SEMIANNUAL REPORT
SOVEREIGN
U.S. GOVERNMENT
INCOME FUND
John Hancock Funds
NOVEMBER 30, 1998
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
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
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
60 State Street
Boston, Massachusetts 02109
<PAGE>
<TABLE>
<CAPTION>
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Assets and Liabilities
November 30, 1998 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
United States government and agencies securities
(cost - $375,613,705) $386,509,710
Joint repurchase agreement (cost - $34,245,000) 34,245,000
Corporate savings account 368
-------------------
420,755,078
Receivable for investments sold 930,060
Receivable for shares sold 7,046
Interest receivable 4,419,813
Receivable for futures variation margin - Note A 55,781
Other assets 41,656
-------------------
Total Assets 426,209,434
----------------------------------------------
Liabilities:
Payable for investments purchased 54,388,682
Payable for shares repurchased 26,556
Dividend payable 156,767
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 347,744
Accounts payable and accrued expenses 1,548
-------------------
Total Liabilities 54,921,297
----------------------------------------------
Net Assets:
Capital paid-in 399,581,704
Accumulated net realized loss on investments and financial future contracts (39,029,995)
Net unrealized appreciation of investments and financial future contracts 10,936,760
Distributions in excess of net investment income (200,332)
===================
Net Assets $371,288,137
==============================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial interest outstanding -
unlimited number of shares authorized with no par value)
Class A - $284,386,267 / 28,135,580 $10.11
=======================================================================================================================
Class B - $86,901,870 / 8,597,583 $10.11
=======================================================================================================================
Maximum Offering Price Per Share*
Class A - ($ 10.11 x 104.71%) $10.59
=======================================================================================================================
* 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.
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Operations
Six months ended November 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------
Investment Income:
Interest $ 13,399,450
--------------------------------
Expenses:
Investment management fee - Note B 936,004
Distribution and service fee - Note B
Class A 430,257
Class B 437,815
Transfer agent fee - Note B 452,010
Custodian fee 47,421
Printing 37,433
Financial services fee - Note B 27,959
Registration and filing fees 21,645
Miscellaneous 7,954
Auditing fee 3,426
Trustees' fees 2,365
Legal fees 1,246
--------------------------------
Total Expenses 2,405,535
-------------------------------------------------------------------------------------
Net Investment Income 10,993,915
-------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Future Contracts:
Net realized gain on investments sold 5,703,221
Net realized gain on financial futures contracts 2,027,268
Change in net unrealized appreciation/depreciation
of investments (594,925)
Change in net unrealized appreciation/depreciation
of financial futures contracts 32,765
--------------------------------
Net Realized and Unrealized Gain on
Investments and Financial Futures Contracts 7,168,329
-------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $ 18,162,244
=====================================================================================
<PAGE>
John Hancock Funds - Sovereign U.S. Government Income Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1998
MAY 31, 1998 (UNAUDITED)
---------------- ----------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $24,465,938 $10,993,915
Net realized gain on investments sold and financial 2,936,186 7,730,489
futures contracts
Change in net unrealized appreciation/depreciation of 11,373,422 (562,160)
investments and financial futures contracts
---------------- ----------------
Net Increase in Net Assets Resulting from Operations 38,775,546 18,162,244
---------------- ----------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6364 and $0.3047 per share, respectively) (19,290,057) (8,663,166)
Class B - ($0.5689 and $0.2694 per share, respectively) (5,223,588) (2,334,908)
---------------- ----------------
Total Distributions to Shareholders (24,513,645) (10,998,074)
---------------- ----------------
From Fund Share Transactions - Net* (45,269,176) (3,807,381)
---------------- ----------------
Net Assets:
Beginning of period 398,938,623 367,931,348
---------------- ----------------
End of period (including distributions in excess of net
investment income of $196,173 and $200,332, respectively) $367,931,348 $371,288,137
================ ================
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED NOVEMBER 30, 1998
MAY 31, 1998 (UNAUDITED)
--------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
----------- -------------- -------------- --------------
Shares sold 1,581,221 $15,573,019 2,069,301 $20,835,845
Shares issued to shareholders in
reinvestment of distributions 1,562,529 15,369,047 690,033 6,948,476
----------- -------------- -------------- --------------
3,143,750 30,942,066 2,759,334 27,784,321
Less shares repurchased (6,008,099) (59,106,595) (3,401,559) (34,259,174)
=========== ============== ============== ==============
Net decrease (2,864,349) ($28,164,529) (642,225) ($6,474,853)
=========== ============== ============== ==============
CLASS B
Shares sold 1,106,741 $10,958,277 3,039,656 $30,674,944
Shares issued to shareholders in
reinvestment of distributions 285,916 2,811,860 125,831 1,267,660
----------- -------------- -------------- --------------
1,392,657 13,770,137 3,165,487 31,942,604
Less shares repurchased (3,137,772) (30,874,784) (2,898,159) (29,275,132)
=========== ============== ============== ==============
Net increase (decrease) (1,745,115) ($17,104,647) 267,328 $2,667,472
=========== ============== ============== ==============
<PAGE>
John Hancock Funds - Sovereign U.S. Government 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 as follows:
..............................................
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1996 YEAR ENDED NOVEMBER 30, 1998
---------------------- ---------------- ---------- -----------------
1993 1994 1995 1996 TO MAY 31, 1997 (5) MAY 31, 1998 (UNAUDITED)
---- ---- ---- ---- ------------------- ------------ -----------
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.75 $ 9.56 $ 9.92
----- ----- ------ ------ ---------- --------- ----------
Net Investment Income 0.68(1) 0.65 0.65 0.64 (1) 0.37 (1) 0.64 (1) 0.30 (1)
Net Realized and Unrealized Gain
(Loss) on Investments and Financial 0.61 (1.34) 0.77 (0.26) (0.19) 0.36 0.19
Futures Contracts ----- ----- ------ ------ ---------- --------- ----------
Total from Investment Operations 1.29 (0.69) 1.42 0.38 0.18 1.00 0.49
----- ----- ------ ------ ---------- --------- ----------
Less Distribution:
Dividends from Net Investment Income (0.68) (0.65) (0.65) (0.64) (0.36) (0.64) (0.30)
Distributions form Net Realized Gain (0.01) (0.31) - - - - -
on Investments sold
Distributions from Capital Paid-In - - - - (0.01) - -
----- ----- ------ ------ ---------- --------- ----------
Total Distributions (0.69) (0.96) (0.65) (0.64) (0.37) (0.64) (0.30)
----- ----- ------ ------ ---------- --------- ----------
Net Asset Value, End of Period $ 10.89 $ 9.24 $ 10.01 $ 9.75 $ 9.56 $ 9.92 $ 10.11
===== ===== ====== ====== ========== ========= ==========
Total Investment Return at Net Asset 12.89% (6.66%) 15.90% 4.02% 1.92%(3) 10.68% 5.07%(3)
Value(2)
Ratios and Supplemental Data
Net Assets, End of Period $375,416 $315,372 $370,966 $330,162 $ 302,589 $ 285,336 $ 284,386
(000s omitted)
Ratio of Expenses to Average Net 1.30% 1.23% 1.17% 1.15% 1.17%(4) 1.14% 1.12%(4)
Assets
Ratio of Net Investment Income to 6.47% 6.62% 6.76% 6.58% 6.69%(4) 6.48% 6.04%(4)
Average Net Assets
Portfolio Turnover Rate 273% 127% 94% 143% 88% 148% 138%
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period$ 10.28 $ 10.88$ 9.23 $ 10.00 $ 9.74 $ 9.56 $ 9.92
----- ----- ------ ------ ---------- --------- ----------
Net Investment Income 0.66(1) 0.61 0.60 0.58 (1) 0.33 0.57 (1) 0.27 (1)
Net Realized and Unrealized Gain
(Loss) on Investments and Financial
Futures Contracts 0.61 (1.34) 0.77 (0.26) (0.18) 0.36 0.19
----- ----- ------ ------ ---------- --------- ----------
Total from Investment Operations 1.27 (0.73) 1.37 0.32 0.15 0.93 0.46
----- ----- ------ ------ ---------- --------- ----------
Less Distribution:
Dividends from Net Investment Income (0.66) (0.61) (0.60) (0.58) (0.32) (0.57) (0.27)
Distributions form Net Realized Gain (0.01) (0.31) - - - - -
on Investments Sold
Distributions from Capital Paid-In - - - - (0.01) - -
----- ----- ------ ------ ---------- --------- ----------
Total Distributions (0.67) (0.92) (0.60) (0.58) (0.33) (0.57) (0.27)
----- ----- ------ ------ ---------- --------- ----------
Net Asset Value, End of Period $ 10.88 $ 9.23 $ 10.00 $ 9.74 $ 9.56 $ 9.92 $ 10.11
===== ===== ====== ====== ========== ========= ==========
Total Investment Return at Net Asset 12.66% (7.05%) 15.27% 3.33% 1.61%(3) 9.93% 4.70%(3)
Value (2)
Ratios and Supplemental Data
Net Assets, End of Period (000s $244,133 $196,899 $130,824 $112,228 $96,349 $82,596 $ 86,902
omitted)
Ratio of Expenses to Average Net 1.51% 1.64% 1.72% 1.82% 1.86%(4) 1.83% 1.82%(4)
Assets
Ratio of Net Investment Income to 6.23% 6.19% 6.24% 5.91% 5.99%(4) 5.79% 5.33%(4)
Average Net Assets
Portfolio Turnover Rate 273% 127% 94% 143% 88% 148% 138%
(1) Based on the average of shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Not annualized.
(4) Annualized.
(5) Effective May 31, 1997, the fiscal year end changed from October 31 to
May 31.
<PAGE>
Schedule of Investments
November 30, 1998 (Unaudited)
- --------------------------------------------
PAR VALUE
INTEREST MATURITY (000s MARKET
ISSUER, DESCRIPTION RATE DATE OMMITTED) VALUE
---------------- ------------ ---------------------
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (33.54%)
United States Treasury,
Bond 10.750% 08-15-05 $ 4,335 $ 5,800,100
Bond 12.000 08-15-13 29,900 45,751,784
Bond 9.250 02-15-16 14,450 20,986,313
Bond 8.125 08-15-19 19,100 25,695,421
Bond 5.250 11-15-28 4,000 4,111,240
Note 8.875 02-15-99 22,000 22,185,680
------------
124,530,538
------------
Government - U.S. Agencies (70.56%)
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 10.500 02-01-03 1,950 1,987,502
30 Yr Pass Thru Ctf 9.500 08-01-16 8,844 9,499,222
CMO REMIC 34-C 9.000 11-15-19 1,720 1,731,049
CMO REMIC 1142-H 7.950 12-15-20 5,680 5,729,992
CMO REMIC 1603-K 6.500 10-15-23 5,000 5,012,500
CMO REMIC 1608-L 6.500 09-15-23 5,000 5,110,900
CMO REMIC 1617-PM 6.500 11-15-23 10,000 10,253,100
CMO REMIC 1727-I 6.500 05-15-24 5,000 5,053,100
Deb 8.190 10-06-04 3,500 3,574,935
Deb 6.700 03-03-08 1,000 996,410
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf 9.050 04-10-00 2,000 2,102,820
10 Yr Pass Thru Ctf 8.900 06-12-00 5,000 5,278,100
15 Yr Pass Thru Ctf 9.000 02-01-10 3,984 4,151,553
15 Yr Pass Thru Ctf+ 6.000 03-01-11 to 10-01-13 49,113 49,174,302
15 Yr Pass Thru Ctf 6.500 05-01-13 14,140 14,343,390
CMO REMIC 1994-60-PJ 7.000 04-25-24 6,100 6,294,407
CMO REMIC 1994-75-K 7.000 04-25-24 3,100 3,208,500
CMO REMIC 1996-28-PK 6.500 07-25-25 7,589 7,620,113
CMO REMIC G-8-E 9.000 04-25-21 4,018 4,298,380
CMO REMIC X-225C-TK 6.500 12-25-23 5,032 5,109,040
Medium Term Note 7.230 03-30-06 3,000 3,016,410
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage 7.000# 10-20-22 to 10-20-23 10,427 10,540,264
30 Yr Pass Thru Ctf+ 6.000 10-01-28 18,500 18,326,470
30 Yr Pass Thru Ctf 6.500 02-15-27 to 10-15-28 40,009 40,429,085
30 Yr Pass Thru Ctf 7.500 08-15-23 to 2-15-26 17,860 8,119,453
30 Yr Pass Thru Ctf 8.000 01-15-25 5,370 5,599,557
30 Yr Pass Thru Ctf 9.000 08-15-16 to 12-15-17 15,812 6,243,884
Small Business Administration,
Pass Thru Ctf Ser 97-B 7.100 02-01-17 4,725 4,971,718
Pass Thru Ctf Ser 97-D 7.500 04-01-17 4,676 4,997,503
Pass Thru Ctf Ser 97-E 7.300 05-01-17 2,342 2,486,253
Tennessee Valley Authority,
Note Ser D 8.250 04-15-42 5,305 6,719,260
------------
261,979,172
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES (104.10%)
(Cost $375,613,705) 386,509,710
------------
<PAGE>
PAR VALUE
INTEREST (000s MARKET
ISSUER, DESCRIPTION RATE OMMITTED) VALUE
---------------- ---------------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (9.22%)
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 % $ 34,245 $34,245,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.350% 368
------------
TOTAL SHORT-TERM INVESTMENTS (9.22%) 34,245,368
------------
TOTAL INVESTMENTS (113.32%) 420,755,078
------------
OTHER ASSETS AND LIABILITIES, NET (13.32%) (49,466,941)
------------
TOTAL NET ASSETS (100.00%) $ 371,288,137
============
NOTES TO THE SCHEDULE OF INVESTMENTS
# Represents rate in effect on November 30, 1998.
+These securities having an aggregate value of $54,371,470 or 14.64% of the
Fund's net assets have been purchased on a when issued basis. The purchase price
and the interest rate of such securities are fixed at trade date, although the
Fund does not earn any interest on such securities until settlement date. The
Fund has instructed its Custodian Bank to segregate assets with a current value
at least equal to the amount of its when issued commitments. Accordingly, the
market value of $57,555,817 of U.S. Treasury Bond, 8.125% thru 12.00%, due
08-15-13 thru 08-15-19, and U.S. Treasury Note, 8.875%, due 02-15-99 has been
segregated to cover the when issued commitments. The percentage shown for each
investment category is the total value of that category as a percentage of the
net assets of the Fund.
</TABLE>
<PAGE>
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management investment
company registered under the Investment Company Act of 1940. The Trust consists
of two series: John Hancock Sovereign U.S. Government Income Fund (the "Fund"),
and John Hancock Strategic Income Fund. The other series of the Trust is
reported in separate financial statements. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-term total
return by investing in securities issued, guaranteed or otherwise backed by the
United States government, its agencies or instrumentalities. The Trustees have
authorized the issuance of multiple classes of shares of the Fund, designated as
Class A and Class B shares. The shares of each class represent an interest in
the same portfolio of investments of the Fund and have equal rights to voting,
redemptions, dividends, and liquidation, except that certain expenses, subject
to the approval of the Trustees, may be applied differently to each class of
shares in accordance with current regulations of the Securities and Exchange
Commission and the Internal Revenue Service. Shareholders of a class which bears
distribution and service expenses under terms of a distribution plan have
exclusive voting rights to that distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost, which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
Inc., may participate in a joint repurchase agreement transaction. Aggregate
cash balances are invested in one or more repurchase agreements, whose
underlying securities are obligations of the U.S. government and/or its
agencies. The Fund's custodian bank receives delivery of the underlying
securities for the joint account on the Fund's behalf. The Adviser is
responsible for ensuring that the agreement is fully collateralized at all
times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $44,586,657 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gains distribution will be made. The carryforwards expire as follows:
May 31, 2002 - $12,665,411, May 31, 2003 - $26,193,155, May 31, 2004 -
$3,597,046 and May 31, 2005 - $2,131,045. The Fund's tax year-end is May 31.
Expired capital loss carryforwards are reclassified to capital paid-in in the
year of expiration. Additionally, net capital losses of $266,692 attributable to
security transactions incurred after October 31, 1997 are treated as arising on
the first day (June 1, 1998) of the Fund's taxable year.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date. Interest income on investment securities is
recorded on the accrual basis. The Fund records all distributions to
shareholders from net investment income and realized gains on the ex-dividend
date. Such distributions are determined in conformity with income tax
regulations, which may differ from generally accepted accounting principles.
Dividends paid by the Fund with respect to each class of shares will be
calculated in the same manner, at the same time and will be in the same amount,
except for the effect of expenses that may be applied differently to each class.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on securities
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the relative net assets of the respective classes. Distribution
and service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.
<PAGE>
USE OF ESTIMATES The preparation of these financial statements in accordance
with generally accepted accounting principles incorporates estimates made by
management in determining the reported amounts of assets, liabilities, revenues
and expenses of the Fund. Actual results could differ from these estimates.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual fund. Expenses which are not readily identifiable to a specific
fund are allocated in such manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the funds.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. These agreements enable
the Fund to participate with other funds managed by the Adviser in 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
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.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest 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 there were the following open positions in
financial futures contracts:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
MAR 99 105 TREASURY NOTES LONG $38,015
======
At November 30, 1998, the Fund had deposited in a segregated account, $825,000,
par value of U.S. Treasury Bond, 9.25%, 02-15-16 to cover margin requirements on
open financial futures contracts.
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.
<PAGE>
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) 0.50% of the first $500,000,000 of the Fund's
average daily net asset value, and (b) 0.45% of the Fund's average daily net
asset value in excess of $500,000,000.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned
subsidiary of the Adviser, act as a distributor for shares of the Fund. For the
period ended November 30, 1998, net sales charges received on sales of Class A
shares of the Fund amounted to $86,047. Of this amount, $11,520 was retained and
used for printing prospectuses, advertising, sales literature, and other
purposes, $9,437 was paid as sales commissions to unrelated broker-dealers and
$65,090 was paid as sales commissions to sales personnel of Signator Investors,
a related broker-dealer. 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 for providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended November 30,
1998 the contingent deferred sales charges received by JH Funds amounted to
$89,755.
In addition, to reimburse JH Funds for the services it provides as
distributors of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of less than 0.02% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione 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 makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At November 30, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $2,740.
<PAGE>
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of the U.S.
government and its agencies, other than short-term securities, during the period
ended November 30, 1998 aggregated $523,406,835 and $505,482,780, respectively.
The cost of investments owned at November 30, 1998 (excluding corporate
savings account) for federal income tax purposes was $409,860,582. Gross
unrealized appreciation and depreciation of investments aggregated $11,954,057
and $1,059,929, respectively, resulting in net unrealized appreciation of
$10,894,128.
NOTE D -
REORGANIZATION
On November 11, 1998, the shareholders of the Fund approved a proposed tax-free
merger between the Fund and John Hancock Government Income Fund ("Government
Income Fund"). The reorganization will provide for a transfer of substantially
all the assets and liabilities of the Fund to the Government Income Fund. After
the transaction and as of the close of business on December 4, 1998, the Fund
will be terminated.
