N-30D 1 sovbond.txt JOHN HANCOCK SOVEREIGN BOND FUND John Hancock Bond FUND A N N U A L R E P O R T Sign up for electronic delivery at 5.31.02 www.jhancock.com/funds/edelivery [LOGO](R) ------------------ JOHN HANCOCK FUNDS -------------------------------------------------------------------------------- [A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush left next to first paragraph.] -------------------------------------------------------------------------------- WELCOME Table of contents =========================== Your fund at a glance page 1 --------------------------- Managers' report page 2 --------------------------- A look at performance page 6 --------------------------- Growth of $10,000 page 7 --------------------------- Fund's investments page 8 --------------------------- Financial statements page 20 --------------------------- Trustees & officers page 35 --------------------------- For your information page 41 --------------------------- Dear Fellow Shareholders, The stock market has done nothing to soothe weary investors in 2002. After two years of losses, the stock market remains bogged down again so far this year. Although the economy appears to be emerging from recession, there are real questions about the strength of the recovery and the prospects for corporate earnings. With added pressures resulting from corporate bankruptcies, accounting questions and Middle East tensions, investors have been slow to shed their skeptical mindset. As a result, the major indexes were either flat or down year to date through May 31, 2002, with the Dow Jones Industrial Average returning -0.22% and the Standard & Poor's 500 Index returning -6.49%. Reflecting the technology and telecommunications sectors' continued woes, the tech-heavy Nasdaq Composite Index was down 17.16% in the first five months. In this turbulent environment, there have been definite winners and losers. Small-cap and midsize companies have done far better than large caps, and even after a two-year run, value stocks have continued to trump growth. Bonds, which outpaced stocks in the last two years, continued to beat the broader stock market. The stock market's disappointing performance has certainly put investors' long-term investment perspective to the test. But we urge you to stay the course and stick to the investment plan that you have crafted with your investment professional to meet your financial goals. The most important element involves being well diversified. We believe it is the best way to better withstand the market's short-term swings -- from both an investment and an emotional perspective. If your investments are spread broadly among different asset classes -- stocks, bonds and cash -- and various types of each, you stand a better chance of having at least one part of your portfolio doing well at any given moment. Although being diversified might not prevent you from suffering losses in tough market conditions, it could help mitigate the decline. And you'll be more ready to capture the returns of a group as it comes back into favor. Sincerely, /s/ Maureen R. Ford ------------------- Maureen R. Ford, Chairman and Chief Executive Officer YOUR FUND AT A GLANCE The Fund seeks a high level of current income consistent with prudent investment risk by investing in a diversified portfolio of debt securities, including corporate bonds and U.S. government and agency securities. Over the last twelve months o The Fund posted gains during a year marked by stock market volatility, low interest rates, economic uncertainty and terrorism. o Telecommunication issues and the Enron debacle drove credit quality down. o The Federal Reserve Board halted rate cuts in 2002 as the economy emerged from recession. -------------------------------------------------------------------------------- [Bar chart with heading "John Hancock Bond Fund". Under the heading is a note that reads "Fund performance for the year ended May 31, 2002." The chart is scaled in increments of 2% with 0% at the bottom and 8% at the top. The first bar represents the 6.10% total return for Class A. The second bar represents the 5.37% total return for Class B. The third bar represents the 5.36% total return for Class C. The fourth bar represents the 3.04 total return for Class I*. A note below the chart reads "Total returns for the Fund are at net asset value with all distributions reinvested. *From inception September 4, 2001 through May 31, 2002."] -------------------------------------------------------------------------------- Top 10 Issuers 15.3% United States Treasury 8.6% Government National Mortgage Assn. 6.3% Federal National Mortgage Assn. 1.4% Morgan Stanley Dean Witter Capital I Trust 1.2% Iberdrola International 1.0% Hydro-Quebec 0.9% Morgan Stanley Capital I 0.8% Scotland International Finance No. 2 0.8% RBSG Capital As a percentage of net assets on May 31, 2002. 1 BY JAMES K. HO, CFA, AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGERS John Hancock Bond Fund MANAGERS' REPORT On June 7, 2002, John Hancock Active Bond Fund merged into John Hancock Bond Fund. A mixed bag of factors influenced bonds during John Hancock Bond Fund's fiscal year that ended May 31, 2002. While declining interest rates and plummeting stock prices created a favorable backdrop for bond investing, liquidity concerns, questionable accounting practices and disappointing corporate earnings posed real problems for many individual issuers. The attacks of September 11, 2001 further prompted investors to reassess their portfolios. The combined effect was a most volatile investment environment. "...a most volatile investment environment." FUND PERFORMANCE For the 12 months ended May 31, 2002, John Hancock Bond Fund Class A, Class B and Class C shares posted gains of 6.10%, 5.37% and 5.36%, respectively, at net asset value. The average corporate debt A-rated fund returned 6.49% according to Lipper, Inc.(1), while the Lehman Brothers Government/Credit Bond Index produced a result of 7.85%. Class I shares, which were launched on September 4, 2001, returned 3.04% through May 31, 2002. Keep in mind that your net asset value return will be different from the Fund's performance if you were not invested in the Fund for the entire period and did not reinvest all distributions. Historical performance information can be found on pages six and seven. TREASURY STAKE HELPED FUND At the period's outset, the economy and corporate profitability remained weak. The Federal Reserve Board responded and prolonged its rate-cutting campaign to jump-start a recovery. 2 -------------------------------------------------------------------------------- [Photos' of Jim Ho and Ben Matthews flush right next to first paragraph.] -------------------------------------------------------------------------------- We positioned the portfolio for such a recovery by increasing exposure to lower-quality corporate bonds and by decreasing our stake in Treasury securities. When September's tragedies occurred, they negated the positioning of many portfolios, including the Fund's. Demand for the safety and liquidity of U.S. Treasury securities spiked and corporate bonds suffered, with some industries such as travel and leisure harder hit than others. The Fund's stake in U.S. government and agency securities contributed to performance during this time. The Treasury Department's decision on October 31 to stop selling the 30-year bond further helped government securities rally and even lifted the price of long-maturity corporate bonds. As the period progressed, we pared the Fund's Treasury holdings to realize profits. "The Fund's ownership of these telecom and media bonds dampened performance..." We also slightly increased exposure to mortgage-backed securities. This proved beneficial because traditional corporate investors -- searching for safer havens but reluctant to sacrifice income -- turned to mortgage-backed securities in order to receive yields similar to A-rated corporate debt without the added risk. Furthermore, mortgage-backed issues are relatively shorter in duration than either Treasury notes or corporate debt, thereby offering less price fluctuation as interest rates change. TELECOM, MEDIA REMAIN UNDER PRESSURE As higher-quality corporate bonds weathered the aftermath of September 11 better than lower-quality bonds did, our strategy involved focusing on higher-quality names, avoiding riskier credits and targeting industries that can offer potential in any economic environment. We emphasized the blue-chip type telecommunication corporations and media companies, cyclical 3 -------------------------------------------------------------------------------- [Table at top left-hand side of page entitled "Top five sectors." The first listing is Government-U.S. agencies 16%, the second is Government-U.S. 15%, the third Utilities 9%, the fourth Mortgage banking 7%, and the fifth Finance 6%.] -------------------------------------------------------------------------------- issues such as paper, oil and gas, and natural resources, as well as stable-growing industries such as health care. Unfortunately, the financial woes of the high-yield telecom issuers recently spilled over into the investment-grade arena, sparking negative sentiment for some high-profile names such as AT&T, Deutsche Telekom, WorldCom and Qwest. Stale growth and large debt burdens (and undisclosed loans in the case of Adelphia Communications) also depressed media bond prices. The Fund's ownership of these telecom and media bonds dampened performance -- although we pared exposure or moved out of some positions prior to the most damaging news. Currently, -------------------------------------------------------------------------------- [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on 5-31-02." The chart is divided into five sections (from top to left): U.S. corporate bonds 51%, U.S. government and agency bonds 31%, Foreign corporate bonds 8%, Short-term investments & other 8% and Foreign government bonds 2%.] -------------------------------------------------------------------------------- we believe the price declines have created attractive value for bonds in the telecom and media sectors. UTILITY BONDS RETREAT Power plant generators and the electric utility sector experienced a dramatic setback during the year -- first as a result of California's electricity problems and then as revelations about Enron's mismanagement and false trading came to light. We reduced or eliminated exposure to many of these bonds over the past several months. Some bonds in this sector we continued to hold because of the issuers' solid fundamentals. 4 -------------------------------------------------------------------------------- [Table at top of page entitled "SCORECARD". The header for the left column is "INVESTMENT" and the header for the right column is "RECENT PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is Newmont Mining followed by an up arrow with the phrase "Benefiting from higher gold prices." The second listing is Northwest Airlines followed by an up arrow with the phrase "Rebound in travel." The third listing is AOL Time Warner followed by a down arrow with the phrase "Adversely affected by recent large new issue."] -------------------------------------------------------------------------------- "...indicators for the second quarter suggest a pause in growth." BOUNCE-BACK WELCOMED The bonds most adversely affected by the terrorism have since improved to become among the Fund's top performers, as investor unease dissipated and prices became too attractive to ignore. These include secured and unsecured airline debt issued by Continental, Northwest Airlines, and Delta Air Lines. Autos and auto part manufacturers like Ford Motor Co. and Delphi Automotive recovered in price, as did Host Marriott properties and Harrah's. Among other contributors were integrated oil and gas company bonds, health care, railway and financial securities. BRIEF PAUSE IN RECOVERY Although the economy grew at a 6.1% rate in the first calendar quarter of 2002, preliminary indicators for the second quarter suggest a pause in growth. Our forecasts call for the resumption of renewed activity later in the year, which we expect will push interest rates higher and raise the specter of inflation. To prepare for this, we recently made our first foray into Treasury Inflation Protected Securities (TIPS), and these have performed well. In the near term, the credit environment will likely remain challenging. Intense credit research will continue to underpin every decision we make. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. (1) Figures from Lipper, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower. 5 A LOOK AT PERFORMANCE For the period ended May 31, 2002 Two indexes are used for comparison. The Lehman Brothers Government/Credit Bond Index, Index 1, an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds, and Yankee bonds. Also shown on page 7 is the Lehman Brothers Credit Bond Index, Index 2, an unmanaged index of U.S. corporate bonds and Yankee bonds. In the future, the Adviser will compare the Fund's performance only to Index 1, since it more closely represents the Fund's investment strategy. It is not possible to invest in an index. Class A Class B Class C Class I(1) Index 1 Inception date 11-9-73 11-23-93 10-1-98 9-4-01 -- -------------------------------------------------------------------------------- Average annual returns with maximum sales charge (POP) -------------------------------------------------------------------------------- One year 1.34% 0.37% 3.31% -- 7.85% Five years 5.54% 5.47% -- -- 7.55% Ten years 6.69% -- -- -- 7.42% Since inception -- 5.76% 3.75% 3.04%(2) -- -------------------------------------------------------------------------------- Cumulative total returns with maximum sales charge (POP) -------------------------------------------------------------------------------- One year 1.34% 0.37% 3.31% -- 7.85% Five years 30.97% 30.54% -- -- 43.91% Ten years 91.04% -- -- -- 104.57% Since inception -- 61.07% 14.44% 3.04% -- -------------------------------------------------------------------------------- SEC 30-day yield as of May 31, 2002 -------------------------------------------------------------------------------- 4.87% 4.40% 4.36% 5.63% -- Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 4.5% and Class C shares of 1%, and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The Class B shares' CDSC declines annually between years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC. The return and principal value of an investment in the Fund will fluctuate, so that shares, when redeemed, may be worth more or less than the original cost. Index figures do not reflect sales charges and would be lower if they did. The returns reflect past results and should not be considered indicative of future performance. The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (1) For certain types of investors as described in the Fund's prospectus for Class I shares. (2) Not annualized. 6 GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment in Class A shares for the period indicated. For comparison, we've shown the same investment in the Lehman Brothers Government/Credit Bond Index and the Lehman Brothers Credit Bond Index. -------------------------------------------------------------------------------- Line chart with the heading "GROWTH OF $10,000." Within the chart are four lines. The first line represents Index 2 and is equal to $20,510 as of May 31, 2002. The second line represents Index 1 and is equal to $20,457 as of May 31, 2002. The third line represents the value of the hypothetical $10,000 investment made in the John Hancock Bond Fund, before sales charge, and is equal to $19,994 as of May 31, 2002. The fourth bar represents the same hypothetical $10,000 investment made in the John Hancock Bond Fund, after sales charge, and is equal to $19,100 as of May 31, 2002. -------------------------------------------------------------------------------- Assuming all distributions were reinvested for the period indicated, the chart above shows the value of a $10,000 investment in the Fund's Class B, Class C and Class I shares, respectively, as of May 31, 2002. Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. (1) No contingent deferred sales charge applicable. (2) For certain types of investors as described in the Fund's prospectus for Class I shares. 7 FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on May 31, 2002 This schedule is divided into three main categories: bonds, preferred stocks and warrants, 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.
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE ------------------------------------------------------------------------------------------------------------ BONDS 92.21% $1,312,227,764 ------------------------------------------------------------------------------------------------------------ (Cost $1,294,296,530) Aerospace 1.23% $17,458,884 Jet Equipment Trust, Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910% BB- $5,800 5,339,712 Lockheed Martin Corp., Bond 12-01-29 8.500 BBB 5,595 6,663,701 Systems 2001 Asset Trust LLC, Pass Thru Cert Ser 2001 Class B 12-15-11 (R) 7.156 A 5,189 5,455,471 Agricultural Operations 0.22% 3,194,356 Cargill, Inc., Note 05-01-06 (R) 6.250 A+ 3,050 3,194,356 Automobiles/Trucks 0.89% 12,717,240 Delphi Automotive Systems Corp., Note 06-15-06 6.550 BBB 2,450 2,531,609 ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 1,440 1,479,845 Note 06-15-08 (R) 7.350 BBB+ 2,600 2,778,784 Note 12-15-09 (R) 7.950 BBB+ 2,675 2,804,925 Hertz Corp., Sr Note 06-01-12 7.625 BBB 3,105 3,122,077
See notes to financial statements. 8
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Banks -- Foreign 3.73% $53,128,076 Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 8.200% AA- $10,000 10,933,000 African Development Bank, Sub Note (Supra National) 12-15-03 9.750 AA- 8,000 8,754,640 Barclays Bank Plc, Perpetual Bond (7.375% to 12-15-11 then variable) (United Kingdom) 06-29-49 (R) 7.375 A+ 5,020 5,332,294 International Bank for Reconstruction & Development, Deb (Supra National) 09-01-16 8.250 AAA 5,000 6,023,850 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49 8.817 A- 3,130 3,426,192 Perpetual Bond (7.648% to 09-30-31 then variable) (United Kingdom) 08-31-49 (R) 7.648 A- 3,505 3,649,581 Scotland International Finance No. 2, B.V., Gtd Sub Note (Netherlands) 11-01-06 (R) 8.850 AA- 10,335 11,768,775 Skandinaviska Enskilda Banken AB, Perpetual Bond (6.50% to 6-04-03 then variable) (Sweden) 12-29-49 (R) 6.500 BBB 3,150 3,239,744 Banks -- United States 2.39% 33,965,135 Bank of New York, Cap Security 12-01-02 (R) 7.780 A- 5,750 5,973,042 Capital One Bank, Sr Note 02-01-06 6.875 BBB- 3,250 3,275,090 Colonial Bank, Sub Note 06-01-11 9.375 BBB- 1,180 1,272,323 MBNA Corp., Sr Note Ser F 03-15-12 7.500 BBB 2,785 2,903,362 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 10,605 11,668,363 UBS Preferred Funding Trust I, Perpetual Bond (8.622% to 10-01-10 then variable) 10-01-49 8.622 AA- 4,500 5,102,955 Zions Financial Corp., Gtd Note (6.95% to 05-15-06 then variable) 05-15-11 6.950 BBB- 3,770 3,770,000 Beverages 0.05% 707,200 Constellation Brands, Inc., Gtd Sr Sub Note Ser B 01-15-12 8.125 B+ 680 707,200 Broker Services 0.54% 7,654,339 Morgan Stanley Dean Witter & Co., Note 04-01-12 6.600 AA- 4,985 5,063,564 Salomon Smith Barney Holdings, Inc., Note 03-15-06 5.875 AA- 2,500 2,590,775 Building 0.41% 5,766,814 CRH America, Inc., Note 03-15-12 6.950 BBB+ 3,640 3,775,044 Vulcan Materials Co., Note 02-01-06 6.400 A+ 1,920 1,991,770
See notes to financial statements. 9
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Business Services -- Misc. 0.39% $5,478,488 Cendant Corp., Note 08-15-06 6.875% BBB $5,535 5,478,488 Chemicals 1.10% 15,622,135 Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 2,860 2,941,510 Eastman Chemical Co., Note 04-15-12 7.000 BBB 2,770 2,877,199 Equistar Chemicals L.P./Equistar Funding Corp., Sr Note 02-15-04 8.500 BB+ 2,785 2,729,913 Nova Chemicals Corp., Sr Note (Canada) 05-15-06 7.000 BBB- 2,260 2,226,394 Potash Corp. of Saskatchewan, Inc., Note (Canada) 05-31-11 7.750 BBB+ 4,485 4,847,119 Electronics 0.37% 5,206,933 HQI Transelect Chile SA, Sr Note (Chile) 04-15-11 7.875 A- 4,075 4,335,433 UCAR Finance, Inc., Gtd Sr Note 02-15-12 (R) 10.250 B 830 871,500 Energy 0.57% 8,087,166 MidAmerican Energy Holdings, Sr Bond 09-15-28 8.480 BBB- 4,275 4,614,606 P&L Coal Holdings Corp., Gtd Sr Sub Note Ser B 05-15-08 9.625 B+ 3,276 3,472,560 Finance 5.74% 81,723,368 CIT Group, Inc., Sr Note 04-02-12 7.750 BBB+ 4,160 4,246,611 Conseco Finance Securitizations Corp., Pass Thru Ctf Ser 2002-A Class A-3 04-15-32 5.330 AAA 7,065 7,166,559 Ford Motor Credit Co., Note 07-16-04 6.700 BBB+ 2,725 2,810,470 Note 02-01-06 6.875 BBB+ 3,650 3,757,857 Note 10-25-11 7.250 BBB+ 2,800 2,868,180 General Motors Acceptance Corp., Note 07-15-05 7.500 BBB+ 4,025 4,270,042 Note 03-02-11 7.250 BBB+ 2,730 2,859,511 HSBC Holding Plc, Sub Note (United Kingdom) 07-15-09 7.500 A 4,890 5,330,638 Humpuss Funding Corp., Gtd Note 12-15-09 (R) 7.720 B3 1,718 1,236,838 ING Capital Funding Trust III, Perpetual Bond (8.439% to 12-31-10 then variable) 12-31-49 8.439 A 4,355 4,848,726 MBNA Master Credit Card Trust II, Pass Thru Ctf Ser 2000-A Class A 07-16-07 7.350 AAA 7,040 7,589,965 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 8,050 8,533,000 Deb Ser B 07-23-06 13.250 BB+ 1,900 2,128,000
See notes to financial statements. 10
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Finance (continued) Pemex Project Funding Master Trust, Gtd Note 10-13-10 9.125% BB+ $5,580 $6,135,601 Standard Credit Card Master Trust, Pass Thru Ctf Ser 1995-1 Class A 01-07-07 8.250 AAA 9,970 10,982,553 Tiers-MIR-2001-14, Coll Trust 06-15-04 (R) 7.200 BBB- 5,200 4,316,000 Yanacocha Receivables Master Trust, Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 2,617 2,642,817 Food 1.20% 17,037,567 ConAgra Foods, Inc., Sub Note 09-15-04 7.400 BBB 2,845 3,027,023 Delhaize America, Inc., Gtd Note 04-15-11 8.125 BBB- 3,835 4,156,105 Earthgrains Co. (The), Sr Note 08-01-03 8.375 A+ 4,085 4,301,628 General Mills, Inc., Note 02-15-07 5.125 BBB+ 5,575 5,552,811 Government -- Foreign 1.75% 24,886,233 Brazil, Federative Republic of, Bond (Brazil) 04-15-14 8.000 BB- 3,386 2,539,783 Note (Brazil) 04-15-10 12.000 BB- 2,790 2,462,175 Nova Scotia, Province of, Deb (Canada) 04-01-22 8.750 A- 7,500 9,517,050 Quebec, Province of, Deb (Canada) 09-15-29 7.500 A+ 3,215 3,631,825 Saskatchewan, Province of, Deb (Canada) 12-15-20 9.375 A+ 5,000 6,735,400 Government -- United States 15.28% 217,501,965 United States Treasury, Bond 08-15-17 8.875 AAA 25,342 33,716,517 Bond 05-15-18 9.125 AAA 17,990 24,528,825 Bond 08-15-25 6.875 AAA 12,700 14,445,742 Bond 02-15-31 5.375 AAA 38,285 36,980,630 Inflation Indexed Bond 04-15-29 3.875 AAA 10,331 11,438,110 Inflation Indexed Note 01-15-07 3.375 AAA 29,556 30,761,613 Inflation Indexed Note 01-15-10 4.250 AAA 25,342 27,507,270 Note 02-15-05 7.500 AAA 5,450 6,000,941 Note 07-15-06 7.000 AAA 21,470 23,777,166 Note 05-15-08 5.625 AAA 5,520 5,817,970 Note 02-15-12 4.875 AAA 2,560 2,527,181
See notes to financial statements. 11
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Government -- U.S. Agencies 15.60% $221,953,786 Federal Home Loan Mortgage Corp., 30 Yr Pass Thru Ctf 01-01-16 11.250% AAA $275 314,398 Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 8,042 8,087,616 15 Yr Pass Thru Ctf 06-01-16** 6.000 AAA 4,850 4,927,309 15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 4,741 4,931,356 15 Yr Pass Thru Ctf 09-01-10 to 05-01-17 7.000 AAA 6,054 6,353,674 15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 559 595,232 30 Yr Pass Thru Ctf 06-16-29** 6.000 AAA 16,775 16,633,419 30 Yr Pass Thru Ctf 11-01-28 to 06-15-32** 6.500 AAA 21,050 21,379,633 30 Yr Pass Thru Ctf 10-01-23 to 06-01-29** 7.000 AAA 6,395 6,625,002 30 Yr Pass Thru Ctf 06-01-30 to 02-01-31 7.500 AAA 6,968 7,293,693 Note 01-15-30 7.125 AAA 9,490 10,502,393 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 2,759 2,877,696 Financing Corp., Bond 02-08-18 9.400 AAA 7,000 9,318,820 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 09-15-28 to 09-15-31 6.500 AAA 33,531 34,190,308 30 Yr Pass Thru Ctf 06-01-28 to 03-15-32** 7.000 AAA 59,983 61,147,671 30 Yr Pass Thru Ctf 08-15-29 to 02-15-32 7.500 AAA 19,553 20,562,046 30 Yr Pass Thru Ctf 11-15-22 8.000 AAA 788 848,700 30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 9.000 AAA 3,433 3,774,916 30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 1,034 1,138,804 30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 10.000 AAA 331 373,254 30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 52 59,592 30 Yr Pass Thru Ctf 01-15-16 11.000 AAA 16 18,254 Insurance 1.95% 27,707,228 AXA, Sub Note (France) 12-15-30 8.600 A- 4,080 4,666,296 Equitable Life Assurance Society of the United States, Surplus Note 12-01-05 (R) 6.950 A+ 3,700 3,882,410 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 3,970 4,168,290 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 3,940 4,205,714 Sun Canada Financial Co., Gtd Sub Note 12-15-07 (R) 6.625 AA- 7,250 7,400,496 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 AA+ 3,110 3,384,022 Leisure 1.15% 16,339,720 Harrah's Operating Co., Inc., Gtd Note 06-01-07 7.125 BBB- 3,900 4,049,370 Gtd Sr Sub Note 12-15-05 7.875 BB+ 2,055 2,121,787 HMH Properties, Inc., Gtd Sr Sec Note Ser A 08-01-05 7.875 BB- 2,790 2,734,200 Starwood Hotels & Resorts Worldwide, Inc., Note 05-01-07 (R) 7.375 BBB- 5,535 5,631,863
See notes to financial statements. 12
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Leisure (continued) Waterford Gaming LLC/Waterford Gaming Finance Corp., Sr Note 03-15-10 (R) 9.500% B+ $1,750 $1,802,500 Machinery 0.20% 2,856,151 Bombardier, Inc., Note (Canada) 05-01-12 (R) 6.750 BBB+ 2,790 2,856,151 Media 5.46% 77,739,562 AOL Time Warner, Inc., Bond 04-15-31 7.625 BBB+ 5,565 5,349,022 Bond 05-01-32 7.700 BBB+ 2,765 2,689,073 British Sky Broadcasting Group Plc, Gtd Sr Note (United Kingdom) 07-15-09 8.200 BB+ 5,690 5,827,584 Charter Communications Holdings LLC/Charter Communications Capital Corp., Sr Note 01-15-11 11.125 B+ 1,055 975,875 Sr Note 05-15-11 10.000 B+ 1,875 1,781,250 Sr Note 05-15-11 (R) 10.000 B+ 1,375 1,223,750 Clear Channel Communications, Inc., Sr Note 06-15-05 7.875 BBB- 5,170 5,461,071 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 BBB+ 5,120 5,241,549 Cox Communications, Inc., Note 08-15-04 7.500 BBB 4,155 4,306,616 CSC Holdings, Inc., Sr Note Ser B 04-01-11 7.625 BB+ 2,790 2,581,754 Sr Sub Deb 05-15-16 10.500 BB- 1,880 1,898,800 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 2,655 2,694,825 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 2,485 2,509,850 Grupo Televisa S.A., Bond (Mexico) 03-11-32 (R) 8.500 BBB- 1,125 1,085,625 Note (Mexico) 09-13-11 8.000 BBB- 1,715 1,732,150 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 2,685 2,818,820 Mediacom LLC/Mediacom Capital Corp., Sr Note 01-15-13 9.500 B+ 810 781,650 Sr Note Ser B 04-15-08 8.500 B+ 2,300 2,185,000 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 1,805 1,876,081 News America, Inc., Gtd Sr Note 04-30-28 7.300 BBB- 2,575 2,375,000 Rogers Cablesystems, Ltd., Sr Note Ser B (Canada) 03-15-05 10.000 BBB- 4,880 5,246,000 TCI Communications, Inc., Sr Deb 02-01-12 9.800 BBB+ 1,905 2,076,471 Sr Deb 02-15-26 7.875 BBB+ 2,830 2,553,849 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 3,420 3,808,786
See notes to financial statements. 13
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Media (continued) Univision Communications, Inc., Gtd Sr Note 07-15-11 7.850% BB+ $4,145 $4,279,634 Viacom, Inc., Gtd Sr Note 01-30-06 6.400 A- 4,185 4,379,477 Medical 1.60% 22,756,610 Dynacare, Inc., Sr Note (Canada) 01-15-06 10.750 B+ 3,465 3,586,275 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 3,480 3,401,700 HCA -- The Healthcare Co., Sr Note 06-01-06 7.125 BBB- 3,930 4,071,559 Sr Note 09-01-10 8.750 BBB- 1,845 2,067,673 HealthSouth Corp., Note 06-01-12 (R) 7.625 BBB- 2,770 2,763,075 Sr Note 02-01-08 8.500 BBB- 2,360 2,472,100 Quest Diagnostics, Inc., Gtd Sr Note 07-12-06 6.750 BBB- 2,820 2,913,878 Triad Hospitals, Inc., Gtd Sr Note Ser B 05-01-09 8.750 B- 1,390 1,480,350 Metal 0.20% 2,868,996 Newmont Mining Corp., Note 05-15-11 8.625 BBB 2,600 2,868,996 Mortgage Banking 6.92% 98,507,355 Asset Securitization Corp., Pass Thru Ctf Ser 1997-D4 Class A-1B 04-14-29 7.400 AAA 7,085 7,484,824 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 06-15-31 6.790 Aaa 4,828 5,097,762 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 2,488 2,491,467 Credit Suisse First Boston Mortgage Securities Corp. Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 05-17-04 6.260 AAA 7,829 8,153,582 Deutsche Mortgage & Asset Receiving Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class C 06-15-31 6.861 A2 3,585 3,750,936 DLJ Commercial Mortgage Corp., Commercial Mtg Pass Thru Ctf Ser 1998-CF2 Class A-1A 11-12-31 5.880 Aaa 6,759 6,965,279 First Union National Bank-Chase Manhattan Bank Commercial Mortgage Trust, Commercial Mtg Pass Thru Ctf Ser 1999-C2 Class A-1 06-15-31 6.360 Aaa 4,888 5,095,848 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.411 Aaa 10,587 11,033,900 LB Commercial Conduit Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 5,237 5,481,249 Morgan (J.P.) Commercial Mortgage Finance Corp., Mtg Pass Thru Ctf Ser 1997-C5 Class A-2 09-15-29 7.069 AAA 3,353 3,540,067
See notes to financial statements. 14
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Mortgage Banking (continued) Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920% AAA $12,480 $13,323,997 Morgan Stanley Dean Witter Capital I Trust, Pass Thru Ctf Ser 2001-IQA Class A-1 12-18-32 4.570 Aaa 12,339 12,379,369 Commercial Mtg Pass Thru Ctf Ser 2001-PPM Class A-1 02-01-31 5.980 AAA 6,790 7,051,269 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1996-D1 Class A-6 02-15-25 7.180 AAA 6,436 6,657,806 Oil & Gas 3.83% 54,459,572 Alberta Energy Co., Ltd., Note (Canada) 09-15-30 8.125 A- 2,850 3,213,261 Note (Canada) 11-01-31 7.375 A- 2,890 3,000,051 Anadarko Finance Co., Gtd Note Ser B (Canada) 05-01-11 6.750 BBB+ 2,780 2,897,316 Apache Finance Canada Corp., Gtd Sr Note (Canada) 12-15-29 7.750 A- 2,890 3,251,163 Colonial Pipeline Co., Sr Note 04-15-32 (R) 7.630 A 4,150 4,265,744 Forest Oil Corp., Sr Note 06-15-08 8.000 BB 1,695 1,703,475 Louis Dreyfus Natural Gas Corp., Note 12-01-07 6.875 BBB+ 2,685 2,824,164 Marathon Oil Corp., Sr Note 03-15-32 6.800 BBB+ 3,340 3,247,716 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB 1,080 1,324,588 Sr Note 01-15-07 5.875 BBB 2,815 2,875,860 Ocean Energy, Inc., Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 2,220 2,329,046 Petrobras International Finance Co., Ltd., Sr Note (Brazil) 02-01-07 (R) 9.125 Baa1 4,175 4,039,312 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 7.125 BBB- 1,425 948,907 Petronas Capital, Ltd., Gtd Note (Malaysia) 05-22-12 (R) 7.000 BBB 2,470 2,499,887 Santa Fe Energy Resources, Sr Sub Note 06-15-07 8.750 BBB- 2,575 2,697,570 Tosco Corp., Note 02-15-30 8.125 BBB+ 5,550 6,521,583 Valero Energy Corp., Note 06-15-05 8.375 BBB 1,690 1,850,668 Note 03-15-06 7.375 BBB 3,110 3,299,586 XTO Energy, Inc., Sr Note 04-15-12 7.500 BB 1,645 1,669,675 Paper & Paper Products 1.59% 22,675,221 Bowater Canada Finance Corp., Gtd Note (Canada) 11-15-11 7.950 BBB 2,790 2,877,690
See notes to financial statements. 15
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Paper & Paper Products (continued) International Paper Co., Sr Note 07-08-05 8.125% BBB $4,165 $4,464,297 Stone Container Corp., Sr Note 02-01-11 9.750 B 2,265 2,446,200 Stora Enso Oyj, Sr Note (Finland) 05-15-11 7.375 BBB+ 4,255 4,521,491 Weyerhaeuser Co., Note 08-01-06 6.000 BBB 4,135 4,178,418 Note 03-15-12 (R) 6.750 BBB 4,085 4,187,125 Real Estate Investment Trusts 1.92% 27,305,612 American Health Properties, Inc., Note 01-15-07 7.500 BBB+ 2,350 2,426,375 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB 3,455 3,542,135 Camden Property Trust, Sr Note 04-15-04 7.000 BBB 3,800 3,963,704 Healthcare Realty Trust, Inc., Sr Note 05-01-11 8.125 BBB- 2,600 2,712,996 Liberty Property, L.P., Med Term Note 06-05-02 6.600 BBB 3,030 3,030,273 ProLogis Trust, Sr Note 04-15-04 6.700 BBB+ 3,555 3,666,449 Socgen Real Estate Co., LLC, Perpetual Bond Ser A (7.64% to 09-30-07 then variable) 12-29-49 (R) 7.640 A 7,520 7,963,680 Real Estate Operations 0.11% 1,635,837 EOP Operating, L.P., Sr Note 02-15-05 6.625 BBB+ 1,580 1,635,837 Retail 0.57% 8,173,416 Kroger Co., Gtd Sr Note 04-01-11 6.800 BBB- 4,540 4,725,822 SUPERVALU, Inc., Note 09-15-04 7.625 BBB 3,270 3,447,594 Telecommunications 3.89% 55,407,998 AT&T Corp., Note 03-15-09 6.000 BBB+ 2,720 2,340,258 Note 03-15-29 6.500 BBB+ 2,720 1,975,454 AT&T Wireless Services, Inc., Note 05-01-12 8.125 BBB 2,730 2,661,532 Sr Note 03-01-31 8.750 BBB 5,525 5,292,508 Cingular Wireless, Bond 12-15-31 (R) 7.125 A+ 2,725 2,597,851 Citizens Communications Co., Note 05-15-06 8.500 BBB 2,200 2,280,036 Deutsche Telekom International Finance B.V., Gtd Bond (Netherlands) 06-15-05 7.750 BBB+ 2,325 2,419,976 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 4,255 4,710,923
See notes to financial statements. 16
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Telecommunications (continued) LCI International, Inc., Sr Note 06-15-07 7.250% BB+ $3,160 $2,449,000 PanAmSat Corp., Gtd Sr Note 02-01-12 (R) 8.500 B 1,370 1,373,425 Qwest Capital Funding, Inc., Gtd Note 02-15-11 7.250 BB 4,990 3,767,450 Sprint Capital Corp., Bond 03-15-32 (R) 8.750 BBB+ 2,785 2,652,490 Gtd Note 01-30-06 7.125 BBB+ 5,470 5,269,142 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 01-26-06 8.250 BBB- 5,590 5,911,425 Telus Corp., Note (Canada) 06-01-11 8.000 BBB+ 4,185 4,005,547 Verizon New York, Inc., Sr Deb Ser B 04-01-32 7.375 A+ 2,720 2,744,181 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 2,640 2,956,800 Textile 0.18% 2,605,194 Mohawk Industries, Inc., Note 04-15-12 (R) 7.200 BBB 2,495 2,605,194 Transportation 2.29% 32,541,098 Burlington Northern Santa Fe Corp., Deb 08-15-30 7.950 BBB+ 5,545 6,251,987 Continental Airlines, Inc., Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA 5,097 4,875,327 CSX Corp., Sr Note 03-15-12 6.300 BBB 3,335 3,342,937 Delta Air Lines, Inc., Note 12-15-05 7.700 BB 235 222,075 Northwest Airlines, Inc., Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BB 1,276 1,167,633 Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BB+ 3,202 2,945,542 NWA Trust, Sr Note Ser A 06-21-14 9.250 AA 4,664 4,652,971 Railcar Trust No. 1992-1, Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 6,290 6,538,226 US Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 B 3,855 2,544,400 Utilities 8.89% 126,558,509 AES Corp., Sr Note 06-01-09 9.500 BB- 1,700 1,300,500 Sr Sub Note 07-15-06 10.250 B 3,570 2,356,200 AES Eastern Energy, Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 3,700 3,404,000 Allied Waste North America, Inc., Gtd Sr Note Ser B 04-01-08 8.875 BB- 1,615 1,651,337 Beaver Valley Funding Corp., Sec Lease Oblig Bond 06-01-17 9.000 BBB- 3,960 4,164,415
See notes to financial statements. 17
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE Utilities (continued) BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890% BBB- $6,600 $7,045,632 Calpine Canada Energy Finance ULC, Gtd Sr Note (Canada) 05-01-08 8.500 B+ 2,110 1,740,750 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BBB 10,220 10,220,000 CMS Energy Corp., Sr Note Ser B 01-15-04 6.750 BB 3,595 3,451,200 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 8,017 8,417,850 El Paso Corp., Sr Note 01-15-32 7.750 BBB 4,080 3,844,584 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 2,946 2,975,793 Hydro-Quebec, Gtd Deb Ser FU (Canada) 02-01-12 11.750 A+ 5,000 6,998,500 Gtd Deb Ser IF (Canada) 02-01-03 7.375 A+ 7,185 7,412,333 Iberdrola International B.V., Note 10-01-02 7.500 A+ 8,000 8,112,480 Sr Note (Netherlands) 06-01-03 (R) 7.125 A+ 8,629 8,907,717 Long Island Lighting Co., Deb 03-15-23 8.200 A- 5,615 5,839,600 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) 9.625 BBB- 1,191 1,286,346 Niagara Mohawk Power Corp., Sec Fac Deb Bond 01-01-18 8.770 Baa2 6,740 6,969,295 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 787 850,838 NRG Energy, Inc., Sr Note 04-01-11 7.750 BBB- 4,245 3,866,473 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 3,830 3,882,931 Pinnacle West Capital Corp., Sr Note 04-01-06 6.400 BBB 3,810 3,888,296 PNPP II Funding Corp., Deb 05-30-16 9.120 BBB- 4,120 4,475,432 PSEG Energy Holdings, Inc., Sr Note 02-15-08 8.625 BBB- 2,685 2,709,058 Republic Services, Inc., Sr Note 08-15-11 6.750 BBB 4,150 4,212,707 Waterford 3 Funding Corp., Sec Lease Oblig Bond 01-02-17 8.090 BBB- 6,525 6,574,242
See notes to financial statements. 18
NUMBER OF SHARES OR ISSUER, DESCRIPTION WARRANTS VALUE ------------------------------------------------------------------------------------------------------------ PREFERRED STOCKS AND WARRANTS 1.35% $19,173,270 ------------------------------------------------------------------------------------------------------------ (Cost $19,960,280) California Federal Preferred Capital Corp., 9.125%, Ser A, Preferred Stock 327,190 $8,670,535 CSC Holdings, Inc., 11.125%, Ser M, Preferred Stock 77,653 6,988,770 CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 33,520 3,083,840 MetroNet Communications Corp., Warrant (Canada) (R)*** 4,625 430,125
INTEREST PAR VALUE RATE (000s OMITTED) VALUE ------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS 10.34% $147,165,000 ------------------------------------------------------------------------------------------------------------ (Cost $147,165,000) Joint Repurchase Agreement 10.34% Investment in a joint repurchase agreement transaction with Barclays Capital, Inc. -- Dated 5-31-02, due 6-03-02 (Secured by U.S. Treasury Inflation Indexed Note, 3.875% due 01-15-09) 1.77% $147,165 147,165,000 ------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS 103.90% $1,478,566,034 ------------------------------------------------------------------------------------------------------------ OTHER ASSETS AND LIABILITIES, NET (3.90%) ($55,551,438) ------------------------------------------------------------------------------------------------------------ TOTAL NET ASSETS 100.00% $1,423,014,596 ------------------------------------------------------------------------------------------------------------
Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, the 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 $143,915,203, or 10.11% of net assets as of May 31, 2002. * Credit ratings are unaudited and are rated by Standard and Poor's where available, or Moody's Investor Services or John Hancock Advisers, LLC, where Standard and Poor's ratings are not available. ** A portion of these securities, having an aggregate value of $69,829,938 or 4.91% of the Fund's net assets, has been purchased as forward commitments -- that is, the Fund has agreed on trade date to take delivery of and to make payment for this security on a delayed basis subsequent to the date of this schedule. The purchase price and interest rate of these securities are fixed at trade date, although the Fund does not earn any interest on these securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of the forward commitments. Accordingly, the market value of $71,201,003 of United States Treasury Inflation Indexed Note, 3.375%, 01-15-07, United States Treasury Inflation Indexed Note, 4.250%, 01-15-10, United States Treasury Bond, 5.375%, 02-15-31, and United States Treasury Bond, 8.875%, 08-15-17 has been segregated to cover the forward commitments. *** Non-income producing security. 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. 19 FINANCIAL STATEMENTS ASSETS AND LIABILITIES May 31, 2002 This Statement of Assets and Liabilities is the Fund's balance sheet. It shows the value of what the Fund owns, is due and owes. You'll also find the net asset value and the maximum offering price per share. -------------------------------------------------------------------------------- ASSETS -------------------------------------------------------------------------------- Investments at value (cost $1,461,421,810) $1,478,566,034 Cash 2,644 Receivable for investments sold 24,055,742 Receivable for shares sold 525,735 Dividends and interest receivable 21,707,617 Other assets 130,196 Total assets 1,524,987,968 -------------------------------------------------------------------------------- LIABILITIES -------------------------------------------------------------------------------- Payable for investments purchased 100,186,822 Payable for shares repurchased 286,707 Dividends payable 184,498 Payable to affiliates 1,050,687 Other payables and accrued expenses 264,658 Total liabilities 101,973,372 -------------------------------------------------------------------------------- NET ASSETS -------------------------------------------------------------------------------- Capital paid-in 1,476,416,272 Accumulated net realized loss on investments (70,400,460) Net unrealized appreciation of investments 17,144,224 Distributions in excess of net investment income (145,440) Net assets $1,423,014,596 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE -------------------------------------------------------------------------------- Based on net asset values and shares outstanding Class A ($1,143,696,949 / 77,767,873 shares) $14.71 Class B ($235,586,777 / 16,019,099 shares) $14.71 Class C ($43,721,041 / 2,972,921 shares) $14.71 Class I ($9,829 / 668 shares) $14.71 -------------------------------------------------------------------------------- MAXIMUM OFFERING PRICE PER SHARE -------------------------------------------------------------------------------- Class A(1) ($14.71 / 95.5%) $15.40 Class C ($14.71 / 99%) $14.86 (1) 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. See notes to financial statements. 20 FINANCIAL STATEMENTS OPERATIONS For the year ended May 31, 2002 This 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. -------------------------------------------------------------------------------- INVESTMENT INCOME -------------------------------------------------------------------------------- Interest (including securities lending income of $238,328) $92,450,853 Dividend 1,870,830 Total investment income 94,321,683 -------------------------------------------------------------------------------- EXPENSES -------------------------------------------------------------------------------- Investment management fee 7,120,006 Class A distribution and service fee 3,452,059 Class B distribution and service fee 2,366,897 Class C distribution and service fee 366,181 Class A, B and C transfer agent fee 3,557,616 Class I transfer agent fee 4 Accounting and legal services fee 299,627 Custodian fee 250,961 Registration and filing fee 91,575 Trustees' fee 84,304 Miscellaneous 52,929 Printing 47,447 Auditing fee 41,000 Legal fee 24,819 Total expenses 17,755,425 Net investment income 76,566,258 -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -------------------------------------------------------------------------------- Net realized loss on investments (2,029,586) Change in unrealized appreciation (depreciation) of investments 6,556,254 Net realized and unrealized gain 4,526,668 Increase in net assets from operations $81,092,926 See notes to financial statements. 21 FINANCIAL STATEMENTS CHANGES IN NET ASSETS This 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, if any, and any increase or decrease in money shareholders invested in the Fund. YEAR YEAR ENDED ENDED 5-31-01 5-31-02 -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS -------------------------------------------------------------------------------- From operations Net investment income $84,683,998 $76,566,258 Net realized gain (loss) 5,032,003 (2,029,586) Change in net unrealized appreciation (depreciation) 65,332,336 6,556,254 Increase in net assets resulting from operations 155,048,337 81,092,926 Distributions to shareholders From net investment income Class A (71,799,469) (66,846,281) Class B (11,680,442) (12,081,364) Class C (1,204,086) (1,858,217) Class I(1) -- (465) (84,683,997) (80,786,327) From fund share transactions (5,151,356) 38,414,077 -------------------------------------------------------------------------------- NET ASSETS -------------------------------------------------------------------------------- Beginning of period 1,319,080,936 1,384,293,920 End of period(2) $1,384,293,920 $1,423,014,596 (1) Class I began operations on 9-4-01. (2) Includes distributions in excess of net investment income of $79,158 and $145,440, respectively. See notes to financial statements. 22 FINANCIAL HIGHLIGHTS CLASS A SHARES The Financial Highlights show how the Fund's net asset value for a share has changed since the end of the previous period.
PERIOD ENDED 5-31-98 5-31-99 5-31-00 5-31-01 5-31-02(1) --------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE --------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.78 $15.25 $14.76 $13.93 $14.69 Net investment income(2) 1.05 0.97 0.96 0.92 0.82 Net realized and unrealized gain (loss) on investments 0.47 (0.49) (0.83) 0.76 0.06 Total from investment operations 1.52 0.48 0.13 1.68 0.88 Less distributions From net investment income (1.05) (0.97) (0.96) (0.92) (0.86) Net asset value, end of period $15.25 $14.76 $13.93 $14.69 $14.71 Total return(3) (%) 10.54 3.11 0.97 12.38 6.10 --------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA --------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $1,328 $1,279 $1,098 $1,140 $1,144 Ratio of expenses to average net assets (%) 1.08 1.07 1.11 1.12 1.11 Ratio of net investment income to average net assets (%) 6.90 6.35 6.69 6.38 5.51 Portfolio turnover (%) 198 228 162 235 189
See notes to financial statements. 23 FINANCIAL HIGHLIGHTS CLASS B SHARES
PERIOD ENDED 5-31-98 5-31-99 5-31-00 5-31-01 5-31-02(1) --------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE --------------------------------------------------------------------------------------------------- Net asset value, beginning of period $14.78 $15.25 $14.76 $13.93 $14.69 Net investment income(2) 0.95 0.86 0.86 0.83 0.72 Net realized and unrealized gain (loss) on investments 0.47 (0.49) (0.83) 0.76 0.06 Total from investment operations 1.42 0.37 0.03 1.59 0.78 Less distributions From net investment income (0.95) (0.86) (0.86) (0.83) (0.76) Net asset value, end of period $15.25 $14.76 $13.93 $14.69 $14.71 Total return(3) (%) 9.78 2.39 0.27 11.64 5.37 --------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA --------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $166 $239 $197 $218 $236 Ratio of expenses to average net assets (%) 1.78 1.77 1.81 1.78 1.81 Ratio of net investment income to average net assets (%) 6.18 5.65 6.00 5.71 4.81 Portfolio turnover (%) 198 228 162 235 189
See notes to financial statements. 24 FINANCIAL HIGHLIGHTS CLASS C SHARES PERIOD ENDED 5-31-99(4) 5-31-00 5-31-01 5-31-02(1) -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE -------------------------------------------------------------------------------- Net asset value, beginning of period $15.61 $14.76 $13.93 $14.69 Net investment income(2) 0.55 0.85 0.82 0.72 Net realized and unrealized gain (loss) on investments (0.85) (0.83) 0.76 0.06 Total from investment operations (0.30) 0.02 1.58 0.78 Less distributions From net investment income (0.55) (0.85) (0.82) (0.76) Net asset value, end of period $14.76 $13.93 $14.69 $14.71 Total return(3) (%) 1.95(5) 0.28 11.60 5.36 -------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA -------------------------------------------------------------------------------- Net assets, end of period (in millions) $21 $24 $26 $44 Ratio of expenses to average net assets (%) 1.77(6) 1.80 1.82 1.81 Ratio of net investment income to average net assets (%) 5.65(6) 6.01 5.66 4.81 Portfolio turnover (%) 228 162 235 189 See notes to financial statements. 25 FINANCIAL HIGHLIGHTS CLASS I SHARES PERIOD ENDED 5-31-02(1,4) -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE -------------------------------------------------------------------------------- Net asset value, beginning of period $14.96 Net investment income(2) 0.66 Net realized and unrealized loss on investments (0.21) Total from investment operations 0.45 Less distributions From net investment income (0.70) Net asset value, end of period $14.71 Total return(3) (%) 3.04(5) -------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA -------------------------------------------------------------------------------- Net assets, end of period (in millions) --(7) Ratio of expenses to average net assets (%) 0.68(6) Ratio of net investment income to average net assets (%) 5.94(6) Portfolio turnover (%) 189 (1) As required, effective June 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The effect of this change on per share amounts for the year ended May 31, 2002 was to decrease net investment income per share by $0.04, increase (decrease) net realized and unrealized gains (losses) per share by $0.04 and, had the Fund not made these changes to amortization and accretion, the annualized ratio of net investment income to average net assets would have been 5.81%, 5.11%, 5.09% and 6.24% for Class A, Class B, Class C and Class I shares, respectively. Per share ratios and supplemental data for periods prior to June 1, 2001 have not been restated to reflect this change in presentation. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment and does not reflect the effect of sales charges. (4) Class C shares and Class I shares began operations on 10-1-98 and 9-4-01, respectively. (5) Not annualized. (6) Annualized. (7) Less than $500,000. See notes to financial statements. 26 NOTES TO STATEMENTS NOTE A Accounting policies John Hancock Bond Fund (the "Fund") is a diversified series of John Hancock Sovereign Bond Fund, an 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. The Trustees have authorized the issuance of multiple classes of shares of the Fund, designated as Class A, Class B, Class C and Class I shares. The shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights to voting, redemptions, dividends and liquidation, except that certain expenses, subject to the approval of the Trustees, may be applied differently to each class of shares in accordance with current regulations of the Securities and Exchange Commission and the Internal Revenue Service. Shareholders of a class that bears distribution and service expenses under terms of a distribution plan have exclusive voting rights to that distribution plan. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for 27 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. Some securities may be purchased on a "when-issued" or "forward delivery" basis, which means that the securities will be delivered to the Fund at a future date, usually beyond customary settlement date. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. 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, and transfer agent fees for Class I shares, are calculated daily at the class level based on the appropriate net assets of each class and the specific expense rate(s) applicable to each class. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. 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. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $475 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended May 31, 2002. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. On May 31, 2002, the Fund loaned securities having a market value of $277,030,349 collateralized by securities in the amount of $284,023,016. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $52,791,015 of capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent such carryforward is used by the Fund, no capital gain distribution will be made. The Fund's carryforward expires as follows: May 31, 2002 -- $6,745,254, May 31, 2004 -- $8,402,805, 28 May 31, 2005 -- $1,183,431, May 31, 2007 -- $619,870, May 31, 2008 -- $15,467,220 and May 31, 2009 -- $20,372,435. Availability of a certain amount of loss carryforwards, which were acquired on September 15, 1995 in a merger, may be limited in a given year. Additionally, net capital losses of $16,277,978, attributable to security transactions incurred after October 31, 2001, are treated as arising on June 1, 2002, the first day of the Fund's next taxable year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date. Interest income on investment securities is recorded on the accrual basis. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. The Fund's net investment income is declared daily as dividends to shareholders of record as of the close of business on the preceding day, and distributed monthly. During the year ended May 31, 2002, the tax character of distributions paid was as follows: ordinary income $80,786,327. Distributions 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. As of May 31, 2002, the components of distributable earnings on a tax basis included $127,446 of undistributed ordinary income. Such distributions and distributable earnings on a tax basis are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser 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 Distribution Plans with John Hancock Funds, LLC ("JH Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted Distribution Plans with respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the Investment Company Act of 1940 to reimburse JH Funds for the services it provides as distributor of shares of the Fund. Accordingly, the Fund makes monthly payments to JH Funds at an annual rate not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B and Class C average daily net assets. A maximum of 0.25% of such payments may be service fees as defined by the Conduct Rules of the National Association of Securities Dealers. Under the Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could occur under certain circumstances. Class A and Class C shares are assessed up-front sales charges. During the year 29 ended May 31, 2002, JH Funds received net up-front sales charges of $1,430,177 with regard to sales of Class A shares. Of this amount, $128,192 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $743,218 was paid as sales commissions to unrelated broker-dealers and $558,767 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect sole shareholder of Signator Investors. During the year ended May 31, 2002, JH Funds received net up-front sales charges of $241,401 with regard to sales of Class C shares. Of this amount, $235,287 was paid as sales commissions to unrelated broker-dealers and $6,114 was paid as sales commissions to sales personnel of Signator Investors. Class B shares that are redeemed within six years of purchase are subject to a contingent deferred sales charge ("CDSC") at declining rates, beginning at 5.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Class C shares that are redeemed within one year of purchase are subject to a CDSC at a rate of 1.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Proceeds from the CDSCs are paid to JH Funds and are used in whole or in part to defray its expenses for providing distribution-related services to the Fund in connection with the sale of Class B and Class C shares. During the year ended May 31, 2002, CDSCs received by JH Funds amounted to $548,374 for Class B shares and $18,011 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc., an indirect subsidiary of JHLICo. For Class A, B and C shares, the Fund pays a monthly transfer agent fee based on the number of shareholder accounts, plus certain out-of-pocket expenses, aggregated and allocated to each class on the basis of their relative net asset values. For Class I shares, the Fund pays a monthly transfer agent fee at an annual rate of 0.05% of the average daily net assets attributable to Class I shares, plus certain out-of-pocket expenses. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. 30 NOTE C Fund share transactions This listing illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 5-31-01 YEAR ENDED 5-31-02 SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------------------------------- CLASS A SHARES --------------------------------------------------------------------------------------- Sold 20,329,913 $292,695,235 9,535,119 $141,492,300 Distributions reinvested 3,885,469 56,285,950 3,593,103 53,313,751 Repurchased (25,386,067) (365,444,508) (12,985,535) (192,313,344) Net increase (decrease) (1,170,685) ($16,463,323) 142,687 $2,492,707 --------------------------------------------------------------------------------------- CLASS B SHARES --------------------------------------------------------------------------------------- Sold 4,030,445 $58,808,128 5,168,809 $76,839,086 Distributions reinvested 438,799 6,362,603 471,880 6,999,215 Repurchased (3,783,675) (54,786,515) (4,458,118) (65,938,032) Net increase 685,569 $10,384,216 1,182,571 $17,900,269 --------------------------------------------------------------------------------------- CLASS C SHARES --------------------------------------------------------------------------------------- Sold 1,373,262 $19,986,436 1,777,434 $26,375,380 Distributions reinvested 43,807 633,249 71,089 1,053,001 Repurchased (1,370,639) (19,691,934) (637,152) (9,417,343) Net increase 46,430 $927,751 1,211,371 $18,011,038 --------------------------------------------------------------------------------------- CLASS I SHARES(1) --------------------------------------------------------------------------------------- Sold -- -- 668 $10,063 Net increase -- -- 668 $10,063 --------------------------------------------------------------------------------------- NET INCREASE (DECREASE) (438,686) ($5,151,356) 2,537,297 $38,414,077 ---------------------------------------------------------------------------------------
(1) Class I shares began operations on 9-4-01. NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended May 31, 2002, aggregated $1,970,868,282 and $1,526,325,069, respectively. Purchases and proceeds from sales of obligations of the U.S. government, during the year ended May 31, 2002, aggregated $693,455,035 and $972,035,980, respectively. The cost of investments owned on May 31, 2002, including short-term investments, for federal income tax purposes was $1,468,462,303. Gross unrealized appreciation and depreciation of investments aggregated $33,705,272 and $23,601,541, respectively, resulting in net unrealized appreciation of $10,103,731. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax deferral of losses on wash sales and amortization of premiums on debt securities. NOTE E Reclassification of accounts During the year ended May 31, 2002, the Fund reclassified amounts to reflect an increase in accumulated net realized loss on investments of $6,974,837, a decrease in distributions in excess of net investment income of $12,684,120 and a decrease in capital paid-in of $5,709,283. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of May 31, 2002. Additional 31 adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income (loss) per share in the financial highlights excludes these adjustments. NOTE F Change in accounting principle Effective June 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $8,530,333 reduction in the cost of investments and a corresponding increase in net unrealized appreciation of investments, based on securities held as of May 31, 2001. The effect of this change for the year ended May 31, 2002 was to decrease net investment income by $4,220,069, decrease unrealized appreciation of investments by $2,821,308 and decrease net realized loss on investments by $7,041,377. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in presentation. NOTE G Subsequent event On May 29, 2002, the shareholders of the John Hancock Active Bond Fund ("Active Bond Fund") approved a plan of reorganization, which provided for the transfer of substantially all of the assets and liabilities of the Active Bond Fund to the Fund on June 7, 2002. 32 AUDITORS' REPORT Report of Ernst & Young LLP, Independent Auditors To the Board of Trustees and Shareholders of John Hancock Bond Fund of John Hancock Sovereign Bond Fund, We have audited the accompanying statement of assets and liabilities of the John Hancock Bond Fund (the "Fund"), one of the portfolios constituting the John Hancock Sovereign Bond Fund, including the schedule of investments, as of May 31, 2002, the related statement of operations for the year then ended, the statements 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 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 auditing standards generally accepted in the United States. 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 May 31, 2002, by correspondence with the custodian and brokers, or other appropriate auditing procedures where 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 the John Hancock Bond Fund of the John Hancock Sovereign Bond Fund at May 31, 2002, 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 the financial highlights for each of the indicated periods, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts July 5, 2002 33 TAX INFORMATION Unaudited For federal income tax purposes, the following information is furnished with respect to the dividends of the Fund paid during its taxable year ended May 31, 2002. With respect to the ordinary dividends paid by the Fund for the fiscal year ended May 31, 2002, 2.32% of the dividends qualify for the dividends-received deduction. Shareholders will be mailed a 2002 U.S. Treasury Department Form 1099-DIV in January 2003. This will reflect the total of all distributions that are taxable for calendar year 2002. 34 TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock Fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE(1) BY TRUSTEE ------------------------------------------------------------------------------------------------------- Dennis S. Aronowitz, Born: 1931 1988 31 ------------------------------------------------------------------------------------------------------- Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. ------------------------------------------------------------------------------------------------------- Richard P. Chapman, Jr., Born: 1935 1975 31 ------------------------------------------------------------------------------------------------------- Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). ------------------------------------------------------------------------------------------------------- William J. Cosgrove, Born: 1933 1991 31 ------------------------------------------------------------------------------------------------------- Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). ------------------------------------------------------------------------------------------------------- Richard A. Farrell(2), Born: 1932 1996 31 ------------------------------------------------------------------------------------------------------- President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); Trustee, Marblehead Savings Bank (since 1994), prior to 1980, headed the venture capital group at Bank of Boston Corporation. ------------------------------------------------------------------------------------------------------- Gail D. Fosler(2), Born: 1947 1994 31 ------------------------------------------------------------------------------------------------------- Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and
35
NUMBER OF NAME, AGE TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE(1) BY TRUSTEE ------------------------------------------------------------------------------------------------------- Gail D. Fosler, Born: 1947 (Continued) ------------------------------------------------------------------------------------------------------- DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). ------------------------------------------------------------------------------------------------------- William F. Glavin, Born: 1932 1996 31 ------------------------------------------------------------------------------------------------------- President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. ------------------------------------------------------------------------------------------------------- John A. Moore(2), Born: 1939 1996 37 ------------------------------------------------------------------------------------------------------- President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). ------------------------------------------------------------------------------------------------------- Patti McGill Peterson, Born: 1943 1996 37 ------------------------------------------------------------------------------------------------------- Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). ------------------------------------------------------------------------------------------------------- John W. Pratt, Born: 1931 1996 31 ------------------------------------------------------------------------------------------------------- Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998).
INTERESTED TRUSTEES(3)
NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE(1) BY TRUSTEE ------------------------------------------------------------------------------------------------------- John M. Deciccio, Born: 1948 2001 59 ------------------------------------------------------------------------------------------------------- Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). ------------------------------------------------------------------------------------------------------- Maureen R. Ford, Born: 1955 2000 59 ------------------------------------------------------------------------------------------------------- Trustee, Chairman, President and Chief Executive Officer Executive Vice President, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and
36
NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND TRUSTEE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER OF FUND FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE(1) BY TRUSTEE ------------------------------------------------------------------------------------------------------- Maureen R. Ford, Born: 1955 (Continued) ------------------------------------------------------------------------------------------------------- Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND OFFICER PRINCIPAL OCCUPATION(S) AND OF FUND DIRECTORSHIPS DURING PAST 5 YEARS SINCE ------------------------------------------------------------------------------------------------------- William L. Braman, Born: 1953 2000 ------------------------------------------------------------------------------------------------------- Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Baring Asset Management, London UK (until 2000). ------------------------------------------------------------------------------------------------------- Richard A. Brown, Born: 1949 2000 ------------------------------------------------------------------------------------------------------- Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). ------------------------------------------------------------------------------------------------------- Thomas H. Connors, Born: 1959 1992 ------------------------------------------------------------------------------------------------------- Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. ------------------------------------------------------------------------------------------------------- William H. King, Born: 1952 1988 ------------------------------------------------------------------------------------------------------- Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). ------------------------------------------------------------------------------------------------------- Susan S. Newton, Born: 1950 1984 ------------------------------------------------------------------------------------------------------- Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts 02199. The Statement of Additional Information of the Fund includes additional information about members of the Board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-225-5291. (1) Each Trustee serves until resignation, retirement age or until his or her successor is elected. (2) Member of Audit Committee. (3) Interested Trustees hold positions with the Fund's investment adviser, underwriter and certain other affiliates. 37 OUR FAMILY OF FUNDS ================================================================================ Equity Balanced Fund Core Equity Fund Focused Equity Fund Growth Trends Fund Large Cap Equity Fund Large Cap Growth Fund Large Cap Spectrum Fund Mid Cap Growth Fund Multi Cap Growth Fund Small Cap Equity Fund Small Cap Growth Fund Sovereign Investors Fund U.S. Global Leaders Growth Fund ================================================================================ Sector Biotechnology Fund Financial Industries Fund Health Sciences Fund Real Estate Fund Regional Bank Fund Technology Fund ================================================================================ Income Bond Fund Government Income Fund High Income Fund High Yield Bond Fund Investment Grade Bond Fund Strategic Income Fund ================================================================================ International European Equity Fund Global Fund International Fund Pacific Basin Equities Fund ================================================================================ Tax-Free Income California Tax-Free Income Fund High Yield Municipal Bond Fund Massachusetts Tax-Free Income Fund New York Tax-Free Income Fund Tax-Free Bond Fund ================================================================================ Money Market Money Market Fund U.S. Government Cash Reserve 38 ELECTRONIC DELIVERY Now available from John Hancock Funds Instead of receiving annual and semiannual reports and prospectuses through the U.S. mail, we'll notify you by e-mail when these documents are available for online viewing. How does electronic delivery benefit you? o No more waiting for the mail to arrive; you'll receive an e-mail notification as soon as the document is ready for online viewing. o Reduces the amount of paper mail you receive from John Hancock Funds. o Reduces costs associated with printing and mailing. Sign up for electronic delivery today at www.jhancock.com/funds/edelivery 39 OUR WEB SITE Available just a few clicks away -- www.jhfunds.com Instant access to --------------------------------------- Portfolio/Account Information --------------------------------------- Proxy Voting --------------------------------------- Daily Mutual Fund Prices --------------------------------------- Mutual Fund Overviews --------------------------------------- Prospectuses --------------------------------------- 4 & 5 Star Funds --------------------------------------- IRA Information/Calculators --------------------------------------- Annual & Semiannual Reports --------------------------------------- Investment Professionals --------------------------------------- Mutual Fund FAQs 40 FOR YOUR INFORMATION INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 PRINCIPAL DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, Massachusetts 02217-1000 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the internet www.jhfunds.com By regular mail John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 By express mail John Hancock Signature Services, Inc. Attn: Mutual Fund Image Operations 529 Main Street Charlestown, MA 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 TDD line 1-800-554-6713 41 [LOGO](R) ------------------ JOHN HANCOCK FUNDS 1-800-225-5291 1-800-554-6713 (TDD) 1-800-338-8080 EASI-Line www.jhfunds.com Now available: electronic delivery www.jhancock.com/funds/edelivery This report is for the information of the shareholders of the John Hancock Bond Fund. 2100A 5/02 7/02