-----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, Fp5Rni2KySrvd/PfnG99J5FiQCG+VYnsJcGZMPZJ14bTQ3g2sCAluKQNfLYkS0z/ wMLVPXR3oKDfhIzM63lzWA== 0001010521-98-000091.txt : 19980203 0001010521-98-000091.hdr.sgml : 19980203 ACCESSION NUMBER: 0001010521-98-000091 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980202 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-30D SEC ACT: SEC FILE NUMBER: 811-02402 FILM NUMBER: 98519119 BUSINESS ADDRESS: STREET 1: 101 HUNTINGTON AVE STREET 2: JOHN HANCOCK FUNDS CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6173751702 MAIL ADDRESS: STREET 1: JOHN HANCOCK FUNDS STREET 2: 101 HUNTINGTON AVENUE CITY: BOSTON STATE: MA ZIP: 02199 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-30D 1 JOHN HANCOCK SOVEREIGN BOND FUND SEMIANNUAL REPORT - -------------------------------------------------------------------------------- Sovereign Bond Fund NOVEMBER 30, 1997 [LOGO] JOHN HANCOCK FUNDS A Global Investment Management Firm --------------------------------------- TRUSTEES EDWARD J. BOUDREAU, JR. DENNIS S. ARONOWITZ* RICHARD P. CHAPMAN, JR.* WILLIAM J. COSGROVE* DOUGLAS M. COSTLE* LELAND O. ERDAHL* RICHARD A. FARRELL* GAIL D. FOSLER* WILLIAM F. GLAVIN* ANNE C. HODSDON DR. JOHN A. MOORE* PATTI MCGILL PETERSON* JOHN W. PRATT* RICHARD S. SCIPIONE EDWARD J. SPELLMAN* *Members of the Audit Committee OFFICERS EDWARD J. BOUDREAU, JR. Chairman and Chief Executive Officer ROBERT G. FREEDMAN Vice Chairman and Chief Investment Officer ANNE C. HODSDON President JAMES B. LITTLE Senior Vice President and Chief Financial Officer SUSAN S. NEWTON Vice President and Secretary JAMES J. STOKOWSKI Vice President and Treasurer THOMAS H. CONNORS Second Vice President and Compliance Officer CUSTODIAN INVESTORS BANK & TRUST COMPANY 200 CLARENDON STREET BOSTON, MASSACHUSETTS 02116 TRANSFER AGENT JOHN HANCOCK SIGNATURE SERVICES, INC. 1 JOHN HANCOCK WAY, SUITE 1000 BOSTON, MASSACHUSETTS 02217-1000 INVESTMENT ADVISER JOHN HANCOCK ADVISERS, INC. 101 HUNTINGTON AVENUE BOSTON, MASSACHUSETTS 02199-7603 PRINCIPAL DISTRIBUTOR JOHN HANCOCK FUNDS, INC. 101 HUNTINGTON AVENUE BOSTON, MASSACHUSETTS 02199-7603 LEGAL COUNSEL HALE AND DORR LLP 60 STATE STREET BOSTON, MASSACHUSETTS 02109-1803 --------------------------------------- ===============================CHAIRMAN'S MESSAGE=============================== DEAR FELLOW SHAREHOLDERS: The financial markets in 1997 have been anything but dull. Bond investors have enjoyed the benefits of a strong economy with no inflation. Stock investors have been treated to record-breaking performance by the Dow Jones Industrial Average, but with record-breaking volatility. After two years of strong advances with relatively minor swings, the stock market's recent sharp drops and enormous rebounds have caused a fair share of investor concern. [A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive Officer, flush right, next to second paragraph.] The latest round came in October and was largely due to uncertainty in foreign markets. Southeast Asia sneezed and the rest of the world caught a cold. On October 27, the Dow experienced its largest one-day point decline, dropping 554 points. In percentage terms, however, that roughly 7% decline didn't even register on the list of 10 largest drops. The next day, the market bounced right back, as the Dow had a record one-day vault of 337 points. In short order, the U.S. market had stabilized, yet many markets remained edgy as investors sorted out the Asian turmoil and its implications on economic growth, interest rates and corporate earnings. In the face of such uncertainty, a trusted investment professional can be your best ally. Now, more than ever, your investment professional can help you take the emotion out of investment decisions. At a time when your instincts might have you react to the heat of the market's moment, your investment professional can serve as an objective voice to put current events in a longer-term perspective. He or she can also help you evaluate your investments in any market environment to ensure that they fit your risk tolerance and time horizons. On an ongoing basis, your investment professional is there for you to check out new investment ideas or to get an informed opinion about current economic and market conditions. We encourage you to take advantage of this important resource. Working together, you can draw up a detailed road map to help reach your financial destination regardless of the conditions along the way. Sincerely, /s/ Edward J. Boudreau, Jr. EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER 2 ================================================================================ BY JAMES K. HO, CFA, PORTFOLIO MANAGER John Hancock Sovereign Bond Fund Tame inflation, moderate economy trigger bond rally Bond investors fared well over the last six months, as interest rates mostly moved down and prices rose. When the period began in June, bonds were rallying on economic data that suggested growth was slowing from its torrid first-quarter pace and that inflation remained tame. In mid July, however, volatility increased and bonds had a setback when monthly economic data suggested the economy was picking up steam. Yet for all investors' fears, inflation remained dormant, and bonds turned upward again in early September and maintained their march through the period's end. In large part the bond surge reflected the market's growing confidence in the notion that the Federal Reserve was not going to raise interest rates again to slow down the economy, given its moderating pace and subdued inflation. Other factors keeping the Fed neutral were the strength of the U.S. dollar, which eroded the overseas profits of multinational companies, and the credit and currency woes that struck Southeast Asia in the summer. These events served to further ease U.S. inflation fears. Yet the shock waves in the Pacific Rim reverberated throughout world markets in October, after the fears of currency devaluations spread to Latin America. As equity markets plunged worldwide, investors in a classic "flight to safety" headed for the security of the more stable U.S. market, and U.S. Treasury bonds in particular. In this brief period, U.S. corporate bonds -- both investment-grade and lower-rated high-yield bonds -- saw their prices drop sharply compared to Treasuries, cutting short their uphill charge. Emerging-market bonds were hardest hit by the turbulence. By the end of November, however, stability returned to most of the U.S. corporate market, "Bond investors fared well over the last six months..." [A 2 1/4" x 3 1/4" photo of Fund management team at bottom right. Caption reads: "Jim Ho (seated) and Fund management team members (l-r): Lester Duke, Beverly Cleathero, Seth Robbins and Linda Carter."] 3 ================================================================================ John Hancock Funds - Sovereign Bond Fund - -------------------------------------------------------------------------------- TOP FIVE BOND SECTORS [Chart with the heading "Top Five Bond Sectors" at top of left hand column. The chart lists five sectors: 1) U.S. Government & Agencies 29% 2) Banks/Financials 22% 3) Utilities 13% 4) Media 7% 5) Transport 6%. A footnote below states: "As a percentage of net assets on November 30, 1997."] As a percentage of net assets on November 30, 1997 - -------------------------------------------------------------------------------- while uncertainty still abounded in the emerging markets. Despite the late-period turbulence, it was a rewarding time for bond investors, and John Hancock Sovereign Bond Fund was no exception. For the six months ended November 30, 1997, the Fund's Class A and Class B shares posted total returns of 6.38% and 6.01%, respectively, at net asset value. Those results were in line with the 6.58% return of the average corporate debt A-rated fund, according to Lipper Analytical Services, Inc.(1) Longer-term performance can be found on pages six and seven. Timely moves, defensive strategy pay off We believe that the key to the Fund's steady long-term performance lies in our in-depth research analysis that helps us both anticipate market moves and know which credits to buy and to avoid. What's more, we maintain such a highly diversified portfolio that the Fund feels the effects less when any sector or specific credit has a downturn. Our timely moves this period helped us successfully maneuver through the late-period pitfalls. We sold some of our corporate bonds in anticipation that their prices, which had risen steadily with the robust U.S. economy, would begin to come down as turbulence increased. In particular, we avoided the most volatile emerging markets, including Thailand, Malaysia and Korea, by selling our small positions there ahead of the worst turmoil. In early summer, for example, we sold a Bangkok Bank bond for only slightly less than what we had paid for it earlier in the year. By the end of October, its price had plunged as the spread, or difference, between its yield and that of U.S. Treasuries widened from 155 basis points (1.5%) when we bought it, to more than 600 basis points (6.0%) at the end of November. We also eliminated our small exposure to Hong Kong. Although we didn't completely escape price declines as we sold our stake, we managed to keep our losses down. In their place, we upped our stake in U.S. Treasury and government agency bonds, which rose to 29% of the Fund's net assets. That defensive strategy served us well in October and November as Treasuries were the biggest beneficiaries of the market concerns. Once we felt that bond prices had bottomed out, we tried to capture the upswing by buying some U.S. high-grade corporate bonds that had been particularly hard hit, many of them unfairly so given their solid credits. We've already seen some prices rebound. Furthermore, we bought some new-issue high-yield bonds that came to the market at attractive prices amid the market's hysteria. High-yield and emerging markets stumble As long-time Sovereign Bond Fund investors "...we avoided the most volatile emerging markets..." [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 MetroNet Communications followed by an up arrow and the phraseImproving fundamentals and equity issuance." The second listing is Cleveland Electric followed by an up arrow and the phrase "Takeover by Ohio Edison." The third listing MRS Logistica followed by a down arrow and the phrase "Bond prices fall with Asian turmoil." Footnote below reads: "See "Schedule of Investments." Investment holdings are subject to change."] 4 ================================================================================ John Hancock Funds - Sovereign Bond Fund - -------------------------------------------------------------------------------- FUND PERFORMANCE For the six months ended November 30, 1997 [Bar chart with heading "Fund Performance" at top of left hand column. Under the heading is the footnote: "For the year ended November 30, 1997." The chart is scaled in increments of 2% from bottom to top, with 8% at the top and 0% at the bottom. Within the chart, there are three solid bars. The first represents the 6.38% total return for John Hancock Sovereign Bond Fund: Class A. The second represents the 6.01% total return for John Hancock Sovereign Bond Fund: Class B. The third represents the 6.58% 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 corporate debt A-rated fund is tracked by Lipper Analytical Services, Inc. (1) See the following two pages for historical performance information."] Total returns for John Hancock Sovereign Bond Fund are at net asset value with all distributions reinvested. The average corporate debt A-rated fund is tracked by Lipper Analytical Services, Inc.(1) See the following two pages for historical performance information. - -------------------------------------------------------------------------------- know, we maintain the Fund's average A credit rating by investing in a mix of U.S. government bonds, investment-grade corporate bonds and, to a lesser extent, high-yield bonds whose credit ratings are below investment grade. As we mentioned earlier, high-yield bonds, including those in emerging markets, were hardest hit at the end of the period, and the Fund was not immune to that downturn. Most notably, our Brazilian corporate bonds, such as rail transport company MRS Logistica and Voto-Votorantim Overseas Trading Operations, a major conglomerate, suffered price drops. Our bonds of Indonesian paper company Indah Kiat also suffered by association with its country's woes. Yet we remain convinced that these world-class companies are likely to withstand the currency volatility, given their strong sources of dollar-based revenues. A look ahead In our view, there is still room for interest rates to come down more and for bonds to do well in 1998. Recent worldwide events suggest that the trend is toward slower, rather than faster, economic growth. As the Asian countries try to export their way back to financial health, their weaker currencies and therefore less expensive products will keep the pricing pressure on -- and inflation low. Given this scenario, it's fairly certain that the Fed will stay on the sidelines for now and not raise rates again. In fact, the next move could even be a rate decrease, something the market could begin to anticipate happening some time in 1998. With this outlook, we'll keep the Fund's duration -- a measure of the Fund's sensitivity to changes in interest rates -- neutral or slightly longer to capture the benefits of any more rate drops. The longer the duration, the more the Fund's share price moves with changes in interest rates. Credit selection will remain as important as ever, since a slowdown in economic growth could put pressure on corporate bond prices later in the year. For now, we'll minimize our investments in the emerging markets until there are further signs that the crisis has passed. Until then, heavier exposure to this sector would present too much volatility for this type of fund. "...there is still room for interest rates to come down more..." - -------------------------------------------------------------------------------- This commentary reflects the views of the portfolio manager through the end of the Fund's period discussed in this report. Of course, the manager's views are subject to change as market and other conditions warrant. (1) Figures from Lipper Analytical Services, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower. 5 ================================================================================ John Hancock Funds - Sovereign Bond Fund - -------------------------------------------------------------------------------- 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 measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. For Class A shares, total return figures include a maximum applicable sales charge of 4.5%. Class B performance reflects a maximum contingent deferred sales charge (maximum 5% and declining to 0% over six years). All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Please read your prospectus carefully before you invest or send money. - -------------------------------------------------------------------------------- CLASS A - -------------------------------------------------------------------------------- For the period ended September 30, 1997 ONE FIVE TEN YEAR YEARS YEARS ---- ----- ----- Cumulative Total Returns 5.73% 37.99% 139.78% Average Annual Total Returns 5.73% 6.65% 9.14% - -------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------- For the period ended September 30, 1997 SINCE ONE INCEPTION YEAR (11/23/93) ---- ---------- Cumulative Total Returns 4.95% 25.00% Average Annual Total Returns 4.95% 5.97% - -------------------------------------------------------------------------------- YIELDS - -------------------------------------------------------------------------------- As of November 30, 1997 SEC 30-DAY YIELD ---------- John Hancock Sovereign Bond Fund: Class A 5.96% John Hancock Sovereign Bond Fund: Class B 5.55% 6 ================================================================================ John Hancock Funds - Sovereign Bond Fund - -------------------------------------------------------------------------------- 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, assuming all distributions were reinvested for the period indicated. 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. Past performance is not indicative of future results. 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 $26,529 as of November 30, 1997. The second line represents the value of the hypothetical $10,000 investment made in the Sovereign Bond Fund, on May 31, 1987, before sales charge, and is equal to $24,915 as of November 30, 1997. The third line represents the value of the Sovereign Bond Fund, after sales charge, and is equal to $23,794 as of November 30, 1997.] 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 Lehman Brothers Corporate Bond Index and is equal to $13,062 as of November 30, 1997. The second line represents the value of the hypothetical $10,000 investment made in the Sovereign Bond Fund, on November 23, 1993, and is equal to $12,957 as of November 30, 1997. The third line represents the value of the Sovereign Bond Fund, after sales charge, and is equal to $12,757as of November 30, 1997.] 7 ==============================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 November 30, 1997. You'll also find the net asset value and the maximum offering price per share as of that date. Statement of Assets and Liabilities November 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- Assets: Investments at value -- Note C: Bonds (cost $1,416,657,498) ............................. $1,441,119,110 Joint repurchase agreement (cost $53,385,000) ........... 53,385,000 Corporate savings account ............................... 969 --------------- 1,494,505,079 Receivable for investments sold .......................... 4,908,726 Receivable for shares sold ............................... 231,709 Interest receivable ...................................... 27,854,926 Other assets ............................................. 78,502 --------------- Total Assets ........................... 1,527,578,942 ----------------------------------------------------------- Liabilities: Payable for investments purchased ........................ 20,962,089 Payable for shares repurchased ........................... 408,001 Dividend payable ......................................... 1,390,192 Payable to John Hancock Advisers, Inc. ................... and affiliates -- Note B ................................ 1,233,481 Accounts payable and accrued expenses .................... 353,820 --------------- Total Liabilities ...................... 24,347,583 ----------------------------------------------------------- Net Assets: Capital paid-in .......................................... 1,494,334,880 Accumulated net realized loss on investments and financial futures contracts ............................. (15,599,152) Net unrealized appreciation of investments ............... 24,473,349 Undistributed net investment income ...................... 22,282 --------------- Net Assets ............................. $1,503,231,359 =========================================================== Net Asset Value Per Share: (Based on net asset values and shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) Class A -- $1,354,060,064/89,177,463 ..................... $15.18 ============================================================================= Class B -- $149,171,295/9,824,319 ........................ $15.18 ============================================================================= Maximum Offering Price Per Share* Class A -- ($15.18 x 104.71%) ............................ $15.90 ============================================================================= * On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced. The Statement of Operations summarizes the Fund's investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. Statement of Operations Six months ended November 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- Investment Income: Interest ................................................... $61,174,192 ------------ Expenses: Investment management fee -- Note B ....................... 3,785,010 Distribution and service fee-- Note B Class A ................................................. 2,057,857 Class B ................................................. 712,423 Transfer agent fee -- Note B .............................. 1,868,689 Custodian fee ............................................. 150,637 Financial services fee -- Note B .......................... 135,171 Trustees' fees ............................................ 66,282 Printing .................................................. 24,449 Auditing fee .............................................. 22,792 Registration and filing fees .............................. 18,664 Miscellaneous ............................................. 16,976 Legal fees ................................................ 4,236 ------------ Total Expenses ........................... 8,863,186 ----------------------------------------------------------- Net Investment Income .................... 52,311,006 ----------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts: Net realized gain on investments sold ...................... 2,898,209 Net realized gain on financial futures contracts ........... 195,978 Change in net unrealized appreciation/depreciation of investments .......................................... 37,939,381 Change in net unrealized appreciation/depreciation of financial futures contracts .......................... (71,000) ------------ Net Realized and Unrealized Gain on Investments and Financial Futures Contracts .............. 40,962,568 ----------------------------------------------------------- Net Increase in Net Assets Resulting from Operations ................ $93,273,574 =========================================================== SEE NOTES TO FINANCIAL STATEMENTS. 8 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund Statement of Changes in Net Assets - --------------------------------------------------------------------------------
PERIOD FROM SIX MONTHS ENDED YEAR ENDED JANUARY 1, 1997 TO NOVEMBER 30, 1997 DECEMBER 31, 1996 MAY 31, 1997(1) (UNAUDITED) ----------------- --------------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income ............................................. $113,173,641 $45,682,556 $52,311,006 Net realized gain (loss) on investments sold and financial futures contracts ..................................... (7,543,254) (2,662,527) 3,094,187 Change in net unrealized appreciation/depreciation of investments and financial futures contracts .................. (45,633,903) (10,582,752) 37,868,381 --------------- --------------- --------------- Net Increase in Net Assets Resulting from Operations ............. 59,996,484 32,437,277 93,273,574 --------------- --------------- --------------- Distributions to Shareholders: Distributions from net investment income Class A - ($1.0858, $0.4449 and $0.5300 per share, respectively) .................................................. (105,555,822) (41,557,976) (48,383,038) Class B - ($0.9813, $0.4021 and $0.4772 per share, respectively) .................................................. (7,590,937) (3,536,786) (4,520,362) --------------- --------------- --------------- Total Distributions to Shareholders ............................ (113,146,759) (45,094,762) (52,903,400) --------------- --------------- --------------- From Fund Share Transactions - Net: * ............................... (30,564,714) (42,760,453) (31,948,428) --------------- --------------- --------------- Net Assets: Beginning of period ............................................... 1,633,942,540 1,550,227,551 1,494,809,613 --------------- --------------- --------------- End of period (including undistributed net investment income of $26,882, $614,676 and $22,282, respectively) .................. $1,550,227,551 $1,494,809,613 $1,503,231,359 =============== =============== =============== * Analysis of Fund Share Transactions: PERIOD FROM SIX MONTHS ENDED YEAR ENDED JANUARY 1, 1997 NOVEMBER 30, 1997 DECEMBER 31, 1996 TO MAY 31, 1997(1) (UNAUDITED) ---------------------------- ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------ ------------- ------------ ------------- ------------ ------------- CLASS A Shares sold ........................ 12,026,163 $178,554,337 15,151,869 $223,145,238 5,442,428 $81,706,957 Shares issued to shareholders in reinvestment of distributions ..... 5,504,983 81,567,467 2,161,346 31,871,020 2,429,324 36,717,914 ------------ ------------- ------------ ------------- ------------ ------------- 17,531,146 260,121,804 17,313,215 255,016,258 7,871,752 118,424,871 Less shares repurchased ............ (22,184,916) (329,117,996) (20,200,777) (297,599,361) (10,844,397) (162,952,475) ------------ ------------- ------------ ------------- ------------ ------------- Net decrease ....................... (4,653,770) ($68,996,192) (2,887,562) ($42,583,103) (2,972,645) ($44,527,604) ============ ============= ============ ============= ============ ============= CLASS B Shares sold ........................ 6,495,177 $96,388,497 1,583,824 $23,396,615 1,470,979 $22,182,916 Shares issued to shareholders in reinvestment of distributions ..... 297,182 4,401,471 137,791 2,031,711 165,099 2,496,980 ------------ ------------- ------------ ------------- ------------ ------------- 6,792,359 100,789,968 1,721,615 25,428,326 1,636,078 24,679,896 Less shares repurchased ............ (4,203,557) (62,358,490) (1,730,811) (25,605,676) (803,012) (12,100,720) ------------ ------------- ------------ ------------- ------------ ------------- Net increase (decrease) ............ 2,588,802 $38,431,478 (9,196) ($177,350) 833,066 $12,579,176 ============ ============= ============ ============= ============ =============
(1) Effective May 31, 1997, the fiscal period end changed from December 31 to May 31. The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous period. The difference reflects earnings less expenses, any investment gains and losses, distributions paid to shareholders, and any increase or decrease in money shareholders invested in the Fund. The footnote illustrates the number of Fund shares sold, reinvested and repurchased during the last three periods, along with the corresponding dollar value. SEE NOTES TO FINANCIAL STATEMENTS. 9 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- CLASS A Per Share Operating Performance Net Asset Value, Beginning of Period ......... $15.31 $15.29 $15.53 $13.90 $15.40 ---------- ---------- ---------- ---------- ---------- Net Investment Income ........................ 1.20 1.14 1.12 1.12 1.09 Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts .......................... (0.01) 0.62 (1.55) 1.50 (0.50) ---------- ---------- ---------- ---------- ---------- Total from Investment Operations ........... 1.19 1.76 (0.43) 2.62 0.59 ---------- ---------- ---------- ---------- ---------- Less Distributions: Dividends from Net Investment Income ......... (1.21) (1.14) (1.12) (1.12) (1.09) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts .......................... -- (0.38) (0.08) -- -- ---------- ---------- ---------- ---------- ---------- Total Distributions ........................ (1.21) (1.52) (1.20) (1.12) (1.09) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period ............... $15.29 $15.53 $13.90 $15.40 $14.90 ========== ========== ========== ========== ========== Total Investment Return at Net Asset Value (1) 8.08% 11.80% (2.75%) 19.40% 4.11% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) ..... $1,386,260 $1,505,754 $1,326,058 $1,535,204 $1,416,116 Ratio of Expenses to Average Net Assets ...... 1.44% 1.41% 1.26% 1.13% 1.14% Ratio of Net Investment Income to Average Net Assets ......................... 7.89% 7.18% 7.74% 7.58% 7.32% Portfolio Turnover Rate ...................... 87% 107% 85% 103%(6) 123% SIX MONTHS ENDED PERIOD FROM NOVEMBER 30, JANUARY 1, 1997 1997 TO MAY 31, 1997(7) (UNAUDITED) --------------- ----------------- CLASS A Per Share Operating Performance Net Asset Value, Beginning of Period ......... $14.90 $14.78 ---------- ---------- Net Investment Income ........................ 0.44 0.53(8) Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts .......................... (0.12) 0.40 ---------- ---------- Total from Investment Operations ........... 0.32 0.93 ---------- ---------- Less Distributions: Dividends from Net Investment Income ......... (0.44) (0.53) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts .......................... -- -- ---------- ---------- Total Distributions ........................ (0.44) (0.53) ---------- ---------- Net Asset Value, End of Period ............... $14.78 $15.18 ========== ========== Total Investment Return at Net Asset Value (1) 2.22%(3) 6.38%(3) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) ..... $1,361,924 $1,354,060 Ratio of Expenses to Average Net Assets ...... 1.11%(4) 1.10%(4) Ratio of Net Investment Income to Average Net Assets ......................... 7.38%(4) 6.97%(4) Portfolio Turnover Rate ...................... 58% 76%
CLASS B (2) Per Share Operating Performance Net Asset Value, Beginning of Period ..................... $15.90 $15.52 $13.90 $15.40 ---------- ---------- ---------- ---------- Net Investment Income .................................... 0.11 1.04 1.02 0.98 Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts ...................................... -- (1.54) 1.50 (0.50) ---------- ---------- ---------- ---------- Total from Investment Operations ....................... 0.11 (0.50) 2.52 0.48 ---------- ---------- ---------- ---------- Less Distributions: Dividends from Net Investment Income ..................... (0.11) (1.04) (1.02) (0.98) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts ...................................... (0.38) (0.08) -- -- ---------- ---------- ---------- ---------- Total Distributions .................................... (0.49) (1.12) (1.02) (0.98) ---------- ---------- ---------- ---------- Net Asset Value, End of Period ........................... $15.52 $13.90 $15.40 $14.90 ========== ========== ========== ========== Total Investment Return at Net Asset Value (1) ........... 0.90%(3) (3.13%) 18.66% 3.38% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) ................. $4,125 $40,299 $98,739 $134,112 Ratio of Expenses to Average Net Assets .................. 1.63%(4) 1.78% 1.75% 1.84% Ratio of Net Investment Income to Average Net Assets ..................................... 0.57%(4) 7.30% 6.87% 6.62% Portfolio Turnover Rate .................................. 107% 85% 103%(6) 123% CLASS B (2) Per Share Operating Performance Net Asset Value, Beginning of Period ..................... $14.90 $14.78 ---------- ---------- Net Investment Income .................................... 0.40 0.48(8) Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts ...................................... (0.12) 0.40 ---------- ---------- Total from Investment Operations ....................... 0.28 0.88 ---------- ---------- Less Distributions: Dividends from Net Investment Income ..................... (0.40) (0.48) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts ...................................... -- -- ---------- ---------- Total Distributions .................................... (0.40) (0.48) ---------- ---------- Net Asset Value, End of Period ........................... $14.78 $15.18 ========== ========== Total Investment Return at Net Asset Value (1) ........... 1.93%(3) 6.01%(3) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) ................. $132,885 $149,171 Ratio of Expenses to Average Net Assets .................. 1.81%(4) 1.80%(4) Ratio of Net Investment Income to Average Net Assets ..................................... 6.68%(4) 6.27%(4) Portfolio Turnover Rate .................................. 58% 76%
SEE NOTES TO FINANCIAL STATEMENTS. 10 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund Financial Highlights (continued) - --------------------------------------------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, MAY 22, 1995 1993 1994 (UNAUDITED) ------------ ------------ ------------ CLASS C (5) Per Share Operating Performance Net Asset Value, Beginning of Period ................... $15.86 $15.52 $13.90 ------ ------ ------ Net Investment Income .................................. 0.81 1.19 0.42 Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts ...................... 0.04 (1.54) 0.91 ------ ------ ------ Total from Investment Operations ..................... 0.85 (0.35) 1.33 ------ ------ ------ Less Distributions: Dividends from Net Investment Income ................... (0.81) (1.19) (0.43) Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts ................. (0.38) (0.08) -- ------ ------ ------ Total Distributions .................................. (1.19) (1.27) (0.43) ------ ------ ------ Net Asset Value, End of Period ......................... $15.52 $13.90 $14.80 ====== ====== ====== Total Investment Return at Net Asset Value (1) ......... 5.45%(3) (2.19%) 9.73%(3) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) ............... $867 $1,670 $142 Ratio of Expenses to Average Net Assets ................ 0.90%(4) 0.73% 0.67%(4) Ratio of Net Investment Income to Average Net Assets ... 4.90%(4) 8.28% 7.82%(4) Portfolio Turnover Rate ................................ 107% 85% N/A
(1) Assumes dividend reinvestment and does not reflect the effect of sales charges. (2) Class B shares commenced operations on November 23, 1993. (3) Not annualized. (4) Annualized. (5) 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. (6) Portfolio turnover excludes merger activity. (7) Effective May 31, 1997, the fiscal period end changed from December 31 to May 31. (8) Based on the average of the shares outstanding at the end of each month. The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net investment income, gains (losses), dividends and total investment 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. 11 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund Schedule of Investments November 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by Sovereign Bond Fund on November 30, 1997. It's divided into two main categories: bonds and short-term investments. The bonds are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last.
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ BONDS Aerospace (0.49%) Jet Equipment Trust, Equipment Trust Cert Ser 95B2 08-15-14 (R) .................................. 10.910% BBB- $5,800 $7,370,814 -------------- Banks - Foreign (3.04%) Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 (Y) ...................................... 8.200 AA- 10,000 10,870,700 African Development Bank, Sub Note (Supra National) 12-15-03 (Y) ...................................... 9.750 AA- 8,000 9,411,760 International Bank for Reconstruction & Development, Deb 09-01-16 ................................................................ 8.250 AAA 5,000 6,023,700 Landeskreditbank Baden - Wuerttemberg, Sub Note (Germany) 02-01-23 (Y) ............................................. 7.625 AAA 6,820 7,625,851 Scotland International Finance No. 2 B.V., Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) ................................. 8.850 A+ 10,250 11,771,069 -------------- 45,703,080 -------------- Banks - United States (4.95%) ABN-Amro Bank N.V. - Chicago Branch, Gtd Sub Deb 05-31-05 ........................................................ 7.250 AA- 5,000 5,214,350 Bank of New York, Cap Security 12-01-26 (R) ................................................... 7.780 A- 5,425 5,562,524 Banque National de Paris - New York Branch, Sub Note 01-15-07 ........................................................... 7.200 A 4,890 5,017,776 Barclays North American Capital Corp., Gtd Cap Note 05-15-21 ....................................................... 9.750 AA- 8,925 10,044,106 National Westminster Bank Plc - New York Branch, Sub Note 05-01-01 ........................................................... 9.450 AA- 10,000 10,905,000 NB Capital Trust IV, Cap Security 04-15-27 ....................................................... 8.250 A- 5,040 5,450,155 RBSG Capital Corp., Gtd Cap Note 03-01-04 ....................................................... 10.125 A+ 10,605 12,516,551 Security Pacific Corp., Medium Term Sub Note 05-09-01 ............................................... 10.360 A1 6,000 6,747,480 Sub Note 11-15-00 ........................................................... 11.500 A 6,400 7,271,616 State Street Institutional Capital B, Cap Security 03-15-27 (R) ................................................... 8.035 A 5,335 5,641,762 -------------- 74,371,320 --------------
SEE NOTES TO FINANCIAL STATEMENTS. 12 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Broker Services (0.33%) CS First Boston, Sub Note 05-15-06 (R) ....................................................... 7.750% AA- $4,635 $4,933,587 -------------- Building (0.52%) Georgia-Pacific Corp., Deb 01-15-18 ................................................................ 9.750 BBB- 7,500 7,825,275 -------------- Chemicals (0.53%) OPP Petroquimica S.A., Bond (Brazil) 10-29-04 (R) (Y) .............................................. 11.000 B+ 5,095 4,738,350 Sociedad Quimica y Minera de Chile S.A., Loan Part Ctf (Chile) 09-15-06 (R) (Y) ...................................... 7.700 BBB+ 3,200 3,268,000 -------------- 8,006,350 -------------- Containers (0.58%) Riverwood International Corp., Gtd Sr Sub Note 04-01-08 .................................................... 10.875 CCC+ 2,790 2,734,200 Stone Container Corp., Unit (Sr Sub Deb & Supplemental Interest Cert) 04-01-02 ..................... 12.250 B- 5,720 5,948,800 -------------- 8,683,000 -------------- Cosmetics & Personal Care (0.46%) Johnson & Johnson, Deb 11-15-23 ................................................................ 6.730 AAA 6,750 6,843,285 -------------- Energy (1.07%) AES China Generating Co. Ltd., Note (China) 12-15-06 (Y) ................................................... 10.125 BB- 2,670 2,710,050 AES Corp., Sr Sub Note 07-15-06 ........................................................ 10.250 B+ 6,005 6,440,362 Sr Sub Note 08-15-07 ........................................................ 8.375 B+ 2,475 2,477,022 CalEnergy Co. Inc., Sr Note 09-15-06 ............................................................ 9.500 BB- 4,115 4,440,949 -------------- 16,068,383 -------------- Finance (8.12%) American Express Co., Gtd Deb Ser D 12-12-00 ...................................................... 11.625 A+ 8,670 8,896,920 Chrysler Financial Corp., Deb 11-01-99 ................................................................ 12.750 A 3,000 3,341,040 CIT Group Holdings, Inc., Deb 03-15-01 ................................................................ 9.250 A 5,000 5,437,150 Constitution Capital Trust I, Cap Security 04-15-27 (R) ................................................... 9.150 BBB 3,725 4,142,982 ContiFinancial Corp., Sr Note 08-15-03 ............................................................ 8.375 BB+ 3,525 3,657,187 DR Investments, Sr Note 05-15-07 (R) ........................................................ 7.450 A- 4,500 4,753,620
SEE NOTES TO FINANCIAL STATEMENTS. 13 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Finance (continued) DSPL Finance Co. B.V., Gtd Sr Sec Note (Netherlands) 12-30-10 (R) (Y) .............................. 9.120% BBB $5,000 $5,118,750 Ford Motor Credit Co., Note 12-08-05 ............................................................... 6.250 A 4,085 4,012,205 Green Tree Home Improvement Loan Trust, Pass Thru Ctf Ser 1995-D Class M-1 09-15-25 ................................. 6.950 Aa2 6,130 6,181,676 IMC Home Equity Loan Trust, Pass Thru Ctf Ser 1996-1 Class A-5 12-25-13 ................................. 6.290 AAA 6,816 6,759,555 Industrial Credit & Investment Corporation of India Ltd., Note (India) 08-15-07 (R) (Y) ............................................... 7.550 BB+ 4,695 4,061,175 MBNA Master Credit Card Trust, Ser 1995-D Class A 11-15-02 ................................................. 6.050 AAA 16,075 16,014,719 Merrill Lynch Mortgage Investors, Inc., Sub Bond Ser 1992-B Class B 04-15-12 ........................................ 8.500 Aaa 2,415 2,455,303 Midland American Capital Corp., Gtd Deb 11-15-03 ............................................................ 12.750 A 19,932 21,106,991 Standard Credit Card Master Trust, Credit Card Part Cert Ser 1995-9 Class A 10-07-07 ........................... 6.550 AAA 5,815 5,842,214 Credit Card Part Ctf Ser 1995-10 Class A 02-07-01 ........................... 5.900 AAA 4,580 4,568,550 Superior National Capital Trust I, Gtd Trust Preferred Security 12-01-17 (R) ................................... 10.750 BB 1,620 1,620,000 United Companies Financial Corp., Sr Note 01-15-04 ............................................................ 7.700 BBB- 5,420 5,419,621 Voto-Votorantim Overseas Trading Operations N.V., Gtd Note (Netherlands) 06-27-05 (Y) ......................................... 8.500 BB- 4,870 4,273,425 Yanacocha Receivables, Pass Thru Cert Ser 1997-A 06-15-05 (R) ...................................... 8.400 BBB- 4,391 4,456,510 -------------- 122,119,593 -------------- Funeral Services & Related (0.47%) Loewen Group International, Inc., Gtd Sr Note Ser 4 10-15-03 .................................................. 8.250 BB+ 6,860 7,134,400 -------------- Glass Products (0.30%) VICAP S.A. de C.V., Gtd Sr Note (Mexico) 05-15-07 (R) (Y) ....................................... 11.375 B+ 4,140 4,491,900 -------------- Government - Foreign (3.89%) Croatia, Republic of, Government Bond (Croatia) 02-27-02 (R) (Y) .................................. 7.000 BBB- 4,600 4,591,375 Nova Scotia, Province of, Deb (Canada) 05-15-13 (Y) ................................................... 11.500 A- 10,655 11,382,417 Deb (Canada) 04-01-22 (Y) ................................................... 8.750 A- 7,500 9,234,075 Ontario, Province of, Deb (Canada) 04-25-13 (Y) ................................................... 11.750 AA- 6,000 6,413,400 Panama, Republic of, Note (Panama) 02-13-02 (R) (Y) .............................................. 7.875 BB+ 4,545 4,454,100
SEE NOTES TO FINANCIAL STATEMENTS. 14 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Government - Foreign (continued) Quebec, Province of, Deb (Canada) 10-01-13 (Y) ................................................... 13.000% A+ $11,000 $12,089,550 Deb (Canada) 09-15-14 (Y) ................................................... 13.250 A+ 1,000 1,157,670 Deb (Canada) 07-15-23 (Y) ................................................... 7.500 A+ 2,425 2,571,082 Saskatchewan, Province of, Bond (Canada) 12-15-20 (Y) .................................................. 9.375 A 5,000 6,550,800 -------------- 58,444,469 -------------- Government - U.S. (21.76%) United States Treasury, Bond 08-15-17 ............................................................... 8.875 AAA 39,612 51,990,750 Bond 05-15-18 ............................................................... 9.125 AAA 47,075 63,403,905 Bond 02-15-23 ............................................................... 7.125 AAA 64,046 72,131,807 Note 02-15-99 ............................................................... 8.875 AAA 19,760 20,463,851 Note 11-30-99 ............................................................... 7.750 AAA 31,138 32,266,752 Note 05-15-01 ............................................................... 8.000 AAA 8,033 8,563,901 Note 05-15-02 ............................................................... 7.500 AAA 37,893 40,290,869 Note 02-15-05 ............................................................... 7.500 AAA 34,750 37,969,935 -------------- 327,081,770 -------------- Government - U.S. Agencies (7.38%) Federal Home Loan Mortgage Corp., 20 Yr Pass Thru Ctf 01-01-16 ................................................ 11.250 AAA 1,300 1,460,621 Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 01-25-05 ................................................ 8.000 AAA 10,000 10,412,500 15 Yr Pass Thru Ctf 02-01-08 ................................................ 7.500 AAA 2,565 2,628,601 15 Yr Pass Thru Ctf 06-01-10 + .............................................. 7.000 AAA 4,530 4,579,513 30 Yr Pass Thru Ctf 10-01-23 ................................................ 7.000 AAA 7,854 7,910,081 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 ................................ 6.940 AAA 3,529 3,649,563 Financing Corp., Bond 02-08-18 ............................................................... 9.400 A-1+ 7,000 9,399,670 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 02-15-24 to 09-15-25 + .................................. 7.500 AAA 27,883 28,476,870 30 Yr Pass Thru Ctf 11-15-22 ................................................ 8.000 AAA 4,821 5,014,210 30 Yr Pass Thru Ctf 12-15-22 to 04-15-23 .................................... 8.500 AAA 13,022 13,687,799 30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 .................................... 9.000 AAA 15,847 17,098,262 30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 .................................... 9.500 AAA 3,680 3,995,129 30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 .................................... 10.000 AAA 2,006 2,239,718 30 Yr Pass Thru Ctf 01-15-16 ................................................ 10.500 AAA 80 90,274 30 Yr Pass Thru Ctf 01-15-16 ................................................ 11.000 AAA 238 269,225 -------------- 110,912,036 -------------- Insurance (5.34%) Conseco, Inc., Sr Note 12-15-04 ............................................................ 10.500 BBB 6,820 8,130,668 Equitable Life Assurance Society of the United States, Surplus Note 12-01-05 (R) ................................................... 6.950 A 6,050 6,139,842
SEE NOTES TO FINANCIAL STATEMENTS. 15 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Insurance (continued) Fairfax Financial Holdings Ltd., Note (Canada) 04-15-26 (Y) .................................................. 8.300% BBB+ $6,440 $7,230,768 Liberty Mutual Insurance Co., Surplus Note 05-04-07 (R) ................................................... 8.200 A+ 10,000 10,975,250 Surplus Note 10-15-26 (R) ................................................... 7.875 A2 3,990 4,333,499 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) ................................................... 7.625 AA 10,450 11,268,862 NAC Re Corp., Note 06-15-99 ............................................................... 8.000 A- 3,360 3,437,885 New York Life Insurance Co., Surplus Note 12-15-23 (R) ................................................... 7.500 AA- 15,000 15,392,550 Sun Canada Financial Co., Gtd Sub Note 12-15-07 (R) ................................................... 6.625 AA 7,250 7,340,625 URC Holdings Corp., Sr Note 06-30-06 (R) ........................................................ 7.875 A- 5,665 6,071,747 -------------- 80,321,696 -------------- Leisure (0.91%) Mohegan Tribal Gaming Authority, Sr Sec Note Ser B 11-15-02 .................................................. 13.500 BB+ 1,500 1,927,500 Showboat Marina Casino Partnership/Finance Corp., 1st Mtg Note Ser B 03-15-03 ................................................. 13.500 B 5,000 5,712,500 Trump Hotels & Casino Resorts Funding, Inc./Holdings, L.P., Sr Sec Note 06-15-05 ........................................................ 15.500 B+ 5,150 5,974,000 -------------- 13,614,000 -------------- Media (7.17%) Adelphia Communications Corp., Sr Note 10-01-02 ............................................................ 9.250 B3 4,750 4,738,125 Century Communications Corp., Sr Note 08-15-00 ............................................................ 9.500 BB- 2,545 2,646,800 Clear Channel Communications, Inc., Deb 10-15-27 ................................................................ 7.250 BBB- 4,675 4,628,250 Comcast Cable Communications, Inc., Note 05-01-17 ............................................................... 8.875 BBB- 1,435 1,669,407 Comcast Corp., Sr Sub Deb 07-15-12 ......................................................... 10.625 BB+ 5,425 6,660,489 Continental Cablevision, Inc., Sr Sub Deb 06-01-07 ......................................................... 11.000 BBB 12,205 13,568,054 Garden State Newspapers, Inc., Sr Sub Note 10-01-09 (R) .................................................... 8.750 B+ 2,980 2,935,300 Hearst-Argyle Television, Inc., Note 11-15-07 ............................................................... 7.000 Baa3 4,325 4,322,621 Le Groupe Videotron Ltee, Sr Note (Canada) 02-15-05 (Y) ............................................... 10.625 Ba3 1,750 1,926,032
SEE NOTES TO FINANCIAL STATEMENTS. 16 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Media (continued) News America Holdings, Inc., Gtd Sr Deb 08-10-18 ......................................................... 8.250% BBB $6,105 $6,542,301 Sr Note 10-15-99 ............................................................ 9.125 BBB 7,500 7,845,375 Rogers Cablesystems Ltd., Sr Note Ser B (Canada) 03-15-05 (Y) ......................................... 10.000 BB+ 8,000 8,760,000 SFX Broadcasting, Inc., Sr Sub Note Ser B 05-15-06 .................................................. 10.750 B- 4,505 4,910,450 TeleWest Communications Plc, Sr Deb (United Kingdom) 10-01-06 (Y) ........................................ 9.625 B+ 3,420 3,539,700 Time Warner, Inc., Deb 01-15-13 ................................................................ 9.125 BBB- 2,445 2,874,415 TKR Cable I, Inc., Sr Deb 10-30-07 ............................................................. 10.500 BBB- 17,240 19,310,352 Viacom, Inc., Sr Note 06-01-05 ............................................................ 7.750 BB+ 4,420 4,455,581 Videotron Holdings Plc, Sr Disc Note (United Kingdom) 08-15-05 (Y) .................................. 11.000 BBB+ 7,355 6,469,532 -------------- 107,802,784 -------------- Medical (1.05%) Integrated Health Services, Inc., Sr Sub Note 01-15-08 (R) .................................................... 9.250 B 5,120 5,101,097 Physician Sales & Service, Inc., Sr Sub Note 10-01-07 (R) .................................................... 8.500 B 2,035 1,999,388 Quest Diagnostics, Inc., Sr Sub Note 12-15-06 ........................................................ 10.750 B+ 3,155 3,438,950 Tenet Healthcare Corp., Sr Sub Note 01-15-07 ........................................................ 8.625 B+ 5,050 5,163,625 -------------- 15,703,060 -------------- Metal (0.15%) Centaur Mining & Exploration Ltd., Gdt Sr Note (Australia) 12-01-07 (R) (Y) .................................... 11.000 B+ 2,280 2,305,650 -------------- Mortgage Banking (0.76%) Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 7-25-24 ........................... 6.750 Aaa 3,940 3,968,319 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 ................................. 7.180 AAA 7,260 7,522,791 -------------- 11,491,110 -------------- Oil & Gas (0.98%) Camuzzi Gas Pampeana S.A., Bond (Argentina) 12-15-01 (Y) ............................................... 9.250 BBB- 2,965 3,002,063 Norsk Hydro ASA, Deb (Norway) 10-01-16 (Y) ................................................... 7.500 A 5,790 6,187,078
SEE NOTES TO FINANCIAL STATEMENTS. 17 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Oil & Gas (continued) Transgas de Occidenta S.A., Sr Note (Colombia) 11-01-10 (R) (Y) ......................................... 9.790% BBB- $5,270 $5,586,575 -------------- 14,775,716 -------------- Paper & Paper Products (1.28%) APP Finance II Mauritius Ltd., Bond (Indonesia) 12-29-49 (Y) ............................................... 12.000 B 4,275 4,007,813 Celulosa Arauco Y Constitucion S.A., Note (Chile) 09-15-09 (Y) ................................................... 7.200 Baa2 4,910 4,787,250 Indah Kiat International Finance Co., Gtd Sec Bond Ser B (Indonesia) 06-15-02 (Y) ................................. 11.875 BB 1,225 1,255,625 Gtd Sec Bond Ser C (Indonesia) 06-15-06 (Y) ................................. 12.500 BB 4,580 4,774,650 S.D. Warren Co., Sr Sub Note Ser B 12-15-04 .................................................. 12.000 B+ 3,945 4,418,400 -------------- 19,243,738 -------------- Real Estate Investment Trust (0.30%) TriNet Corporate Realty Trust, Inc., Note 05-15-01 ............................................................... 7.300 BBB- 4,395 4,476,967 -------------- Retail (1.22%) Fort James Corp., Sr Note 09-15-02 ............................................................ 6.500 BBB- 4,110 4,101,246 Friendly Ice Cream Corp., Sr Note 12-01-07 ............................................................ 10.500 B 2,430 2,433,730 Safeway, Inc., Deb 01-15-09 ................................................................ 13.500 BBB 2,609 2,908,849 Southern Foods Group L.P., Sr Sub Note 09-01-07 (R) .................................................... 9.875 B 4,455 4,633,200 Supermercados Norte, Bond (Argentina) 02-09-04 (R) (Y) ........................................... 10.875 B1 4,440 4,195,800 -------------- 18,272,825 -------------- Steel (0.55%) IVACO Inc., Sr Note (Canada) 09-15-05 (Y) ............................................... 11.500 B+ 2,795 3,053,538 NS Group, Inc., Unit (Sr Sec Note & Warrant) 07-15-03 ....................................... 13.500 B- 2,785 3,780,638 Weirton Steel Corp., Sr Note 03-01-98 ............................................................ 11.500 B 1,430 1,430,000 -------------- 8,264,176 -------------- Telecommunications (2.37%) Iridium LLC/Iridium Capital Corp., Gtd Sr Note Ser A 07-15-05 .................................................. 13.000 B- 2,850 2,931,564 MetroNet Communications Corp., Unit (Sr Note & Warrant) (Canada) 08-15-07 (R) (Y) .......................... 12.000 B- 4,625 5,226,250 Nextel Communications, Inc., Sr Disc Note, Step Coupon (9.75%, 02-15-99) 08-15-04 (A) .................... Zero CCC 13,255 11,432,438
SEE NOTES TO FINANCIAL STATEMENTS. 18 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Telecommunications (continued) NEXTLINK Communications, Inc., Sr Note 10-01-07 ............................................................ 9.625% B $1,620 $1,636,200 Qwest Communications International Inc., Sr Note Ser B 04-01-07 ...................................................... 10.875 B+ 4,090 4,601,250 TCI Communications, Inc., Sr Deb 08-01-15 ............................................................. 8.750 BBB- 6,724 7,639,742 Teligent, Inc., Sr Note 12-01-07 ............................................................ 11.500 CCC 2,230 2,218,672 -------------- 35,686,116 -------------- Tobacco (0.51%) RJR Nabisco, Inc., Note 12-01-02 ............................................................... 8.625 BBB- 4,555 4,828,710 Note 09-15-03 ............................................................... 7.625 BBB- 2,770 2,802,963 -------------- 7,631,673 -------------- Transport (6.04%) America West Airlines, Inc., Pass Thru Ctf Ser B 01-02-08 ................................................ 6.930 A- 4,867 4,885,697 Continental Airlines, Pass Thru Ctf Ser 96-C 04-15-15 ............................................. 9.500 BBB 4,902 5,677,892 Greater Beijing First Expressways Ltd., Sr Note (China) 06-15-04 (R) (Y) ............................................ 9.250 BB 4,080 3,651,600 Humpuss Funding Corp., Gtd Note 12-15-09 (R) ....................................................... 7.720 Baa2 4,983 4,844,125 MRS Logistica S.A., Bond Ser B (Brazil) 08-15-05 (R) (Y) ........................................ 10.625 B 3,870 3,570,075 Northwest Airlines Inc., Gtd Note 03-15-04 ........................................................... 8.375 BB- 2,260 2,331,190 Pass Thru Ctf Ser 1996-1C 01-02-05 .......................................... 10.150 BB+ 3,414 3,670,355 Pass Thru Ctf Ser 1996-1D 01-02-15 .......................................... 8.970 BBB- 3,757 4,194,116 NWA Trust, Sr Note Ser A 06-21-14 ...................................................... 9.250 A2 5,450 6,388,379 Rail Car Trust, Pass Thru Ser 1992-1 Class A 06-01-04 ....................................... 7.750 AAA 15,085 15,796,324 Scandinavian Airlines System, Deb (Multinational) 07-20-99 (Y) ............................................ 9.125 A3 6,834 7,141,530 Sea-Land Service, Inc., Gtd Deb Ser A 01-02-11 ...................................................... 10.600 BBB 5,000 5,291,700 Gtd Deb Ser B 01-02-11 ...................................................... 10.600 BBB 7,000 7,408,380 Gtd Deb Ser C 01-02-11 ...................................................... 10.600 BBB 6,000 6,350,040 U.S. Air, Inc., Pass Thru Ctf Ser 1989-A2 01-01-13 .......................................... 9.820 A- 3,100 3,425,500 Pass Thru Ctf Ser 1990-A1 03-19-05 .......................................... 11.200 BB+ 5,493 6,159,354 -------------- 90,786,257 --------------
SEE NOTES TO FINANCIAL STATEMENTS. 19 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Utilities (13.35%) British Columbia Hydro and Power Auth., Gtd Bond Ser FN (Canada) 09-01-13 (Y) ....................................... 12.500% AA $6,175 $6,695,614 British Telecom Finance, Inc., Gtd Deb (United Kingdom) 02-15-19 (Y) ....................................... 9.625 AAA 9,805 10,592,342 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 .......................................... 8.890 BB- 6,600 7,326,508 Calpine Corp., Sr Note 05-15-06 ............................................................ 10.500 B+ 4,650 4,987,125 Sr Note 07-15-07 (R) ........................................................ 8.750 BB- 1,725 1,737,938 CE Casecnan Water & Energy Co., Inc., Sr Note Ser A (Philippines) 11-15-05 (Y) .................................... 11.450 BB 4,100 4,223,000 Cleveland Electric Illuminating Co. & Toledo Edison Co., Sec Note Ser B 07-01-04 ..................................................... 7.670 BB+ 5,120 5,295,155 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 ...................................................... 9.500 BB+ 9,705 10,678,217 Sr Sec Note 11-01-17 (R) .................................................... 7.880 BB+ 2,460 2,543,025 EIP Funding-PNM, Sec Fac Bond 10-01-12 ....................................................... 10.250 Ba2 9,352 10,793,611 Enersis S.A., Note (Cayman Islands) 12-01-16 (Y) .......................................... 7.400 A- 7,530 7,480,528 Fideicomiso Petacalco Trust, Sr Sec Note (Mexico) 12-23-09 (R) (Y) ....................................... 10.160 BB 4,190 4,190,000 First PV Funding Corp., Deb Ser 86A 01-15-14 ........................................................ 10.300 BB- 2,123 2,317,424 Deb Ser 86B 01-15-16 ........................................................ 10.150 BB- 6,866 7,360,627 GTE Corp., Deb 11-01-20 ................................................................ 10.250 A 6,875 7,760,294 Hydro-Quebec, Gtd Bond (Canada) 02-01-21 (Y) .............................................. 9.400 A+ 7,500 9,539,175 Gtd Deb Ser IF (Canada) 02-01-03 (Y) ........................................ 7.375 A+ 7,185 7,466,652 Gtd Deb Ser FU (Canada) 02-01-12 (Y) ........................................ 11.750 A+ 5,000 7,193,550 Iberdrola International B.V., Sr Note (Netherlands) 06-01-03 (R) (Y) ...................................... 7.125 A 8,629 8,870,612 Note 10-01-02 ............................................................... 7.500 AA- 8,000 8,382,480 Long Island Lighting Co., Deb 07-15-19 ................................................................ 8.900 BB+ 3,475 3,831,361 Gen Ref Bond 05-01-21 ....................................................... 9.750 BBB 11,585 11,826,663 Gen Ref Mtg 07-01-24 ........................................................ 9.625 BBB 8,660 8,896,158 Midland Cogeneration Venture L.P., Sec Deb Ser C-91 07-23-02 ................................................... 10.330 BB 10,820 11,813,155 Midland Funding Corp. II, Deb Ser A 07-23-05 .......................................................... 11.750 B 3,000 3,586,590 Deb Ser B 07-23-06 .......................................................... 13.250 B 1,900 2,429,511 North Atlantic Energy Corp., 1st Mtg Ser A 06-01-02 ...................................................... 9.050 B+ 5,150 5,217,825
SEE NOTES TO FINANCIAL STATEMENTS. 20 ==============================FINANCIAL STATEMENTS============================== John Hancock Funds - Sovereign Bond Fund
PAR VALUE INTEREST CREDIT (000s MARKET ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE - ------------------- ------ ------- ---------- ------ Utilities (continued) Philippine Long Distance Telephone Co., Note (Philippines) 03-06-07 (Y) ............................................. 7.850% BB+ $4,770 $4,088,186 Puget Sound Energy Capital Trust I Cap Security 06-01-27 (R) ................................................... 8.231 Baa3 2,910 3,022,763 System Energy Resources, Inc., 1st Mtg 08-01-01 ............................................................ 7.710 BBB- 5,525 5,710,198 Waterford 3 Funding Corp., Sec Lease Obligation Bond 01-02-17 .......................................... 8.090 BBB- 4,755 4,897,793 -------------- 200,754,080 -------------- TOTAL BONDS (Cost $1,416,657,498) (95.87%) 1,441,119,110 ------ -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (3.55%) Investment in a joint repurchase agreement transaction with Swiss Bank Corp., - Dated 11-28-97, Due 12-1-97 (secured by U.S. Treasury Note, 7.75%, Due 12-31-99 and U.S. Treasury Bonds, 6.50% thru 11.25%, Due 2-15-15 thru 11-15-26) - Note A ...................... 5.670% 53,385 53,385,000 -------------- Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 4.950%.......................................................... 969 -------------- TOTAL SHORT-TERM INVESTMENTS (3.55%) 53,385,969 ----- -------------- TOTAL INVESTMENTS (99.42%) $1,494,505,079 ======= ==============
NOTES TO THE SCHEDULE OF INVESTMENTS (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is U.S. dollar denominated. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $206,912,291 as of November 30, 1997. * Credit Ratings are rated by Moody's Investor Services or John Hancock Advisers, Inc. where Standard and Poors ratings are not available. + A portion of these securities having an aggregate value of $12,153,013 or .81% 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 current values at least equal to the amounts of its when issued commitments. Accordingly, the market values of $4,829,686 of United States Treasury 8.875%, 08-15-17 and $8,027,820 of United States Treasury 9.125%, 05-15-18 have been segregated to the when issued commitments. SEE NOTES TO FINANCIAL STATEMENTS. 22 ==========================NOTES TO FINANCIAL STATEMENTS======================== John Hancock Funds - Sovereign Bond Fund (UNAUDITED) 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 multiple classes of the Fund, designated as Class A and Class B. 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 and service expenses under the terms of a distribution plan, have exclusive voting rights regarding such distribution plan. Significant accounting policies of the Fund are as follows: VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost which approximates market value. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"),a wholly owned subsidiary of The Berkeley Financial Group, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all of its taxable income, including any net realized gain on investment, to its shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $29,796,705 of a capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent that such carryforward is used by the Fund, no capital gain distributions will be made. The carryforward expires as follows: May 31, 1999 -- $755,945, May 31, 2001 -- $10,107,031, May 31, 2002 -- $9,347,493, May 31, 2004-- $8,402,805 and May 31, 2005 -- $1,183,431. Expired capital loss carryforwards are reclassified to capital paid-in in the year of expiration. 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, 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 appropriate net assets of the respective classes. Distribution and service fees, if any, are calculated 22 ==========================NOTES TO FINANCIAL STATEMENTS======================== John Hancock Funds - Sovereign Bond Fund daily at the class level based on the appropriate net assets of each class and the specific expense rate(s) applicable to each class. USE OF ESTIMATES The preparation of these financial statements in accordance with generally accepted accounting principles incorporates estimates made by management in determining the reported amounts of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. 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 Advisor in an unsecured line of credit with banks which permit borrowings up to $600 million, collectively. Interest is charged to each Fund, based on its borrowing, at a rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a rate of 0.075% per annum based on the average daily unused portion of the line of credit, is allocated among the participating Funds. The Fund had no borrowing activity for the year ended November 30, 1997. 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 future contracts being traded. Each day, the futures contract is valued at the official settlement price of 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," 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. There were no open positions in financial futures contracts. 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. The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser. For the period ended November 30, 1997, JH Funds received net sales charges of $711,879 with regard to sales of Class A shares. Out of this amount, $82,583 was retained and used for printing of prospectuses, advertising, sales literature and other purposes, and $175,925 was paid as sales commissions to unrelated broker-dealers and $453,371 was paid as sales commissions to sales personnel of John Hancock Distributors, Inc. ("Distributors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole shareholder of Distributors. Class B shares which are redeemed within six years of purchase will be subject to a contingent deferred sales charge ("CDSC") at declining rates beginning at 5.0% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Proceeds from the CDSC are paid to JH Funds and are used 23 ==========================NOTES TO FINANCIAL STATEMENTS======================== John Hancock Funds - Sovereign Bond Fund in whole or in part to defray its expenses related to providing distribution related services to the Fund in connection with the sale of Class B shares. For the period ended November 30, 1997, contingent deferred sales charges received by JH Funds amounted to $148,784. In addition, to reimburse 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 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 trustees and/or officers of the Adviser, and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. At November 30, 1997, the Fund's investment to cover the deferred compensation had unrealized appreciation of $11,737. 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 November 30, 1997, aggregated $457,197,278 and $503,503,887, respectively. Purchases and proceeds from sales of obligations of the U.S. government and its agencies, during the period ended November 30, 1997, aggregated $651,122,382 and $584,337,252, respectively. The cost of investments owned at November 30, 1997 (excluding the corporate savings account) for federal income tax purposes was $1,740,042,498. Gross unrealized appreciation and depreciation of investments aggregated $44,078,447 and $19,616,835, respectively, resulting in net unrealized depreciation of $24,461,612. 24 ======================================NOTES===================================== John Hancock Funds - Sovereign Bond Fund 25 ======================================NOTES===================================== John Hancock Funds - Sovereign Bond Fund 26 ======================================NOTES===================================== John Hancock Funds - Sovereign Bond Fund 27 ================================================================================ ---------------- JOHN HANCOCK FUNDS Bulk Rate A Global Investment Management Firm U.S. Postage PAID 101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 Randolph, MA 1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75 INTERNET: www.jhancock.com/funds ---------------- [A 1/2" 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."] - -------------------------------------------------------------------------------- This report is for the information of shareholders of the John Hancock Sovereign U.S. Government Income Fund. It may be used as sales literature when preceded or accompanied by the current prospectus, which details charges, investment objectives and operating policies. [A recycled logo in lower left hand corner with the caption "Printed on Recycled Paper."] 210SA 11/97 1/98 -----END PRIVACY-ENHANCED MESSAGE-----