-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CIobCNzr1aPmpAn3rTmp6nODfMnM9p8zVYRM0K/oakykmcLQIIhArc8bGzAc86mn 6V2DnbirkKoDNRbGHGVFag== 0000950135-96-001142.txt : 19960228 0000950135-96-001142.hdr.sgml : 19960228 ACCESSION NUMBER: 0000950135-96-001142 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960226 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN SOVEREIGN BOND FUND CENTRAL INDEX KEY: 0000045288 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042528977 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-02402 FILM NUMBER: 96525553 BUSINESS ADDRESS: STREET 1: 101 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6173751700 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN BOND FUND DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN BOND TRUST DATE OF NAME CHANGE: 19910704 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN BOND FUND INC DATE OF NAME CHANGE: 19841225 N-30B-2 1 JH SOVEREIGN BOND FUND 1 JOHN HANCOCK FUNDS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SOVEREIGN BOND FUND ANNUAL REPORT DECEMBER 31, 1995 2 TRUSTEES EDWARD J. BOUDREAU, JR. Chairman DENNIS S. ARONOWITZ* RICHARD P. CHAPMAN, JR.* WILLIAM J. COSGROVE* GAIL D. FOSLER* BAYARD HENRY* RICHARD S. SCIPIONE EDWARD J. SPELLMAN* *Members of the Audit Committee OFFICERS EDWARD J. BOUDREAU, JR. Chairman and Chief Executive Officer ROBERT G. FREEDMAN Vice Chairman and Chief Investment Officer ANNE C. HODSDON President THOMAS H. DROHAN Senior Vice President and Secretary JAMES B. LITTLE Senior Vice President and Chief Financial Officer SUSAN S. NEWTON Vice President, Assistant Secretary and Compliance Officer JAMES J. STOKOWSKI Vice President and Treasurer CUSTODIAN INVESTORS BANK & TRUST COMPANY 89 SOUTH STREET BOSTON, MASSACHUSETTS 02111 TRANSFER AGENT JOHN HANCOCK INVESTOR SERVICES CORPORATION P.O. BOX 9116 BOSTON, MASSACHUSETTS 02205-9116 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 INDEPENDENT AUDITORS ERNST & YOUNG LLP 200 CLARENDON STREET BOSTON, MASSACHUSETTS 02116 CHAIRMAN'S MESSAGE DEAR FELLOW SHAREHOLDERS: [A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive Officer, flush right, next to second paragraph.] The stock market's record-breaking, whirlwind performance in 1995 will be a tough act to follow in 1996. In fact, we've already seen greater market volatility this year, particularly among last year's leaders -- technology stocks. That's to be expected after a year that saw market indexes soar, including the Standard & Poor's 500-Stock Index's 37% advance. While many of the same economic conditions that fostered the stellar 1995 market are still in place -- slow economic growth, muted inflation and decent corporate earnings -- it would be unrealistic to expect the market to stage a repeat in 1996. The old saying "trees don't grow to the sky" comes to mind. Shareholders would do well to temper expectations of investment returns and perhaps revisit their investment allocations with their financial advisor to determine if rebalancing their portfolio makes sense. No matter how you scale back your market expectations, you should always be able to count on consistent customer service performance. At John Hancock Funds, we never stop working to find ways to sustain and improve the quality of information and the level of assistance we provide you. Our commitment to this task is no less than John Hancock's loyalty was to his fledgling country when he is said to have uttered, "if it does the public good, burn Boston." We won't go that far, of course, but we share our namesake's dedication to putting the public before all else. In our case, that public is you, our shareholders. We take very seriously the role you have entrusted to us, that of helping you achieve your financial goals. Part of that will always involve good customer service. So please do not hesitate to call your Customer Service Representative at 1-800-225-5291 if you have any questions or need information. We take pride in helping you with the same spirit that John Hancock displayed at the dawning of America. Sincerely, /s/ Edward J. Boudreau, Jr. - ------------------------------------ EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER 2 3 BY JAMES K. HO, PORTFOLIO MANAGER JOHN HANCOCK SOVEREIGN BOND FUND MODERATE GROWTH, LOW INFLATION AND FALLING INTEREST RATES IN 1995 CREATE NEARLY IDEAL CONDITIONS FOR BOND INVESTORS Last autumn, shareholders of John Hancock Investment Quality Bond Fund approved the merger of their fund with John Hancock Sovereign Bond Fund. The merger was effective September 15, 1995. By at least one key measure of the state of the bond market, 1995 ended exactly the way it began, with the federal funds rate, the rate banks charge each other for overnight loans, at 5.50%. But what a difference 12 months can make. In December 1994, we were licking our wounds after one of the worst years for bond investors in recent memory. By December 1995, on the other hand, we could look back on an outstanding year, marked by moderate growth, low inflation, falling interest rates and double-digit returns. When 1995 began, the Federal Reserve was still in a restrictive mode, raising interest rates in hopes of putting the brakes on the economy and preventing an outbreak of inflation. There had been six rate increases since the beginning of 1994 and the market was bracing for a seventh. It came, as expected, in February 1995, lifting the federal funds rate to 6.00%, exactly double the rate of a year earlier. But already there were signs among the leading indicators that the economy was losing steam. [A 2 1/2" x 3 1/2" photo of James K. Ho at bottom right. Caption reads: "James K. Ho, Portfolio Manager."] [CAPTION] "...AN OUTSTANDING YEAR, MARKED BY MODERATE GROWTH, LOW INFLATION, FALLING INTEREST RATES..." 3 4 John Hancock Funds - Sovereign Bond Fund [Chart with the heading "Top Five Sectors" at top of left hand column. The chart lists five sectors: 1) U.S. Government & Agency Bonds 34% 2) Financials 20% 3) Utilities 13% 4) Broadcasting/Communications 8% 5) Transportation 5%. A footnote below states: "As a percentage of net assets on December 31, 1995."] Economic growth slowed to a 2.7% annual rate during the first quarter of 1995, down from 5.1% during the fourth quarter of 1994. In the second quarter, the growth rate dropped still further to an anemic 1.3%. Fearful of a recession, the Fed switched direction in July and cut the federal funds rate one-quarter percentage point. After a slight uptick in economic activity during the third quarter of 1995, the growth rate tapered off again during the fourth quarter, leading to another quarter-point reduction by the Fed in December. While performance tailed off slightly during the second half of 1995, the Fund's overall results were impressive, both in absolute and relative terms. For the year that ended December 31, 1995, John Hancock Sovereign Bond Fund's Class A and Class B shares had total returns of 19.40% and 18.66%, respectively, at net asset value. Those results compared favorably with the average total return during the same period of 18.45% for all corporate debt A-rated funds, according to Lipper Analytical Services.(1) STRATEGY REVIEW Our long-term strategy places greater emphasis on sector and security selection than on trying to predict the movement of interest rates. For that reason, the Fund's duration -- a measure of how much its net asset value will vary in response to changing interest rates -- hovered just above five years for most of the period. That put us in a neutral position relative to our peers, and freed us to concentrate on variables that better lend themselves to rational analysis. That said, we try to stay on top of broad trends in interest rates and structure the Fund accordingly. During 1995, that meant using what's known as a bullet structure. A bullet structure emphasizes medium-term securities -- in this case, bonds with maturities of three to 10 years -- and de-emphasizes short-term and long-term securities. A bullet structure is often advantageous when the difference between short-term and long-term rates is widening. That was the case after the Fed switched from a tightening mode to an easing mode in July 1995 and began cutting short-term interest rates. SECTOR AND SECURITY SELECTION In broad terms, the Fund's sector breakdown has changed only slightly during the year. On December 31, 1995, the bulk of the Fund's assets were deployed in corporate bonds, including investment-grade corporate bonds and [Table entitled "Scorecard" at bottom of left hand column. The header for the left column is "Investment"; the header for the right column is "Recent performance ... and what's behind the numbers. The first listing is Time Warner followed by an up arrow and the phrase "Improving credit outlook." The second listing is United Air Lines followed by an up arrow and the phrase "Chose not to merge with USAir." The third listing is K-mart followed by a down arrow and the phrase "Hurt by retailing slump." Footnote below reads: "See "Schedule of Investments." Investment holdings are subject to change."] [CAPTION] "THE FUND'S HIGHER ALLOCATION IN CORPORATE BONDS CONTRIBUTED STRONGLY TO PERFORMANCE." 4 5 John Hancock Funds - Sovereign Bond Fund [Bar chart with heading "Fund Performance" at top of left hand column. Under the heading is the footnote: "For the year ended December 31, 1995." The chart is scaled in increments of 5% from bottom to top, with 20% at the top and 0% at the bottom. Within the chart, there are three solid bars. The first represents the 19.40% total return for John Hancock Sovereign Bond Fund: Class A. The second represents the 18.66% total return for John Hancock Sovereign Bond Fund: Class B. The third represents the 18.45% return for the average corporate debt A-rated fund. The footnote below states: "Total returns for John Hancock Sovereign Bond Fund are at net asset value with all distributions reinvested. The average balanced fund is tracked by Lipper Analytical Services. See following page for historical performance information."] high-yield bonds, sometimes known as junk bonds, which have been given credit ratings of BB or lower by one of the bond rating agencies. Moderate growth, low inflation and otherwise comfortable market conditions during 1995 encouraged investors to reach for the higher yield available from corporate bonds. As the year went on, interest-rate spreads, that is, the difference in yield between corporate and Treasury securities, narrowed and corporate bonds realized corresponding price gains. The Fund's higher allocation in corporate bonds contributed strongly to performance. We are now carefully analyzing the economy and the corporate-bond market to determine an opportune time to shift more of the Fund's assets into Treasury securities. Mortgage-backed securities never totaled more than 15% of the Fund's assets all year, and were under 10% for most of the past six months. Mortgage-backed securities have lagged the broader bond market lately as continued steep declines in interest rates have increased prepayment risk. Prepayment risk is the risk that mortgage holders will pay off their debt early and refinance at the lower prevailing rates. As growth has slowed, we've turned away from cyclical sectors of the economy, such as paper and steel, in favor of non-cyclical sectors, including media and cable. Among the Fund's top performers during the year were Delta Air Lines; AMR Corp., the parent of American Airlines which we sold during the period, and United Air Lines, which rallied following the decision not to merge with USAir. Media and cable companies that did well included Viacom, a programmer, and Continental Cablevision. Time Warner bonds posted impressive gains during 1995 as its credit outlook improved and investors applauded the proposed merger with Turner Broadcasting Systems. Our biggest disappointment of the year was K-mart, which was hurt by the slump in retailing and rumors of a possible bankruptcy. OUTLOOK Our outlook has two parts. Looking ahead six months through the middle of 1996, we see conditions remaining favorable for bond investors. The Fed is still in an easing mode and might well cut the federal funds rate again [CAPTION] "A KEY VARIABLE WE'LL BE WATCHING IS THE BUDGET DEBATE IN WASHINGTON." - -------------------------------------------------------------------------------- (1)Figures from Lipper Analytical Services include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower. This commentary reflects the views of the portfolio manager through the end of the Fund's period discussed in this report. Of course, the manager's views are subject to change as market and other conditions warrant. 5 6 John Hancock Funds - Sovereign Bond Fund sometime before the end of the first quarter. A key variable we'll be watching is the budget debate in Washington. If and when the parties agree on a balanced budget, that could be seen by the Fed as restricting economic growth sufficiently to warrant another rate cut. Farther out, though, the outlook begins to change. Ultimately lower interest rates can't help but stimulate growth. If so, then we begin to worry about inflation again, and perhaps a return to market conditions more like those that prevailed a year ago. While we do not expect a sharp increase in rates, shareholders would be wise to temper their expectations going forward. 6 7 A LOOK AT PERFORMANCE The tables on the right show the cumulative total returns and the average annual total returns for the John Hancock Sovereign Bond Fund. Total return is a performance measure that equals the sum of all dividends and capital gains, assuming reinvestment of these distributions and the change in the price of the Fund's average net assets. Performance figures include the maximum applicable sales charge of 4.5% for Class A shares. The effect of the maximum contingent deferred sales charge for Class B shares (maximum 5.0% and declining to 0% over six years) is included in Class B performance. Performance is affected by a 12b-1 plan, which commenced on January 1, 1990 and November 23, 1993 for Class A shares and Class B shares, respectively. For Class A shares, different sales charge schedules were in effect prior to September 28, 1989 and are not reflected in the performance information. Remember that all figures represent past performance and are no guarantee of how the Fund will perform in the future. Also, keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. CUMULATIVE TOTAL RETURNS FOR THE PERIOD ENDED DECEMBER 31, 1995
ONE FIVE MOST RECENT YEAR YEARS TEN YEARS ---- ----- --------- Sovereign Bond Fund: Class A 14.11% 56.22% 137.04% Sovereign Bond Fund: Class B 13.71% 12.93%(1) N/A
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED DECEMBER 31, 1995
ONE FIVE MOST RECENT YEAR YEARS TEN YEARS ---- ----- --------- Sovereign Bond Fund: Class A 14.11% 9.33% 9.01% Sovereign Bond Fund: Class B 13.71% 5.96%(1) N/A
YIELDS AS OF DECEMBER 31, 1995
SEC 30-DAY YIELD ----- Sovereign Bond Fund: Class A 5.88% Sovereign Bond Fund: Class B 5.46%
NOTES TO PERFORMANCE (1) Class B shares started on November 23, 1993. 7 8 WHAT HAPPENED TO A $10,000 INVESTMENT . . . The charts on the right show how much a $10,000 investment in the John Hancock Sovereign Bond Fund would be worth on December 31, 1995, assuming you have been invested for the past ten years or since the day each class of shares started and reinvested all distributions. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Corporate Bond Index -- an unmanaged index that mirrors the investment objectives and characteristics of the Fund. Sovereign Bond Fund Class A shares [Line chart with the heading Sovereign Bond Fund: Class A, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines.] [The first line represents the value of the Lehman Brothers Corporate Bond Index and is equal to $27,049 as of December 31, 1995. The second line represents the value of the hypothetical $10,000 investment made in the Sovereign Bond Fund on December 31, 1985, before sales charge, and is equal to $24,826 as of December 31, 1995. The third line represents the Sovereign Bond Fund after sales charge and is equal to $23,704 as of December 31, 1995.] Sovereign Bond Fund Class B shares [Line chart with the heading Sovereign Bond 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 Sovereign Bond Fund on November 23, 1993, before contingent deferred sales charge, and is equal to $11,668 as of December 31, 1995. The second line represents the value of the Lehman Brothers Corporate Bond Index and is equal to $11,593 as of December 31, 1995. The third line represents the Sovereign Bond Fund after contingent deferred sales charge and is equal to $11,293 as of December 31, 1995.] 8 9 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1995. YOU'LL ALSO FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE. STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 - ------------------------------------------------------------------------------ ASSETS: Investments at value - Note C: Publicly traded bonds (cost - 1,538,585,688)............... $1,581,407,311 Joint repurchase agreement (cost - $64,434,000)..................................... 64,434,000 Corporate savings account.................................. 75,538 -------------- 1,645,916,849 Receivable for shares sold.................................. 1,358,339 Receivable for investments sold............................. 571,950 Interest receivable......................................... 28,133,021 Other assets................................................ 58,106 -------------- Total Assets.............................. 1,676,038,265 ---------------------------------------------------------- LIABILITIES: Payable for shares repurchased.............................. 206,464 Payable for investments purchased........................... 40,189,661 Dividend payable............................................ 401,677 Payable to John Hancock Advisers, Inc. and affiliates - Note B.................................... 1,066,977 Accounts payable and accrued expenses....................... 230,946 -------------- Total Liabilities......................... 42,095,725 ---------------------------------------------------------- NET ASSETS: Capital paid-in............................................. 1,599,608,475 Accumulated net realized loss on investments and financial futures contracts................................ (8,487,558) Net unrealized appreciation of investments.................. 42,821,623 -------------- Net Assets................................ $1,633,942,540 ========================================================== NET ASSET VALUE PER SHARE: (Based on net asset values and shares of beneficial interest outstanding - unlimited number of shares authorized with no par value, respectively) Class A - $1,535,203,984/99,691,440......................... $ 15.40 ============================================================================ Class B - $98,738,556/6,411,647............................. $ 15.40 ============================================================================ MAXIMUM OFFERING PRICE PER SHARE * Class A - ($15.40 x 104.71%)................................ $ 16.13 ============================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced. THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR THE PERIOD STATED. STATEMENT OF OPERATIONS Year ended December 31, 1995 - ------------------------------------------------------------------------------ INVESTMENT INCOME: Interest.................................................... $ 128,984,162 -------------- Expenses: Investment management fee - Note B......................... 7,406,635 Distribution/service fee - Note B Class A.................................................. 4,251,420 Class B.................................................. 638,594 Transfer agent fee - Note B................................ 4,094,308 Custodian fee.............................................. 225,328 Miscellaneous.............................................. 144,341 Trustees' fees............................................. 131,560 Printing................................................... 125,715 Registration and filing fees............................... 104,206 Auditing fee............................................... 40,175 Legal fees................................................. 21,543 -------------- Total Expenses............................ 17,183,825 ---------------------------------------------------------- Net Investment Income..................... 111,800,337 ---------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FINANCIAL FUTURES CONTRACTS Net realized gain on investments sold....................... 14,077,762 Net realized loss on financial futures contracts............ (4,202,362) Change in net unrealized appreciation/depreciation of investments............................................. 139,252,581 Change in net unrealized appreciation/depreciation of financial futures contracts............................. 829,375 -------------- Net Realized and Unrealized Gain on Investments and Financial Futures Contracts............... 149,957,356 ---------------------------------------------------------- Net Increase in Net Assets Resulting from Operations................. $ 261,757,693 ==========================================================
SEE NOTES TO FINANCIAL STATEMENTS. 9 10 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 -------------- -------------- INCREASE (DECREASE) IN NET ASSETS: FROM OPERATIONS: Net investment income............................................................. $ 111,800,337 $ 110,094,190 Net realized gain (loss) on investments sold and financial futures contracts...... 9,875,400 (18,179,593) Change in net unrealized appreciation/depreciation of investments................. 140,081,956 (133,477,882) -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations.................. 261,757,693 (41,563,285) -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income Class A - ($1.1151 and $1.1202 per share, respectively).......................... (107,383,916) (108,234,785) Class B - ($1.0221 and $1.0443 per share, respectively).......................... (4,389,308) (1,784,944) Class C** - ($0.4338 and $1.1929 per share, respectively)........................ (27,113) (74,461) Dividends from net realized gain on investments sold Class A - (none and $0.0801 per share, respectively)............................. -- (7,707,353) Class B - (none and $0.0801 per share, respectively)............................. -- (84,479) Class C** - (none and $0.0801 per share, respectively)........................... -- (4,864) -------------- -------------- Total Distributions to Shareholders............................................ (111,800,337) (117,890,886) -------------- -------------- FROM FUND SHARE TRANSACTIONS-- NET*................................................. 115,957,978 16,735,156 -------------- -------------- NET ASSETS: Beginning of period............................................................... 1,368,027,206 1,510,746,221 -------------- -------------- End of period..................................................................... $1,633,942,540 $1,368,027,206 ============== ==============
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 REDEEMED DURING THE LAST TWO PERIODS, ALONG WITH THE CORRESPONDING DOLLAR VALUES. SEE NOTES TO FINANCIAL STATEMENTS. 10 11 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund STATEMENT OF CHANGES IN NET ASSETS (continued) - -------------------------------------------------------------------------------- * ANALYSIS OF FUND SHARE TRANSACTIONS:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1995 1994 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------- CLASS A Shares sold...................................................... 8,319,081 $ 123,160,717 7,211,540 $ 105,031,130 Shares issued in reorganization - Note D......................... 5,218,646 78,550,023 -- -- Shares issued to shareholders in reinvestment of distributions... 5,650,757 83,509,985 6,285,614 90,586,929 ----------- ------------- ----------- ------------- 19,188,484 285,220,725 13,497,154 195,618,059 Less shares repurchased.......................................... (14,896,492) (219,827,040) (15,075,386) (218,252,651) ----------- ------------- ----------- ------------- Net increase (decrease)......................................... 4,291,992 $ 65,393,685 (1,578,232) $ (22,634,592) =========== ============= =========== ============= CLASS B Shares sold...................................................... 3,520,133 $ 52,253,097 2,846,673 $ 41,518,783 Shares issued in reorganization - Note D......................... 493,051 7,421,307 -- -- Shares issued to shareholders in reinvestment of distributions... 181,534 2,696,476 84,680 1,203,433 ----------- ------------- ----------- ------------- 4,194,718 62,370,880 2,931,353 42,722,216 Less shares repurchased.......................................... (681,957) (10,100,167) (298,214) (4,254,708) ----------- ------------- ----------- ------------- Net increase.................................................... 3,512,761 $ 52,270,713 2,633,139 $ 38,467,508 =========== ============= =========== ============= CLASS C** Shares sold...................................................... -- -- 63,842 $ 895,248 Shares issued to shareholders in reinvestment of distributions... -- -- 5,491 78,992 ----------- ------------- ----------- ------------- -- -- 69,333 974,240 Less shares repurchased.......................................... (120,133) (1,706,420) (5,071) (72,000) ----------- ------------- ----------- ------------- Net increase (decrease)......................................... (120,133) $ (1,706,420) 64,262 $ 902,240 =========== ============= =========== =============
** All Class C shares were redeemed on May 22, 1995. SEE NOTES TO FINANCIAL STATEMENTS. 11 12 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund FINANCIAL HIGHLIGHTS Selected data for each share of beneficial interest outstanding throughout the period indicated, investment returns, key ratios, and supplemental data are as follows: - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- ------------ ---------- CLASS A PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period...................... $ 13.90 $ 15.53 $ 15.29 $ 15.31 $ 14.33 ---------- ---------- ---------- ---------- ---------- Net Investment Income..................................... 1.12 1.12 1.14 1.20 1.29 Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts......................... 1.50 (1.55) 0.62 (0.01) 0.98 ---------- ---------- ---------- ---------- ---------- Total from Investment Operations....................... 2.62 (0.43) 1.76 1.19 2.27 ---------- ---------- ---------- ---------- ---------- Less Distributions: Dividends from Net Investment Income...................... (1.12) (1.12) (1.14) (1.21) (1.29) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts......................... -- (0.08) (0.38) -- -- ---------- ---------- ---------- ---------- ---------- Total Distributions.................................... (1.12) (1.20) (1.52) (1.21) (1.29) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period............................ $ 15.40 $ 13.90 $ 15.53 $ 15.29 $ 15.31 ========== ========== ========== ========== ========== Total Investment Return at Net Asset Value (e)............ 19.40% (2.75%) 11.80% 8.08% 16.59% RATIO AND SUPPLEMENTAL DATA Net Assets, End of Period (000's omitted)................. $1,535,204 $1,326,058 $1,505,754 $1,386,260 $1,249,980 Ratio of Expenses to Average Net Assets................... 1.13% 1.26% 1.41% 1.44% 1.27% Ratio of Net Investment Income to Average Net Assets...... 7.58% 7.74% 7.18% 7.89% 8.81% Portfolio Turnover Rate................................... 103%+ 85% 107% 87% 90% CLASS B (a) PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period...................... $ 13.90 $ 15.52 $ 15.90(b) ---------- ---------- ---------- Net Investment Income..................................... 1.02 1.04 0.11 Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts............................. 1.50 (1.54) -- ---------- ---------- ---------- Total from Investment Operations....................... 2.52 (0.50) 0.11 ---------- ---------- ---------- Less Distributions: Dividends from Net Investment Income...................... (1.02) (1.04) (0.11) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts......................... -- (0.08) (0.38) ---------- ---------- ---------- Total Distributions.................................... (1.02) (1.12) (0.49) ---------- ---------- ---------- Net Asset Value, End of Period............................ $ 15.40 $ 13.90 $ 15.52 ========== ========== ========== Total Investment Return at Net Asset Value (e)............ 18.66% (3.13%) 0.90%(d) RATIO AND SUPPLEMENTAL DATA Net Assets, End of Period (000's omitted)................. $ 98,739 $ 40,299 $ 4,125 Ratio of Expenses to Average Net Assets................... 1.75% 1.78% 1.63%* Ratio of Net Investment Income to Average Net Assets...... 6.87% 7.30% 0.57%* Portfolio Turnover Rate................................... 103%+ 85% 107%
SEE NOTES TO FINANCIAL STATEMENTS. 12 13 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund FINANCIAL HIGHLIGHTS (continued) - --------------------------------------------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED MAY 22, 1995 DECEMBER 31, DECEMBER 31, (UNAUDITED) 1994 1993 ------------ ------------ ------------ CLASS C (c) PER SHARE OPERATING PERFOMANCE Net Asset Value, Beginning of Period...................................................... $13.90 $15.52 $15.86(b) ------ ------ ------ Net Investment Income..................................................................... 0.42 1.19 0.81 Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts.... 0.91 (1.54) 0.04 ------ ------ ------ Total from Investment Operations....................................................... 1.33 (0.35) 0.85 ------ ------ ------ Less Distributions: Dividends from Net Investment Income...................................................... (0.43) (1.19) (0.81) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts.. -- (0.08) (0.38) ------ ------ ------ Total Distributions.................................................................... (0.43) (1.27) (1.19) ------ ------ ------ Net Asset Value, End of Period............................................................ $14.80 $13.90 $15.52 ====== ====== ====== Total Investment Return at Net Asset Value (e)............................................ 9.73%(d) (2.19%) 5.45%(d) RATIO AND SUPPLEMENTAL DATA Net Assets, End of Period (000's omitted)................................................. $ 142 $1,670 $ 867 Ratio of Expenses to Average Net Assets................................................... 0.67%* 0.73% 0.90%* Ratio of Net Investment Income to Average Net Assets...................................... 7.82%* 8.28% 4.90%* Portfolio Turnover Rate................................................................... N/A 85% 107%
* On an annualized basis. + Portfolio turnover excludes merger activity. (a) Class B shares commenced operations on November 23, 1993. (b) Initial price to commence operations. (c) Class C shares commenced operations on May 7, 1993. Net asset value and net assets at the end of the period reflect amounts prior to the redemption of all shares on May 22, 1995. (d) Not annualized. (e) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. N/A Not applicable. THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A SINGLE SHARE FOR THE PERIOD INDICATED: NET INVESTMENT INCOME, GAINS (LOSSES), DIVIDENDS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD. ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM. SEE NOTES TO FINANCIAL STATEMENTS. 13 14 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund SCHEDULE OF INVESTMENTS December 31, 1995 - -------------------------------------------------------------------------------- THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY SOVEREIGN BOND FUND ON DECEMBER 31, 1995. IT'S DIVIDED INTO TWO MAIN CATEGORIES: PUBLICLY TRADED BONDS AND SHORT-TERM INVESTMENTS. THE BONDS ARE FURTHER BROKEN DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S "CASH" POSITION, ARE LISTED LAST.
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- PUBLICLY TRADED BONDS AEROSPACE (0.39%) Jet Equipment Trust Ser 1995-B, *Cert 08-15-14 (R)...................................... 10.910% BB+ $ 5,800 $ 6,364,920 ------------ BANKS (11.03%) Abbey National First Capital B.V., Sub Note 10-15-04...................................... 8.200 AA- 10,000 11,341,200 ABN Amro Bank N.V. - Chicago Branch, *Global Bond 05-31-05................................... 7.250 AA- 10,000 10,735,800 African Development Bank, Sub Note 12-15-03...................................... 9.750 AA 8,000 9,878,160 Barclays North American Capital Corp., Gtd Cap Note 05-15-21.................................. 9.750 AA- 8,925 10,754,625 Den Danske Bank Aktieselskab, *Sub Note 06-15-05 (R).................................. 7.250 BBB+ 8,640 9,120,125 First Interstate Bancorp., Sub Note 05-01-97...................................... 12.750 BBB+ 3,250 3,540,810 International Bank for Reconstruction and Development, 30 Yr Bond 09-01-16.................................... 8.250 AAA 5,000 6,060,950 30 Yr Bond 07-15-17.................................... 9.250 AAA 17,050 22,642,400 Midland American Capital Corp., Gtd Note 11-15-03...................................... 12.750 A 19,932 23,524,743 National Westminster Bank PLC - New York Branch, Sub Note 05-01-01...................................... 9.450 AA- 10,000 11,589,800 RBSG Capital Corp., Gtd Cap Note 03-01-04.................................. 10.125 A+ 10,605 13,179,788 Scotland International Finance No. 2 B.V., Sub Gtd Note 11-01-06 (R).............................. 8.850 A+ 10,250 12,169,374 Security Pacific Corp., Medium Term Sub Note 05-09-01.......................... 10.360 A- 6,000 7,211,460 Sub Note 11-15-00...................................... 11.500 A- 6,400 7,868,352 Toronto Dominion Bank - New York Branch, Sub Note 01-15-09...................................... 6.450 AA- 10,000 10,048,300
SEE NOTES TO FINANCIAL STATEMENTS. 14 15 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- BANKS (CONTINUED) Westdeutsche Landesbank Girozentrale - New York Branch, Sub Note 06-15-05...................................... 6.750% AA+ $10,000 $ 10,479,800 ------------ 180,145,687 ------------ BROADCASTING (6.97%) Cablevision Systems Corp., Sr Sub Deb 04-01-04.................................... 10.750 B 9,000 9,495,000 Century Communications Corp., Sr Sub Deb 10-15-03.................................... 11.875 B+ 12,675 13,657,312 Comcast Corp., *Sr Sub Deb 05-15-05.................................... 9.375 B+ 1,500 1,586,250 Continental Cablevision, Inc., *Sr Note 05-15-06 (R)................................... 8.300 BB+ 6,000 6,000,000 Sr Sub Deb 06-01-07.................................... 11.000 BB- 12,205 13,639,088 Jones Intercable, Inc., *Sr Note 03-15-02....................................... 9.625 BB 3,000 3,225,000 Sr Sub Deb 07-15-04.................................... 11.500 B+ 9,500 10,545,000 Le Groupe Videotron Ltee, *Sr Note 02-15-05....................................... 10.625 BB+ 1,750 1,876,875 Lenfest Communications, Inc., *Sr Note 11-01-05....................................... 8.375 BB- 4,000 4,015,000 Rogers Cablesystems Ltd., *Sr Sec Second Priority Note 03-15-05................... 10.000 BB+ 7,500 8,062,500 *Sr Sub Deb 12-01-15.................................... 11.000 BB+ 2,350 2,526,250 TeleWest plc, *Sr Deb 10-01-06........................................ 9.625 BB 4,500 4,578,750 TKR Cable I, Inc., Sr Deb 10-30-07........................................ 10.500 BBB- 11,000 13,099,020 Turner Broadcasting Systems Inc., *Sr Note 07-01-13....................................... 8.375 BB+ 5,500 5,709,330 Viacom Inc., *Sr Deb 01-15-16........................................ 7.625 BB+ 5,000 5,064,000 Sub Deb 07-07-06....................................... 8.000 BB+ 10,710 10,897,425 ------------ 113,976,800 ------------ COMPUTERS (0.30%) Unisys Corp., Credit Sensitive Note 07-01-97......................... 13.500 BB- 5,220 4,959,000 ------------ CONTAINERS (0.07%) Stone Container Corp., Sr Sub Note 10-01-04................................... 11.500 B 1,150 1,144,250 ------------ COSMETICS & TOILETRIES (0.43%) Johnson & Johnson, Deb 11-15-23........................................... 6.730 AAA 6,750 6,994,282 ------------
SEE NOTES TO FINANCIAL STATEMENTS. 15 16 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- FINANCE (6.48%) American Express Co., Euronote 12-12-00........................................ 11.625% A+ $ 8,670 $ 9,765,316 Banc One Credit Card Master Trust, Class A Asset Backed Ctf Ser 1994-B 12-15-99............. 7.550 AAA 10,000 10,365,600 Chrysler Financial Corp., Note 11-01-99............................................ 12.750 A- 3,000 3,682,740 CIT Group Holdings, Inc. (The), Medium Term Sr Sub Cap Note 03-15-01..................... 9.250 A 5,000 5,728,200 Great Western Financial Corp., Note 02-01-02............................................ 8.600 BBB+ 11,000 12,339,030 Greentree Financial Corp., *Ctf Home Improv Ln Ser 1995-D CI M-2 09-15-25............ 6.950 AAA 6,130 6,258,301 MBNA Master Credit Card Trust, *Ser 1995-D Asset Backed Ctf 06-15-00..................... 6.050 AAA 16,000 16,240,000 Merrill Lynch Mortgage Investors, Inc., Sr/Sub Pass Thru Ctf Ser 1992 B, Class B (Sub) 04-15-12.. 8.500 AA 3,228 3,356,342 Santander Financial Issuances Ltd., *Sub Gtd Note 04-15-05.................................... 7.875 A+ 10,000 11,037,600 Standard Credit Card Master Trust I, *Class A Credit Card Part Ctf Ser 1995-2 01-07-00......... 8.625 AAA 11,500 11,841,320 *Class A Credit Card Part Ctf Ser 1993-2 10-07-04......... 5.950 AAA 5,080 5,038,700 *Class A Credit Card Part Ctf Ser 1995-9 10-07-07......... 6.550 AAA 10,000 10,300,000 ------------ 105,953,149 ------------ FOODS (0.33%) Nabisco Inc., Note 04-15-99............................................ 8.300 BBB 5,000 5,330,800 ------------ GLASS PRODUCTS (0.52%) Owens-Illinois, Inc., Sr Deb 12-01-03.......................................... 11.000 BB 7,500 8,475,000 ------------ GOLD MINING & PROCESSING (0.97%) Magma Copper Co., Sr Sub Note 12-15-01..................................... 12.000 BB+ 14,250 15,870,937 ------------ GOVERNMENTAL - FOREIGN (3.97%) Brazil, Republic of, *Par Bond YL4 04-15-24.................................... 4.250 NR 2,500 1,328,125 Nova Scotia, Province Of, Deb 04-01-22............................................. 8.750 A- 8,800 10,688,392 SF Deb 05-15-13.......................................... 11.500 A- 10,655 12,385,479 Ontario, Province Of, *Deb 11-05-11............................................. 17.000 AA- 3,750 4,326,337 Deb 08-31-12............................................. 15.250 AA- 6,595 7,941,369 Deb 04-25-13............................................. 11.750 AA- 6,000 7,023,900
SEE NOTES TO FINANCIAL STATEMENTS. 16 17 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- GOVERNMENTAL - FOREIGN (CONTINUED) Quebec, Province Of, Deb 10-01-13............................................. 13.000% A+ $11,000 $ 13,412,300 Deb 09-15-14............................................. 13.250 A+ 1,000 1,273,730 Saskatchewan, Province Of, Deb 12-15-20............................................. 9.375 BBB+ 5,000 6,493,600 ------------ 64,873,232 ------------ GOVERNMENTAL - U.S. (21.95%) United States Treasury, Bond 11-15-02............................................ 11.625 AAA 8,500 11,437,770 Bond 08-15-05............................................ 10.750 AAA 10,725 14,735,185 Bond 08-15-17............................................ 8.875 AAA 48,330 64,731,752 Bond 05-15-18............................................ 9.125 AAA 47,075 64,698,468 Bond 02-15-23............................................ 7.125 AAA 54,050 61,802,932 Note 11-15-96............................................ 7.250 AAA 700 711,592 Note 05-15-98............................................ 9.000 AAA 54,010 58,482,568 Note 11-30-99............................................ 7.750 AAA 28,415 30,790,210 Note 05-15-01............................................ 8.000 AAA 27,950 31,286,391 *Note 11-15-04............................................ 7.875 AAA 17,310 20,036,325 ------------ 358,713,193 ------------ GOVERNMENTAL - U.S. AGENCIES (12.38%) Federal Home Loan Mortgage Corp., *CMO Remic 1218-G 05-15-14................................ 4.500 AAA 1,000 941,250 Federal National Mortgage Association, 15 Yr SF Pass Thru Ctf 02-01-08.......................... 7.500 AAA 3,523 3,623,974 15 Yr SF Pass Thru Ctf 01-25-05.......................... 8.000 AAA 10,000 10,746,800 *30 Yr SF Pass Thru Ctf 10-01-23.......................... 7.000 AAA 9,345 9,421,073 Financing Corp., Bond Ser A 02-08-18...................................... 9.400 AAA 7,000 9,492,630 Bond Ser B 04-06-18...................................... 9.800 AAA 1,675 2,352,856 Bond Ser D 09-26-19...................................... 8.600 AAA 9,250 11,750,368 Government National Mortgage Association, *30 Yr SF Pass Thru Ctf 12-15-99 +........................ 7.000 AAA 16,285 16,478,303 *30 Yr SF Pass Thru Ctf 02-15-24 To 08-15-25.............. 7.500 AAA 8,436 8,678,257 *30 Yr SF Pass Thru Ctf 09-15-22 To 06-15-25 +............ 8.000 AAA 51,063 53,205,884 30 Yr SF Pass Thru Ctf 12-15-22 To 09-15-24.............. 8.500 AAA 34,746 36,483,140 *30 Yr SF Pass Thru Ctf 07-15-16 To 01-15-25.............. 9.000 AAA 25,683 27,350,009 30 Yr SF Pass Thru Ctf 11-15-19 To 05-15-21.............. 9.500 AAA 6,647 7,167,424 *30 Yr SF Pass Thru Ctf 06-15-20 To 03-15-25.............. 10.000 AAA 3,624 3,988,392 30 Yr SF Pass Thru Ctf 01-15-16.......................... 10.500 AAA 218 243,402 30 Yr SF Pass Thru Ctf 01-15-16.......................... 11.000 AAA 322 364,352 ------------ 202,288,114 ------------
SEE NOTES TO FINANCIAL STATEMENTS. 17 18 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- INSURANCE (2.80%) Equitable Life Assurance Society of the United States (The), *Surplus Note 12-01-05 (R).................................... 6.950% A $ 6,050 $ 6,153,273 Liberty Mutual Insurance Co., *Surplus Note 05-04-07 (R).................................... 8.200 A2** 10,000 11,125,900 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R).................................... 7.625 AA- 10,450 10,917,638 New York Life Insurance Co., Surplus Note 12-15-23 (R).................................... 7.500 AA 10,000 10,250,500 Sun Canada Financial Co., *Sub Note 12-15-07 (R)........................................ 6.625 AA 7,250 7,318,078 ----------- 45,765,389 ----------- LEISURE & RECREATION (0.10%) Mohegan Tribal Gaming Authority, *Sr Sec Note 11-15-02 (R)..................................... 13.500 NR 1,500 1,620,000 ----------- MEDICAL/DENTAL (0.46%) Fisher Scientific International Inc., *Note 12-15-05................................................ 7.125 BBB 7,500 7,530,750 ----------- OIL & GAS (2.09%) Ashland Oil, Inc., SF Deb 10-15-17.............................................. 11.125 BBB 5,000 5,659,500 Coastal Corp. (The), Sr Deb 06-15-06.............................................. 11.750 BB+ 10,500 11,169,375 Norsk Hydro, a.s., *Deb 06-15-23................................................. 7.750 A- 2,000 2,235,300 Oryx Energy Co., Note 05-01-96................................................ 9.300 BB 5,000 5,048,650 TransTexas Gas Corp., *Sr Sec Note 06-15-02......................................... 11.500 BB- 9,710 10,025,575 ----------- 34,138,400 ----------- PAPER (1.35%) APP International Finance Co. B.V., *Gtd Sec Note 10-01-05........................................ 11.750 BB 4,000 3,940,000 Georgia Pacific Corp., Deb 01-15-18................................................. 9.750 BBB- 7,500 7,844,850 Repap New Brunswick, *Sr Note 04-15-05............................................. 10.625 B+ 3,800 3,724,000 S.D. Warren Co., Sr Sub Note 12-15-04......................................... 12.000 B+ 2,500 2,756,250 Stone Consolidated, *Sr Note 12-15-00............................................. 10.250 B+ 3,500 3,745,000 ----------- 22,010,100 -----------
SEE NOTES TO FINANCIAL STATEMENTS. 18 19 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- PUBLISHING (2.68%) News America Holdings Inc., *Deb 08-10-18................................................. 8.250% BBB $11,000 $11,956,560 Sr Note 10-15-99............................................. 9.125 BBB 7,500 8,290,350 Sr Note 12-15-01............................................. 12.000 BBB 8,700 9,682,491 Time Warner Inc., Deb 01-15-13................................................. 9.125 BBB- 12,255 13,810,772 ----------- 43,740,173 ----------- RETAIL (0.69%) K mart Corp., Lease Ctf 01-01-09........................................... 13.500 BBB 2,000 2,297,140 Safeway Stores, Inc., Lease Ctf 01-15-09........................................... 13.500 BBB- 2,609 3,006,680 Thrifty Payless Inc., Sr Note 04-15-03............................................. 11.750 B 5,500 5,940,000 ----------- 11,243,820 ----------- STEEL (0.90%) UCAR Global Enterprises Inc., *Sr Sub Note 01-15-05......................................... 12.000 B+ 4,150 4,793,250 Weirton Steel Corp., *Sr Note 03-01-98............................................. 11.500 B 2,900 2,979,750 Sr Note 10-15-99............................................. 10.875 B 2,000 2,000,000 *Sr Note 06-01-05............................................. 10.750 B 5,225 4,924,563 ----------- 14,697,563 ----------- TELECOMMUNICATIONS (0.89%) British Telecom Finance Inc., *Gtd Deb 02-15-19............................................. 9.625 AAA 9,000 10,273,320 Tele-Communications Inc., *Sr Deb 02-01-12.............................................. 9.800 BBB- 3,500 4,197,095 ----------- 14,470,415 ----------- TOBACCO (0.47%) RJR Nabisco, Inc., Note 12-01-02................................................ 8.625 BBB- 7,425 7,734,548 ----------- TRANSPORTATION (5.47%) Delta Air Lines, Inc., Deb 05-15-21................................................. 9.750 BB 4,000 4,934,920 NWA Inc., Note 08-01-96................................................ 8.625 B 14,165 14,306,650 Rail Car Trust No. 1992-1, Trust Note 06-01-04.......................................... 7.750 AAA 17,497 18,918,497 Scandinavian Airlines System, Bond 07-20-99................................................ 9.125 A3** 6,834 7,500,315
SEE NOTES TO FINANCIAL STATEMENTS. 19 20 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- TRANSPORTATION (CONTINUED) Sea-Land Service, Inc., Sec Bond Ser A 01-02-11.................................................. 10.600% BBB+ $ 5,000 $ 5,316,250 Sec Bond Ser B 01-02-11.................................................. 10.600 BBB+ 7,000 7,442,750 Sec Bond Ser C 01-02-11.................................................. 10.600 BBB+ 6,000 6,350,040 United Air Lines, Inc., Deb Ser B 05-01-14....................................................... 11.210 BB 10,000 13,236,500 USAir 1990-A Pass Through Trusts, Pass Thru Ctf Ser 1990-A1 03-19-05....................................... 11.200 B+ 11,660 11,412,239 ------------- 89,418,161 ------------- UTILITIES (13.09%) British Columbia Hydro And Power Auth. (Gtd By Prov Of British Columbia), *Bond Ser FG 04-15-11..................................................... 15.000 AA+ 2,050 2,208,588 *Bond Ser FH 07-15-11..................................................... 15.500 AA+ 225 251,192 *Bond Ser FJ 11-15-11..................................................... 15.500 AA+ 1,081 1,239,896 Bond Ser FN 09-01-13..................................................... 12.500 AA+ 6,175 7,418,830 BVPS II Funding Corp., *Collateralized Lease Bond 12-01-07....................................... 8.330 BB+ 5,980 5,985,980 *Collateralized Lease Bond 06-01-17....................................... 8.890 BB 2,047 2,101,962 CE Casecnan Water & Energy, Co., Inc., *Sr Sec Note Ser A 11-15-05 (R)........................................... 11.450 BB 5,000 5,050,000 Cleveland Electric Illuminating Co., *1st Mtg Ser 2005-B 05-15-05.............................................. 9.500 BB 7,500 7,762,500 CTC Mansfield Funding Corp., Sec Lease Oblig 09-30-16................................................. 11.125 B+ 17,270 18,385,642 E.I.P. Refunding Corp., Sec Fac Bond 10-01-12.................................................... 10.250 B+ 9,694 10,277,773 First PV Funding Corp., Lease Oblig Ser 1986 A 01-15-14.......................................... 10.300 B+ 2,000 2,092,500 *Lease Oblig Ser 1986 B 01-15-16.......................................... 10.150 B+ 14,001 14,316,023 GG1B Funding Corp., *Sec Lease Oblig 01-15-11................................................. 7.430 BBB- 8,227 8,191,839 Sec Lease Oblig 01-15-14................................................. 8.200 BBB- 3,000 3,016,725 GTE Corp., Deb 11-15-17............................................................. 10.300 BBB+ 8,725 10,600,352 *Deb 11-01-20............................................................. 10.250 BBB+ 6,875 8,195,687 Hydro-Quebec (Gtd By Province Of Quebec), Deb 02-01-03............................................................. 7.375 A+ 7,185 7,672,933 Deb Ser FV 02-01-12...................................................... 11.750 A+ 5,000 7,358,250 Deb Ser HS 02-01-21...................................................... 9.400 A+ 3,500 4,442,305 Iberdrola International B.V., Gtd Note 10-01-02........................................................ 7.500 AA- 8,000 8,608,000 Gtd Note 06-01-03 (R).................................................... 7.125 AA- 8,629 9,094,966
SEE NOTES TO FINANCIAL STATEMENTS. 20 21 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST S&P (000'S MARKET ISSUER, DESCRIPTION RATE RATING*** OMITTED) VALUE - ------------------- ---- --------- -------- ----- UTILITIES (CONTINUED) Long Island Lighting Co., *Deb 03-15-03............................................ 7.050% BB+ $ 7,315 $ 7,191,157 Gen Ref 05-01-21........................................ 9.750 BBB- 6,075 6,249,292 *Gen Ref Mtg 07-01-24.................................... 9.625 BBB- 6,000 6,107,760 Louisiana Power & Light Co., *Sec Lease Oblig Bond Ser B 01-02-17..................... 10.670 BBB- 10,000 10,757,300 Midland Funding Corp. I, Sr Sec Lease Oblig Ser C 07-23-02....................... 10.330 BB- 14,650 15,235,646 Philippine Long Distance Telephone Co., *Note 08-01-05........................................... 9.875 BB 2,490 2,642,513 System Energy Resources, Inc., 1st Mtg 09-01-96........................................ 10.500 BBB- 10,870 11,273,712 Tenaga Nasional Berhad, Note 06-15-04 (R)....................................... 7.875 A+ 9,300 10,219,305 -------------- 213,948,628 -------------- TOTAL PUBLICLY TRADED BONDS (Cost $1,538,585,688) (96.78%) 1,581,407,311 ------ --------------
SEE NOTES TO FINANCIAL STATEMENTS. 21 22 FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST (000'S MARKET ISSUER, DESCRIPTION RATE OMITTED) VALUE - ------------------- ---- -------- ----- SHORT-TERM INVESTMENTS JOINT REPURCHASE AGREEMENT (3.94% ) Investment in a joint repurchase agreement transaction with SBC Capital Markets Inc., Dated 12-29-95, Due 01-02-96 (secured by U.S. Treasury Bonds, 7.500%, due 11-15-16, and 10.375%, due 11-15-12 ) - Note A............................. 5.900% $64,434 $ 64,434,000 -------------- CORPORATE SAVINGS ACCOUNT (0.01%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.00%............................................... 75,538 -------------- TOTAL SHORT-TERM INVESTMENTS (3.95%) 64,509,538 ------- -------------- TOTAL INVESTMENTS (100.73%) $1,645,916,849 ======= ==============
NOTES TO THE SCHEDULE OF INVESTMENTS (R) These securites are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securites amounted to $105,404,079 as of December 31, 1995. See Note A of the Notes to Financial Statements for valuation policy. + These securities having an aggregated value of $40,321,498 or 2.47% of the Fund's net assets, have been purchased on a when issued basis subsequent to the date of this schedule. The purchase price and the interest rate of such security is fixed at trade date, although the Fund does not earn any interest on such securities until settlement date. The Fund has instructed the Custodian Bank to segregate assets with a current value at least equal to the amount of its when issued commitment. Accordingly, the market value of $62,533,835 of U.S. Treasury Bond 9.125%, 05-15-18 has been segregated to cover the when issued commitments. * Securities, other than short-term investments, newly added to the portfolio during the year ended December 31, 1995. ** Credit ratings are unaudited and are rated by Moody's Investor Services or John Hancock Advisers, Inc. where Standard and Poors ratings are not available. *** Credit ratings are unaudited. 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. 22 23 NOTES TO FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund NOTE A -- ACCOUNTING POLICIES John Hancock Sovereign Bond Fund (the "Fund") is a diversified open-end investment management company, registered under the Investment Company Act of 1940. The investment objective of the Fund is to generate a high level of current income, consistent with prudent investment risk, through investment in a diversified portfolio of freely marketable debt securities. The Trustees have authorized the issuance of two classes 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, redemption, 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/service expenses under the terms of a distribution plan, have exclusive voting rights regarding such distribution plan. Class C shares were outstanding in the current fiscal year during the period from January 1, 1995 through May 22, 1995, but were abolished by the trustees on August 28, 1995. Significant accounting policies of the Fund are as follows: VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or, at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost which approximates market value. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all of its taxable income, including any net realized gain on investment, to its shareholders. Therefore, no federal income tax provision is required. For Federal income tax purposes, the Fund has $20,654,741 of capital loss carryovers available, to the extent provided by regulations, to offset future realized capital gains. If such carryforwards are used by the Fund, no capital gain distributions will be made. The carryforwards expire as follows: December 31, 1996 -- $1,909,995, December 31, 1998 -- $755,945, December 31, 2000 -- $10,107,031, December 31, 2001 -- $1,711,432 and December 31, 2002 -- $6,170,338. Expired capital loss carryforwards are reclassified to capital paid-in in the year of expiration. Of the capital loss carryovers expiring in 1996, 1998, 2000 and 2001, $1,909,995, $755,945, $10,107,031 and $1,711,432, respectively, were acquired on 9/15/95 in the merger with John Hancock Investment Quality Bond Fund. Their availability may be limited in a given year. Additionally, net capital losses of $846,680 attributable to security transactions occurring after October 31, 1995 are treated as arising on the first day (January 1, 1996) of the Fund's current taxable year. DIVIDENDS, DISTRIBUTIONS AND INTEREST 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. Dividends paid by the Fund with respect to each class of shares will be calculated in the same manner, at the same time and 23 24 NOTES TO FINANCIAL STATEMENTS John Hancock Funds - Sovereign Bond Fund will be in the same amount, except for the effect of expenses that may be applied differently to each class as explained previously. 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 appropriate net assets of the respective classes. Distribution/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. 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. 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. 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". Each day, the futures contract is valued at the official settlement price of the board of trade or U.S. commodities exchange. 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", are 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 contract 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 fluctuations 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 transactions. At December 31, 1995, there were no open positions in financial futures. NOTE B -- MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS Under the present investment management contract, the Fund pays a monthly fee to the Adviser for a continuous investment program equivalent on an annual basis to the sum of (a) 0.50% of the first $1,500,000,000 of the Fund's average daily net asset value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next $500,000,000 and (d) 0.35% of the Fund's average daily net asset value in excess of $2,500,000,000. In the event normal operating expenses of the Fund, exclusive of certain expenses prescribed by state law, are in excess of the most restrictive state limit where the Fund is registered to sell shares of beneficial interest, the fee payable to the Adviser will be reduced to the extent of such excess and the Adviser will make additional arrangements necessary to eliminate any remaining excess expenses. The current limits are 2.5% of the first $30,000,000 of the Fund's average daily net asset value, 2.0% of the next $70,000,000 and 1.5% of the remaining average daily net asset value. The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH Funds"), a wholly-owned subsidiary of the Adviser. For the period ended December 31, 1995, net sales charges received with regard to sales of Class A shares amounted to $2,063,924. Out of this amount, $215,658 was retained and used for printing of prospectuses, advertising, sales literature and other purposes, and $188,165 was paid as sales commissions and first year service fees to unrelated broker-dealers and $1,660,101 was paid as sales commissions and first year service fees to sales personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of which are broker dealers. The Adviser's indirect parent, John Hancock Mutual Life Insurance Company, is the indirect sole shareholder of Distributors and John Hancock Freedom Securities Corporation and its subsidiaries, which include Tucker Anthony and Sutro. Class B shares which are redeemed within six years of purchase will be subject to a contingent deferred sales charge ("CDSC") at declining rates beginning at 5.0% of the lesser of the current market 24 25 NOTES TO FINANCIAL STATEMENTS John Hancock Funds-Sovereign Bond Fund 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 sale of Class B shares. For the period ended December 31, 1995, contingent deferred sales charges received by JH Funds amounted to $213,282. In addition, to compensate JH Funds for the services it provides as distributor 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 these 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 Investor Services Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley Financial Group. Prior to October 1, 1995, the Fund paid transfer agent fees as a class specific expense based on the number of shareholder accounts and certain out-of-pocket expenses. For the nine months ended September 30, 1995 the transfer agent expense, calculated as a class specific expense, was $3,386,770 for Class A, $97,393 for Class B and $328 for Class C, respectively. Effective October 1, 1995, transfer agent expense is a fund expense. Messrs. Edward J. Boudreau, Jr. and 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. Effective with the fees paid for 1995, 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 is marked to market on a periodic basis and income earned by the investment is recorded on the Fund's books. NOTE C -- INVESTMENT TRANSACTIONS Purchases and proceeds from sales and maturities of securities, other than obligations of the U.S. government and its agencies and short-term securities, during the period ended December 31, 1995, aggregated $629,041,385 and $526,006,053, respectively. Purchases and proceeds from sales of obligations of the U.S. government and its agencies, during the period ended December 31, 1995, aggregated $937,979,202 and $961,809,577, respectively. The cost of investments owned at December 31, 1995 (excluding the corporate savings account) for Federal income tax purposes was $1,603,487,408. Gross unrealized appreciation and depreciation of investments aggregated $58,103,914 and $15,750,011, respectively, resulting in net unrealized appreciation of $42,353,903. NOTE D -- REORGANIZATION On September 8, 1995, the shareholders of John Hancock Investment Quality Bond Fund (JHIQBF) approved a plan of reorganization between JHIQBF and the Fund providing for the transfer of substantially all of the assets and liabilities of JHIQBF to the Fund in exchange solely for Class A shares and Class B shares of the Fund. The acquisition was accounted for as a tax free exchange of 5,218,646 Class A shares, and 493,051 Class B shares of John Hancock Sovereign Bond Fund for the net assets of JHIQBF, which amounted to $78,550,023 and $7,421,307 for Class A and Class B shares, respectively, including $730,736 of unrealized appreciation, after the close of business at September 15, 1995. 25 26 John Hancock Funds - Sovereign Bond Fund REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Trustees and Shareholders of John Hancock Sovereign Bond Fund We have audited the accompanying statement of assets and liabilities of John Hancock Sovereign Bond Fund (the "Fund"), including the schedule of investments, as of December 31, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995, by correspondence with the custodian and brokers or other appropriate audit procedures when replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of John Hancock Sovereign Bond Fund at December 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and financial highlights for each of the indicated periods, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts February 9, 1996 TAX INFORMATION NOTICE (UNAUDITED) For Federal Income Tax purposes, the following information is furnished with respect to the taxable distributions of the Fund for its fiscal year ended December 31, 1995. Corporate Dividends Received Deduction: None of the 1995 dividends qualify for the corporate dividends received deduction. U.S. Government Obligations: Income from these investments may be exempt from certain state and local taxes. The percentage of assets invested in U.S. Treasury bonds, bills, and notes was 20.72% at year end. The percentage of income derived from U.S. Treasury bonds, bills, and notes was 20.07%. The percentage of assets invested in obligations of other U.S. government agencies (excluding securities issued by Federal National Mortgage Association and Government National Mortgage Association) was 1.41% at year end. The percentage of income derived from these investments was 0.74% For specific information on exemption provisions in your state, consult your local state tax office or your tax adviser. 26 27 NOTES John Hancock Funds - Sovereign Bond Fund 27 28 [LOGO] JOHN HANCOCK FUNDS Bulk Rate A GLOBAL INVESTMENT MANAGEMENT FIRM U.S. Postage 101 HUNTINGTON AVENUE BOSTON, MA 02199-7603 PAID Brockton, MA Permit No. 582 [A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page. A box sectioned in quadrants with a triangle in upper left, a circle in upper right, a cube in lower left and a diamond in lower right. A tag line below reads: "A Global Investment Management Firm."] [A recycled logo in lower left hand corner with the caption " Printed on Recycled Paper."] - -------------------------------------------------------------------------------- This report is for the information of shareholders of the John Hancock Sovereign Bond Fund. It may be used as sales literature when preceded or accompanied by the current prospectus, which details charges, investment objectives and operating policies. JHD 2100A 12/95 2/96 -----END PRIVACY-ENHANCED MESSAGE-----