................. 12,394 266,471
NEXTLINK Communications, Inc., Warrant (R) ** ...................................... 30,000 --
NEXTLINK Communications, Inc., 14.00%, Preferred Stock ............................. 107,657 5,759,649
Northeast Utilities, Common Stock ** ............................................... 75,000 1,181,250
Northwest Airlines Corp., Common Stock ............................................. 150,000 3,759,375
NTL, Inc., 13.00%, Ser B, Preferred Stock .......................................... 4,695 4,999,938
Occidente y Caribe Celular S.A., Warrant (R) ....................................... 16,000 224,000
PG&E Corp., Common Stock ........................................................... 25,622 792,681
Powertel, Inc., Warrant ** ......................................................... 2,880 23,040
PRIMEDIA, Inc., 8.625%, Preferred Stock (R) ........................................ 25,000 2,375,000
Qualcomm Financial Trust, 5.75%, Preferred Stock ................................... 60,000 2,730,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<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)
Qantas Airways Ltd., ADS Common Stock (Australia) (R) (Y) .......................... 13,800 $244,877
RCN Corp., Common Stock ** ......................................................... 40,000 680,000
Renaissance Cosmetics, Warrant ** .................................................. 4,000 4
Rite Aid Corp., Common Stock ....................................................... 14,820 687,278
Rural Cellular Corp., 11.375% Ser B, Preferred Stock ............................... 1,852 1,759,177
SFX Broadcasting, Inc., 12.625%, Ser E, Preferred Stock ............................ 5,085 610,200
SFX Entertainment, Inc. (Class A), Common Stock ** ................................. 27,467 1,376,783
Station Casinos, Inc., 7.00% Conv Preferred Stock .................................. 5,000 200,000
Teletrac, Inc., Warrant ** ......................................................... 2,000 --
TLC Beatrice International Holdings (Class A), Common Stock (r) ** ................. 20,000 1,040,000
Valero Energy Corp., Common Stock .................................................. 46,250 971,250
VersaTel Telecom B.V., Warrant (R) ................................................. 2,400 28,800
Viatel, Inc., 10.00%, Ser A, Preferred Stock ....................................... 744 66,960
-----------
TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $61,780,120) (5.71%) 61,458,541
-----------
<CAPTION>
PAR VALUE
INTEREST (000s
RATE OMITTED)
--------- ---------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (2.94%)
Investment in a joint repurchase agreement
transaction with Toronto Dominion Securities USA, Inc. -
Dated 11-30-98, due 12-01-98 (Secured by
U.S. Treasury Bills, 4.49% thru 4.54%, due 10-14-99
thru 11-12-99, U.S. Treasury Bonds, 8.125% thru
12.00%, due 08-15-13 thru 08-15-19, and U.S. Treasury
Notes, 5.25% thru 8.75%, due 07-31-99 thru 05-15-08) -
Note A.................................................................... 5.370% $31,619 31,619,000
--------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.35%........................................................ 509
--------------
TOTAL SHORT-TERM INVESTMENTS (2.94%) 31,619,509
-------- --------------
TOTAL INVESTMENTS (98.28%) 1,057,977,534
-------- --------------
OTHER ASSETS AND LIABILITIES, NET (1.72%) 18,483,317
-------- --------------
TOTAL NET ASSETS (100.00%) $1,076,460,851
======== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
NOTES TO THE SCHEDULE OF INVESTMENTS
* Credit ratings are unaudited and rated by Moody's Investors Service or
John Hancock Advisers, Inc. where Standard & Poor's ratings are not
available.
** Non-income producing security.
# Par value of foreign bonds is expressed in local currency, as shown
parenthetically in security description.
(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 $78,654,399 or 7.31% of the Fund's net assets
as of November 30, 1998.
(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 as 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 AS OF
DATE COST NET ASSETS NOVEMBER 30, 1998
----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Core Cap, Inc., Common Stock..................................... 10-31-97 $900,000 0.05% $585,000
Core Cap, Inc. Ser A/1, 10.00%, Preferred Stock.................. 10-31-97 1,125,000 0.10 1,070,550
ICF Kaiser International, Inc., Warrant.......................... 01-04-94 15,000 0.00 1,200
TLC Beatrice International Holdings (Class A), Common Stock ..... 11-25-87 1,006,000 0.10 1,040,000
</TABLE>
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.
25
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Strategic Income Fund
Portfolio Concentration
November 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
The Strategic Income Fund invests primarily in securities issued in the United
States of America. The performance of this Fund is closely tied to the economic
and financial conditions within the countries in 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, the concentration of investments can be aggregated by various
countries. The table below shows the percentages of the Fund's investments at
November 30, 1998 assigned to country categories.
MARKET VALUE
AS A PERCENTAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ---------------
Argentina................................................... 0.25%
Australia................................................... 3.71
Bahamas..................................................... 0.19
Bermuda..................................................... 0.37
Canada...................................................... 4.94
Colombia.................................................... 0.56
France...................................................... 0.22
Greece...................................................... 0.23
Luxembourg.................................................. 0.22
Mexico...................................................... 0.22
Netherlands................................................. 0.67
South Africa................................................ 0.49
United Kingdom.............................................. 11.04
United States............................................... 75.17
------
TOTAL INVESTMENTS 98.28%
======
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......................................................... 43.26%
BBB......................................................... 1.51
BB.......................................................... 7.96
B........................................................... 32.69
CCC......................................................... 4.21
------
TOTAL BONDS 89.63%
======
SEE NOTES TO FINANCIAL STATEMENTS.
26
<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
consisted of two series of portfolios: John Hancock Strategic Income Fund (the
"Fund") and John Hancock Sovereign U.S. Government Income Fund ("Sovereign U.S.
Government Income Fund"). The other series of the Trust is reported in separate
financial statements. The Sovereign U.S. Government Income Fund merged into the
John Hancock Government Income Fund as of the close of business on December 4,
1998. 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, Class B and Class C 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,
Inc., 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 which 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 $20,119,940 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, 2003 -- $19,852,932 and May 31, 2004 -- $267,008. Additionally, net
capital losses of $541,663 attributable to security transactions incurred after
October 31, 1997 are treated as arising on the first day (June 1, 1998) of the
Fund's current taxable year.
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
27
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
made aware of the dividend. Interest income on investment securities is recorded
on the accrual basis. Foreign income may be subject to foreign withholding
taxes, which are accrued as applicable.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are calculated at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class level
based on the appropriate net assets of each class and the specific expense
rate(s) applicable to each class.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in unsecured
lines of credit with banks which permit borrowings up to $800 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
rates ranging from 0.070% to 0.075% per annum based on the average daily unused
portion of the lines of credit, is allocated among the participating funds. The
Fund had no borrowing activity for the period ended November 30, 1998.
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
28
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
foreign currency contract is closed out or offset by a matching contract. Risks
may arise upon entering these contracts from potential inability of
counterparties to meet the terms of the contract and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the unrealized
gain or loss reflected in the Fund's Statement of Assets and Liabilities. The
Fund may also purchase and sell forward contracts to facilitate the settlement
of foreign currency denominated portfolio transactions, under which it intends
to take delivery of the foreign currency. Such contracts normally involve no
market risk if they are offset by the currency amount of the underlying
transaction.
Open forward foreign currency exchange contracts at November 30, 1998 were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION/
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ----- --------------
BUYS
Canadian Dollar 15,469,000 DEC 98 $121,358
=========
SELLS
Australian Dollar 52,491,949 JAN 99 $93,961
British Pound Sterling 7,000,000 DEC 98 137,552
British Pound Sterling 5,390,000 FEB 99 26,689
Canadian Dollar 46,900,450 DEC 98 (614,153)
Canadian Dollar 3,404,000 JAN 99 (28,675)
Canadian Dollar 19,238,768 FEB 99 (154,791)
Deutsche Mark 62,577,880 DEC 98 666,039
Deutsche Mark 52,095,842 JAN 99 900,608
Deutsche Mark 15,000,000 MAR 99 (49,413)
Deutsche Mark 4,589,000 APRIL 99 (13,452)
---------
$964,365
=========
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, 1998, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
MAR 99 300 U.S. TREASURY NOTES LONG $588,525
========
At November 30, 1998, the Fund had deposited in a segregated account
$23,950,000 par value of U.S. Treasury Bond, 8.125%, 08-15-19, to cover margin
requirements on open financial futures contracts.
29
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
OPTIONS Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Over-the-counter options are valued
at the mean between the last bid and asked prices. Upon the writing of a call or
put option, an amount equal to the premium received by the Fund will be included
in the Statement of Assets and Liabilities as an asset and corresponding
liability. The amount of the liability will be subsequently marked to market to
reflect the current market value of the written option.
The Fund may use option contracts to manage its exposure to the stock market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.
The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the contract's
terms ("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit risk
may involve amounts in excess of those reflected in the Fund's period-end
Statement of Assets and Liabilities.
There were no written option transactions for the period ended November 30,
1998.
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, 1998, net sales charges received with regard to sales of Class A shares
amounted to $1,073,904. Out of this amount, $109,712 was retained and used for
printing prospectuses, advertising, sales literature and other purposes,
$443,705 was paid as sales commissions to unrelated broker-dealers and $520,487
was paid as sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer, formerly known as John Hancock
Distributors, Inc. The Adviser's indirect parent, John Hancock Mutual Life
Insurance Company ("JHMLICo"), is the indirect sole shareholder of Signator
Investors.
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 5.00% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended November 30,
1998, contingent deferred sales charges paid to JH Funds amounted to $312,704.
Class C shares which are redeemed within one year of purchase will be subject
to a CDSC at a rate of 1.00% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being redeemed.
Proceeds from the CDSC are paid to JH Funds and are used in whole or in part to
defray its expenses related to providing distribution related services to the
Fund in connection with
30
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Strategic Income Fund
the sale of Class C shares. For the period ended November 30, 1998, contingent
deferred sales charges paid to JH Funds amounted to $1,508.
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, Class B and Class C 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 and Class C
average daily net assets to reimburse the JH Funds for its distribution and
service costs. Up to a maximum of 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent 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 directors and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund will make investments into other John Hancock funds,
as applicable, to cover its liability for the deferred compensation. Investments
to cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At November 30, 1998, 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, 1998, aggregated $309,767,446 and $291,905,210, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $157,175,914 and $50,314,783, respectively, during the
period ended November 30, 1998.
The cost of investments owned at November 30, 1998 (excluding the corporate
savings account) for federal income tax purposes was $1,050,264,608. Gross
unrealized appreciation and depreciation of investments aggregated $47,175,691
and $39,463,274, respectively, resulting in net unrealized appreciation of
$7,712,417.
31
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS ---------------
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This report is for the information of shareholders of the John Hancock
Strategic Income Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 910SA 11/98
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