July 21, 2004
EDGAR
United States Securities and
Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form N-CSR
John Hancock Sovereign Bond Trust (the "Registrant") on behalf of:
John Hancock Bond Fund
File Nos. 2-48925; 811-2402
Ladies and Gentlemen:
Enclosed herewith for filing pursuant to the Investment Company Act of 1940
and the Securities Exchange Act of 1934 is the Registrant's Form N-CSR filing
for the period ending May 31, 2004.
If you have any questions or comments regarding this filing, please contact
the undersigned at (617) 375-1722.
Sincerely,
/s/Brian E. Langenfeld
Brian E. Langenfeld
Attorney and Assistant Secretary
ITEM 1. REPORT TO SHAREHOLDERS.
JOHN HANCOCK
Bond Fund
5.31.2004
Annual Report
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of James A. Shepherdson, Chairman, President and Chief Executive
Officer of John Hancock Funds, LLC, 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 21
Trustees & officers
page 38
For your information
page 41
To Our Shareholders,
I am pleased to be writing to you as Chairman, President and Chief
Executive Officer of John Hancock Funds, LLC.
As you may know, John Hancock Financial Services, Inc. -- the parent
company of John Hancock Funds -- was acquired by Manulife Financial
Corporation on April 28, 2004. Although this change has no impact on the
mutual funds you have invested in, it did bring with it some changes in
the executive-level management of John Hancock Funds. Specifically,
Maureen Ford Goldfarb has decided to step down as Chairman, President
and Chief Executive Officer of John Hancock Funds, LLC in order to
pursue personal interests, and I was named her replacement. Since her
appointment in January 2000, Maureen has provided John Hancock Funds
with strong leadership and steady guidance through several years of
extremely turbulent market and industry conditions.
Additionally, on May 12, 2004, your fund's Board of Trustees appointed
me to the roles of Trustee, President and Chief Executive Officer of
your fund. On June 15, 2004, the board also appointed Charles L. Ladner
as independent Chairman of the Board of Trustees, a position previously
held by Ms. Goldfarb. This appointment came just in advance of new SEC
regulations requiring all mutual funds to have independent chairmen.
As to our backgrounds, I have been in the investment business for over
25 years, most recently as President of Retirement Services at John
Hancock Financial Services. My responsibilities included developing and
directing the sale of John Hancock's variable and fixed annuity products
through a diverse distribution network of banks and broker-dealers --
including wirehouses, regional brokerage houses and financial planners.
Mr. Ladner has served as an independent member of John Hancock Funds'
Board of Trustees since 1992 and formerly held the position of Senior
Vice President and Chief Financial Officer of UGI Corporation, a public
utility holding company in Valley Forge, PA, until his retirement in
1998. He brings a wealth of knowledge, experience and leadership and we
are delighted to have him serve as Chairman.
Although there has been change in executive-level management, the one
thing that never wavers is John Hancock Funds' commitment to placing the
needs of our shareholders above all else. We are all dedicated to the
task of working with you and your financial advisor to help you reach
your long-term financial goals.
Sincerely,
/S/ JAMES A. SHEPHERDSON
James A. Shepherdson,
Chief Executive Officer
This commentary reflects the CEO's views as of May 31, 2004. They are
subject to change at any time.
YOUR FUND
AT A GLANCE
The Fund seeks
a high level of
current income
consistent with
prudent invest-
ment risk by
investing at least
80% of its assets
in a diversified
portfolio of bonds
and other debt
securities, includ-
ing corporate
bonds and U.S.
government and
agency securities.
Over the last twelve months
* Bonds posted losses as improving economic conditions led to rising
interest rates.
* Lower-quality corporate bonds and mortgage-backed securities posted
positive results, while Treasury and government bonds declined.
* The Fund began to shift toward a more defensive posture near the end
of the period.
[Bar chart with heading "John Hancock Bond Fund." Under the heading is a
note that reads "Fund performance for the year ended May 31, 2004." The
chart is scaled in increments of 1% with -1% at the bottom and 5% at the
top. The first bar represents the 0.31% total return for Class A shares.
The second bar represents the -0.39% total return for Class B shares. The
third bar represents the 0.39% total return for Class C shares. The fourth
bar represents the 0.78% total return for Class I shares and the fifth bar
represents the 4.30%* total return for Class R shares. A note below the
chart reads "Total returns for the Fund are at net asset value with all
distributions reinvested."]
Top 10 issuers
21.0% Federal National Mortgage Assn.
11.6% United States Treasury
3.1% Federal Home Loan Mortgage Corp.
3.0% Financing Corp.
1.2% Government National Mortgage Assn.
1.2% Midland Funding Corp. II
1.1% Ameriquest Mortgage Securities, Inc.
1.1% Sprint Capital Corp.
1.0% HCA, Inc.
0.9% Time Warner, Inc.
As a percentage of net assets on May 31, 2004.
1
BY HOWARD C. GREENE, CFA, BARRY H. EVANS, CFA AND BENJAMIN A. MATTHEWS,
PORTFOLIO MANAGERS
MANAGERS' REPORT
JOHN HANCOCK
Bond Fund
"Bonds declined during
the year ended May 31,
2004, as improving eco-
nomic conditions led to
rising interest rates."
Bonds declined during the year ended May 31, 2004, as improving economic
conditions led to rising interest rates. After several years of sluggish
growth, the U.S. economy rebounded sharply, growing at an 8% annual pace
in the third quarter of 2003 -- its strongest quarter in 20 years -- and
an annual rate of more than 4% in the two subsequent quarters. Healthy
employment growth during the last few months of the period lent further
credence to the economy's solid recovery.
The combination of an expanding economy and rising commodities prices
(especially oil) pushed bond yields higher and bond prices lower during
the past year. Yields bottomed at 45-year lows in June 2003, then rose
sharply during the ensuing summer months and again in the spring of
2004. As a result, the bond market posted modest losses overall; the
broad Lehman Brothers U.S. Aggregate Index returned -0.44% for the
one-year period.
The best returns in the bond market came from lower-quality corporate
bonds, which typically perform well during an economic recovery. In
particular, "high-yield" corporate bonds posted double-digit gains over
the past year. Mortgage-backed securities also produced positive
results, while higher-quality corporate and government bonds declined.
FUND PERFORMANCE
For the year ended May 31, 2004, the John Hancock Bond Fund's Class A,
Class B, Class C and Class I shares posted total returns of 0.31%,
- -0.39%, -0.39% and 0.78%, respectively, at net asset value. By
comparison, the average A-rated corporate debt fund returned -0.64%,
according to Lipper, Inc.1, and the Lehman Brothers Government/Credit
Bond Index returned -1.52%. Class R shares, which were launched on
August 5, 2003, returned 4.30% at net asset value from inception through
May 31, 2004.
2
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. See pages six and seven for historical
performance information.
[Photos of Howard Greene, Barry Evans and Ben Matthews flush right next to
first paragraph.]
The Fund's outperformance of its peer group and the index was the result of
positioning we established before the one-year period began. We increased our
exposure to mortgage-backed securities and lower-quality corporate bonds, both
of which were attractively valued after underperforming the high-quality
segments of the bond market. In addition, we expected the lower-rated
corporates to outperform when the economy rebounded.
LOWER QUALITY, BETTER RESULTS
We typically invest about half of the portfolio's assets in corporate
bonds, and the past year was no exception. The vast majority of these
holdings were in lower-rated bonds. Below-investment-grade securities
made up more than 20% of the portfolio, and a similar percentage was
devoted to bonds rated BBB, the lowest investment-grade rating. These
lower-quality bonds posted impressive results during the one-year period
as the emerging economic recovery strengthened the financial position of
many corporations.
One of the portfolio's better performers during the past year was
department store retailer J.C. Penney. Penney is in the process of
selling Eckerd, a drug store chain the company purchased eight years
ago. Penney is expected to use the proceeds from this sale to pay down
debt and improve its balance sheet, which should in turn boost its
credit standing.
"...our sizable position
in mortgage-backed
bonds provided a lift
to performance."
In recent months, we have been trimming some of our lower-quality
corporate holdings. The strong run-up in this segment of the market has
pushed valuations above historical norms, so we have reduced our
exposure in selected names. For example, we sold our positions in the
bonds of two chemical companies, Lyondell Chemical and Nova Chemicals.
These bonds rallied as the economic recovery boosted demand in the
chemicals industry, but a sharp rise in raw-material costs led us to
take profits in these names.
3
MORTGAGES PAY OFF
In late 2002, we doubled the portfolio's stake in mortgage-backed
securities, which had underperformed as historically low interest rates
led many homeowners to refinance their mortgages. We expected rates to
rise in 2003, putting a lid on refinancing activity. This didn't happen
until the second half of 2003, but when it did, our sizable position in
mortgage-backed bonds provided a lift to performance. As with our
lower-rated corporate bonds, we have recently reduced our holdings of
mortgage-backed securities in light of their outperformance over the
past year.
[Table at top left-hand side of page entitled "Top five sectors." The first
listing is Government -- U.S. agencies 28%, the second is Government --
U.S. 12%, the third is Utilities 9%, the fourth is Mortgage banking 7% and
the fifth is Telecommunications 6%.]
SHIFTING TO A MORE CONSERVATIVE POSITION
During the last few months of the period, we began to reposition the
portfolio in anticipation of rising interest rates. We made several
changes to the portfolio, including upgrading its overall credit
quality. As mentioned before, we cut back on our holdings of
lower-quality corporate bonds, especially those rated below BB. In their
place, we have added more asset-backed securities -- bonds backed by
home-equity loans, auto loans and credit-card debt. These securities
typically have shorter maturities and very high credit quality.
[Pie chart at middle of page with heading "Portfolio diversification As a
percentage of net assets on 5-31-04." The chart is divided into four
sections (from top to left): Corporate bonds 53%, U.S. government and agency
bonds 40%, Short-term investments & other 6% and Preferred stocks 1%.]
We continued to reduce the interest rate sensitivity of the portfolio to limit
the negative impact of higher rates. We also adjusted our maturity structure,
largely by selling bonds maturing in 5-10 years -- which tend to decline to a
greater degree in a rising interest rate environment -- while generally
expanding our holdings of shorter-term securities. These shorter-term
securities included floating-rate notes, which reset their interest rates at
4
regular intervals (such as monthly or quarterly). Floating-rate notes are
among the few types of bonds that can benefit when interest rates increase.
[Table at top of page entitled "SCORECARD." The header for the left column
is "INVESTMENT" and the header for the right column is "PERIOD'S
PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is Mizuho
Financial followed by an up arrow with the phrase "Benefited from growth in
China and strengthening Japanese bank industry." The second listing is Corn
Products International followed by an up arrow with the phrase "Higher
earnings and reduced debt stoked expectations for a credit upgrade." The
third listing is Long-term Treasury bonds followed by a down arrow with the
phrase "The most interest rate-sensitive bonds fell as rates rose."]
OUTLOOK
We expect interest rates to rise further in the second half of 2004.
Given the recent resurgence in job growth (the one missing component in
the recovery), the Federal Reserve is likely to start raising short-term
rates in the near future. Although we expect the Fed to raise rates
gradually, it clearly signals the end of historically low rates.
"Although we expect the
Fed to raise rates gradually,
it clearly signals the end of
historically low rates."
In this environment, our goal is to play defense and protect our
shareholders' investments. We intend to continue reducing the
portfolio's credit risk and interest rate sensitivity while increasing
its holdings of floating-rate notes and other defensive securities.
This commentary reflects the views of the portfolio managers through the
end of the Fund's period discussed in this report. The managers'
statements reflect their own opinions. As such, they are in no way
guarantees of future events, and are not intended to be used as
investment advice or a recommendation regarding any specific security.
They are also subject to change at any time 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, 2004
Class A Class B Class C Class I 1 Class R 1
Inception date 11-9-73 11-23-93 10-1-98 9-4-01 8-5-03
Average annual returns with maximum sales charge (POP)
One year -4.21% -5.16% -2.34% 0.78% --
Five years 5.28% 5.21% 5.31% -- --
Ten years 6.60% 6.52% -- -- --
Since inception -- -- 4.32% 5.89% --
Cumulative total returns with maximum sales charge (POP)
One year -4.21% -5.16% -2.34% 0.78% --
Five years 29.36% 28.91% 29.55% -- --
Ten years 89.51% 88.10% -- -- --
Since inception -- -- 27.08% 16.96% 4.30%
SEC 30-day yield as of May 31, 2004
4.02% 3.52% 3.49% 4.67% 3.92%
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. Sales charge is not
applicable for Class I or Class R shares. Effective July 15, 2004, the 1%
up-front sales charge on Class C shares was eliminated. 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.
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 Class I and
Class R share prospectuses.
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.
Cum Value Cum Value Lehman Brothers
of $10K of $10K Government/Credit
Plot Date (No Load) (W/Load) Bond Index
6-30-94 $9,981 $9,531 $9,977
11-30-94 10,014 9,562 9,997
5-31-95 11,248 10,741 11,161
11-30-95 11,883 11,347 11,825
5-31-96 11,781 11,250 11,618
11-30-96 12,662 12,091 12,487
5-31-97 12,849 12,270 12,536
11-30-97 13,670 13,053 13,412
5-31-98 14,205 13,564 13,975
11-30-98 14,750 14,085 14,800
5-31-99 14,649 13,988 14,544
11-30-99 14,690 14,028 14,606
5-31-00 14,783 14,116 14,822
11-30-00 15,801 15,089 15,924
5-31-01 16,613 15,864 16,727
11-30-01 17,411 16,626 17,759
5-31-02 17,627 16,832 18,040
11-30-02 18,169 17,350 19,058
5-31-03 19,789 18,896 20,669
11-30-03 19,760 18,869 20,276
5-31-04 19,846 18,951 20,354
Line chart with the heading "GROWTH OF $10,000." Within the chart are three
lines. The first line represents the Index and is equal to $20,354 as of
May 31, 2004. The second line represents the value of the hypothetical
$10,000 investment made in the John Hancock Bond Fund, before sales charge,
and is equal to $19,846 as of May 31, 2004. The third line represents the
same hypothetical $10,000 investment made in the John Hancock Bond Fund,
after sales charge, and is equal to $18,951 as of May 31, 2004.
Class B 1 Class C 1 Class I 2 Class R 2
Period beginning 5-31-94 10-1-98 9-4-01 8-5-03
Without sales charge $18,810 $12,838 $11,696 $10,430
With maximum sales charge $18,810 $12,708 $11,696 $10,430
Index $20,354 $13,652 $11,767 $10,324
Assuming all distributions were reinvested for the period indicated, the
table above shows the value of a $10,000 investment in the Fund's Class
B, Class C, Class I and Class R shares, respectively, as of May 31,
2004. 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.
Lehman Brothers Government/Credit Bond Index is an unmanaged index that
measures the performance of U.S. government bonds, U.S. corporate bonds
and Yankee bonds.
It is not possible to invest directly in an index. Index figures do not
reflect sales charges and would be lower if they did.
1 No contingent deferred sales charge applicable.
2 For certain types of investors as described in the Fund's Class I and
Class R share prospectuses.
7
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
May 31, 2004
This schedule is divided into three main categories: bonds, preferred
stocks and short-term investments. Bonds and preferred stocks 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 93.15% $1,161,960,015
(Cost $1,163,609,444)
Agricultural Operations 0.17% 2,166,985
Bunge Ltd. Finance Corp.,
Note 04-15-14 (R) 5.350% BBB $2,260 2,166,985
Automobiles / Trucks 1.74% 21,683,466
Auburn Hills Trust,
Deb 05-01-20 12.375 BBB 1,925 2,779,109
Chase Manhattan Auto Owner Trust,
Pass Thru Ctf Ser 2000-A Class A4 06-15-07 6.260 AAA 1,207 1,214,678
DaimlerChrysler North America Holding Corp.,
Medium Term Note Ser D 05-24-06 1.880 BBB 4,755 4,753,003
ERAC USA Finance Co.,
Note 12-15-09 (R) 7.950 BBB+ 2,720 3,134,057
Ford Credit Auto Owner Trust,
Pass Thru Ctf Ser 2004-A Class A3 03-15-08 2.930 AAA 5,975 5,980,605
Ford Motor Co.,
Deb 02-15-47 9.980 BBB- 3,255 3,822,014
Banks -- Foreign 2.33% 29,103,527
Mizuho Financial Group Cayman Ltd.,
Gtd Note (Cayman Islands) 04-15-14 (R) 5.790 BBB- 3,260 3,136,166
Gtd Note (Cayman Islands) 12-29-49 8.375 Baa1 3,500 3,581,200
Rabobank Capital Fund II,
Perpetual Bond (5.260% to 12-31-13
then variable) 12-31-49 (R) 5.260 AA 1,180 1,138,346
Royal Bank of Scotland Group Plc,
Perpetual Bond (7.648% to 09-30-31
then variable) (United Kingdom) 08-31-49 7.648 A 8,055 9,007,318
Socgen Real Estate Co. LLC,
Perpetual Bond Ser A (7.64% to 09-30-07
then variable) 12-31-49 (R) 7.640 A 3,915 4,338,012
St. George Funding Co.,
Perpetual Bond (8.485% to 06-30-17
then variable) (Australia) 12-31-49 (R) 8.485 Baa1 4,555 5,145,661
See notes to
financial statements.
8
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Banks -- Foreign (continued)
Westpac Capital Trust III,
Perpetual Sub Bond (5.819% to 09-30-13
then variable) 12-31-49 (R) 5.819% A- $2,775 $2,756,824
Banks -- United States 0.63% 7,879,973
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 5,050 5,375,074
Colonial Bank,
Sub Note 06-01-11 9.375 BBB- 1,480 1,727,221
NBD Bank N.A.,
Sub Deb 11-01-24 8.250 A 650 777,678
Beverages 0.13% 1,638,627
Panamerican Beverages, Inc.,
Sr Note (Panama) 07-01-09 7.250 BBB 1,545 1,638,627
Building 0.45% 5,550,269
KB Home,
Sr Note 02-01-14 (R) 5.750 BB+ 2,890 2,644,350
Lennar Corp.,
Gtd Sr Note 05-01-10 9.950 BBB- 2,615 2,905,919
Business Services -- Misc. 0.23% 2,881,000
Muzak LLC/Muzak Finance Corp.,
Sr Note 02-15-09 10.000 CCC+ 1,135 1,089,600
NationsRent, Inc.,
Sr Sec Note 10-15-10 (R) 9.500 BB- 1,690 1,791,400
Chemicals 0.47% 5,823,140
Braskem S.A.,
Note (Brazil) 01-22-14 (R) 11.750 B+ 1,070 936,250
Du Pont (E.I.) de Nemours & Co.,
Note 04-30-10 4.125 AA- 1,600 1,565,514
RPM International, Inc.,
Bond 12-15-13 (R) 6.250 BBB 3,305 3,321,376
Computers 0.28% 3,477,838
NCR Corp.,
Note 06-15-09 7.125 BBB- 3,175 3,477,838
Containers 0.69% 8,595,706
BWAY Corp.,
Sr Sub Note 10-15-10 10.000 B- 1,460 1,533,000
Owens-Brockway Glass Container, Inc.,
Gtd Sr Sec Note 11-15-12 8.750 BB- 1,625 1,710,313
Sealed Air Corp.,
Sr Note 04-15-08 (R) 5.375 BBB 5,185 5,352,393
See notes to
financial statements.
9
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Diversified Operations 0.59% $7,340,104
Brascan Corp.,
Note (Canada) 03-01-10 5.750% A- $2,815 2,891,484
Glencore Funding LLC,
Gtd Note 04-15-14 (R) 6.000 BBB 4,860 4,448,620
Electronics 1.11% 13,816,957
AMETEK, Inc.,
Sr Note 07-15-08 7.200 BBB 4,500 4,787,896
General Electric Co.,
Note 02-01-13 5.000 AAA 5,575 5,477,911
Tyco International Group S.A.,
Note (Luxembourg) 02-15-11 + 6.750 BBB 3,305 3,551,150
Finance 4.30% 53,710,480
Bank One Issuance Trust,
Pass Thru Ctf Ser 2003-C1 09-15-10 4.540 BBB 3,095 3,127,830
Capital One Bank,
Sr Note 06-15-05 8.250 BBB- 3,000 3,169,428
Sub Note 06-13-13 6.500 BB+ 1,570 1,601,683
Capital One Financial Corp.,
Note 05-01-06 + 7.250 BB+ 1,940 2,064,796
Citibank Credit Card Issuance Trust,
Pass Thru Ctf Ser 2003-C3 04-07-10 4.450 BBB 3,870 3,887,575
Citigroup, Inc.,
Sub Note 10-31-33 6.000 A+ 8,285 7,889,847
Ford Motor Credit Co.,
Note 02-01-06 6.875 BBB- 3,260 3,423,808
Note 10-28-09 7.375 BBB- 5,700 6,054,848
General Electric Capital Corp.,
Note Ser A 03-15-32 6.750 AAA 2,620 2,791,353
General Motors Acceptance Corp.,
Note 03-02-11 7.250 BBB 5,145 5,370,500
Household Finance Corp.,
Note 05-15-11 6.750 A 7,760 8,488,035
MBNA Master Credit Card Trust,
Sub Bond Ser 1998-E Class C 09-15-10 (R) 6.600 BBB 3,735 4,001,851
Morgan Stanley,
Sub Note 04-01-14 4.750 A 2,000 1,838,926
Food 0.87% 10,786,734
Corn Products International, Inc.,
Sr Note 08-15-09 8.450 BBB- 8,665 9,639,812
General Foods Corp.,
Deb 06-15-11 7.000 A- 1,145 1,146,922
See notes to
financial statements.
10
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Government -- Foreign 0.20% $2,506,171
Colombia, Republic of,
Bond (Colombia) 04-09-11 9.750% BB+ $2,258 2,506,171
Government -- U.S. 11.57% 144,267,598
United States Treasury,
Bond 02-15-31 + 5.375 AAA 45,270 45,437,997
Inflation Indexed Note 01-15-11 + 3.500 AAA 9,448 10,547,408
Note 05-15-06 + 6.875 AAA 49,115 53,170,818
Note 05-15-14 + 4.750 AAA 34,850 35,111,375
Government -- U.S. Agencies 28.28% 352,800,233
Federal Home Loan Mortgage Corp.,
20 Yr Pass Thru Ctf 01-01-16 11.250 AAA 140 154,542
30 Yr Pass Thru Ctf 08-01-33 5.000 AAA 12,706 12,225,060
CMO REMIC 2563-PA 03-15-33 4.250 AAA 7,843 7,574,247
CMO REMIC 2640-WA 03-15-33 3.500 AAA 2,987 2,940,779
CMO REMIC 2754-PC 12-15-28 5.000 AAA 10,405 10,047,258
Note 01-12-09 3.875 AAA 6,075 5,959,842
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 184 195,186
15 Yr Pass Thru Ctf 09-01-10 to 06-01-17 7.000 AAA 1,968 2,094,709
15 Yr Pass Thru Ctf 01-01-18 to 06-01-18 5.000 AAA 41,479 41,517,350
15 Yr Pass Thru Ctf 05-01-18 to 10-01-18 4.500 AAA 36,220 35,462,275
30 Yr Pass Thru Ctf 02-01-33 to 06-01-34 ** 6.500 AAA 25,900 26,820,580
30 Yr Pass Thru Ctf 02-01-33 to 01-01-34 6.000 AAA 31,510 32,051,036
30 Yr Pass Thru Ctf 04-01-33 to 11-01-33 5.500 AAA 23,879 23,765,058
30 Yr Pass Thru Ctf 04-01-34 to 06-01-34 5.000 AAA 50,572 48,636,451
CMO REMIC 2002-82-QL 05-25-27 5.000 AAA 6,375 6,500,095
CMO REMIC 2003-16-PD 10-25-16 5.000 AAA 10,690 10,592,316
CMO REMIC 2003-17-QT 08-25-27 5.000 AAA 13,365 13,015,420
CMO REMIC 2003-33-AC 03-25-33 4.250 AAA 2,686 2,657,779
CMO REMIC 2003-49-JE 04-25-33 3.000 AAA 7,073 6,585,926
CMO REMIC 2003-58-AD 07-25-33 3.250 AAA 7,721 7,328,022
CMO REMIC 2003-63-PE 07-25-33 3.500 AAA 4,940 4,367,887
Financing Corp.,
Bond 02-08-18 9.400 AAA 21,035 28,854,320
Bond 08-03-18 10.350 AAA 6,045 8,893,356
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 48 54,066
30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 332 374,328
30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 10.000 AAA 111 124,165
30 Yr Pass Thru Ctf 10-15-33 5.500 AAA 2,544 2,532,814
30 Yr Pass Thru Ctf 12-20-33 6.000 AAA 7,913 8,059,916
30 Yr Pass Thru Ctf 05-15-34 5.000 AAA 1,400 1,350,708
CMO REMIC 2003-42-XA 05-16-33 3.750 AAA 2,174 2,064,742
See notes to
financial statements.
11
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Insurance 1.54% $19,228,279
Liberty Mutual Group,
Gtd Sr Note 03-15-14 (R) 5.750% BBB $2,410 2,321,640
Mantis Reef Ltd.,
Note (Australia) 11-14-08 (R) 4.692 A- 2,990 2,953,600
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 3,985 4,671,444
New York Life Insurance Co.
Note 05-15-33 (R) 5.875 AA- 3,685 3,478,375
QBE Insurance Group Ltd.,
Bond (Australia) 07-01-23 (R) 5.647 BBB 4,230 4,011,601
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 AA- 1,630 1,791,619
Leisure 1.08% 13,454,225
Hyatt Equities LLC,
Note 06-15-07 (R) 6.875 BBB 5,105 5,356,865
Meditrust,
Med Term Note 01-16-06 7.300 BB- 1,945 2,003,350
Note 08-15-07 7.000 BB- 1,500 1,530,000
MTR Gaming Group, Inc.,
Gtd Sr Note Ser B 04-01-10 9.750 B+ 1,120 1,198,400
Starwood Hotels & Resorts Worldwide, Inc.,
Sr Note 05-01-07 7.375 BB+ 2,215 2,325,750
Waterford Gaming LLC,
Sr Note 09-15-12 (R) 8.625 B+ 981 1,039,860
Machinery 0.41% 5,162,581
Case Corp.,
Note 08-01-05 7.250 BB- 2,200 2,233,000
Kennametal, Inc.,
Sr Note 06-15-12 7.200 BBB 2,775 2,929,581
Media 4.52% 56,386,757
British Sky Broadcasting Group Plc,
Gtd Sr Note (United Kingdom) 07-15-09 8.200 BBB- 6,305 7,276,115
Continental Cablevision, Inc.,
Deb 08-01-13 9.500 BBB 3,280 3,665,469
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 2,495 2,594,800
Grupo Televisa S.A.,
Note (Mexico) 09-13-11 8.000 BBB- 3,580 3,884,300
Innova S. de R.L.,
Note (Mexico) 09-19-13 9.375 B+ 1,635 1,700,400
Sr Note (Mexico) 04-01-07 12.875 B+ 314 316,497
See notes to
financial statements.
12
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Media (continued)
Liberty Media Corp.,
Note 09-17-06 2.610% BBB- $7,635 $7,764,673
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 8.250 BBB- 4,400 5,228,568
Shaw Communications, Inc.,
Sr Note (Canada) 04-11-10 8.250 BB+ 2,110 2,308,091
Tele-Communications, Inc.,
Deb 02-01-12 9.800 BBB 2,550 3,227,186
Deb 04-15-22 10.125 BBB 2,675 3,583,117
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 9,106 11,076,821
XM Satellite Radio, Inc.,
Sr Sec Disc Note (Zero to 12-31-05
then 14.00%) 12-31-09 (A) Zero CCC+ 2,000 1,850,000
Sr Sec Note 06-15-10 12.000 CCC+ 1,706 1,910,720
Medical 1.52% 18,903,868
HCA, Inc.,
Note 09-01-10 8.750 BBB- 7,785 8,756,973
Note 12-15-14 9.000 BBB- 3,182 3,637,755
Medco Health Solutions, Inc.,
Sr Note 08-15-13 + 7.250 BBB 3,245 3,443,390
Schering-Plough Corp.,
Sr Note 12-01-33 6.500 A- 3,085 3,065,750
Metal 0.17% 2,140,000
Freeport-McMoRan Copper & Gold, Inc.,
Sr Note 02-01-10 10.125 B- 2,000 2,140,000
Mortgage Banking 6.59% 82,257,662
Ameriquest Mortgage Securities, Inc.,
Pass Thru Ctf Ser 2003-10 Class AF-3 12-25-33 3.230 AAA 9,655 9,610,721
Pass Thru Ctf Ser 2003-IA1 Class A-4 11-25-33 4.965 AAA 4,155 4,140,979
Bank of America Mortgage Securities, Inc.,
Mtg Pass Thru Ctf Ser 2004-D
Class 2A1 05-25-34 3.649 AAA 6,874 6,687,291
Centex Home Equity Loan Trust,
Home Equity Loan Asset-Backed Ctf
Ser 2004-A Class AF-4 08-25-32 4.510 AAA 4,550 4,420,841
Conseco Finance Securitizations Corp.,
Pass Thru Ctf Ser 2002-A Class A-3 04-15-32 5.330 AAA 382 382,702
ContiMortgage Home Equity Loan Trust,
Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 1,246 1,246,265
Deutsche Mortgage & Asset Receiving Corp.,
Commercial Mtg Pass Thru Ctf
Ser 1998-C1 Class C 06-15-316.861 6,861 A2 3,585 3,870,332
See notes to
financial statements.
13
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Mortgage Banking (continued)
Global Signal Trust,
Sub Bond Ser 2004-1A Class D 01-15-34 (R) 5.098% BBB $3,270 $3,158,231
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.853 Aaa 4,604 4,742,508
Greenwich Capital Commercial Funding Corp.,
Commercial Mtg Pass Thru Ctf Ser 2003-C1
Class A-4 07-05-35 4.111 AAA 2,865 2,641,642
Commercial Mtg Pass Thru Ctf Ser 2003-C2
Class A-2 01-05-36 4.022 AAA 7,185 7,049,640
Impac Secured Assets Corp.,
Mtg PassThru Ctf Ser 2004-1 Class A-3 03-25-34 3.710 AAA 3,675 3,580,828
LB-UBS Commercial Mortgage Trust,
Commercial Mtg PassThru Ctf Ser 2003-C3
Class A4 05-15-32 4.166 AAA 5,225 4,843,010
Morgan Stanley Dean Witter Capital I Trust,
Pass Thru Ctf Ser 2001-IQA Class A-1 12-18-32 4.570 Aaa 4,208 4,300,359
Residential Asset Mortgage Products, Inc.,
Pass Thru Ctf Ser 2003-RS8
Class AI-2 11-25-23 2.904 AAA 4,580 4,566,527
Pass Thru Ctf Ser 2003-RS10
Class AI-5 01-25-31 4.910 AAA 4,595 4,548,012
Residential Asset Securities Corp.,
Ser 2004-KS5 Class A2B2 09-25-33 1.320 AAA 5,965 5,965,000
Specialty Underwriting & Residential Finance Trust,
Mtg Loan Asset Backed Ctf Ser 2003-BC4
Class A3B 11-25-34 4.788 AAA 6,685 6,502,774
Oil & Gas 2.06% 25,703,194
Chesapeake Energy Corp.,
Sr Note 06-15-14 (R) + 7.500 BB- 1,105 1,140,913
Kinder Morgan Energy Partners, L.P.,
Sr Note 08-15-33 7.300 BBB+ 3,160 3,338,075
Louis Dreyfus Natural Gas Corp.,
Note 12-01-07 6.875 BBB+ 2,695 2,899,836
Magellan Midstream Partners, L.P.,
Note 06-01-14 6.450 BBB 2,800 2,821,501
Occidental Petroleum Corp.,
Sr Deb 09-15-09 10.125 BBB+ 1,925 2,395,241
Pemex Project Funding Master Trust,
Gtd Note 10-13-10 + 9.125 BBB- 9,250 10,651,375
TEPPCO Partners, L.P.,
Sr Note 02-15-12 7.625 BBB 2,215 2,456,253
See notes to
financial statements.
14
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Paper & Paper Products 1.63% $20,371,494
Boise Cascade Corp.,
Sr Note 11-01-10 6.500% BB $2,085 2,112,668
Corporacion Durango S.A. de C.V.,
Sr Note (Mexico) 07-15-09 (R) (B) 13.750 D# 5,750 3,018,750
Donohue Forest Products,
Gtd Note (Canada) 05-15-07 7.625 BB 3,050 3,150,494
MDP Acquisitions Plc,
Sr Note (Ireland) 10-01-12 9.625 B 1,290 1,399,650
Stone Container Corp.,
Sr Note 02-01-11 9.750 B 2,365 2,566,025
Sr Note 07-01-12 8.375 B 4,050 4,171,500
Weyerhaeuser Co.,
Deb 07-15-23 7.125 BBB 3,785 3,952,407
Real Estate Investment Trusts 0.93% 11,642,774
American Health Properties, Inc.,
Note 01-15-07 7.500 BBB+ 2,380 2,577,166
Healthcare Realty Trust, Inc.,
Sr Note 05-01-11 8.125 BBB- 2,515 2,887,107
iStar Financial, Inc.,
Sr Note 03-15-08 7.000 BB+ 2,185 2,270,864
ProLogis Trust,
Note 07-15-06 7.050 BBB+ 1,745 1,903,387
TriNet Corporate Realty Trust, Inc.,
Note 05-15-06 7.950 BB+ 730 751,900
Note 07-15-17 7.700 BB+ 1,210 1,252,350
Retail 1.20% 14,912,009
Delhaize America, Inc.,
Note 04-15-11 8.125 BB+ 1,400 1,522,704
Food Lion, Inc.,
Note 08-30-06 8.730 BBB- 2,500 2,600,948
Note 04-15-07 7.550 BB+ 2,120 2,244,546
Gap, Inc. (The),
Note 12-15-08 + 10.550 BB+ 1,500 1,811,250
Office Depot, Inc.,
Note 08-15-13 6.250 BBB- 2,445 2,515,311
Penney J.C. Co., Inc.,
Deb 08-15-16 + 7.650 BB+ 1,605 1,725,375
Penney J.C. Corp., Inc.,
Note 03-01-10 + 8.000 BB+ 2,215 2,491,875
Revenue Bonds 0.43% 5,341,418
Golden State Tobacco Securitization Corp.,
Rev Ser 2003-A-1 06-01-39 6.750 BBB 6,070 5,341,418
See notes to
financial statements.
15
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Telecommunications 5.36% $66,831,125
AT&T Corp.,
Sr Note 11-15-11 + 7.300% BBB $5,256 5,668,160
Corning, Inc.,
Med Term Note 04-04-25 8.300 Ba2 3,565 3,718,149
Note 03-01-09 6.300 BB+ 1,165 1,179,112
Deutsche Telekom International Finance B.V.,
Bond (Coupon rate step up/down on rating)
(Netherlands) 06-15-10 8.000 BBB+ 6,415 7,499,109
France Telecom,
Note (France) 03-01-06 7.200 BBB+ 1,615 1,742,627
Mobile Telesystems Finance S.A.,
Gtd Note (Luxembourg) 10-14-10 (R) 8.375 BB- 1,430 1,340,625
Gtd Sr Note (Luxembourg) 01-30-08 (R) 9.750 BB- 720 738,000
PTC International Finance II SA,
Gtd Note (Luxembourg) 12-01-09 11.250 BB- 1,110 1,193,250
Qwest Capital Funding, Inc.,
Gtd Note 08-15-06 + 7.750 CCC+ 3,590 3,518,200
Qwest Corp.,
Note 03-15-12 (R) + 8.875 B- 3,940 4,176,400
Sprint Capital Corp.,
Note 01-30-06 7.125 BBB- 8,515 9,058,649
Note 05-01-19 6.900 BBB- 4,600 4,686,406
Telefonos de Mexico S.A. de C.V.,
Sr Note (Mexico) 01-26-06 + 8.250 BBB- 6,585 7,080,192
Telus Corp.,
Note (Canada) 06-01-11 8.000 BBB 8,290 9,425,854
Verizon Pennsylvania, Inc.,
Deb Ser A 11-15-11 5.650 A+ 5,725 5,806,392
Tobacco 0.92% 11,482,623
Altria Group, Inc.,
Note 11-04-13 7.000 BBB 3,435 3,433,990
Commonwealth Brands, Inc.,
Sr Sec Sub Note 09-01-08 (R) 10.625 B- 1,355 1,395,650
Philip Morris Cos., Inc.,
Note 06-01-06 6.950 BBB 5,445 5,632,983
Standard Commercial Corp.,
Sr Note 04-15-12 (R) 8.000 BB+ 1,000 1,020,000
Transportation 1.46% 18,185,772
American Airlines, Inc.,
Pass Thru Ctf Ser 2001-2 04-01-13 + 7.858 A- 4,200 4,170,432
CNF, Inc.,
Deb 05-01-34 (R) 6.700 BBB- 1,975 1,934,890
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 A- 3,938 3,766,217
See notes to
financial statements.
16
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Transportation (continued)
Humpuss Funding Corp.,
Note 12-15-09 (R) 7.720% B2 $2,115 $1,861,297
Jet Equipment Trust,
Equipment Trust Ctf Ser 95B2 08-15-14 (B)(R) 10.910 D 5,800 293,712
Northwest Airlines Corp.,
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 B- 2,737 1,860,905
TFM S.A. de C.V.,
Gtd Sr Disc Note (Mexico) 06-15-09 11.750 B 1,215 1,187,663
Trinity Industries, Inc.,
Pass Thru Ctf 02-15-09 (R) 7.755 BB+ 2,945 3,110,656
Utilities 6.88% 85,880,636
AES Eastern Energy L.P.,
Pass Thru Ctf Ser 1999-A 01-02-17 + 9.000 BB+ 3,624 3,913,712
Beaver Valley Funding Corp.,
Deb 06-01-07 8.625 BB+ 1,015 1,072,882
Sec Lease Obligation Bond 06-01-17 9.000 BB+ 6,799 7,658,992
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BB+ 6,607 7,380,349
CenterPoint Energy, Inc.,
Sr Note Ser B 09-01-10 7.250 BBB- 3,365 3,557,656
East Coast Power LLC,
Sr Sec Note Ser B 03-31-12 7.066 BBB- 3,062 3,021,371
Sr Sec Note 03-31-08 6.737 BBB- 295 295,265
El Paso Electric Co.,
1st Mtg Ser E 05-01-11 9.400 BBB- 5,695 6,519,141
ESI Tractebel Acquisition Corp.,
Sec Bond Ser B 12-30-11 7.990 BB 500 515,000
Illinois Power Co.,
Mtg Bond 07-15-25 7.500 B 1,885 1,922,700
IPALCO Enterprises, Inc.,
Sr Sec Note 11-14-11 7.625 BB- 3,000 3,270,000
Kansas Gas & Electric Co.,
Deb 03-29-16 8.290 BB- 3,385 3,524,800
Midland Funding Corp. II,
Deb Ser A 07-23-05 + 11.750 BB- 10,869 11,195,071
Deb Ser B 07-23-06 13.250 BB- 2,970 3,267,000
NorAm Energy Corp.,
Deb 02-01-08 6.500 BBB 2,040 2,156,409
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BB+ 4,132 4,754,031
PSEG Energy Holdings LLC,
Sr Note 04-16-07 7.750 BB- 2,580 2,683,200
Salton Sea Funding Corp.,
Sr Sec Note Ser C 05-30-10 7.840 BB+ 5,063 5,250,948
See notes to
financial statements.
17
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
Utilities (continued)
System Energy Resources, Inc.,
Sec Bond 01-15-14 (R) 5.129% BBB- $3,815 $3,738,166
Texas-New Mexico Power Co.,
Sr Note 06-01-08 6.125 BB+ 3,135 3,175,112
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 8.090 BBB- 5,072 5,505,031
Westar Energy, Inc.,
1st Mtg 04-15-23 7.650 BBB- 1,460 1,503,800
Utilities -- Foreign 1.79% 22,327,728
Empresa Electrica Guacolda S.A.,
Sec Sr Note (Chile) 04-30-13 (R) 8.625 BBB- 2,133 2,233,791
Empresa Nacional de Electricidad S.A.,
Note (Chile) 07-15-08 7.750 BBB- 2,000 2,089,552
HQI Transelect Chile S.A.,
Sr Note (Chile) 04-15-11 7.875 A- 6,780 7,626,036
Korea Gas Corp.,
Sr Note (South Korea) 11-26-10 (R) 4.750 A- 2,630 2,537,529
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) 9.625 BBB- 2,445 2,812,078
TransAlta Corp.,
Note (Canada) 12-15-13 5.750 BBB- 3,295 3,258,086
TXU Australia Holdings, LP,
Sr Note (Australia) 12-01-06 (R) 6.750 BBB 1,650 1,770,656
Waste Disposal Service & Equip 0.62% 7,719,062
Allied Waste North America, Inc.,
Sr Sub Note Ser B 08-01-09 10.000 B+ 7,265 7,719,062
CREDIT
ISSUER, DESCRIPTION RATING* SHARES VALUE
PREFERRED STOCKS 1.32% $16,478,757
(Cost $16,559,345)
Automobiles/Trucks 0.36% 4,479,256
Delphi Trust I, 8.25% BB 175,795 4,479,256
Finance 0.22% 2,727,820
J.P. Morgan Chase Capital XII, 6.25% A- 113,000 2,727,820
Real Estate Investment Trusts 0.45% 5,590,280
Health Care Property Investors, Inc., 7.10%,
Ser F BBB 113,000 2,712,000
ProLogis Trust, 6.75%, Ser F BBB 122,480 2,878,280
Utilities 0.29% 3,681,401
Dominion Resources, Inc., 9.50%, Conv BBB+ 67,760 3,681,401
See notes to
financial statements.
18
FINANCIAL STATEMENTS
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
SHORT-TERM INVESTMENTS 4.90% $61,052,455
(Cost $61,065,328)
Automobiles/Trucks 0.07% 882,761
Hertz Corp.,
Sr Note 07-01-04 7.000% BBB- $880 882,761
Banks -- United States 0.28% 3,412,053
Capital One Bank,
Note 07-30-04 6.500 BBB- 3,385 3,412,053
Finance 0.03% 355,440
Yanacocha Receivables Master Trust,
Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 355 355,440
Joint Repurchase Agreement 3.24% 40,433,000
Investment in a joint repurchase agreement
transaction with Cantor Fitzgerald Securities
- -- Dated 05-28-04 due 06-01-04 (Secured by
U.S. Treasury Bill, 1.378% due 11-18-04,
U.S. Treasury Bonds, 6.250% thru 8.125%
due 08-15-21 thru 08-15-23, and U.S. Treasury
Note, 1.875% due 09-30-04) 0.980 40,433 40,433,000
Media 0.41% 5,121,238
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 10.000 BBB- 4,880 5,121,238
Metal 0.19% 2,404,999
Noranda, Inc.,
Deb (Canada) 06-15-04 8.125 BBB- 2,400 2,404,999
Telecommunications 0.20% 2,458,875
Mobile Telesystems Finance S.A.,
Gtd Bond (Luxembourg) 12-21-04 (R) 10.950 BB- 1,470 1,525,125
Gtd Bond (Luxembourg) 12-21-04 10.950 BB- 900 933,750
Transportation 0.06% 788,353
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 B- 565 559,537
Northwest Airlines Corp.,
Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 B- 341 228,816
Utilities 0.42% 5,195,736
Salton Sea Funding Corp.,
Gtd Sr Sec Note 03-30-05 7.370 BB+ 5,020 5,195,736
See notes to
financial statements.
19
FINANCIAL STATEMENTS
TOTAL INVESTMENTS 99.37% $1,239,491,227
OTHER ASSETS AND LIABILITIES, NET 0.63% $7,914,164
TOTAL NET ASSETS 100.00% $1,247,405,391
+ All or a portion of this security is on loan on May 31, 2004.
* Credit ratings are unaudited and rated by Standard and Poor's where
available, or Moody's Investor Services, unless indicated otherwise.
** A portion of these securities having an aggregate value of $19,008,328
or 1.52% 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 $20,716,633 of Time Warner, Inc., 9.125%, 01-15-13 and Corn
Products International, Inc., 8.450%, 08-15-09 have been segregated to
cover the forward commitments.
# Security rated internally by John Hancock Advisers, LLC.
(A) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(B) Non-income-producing issuer filed for protection under Federal
Bankruptcy Code or is in default of interest payment.
(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 $113,474,278 or 9.10% of
net assets as of May 31, 2004.
Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer, however, the
security is U.S. dollar-denominated.
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.
20
FINANCIAL STATEMENTS
ASSETS AND
LIABILITIES
May 31, 2004
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 $1,241,234,117)
including $161,411,510 of securities loaned $1,239,491,227
Cash 471
Cash segregated for futures contracts 1,020,500
Receivable for investments sold 15,944,022
Receivable for shares sold 83,440
Receivable for futures variation margin 429,301
Dividends and interest receivable 15,216,521
Other assets 142,381
Total assets 1,272,327,863
LIABILITIES
Payable for investments purchased 21,651,964
Payable for shares repurchased 1,151,236
Dividends payable 759,181
Payable to affiliates
Management fees 491,886
Distribution and service fees 84,193
Other 506,714
Other payables and accrued expenses 277,298
Total liabilities 24,922,472
NET ASSETS
Capital paid-in 1,265,211,185
Accumulated net realized loss on investments and
financial futures contracts (15,014,062)
Net unrealized depreciation of investments and
financial futures contracts (2,005,963)
Distributions in excess of net investment income (785,769)
Net assets $1,247,405,391
NET ASSET VALUE PER SHARE
Based on net asset values and shares outstanding
Class A ($1,046,639,162 [DIV] 69,872,637 shares) $14.98
Class B ($164,173,911 [DIV] 10,960,179 shares) $14.98
Class C ($31,971,180 [DIV] 2,134,362 shares) $14.98
Class I ($4,519,175 [DIV] 301,720 shares) $14.98
Class R ($101,963 [DIV] 6,806 shares) $14.98
MAXIMUM OFFERING PRICE PER SHARE
Class A 1 ($14.98 [DIV] 95.5%) $15.69
Class C2 ($14.98 [DIV] 99%) $15.13
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.
2 The up-front sales charge on Class C shares has been eliminated,
effective July 15, 2004.
See notes to
financial statements.
21
FINANCIAL STATEMENTS
OPERATIONS
For the year ended
May 31, 2004
This Statement
of Operations
summarizes the
Fund's investment
income earned
and expenses
incurred in oper-
ating the Fund.
It also shows net
gains (losses) for
the period stated.
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $10,373) $74,225,881
Dividends 1,705,591
Securities lending 198,709
Total investment income 76,130,181
EXPENSES
Investment management fees 6,755,210
Class A distribution and service fees 3,326,564
Class B distribution and service fees 1,967,582
Class C distribution and service fees 371,562
Class R distribution and service fees 422
Class A, B and C transfer agent fees 2,905,858
Class I transfer agent fees 4,094
Class R transfer agent fees 252
Accounting and legal services fees 367,292
Custodian fees 252,378
Printing 109,330
Miscellaneous 100,077
Registration and filing fees 94,454
Trustees' fees 78,823
Professional fees 63,148
Interest 10,499
Securities lending fees 2,908
Total expenses 16,410,453
Less expense reductions (50,022)
Net expenses 16,360,431
Net investment income 59,769,750
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on
Investments 23,192,834
Financial futures contracts (1,454,611)
Change in unrealized appreciation (depreciation) of
Investments (79,370,118)
Financial futures contracts (263,073)
Net realized and unrealized loss (57,894,968)
Increase in net assets from operations $1,874,782
See notes to
financial statements.
22
FINANCIAL STATEMENTS
CHANGES IN
NET ASSETS
These Statements
of Changes in
Net Assets show
how the value
of the Fund's
net assets has
changed during
the last two
periods. The dif-
ference reflects
earnings less
expenses, any
investment gains
and losses,
distributions, if
any, paid to
shareholders and
any increase or
decrease in
money share-
holders invested
in the Fund.
YEAR YEAR
ENDED ENDED
5-31-03 5-31-04
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $67,667,581 $59,769,750
Net realized gain 37,149,906 21,738,223
Change in net unrealized
appreciation (depreciation) 60,407,234 (79,633,191)
Increase in net assets
resulting from operations 165,224,721 1,874,782
Distributions to shareholders
From net investment income
Class A (58,775,529) (54,665,922)
Class B (10,462,357) (8,303,883)
Class C (2,024,816) (1,569,152)
Class I (461,750) (439,075)
Class R 1 -- (3,991)
(71,724,452) (64,982,023)
From Fund share transactions (36,619,370) (169,382,863)
NET ASSETS
Beginning of period 1,423,014,596 1,479,895,495
End of period 2 $1,479,895,495 $1,247,405,391
1 Class R shares began operations on 8-5-03.
2 Includes distributions in excess of net investment income of $420,557
and $785,769, respectively.
See notes to
financial statements.
23
FINANCIAL HIGHLIGHTS
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 5-31-00 1 5-31-01 1 5-31-02 1,2 5-31-03 5-31-04
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.76 $13.93 $14.69 $14.71 $15.69
Net investment income 3 0.96 0.92 0.82 0.72 0.70
Net realized and unrealized
gain (loss) on investments (0.83) 0.76 0.06 1.02 (0.65)
Total from
investment operations 0.13 1.68 0.88 1.74 0.05
Less distributions
From net investment income (0.96) (0.92) (0.86) (0.76) (0.76)
Net asset value,
end of period $13.93 $14.69 $14.71 $15.69 $14.98
Total return 4 (%) 0.97 12.38 6.10 12.26 0.31
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $1,098 $1,140 $1,144 $1,192 $1,047
Ratio of expenses
to average net assets (%) 1.11 1.12 1.11 1.12 1.09
Ratio of net investment income
to average net assets (%) 6.69 6.38 5.51 4.84 4.55
Portfolio turnover (%) 162 235 189 273 241
See notes to
financial statements.
24
FINANCIAL HIGHLIGHTS
CLASS B SHARES
PERIOD ENDED 5-31-00 1 5-31-01 1 5-31-02 1,2 5-31-03 5-31-04
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.76 $13.93 $14.69 $14.71 $15.69
Net investment income 3 0.86 0.83 0.72 0.62 0.59
Net realized and unrealized
gain (loss) on investments (0.83) 0.76 0.06 1.02 (0.65)
Total from
investment operations 0.03 1.59 0.78 1.64 (0.06)
Less distributions
From net investment income (0.86) (0.83) (0.76) (0.66) (0.65)
Net asset value,
end of period $13.93 $14.69 $14.71 $15.69 $14.98
Total return 4 (%) 0.27 11.64 5.37 11.48 (0.39)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $197 $218 $236 $233 $164
Ratio of expenses
to average net assets (%) 1.81 1.78 1.81 1.82 1.79
Ratio of net investment income
to average net assets (%) 6.00 5.71 4.81 4.15 3.84
Portfolio turnover (%) 162 235 189 273 241
See notes to
financial statements.
25
FINANCIAL HIGHLIGHTS
CLASS C SHARES
PERIOD ENDED 5-31-00 1 5-31-01 1 5-31-02 1,2 5-31-03 5-31-04
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.76 $13.93 $14.69 $14.71 $15.69
Net investment income 3 0.85 0.82 0.72 0.62 0.59
Net realized and unrealized
gain (loss) on investments (0.83) 0.76 0.06 1.02 (0.64)
Total from
investment operations 0.02 1.58 0.78 1.64 (0.05)
Less distributions
From net investment income (0.85) (0.82) (0.76) (0.66) (0.66)
Net asset value,
end of period $13.93 $14.69 $14.71 $15.69 $14.98
Total return 4 (%) 0.28 11.60 5.36 11.48 (0.39)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $24 $26 $44 $45 $32
Ratio of expenses
to average net assets (%) 1.80 1.82 1.81 1.82 1.79
Ratio of net investment income
to average net assets (%) 6.01 5.66 4.81 4.15 3.84
Portfolio turnover (%) 162 235 189 273 241
See notes to
financial statements.
26
FINANCIAL HIGHLIGHTS
CLASS I SHARES
PERIOD ENDED 5-31-02 1,2,5 5-31-03 2 5-31-04
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.96 $14.71 $15.69
Net investment income 3 0.66 0.78 0.76
Net realized and unrealized
gain (loss) on investments (0.21) 1.02 (0.64)
Total from
investment operations 0.45 1.80 0.12
Less distributions
From net investment income (0.70) (0.82) (0.83)
Net asset value,
end of period $14.71 $15.69 $14.98
Total return 4 (%) 3.04 6 12.71 0.78
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) -- 7 $9 $5
Ratio of expenses
to average net assets (%) 0.68 8 0.72 0.63
Ratio of net investment income
to average net assets (%) 5.94 8 5.23 4.98
Portfolio turnover (%) 189 273 241
See notes to
financial statements.
26
FINANCIAL HIGHLIGHTS
CLASS R SHARES
PERIOD ENDED 5-31-04 5
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.93
Net investment income 3 0.54
Net realized and unrealized
gain on investments 0.10
Total from
investment operations 0.64
Less distributions
From net investment income (0.59)
Net asset value,
end of period $14.98
Total return 4 (%) 4.30 6
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) -- 7
Ratio of expenses
to average net assets (%) 1.38 8
Ratio of net investment income
to average net assets (%) 4.40 8
Portfolio turnover (%) 241
1 Audited by previous auditor.
2 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.
3 Based on the average of the shares outstanding.
4 Assumes dividend reinvestment and does not reflect the effect of sales
charges.
5 Class I and Class R shares began operations on 9-4-01 and 8-5-03,
respectively.
6 Not annualized.
7 Less than $500,000.
8 Annualized.
See notes to
financial statements.
28
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 management investment 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, Class I and Class
R shares. The shares of each class represent an interest in the same
portfolio of investments of the Fund and have equal rights as 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 the 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 John Hancock Financial
Services, Inc., may participate in a joint repurchase agreement
transaction. Aggregate cash balances are invested in one or more large
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
Investment transactions
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are
determined on the identified cost basis. 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 the customary settlement date.
29
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 asset value of the respective classes.
Distribution and service fees, if any, and transfer agent fees for Class I
and Class R shares are calculated daily at the class level based on the
appropriate net asset value of each class and the specific expense rate(s)
applicable to each class.
Expenses
The majority of expenses are directly identifiable to an individual
fund. Expenses that are not readily identifiable to a specific fund are
allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and
the relative sizes of the funds.
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 permits
borrowings of up to $250 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, 2004.
Securities lending
The Fund may lend securities to certain qualified brokers who pay the Fund
negotiated lender fees. 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. At May 31, 2004, the Fund loaned securities having market
value of $161,411,510 collateralized by securities in the amount of
$165,241,802. Securities lending expenses are paid by the Fund to the
Adviser.
Financial futures contracts
The Fund may buy and sell financial futures contracts. 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's instruments. At the time the Fund
enters into a financial futures contract, it is required to deposit with
its custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of
the financial futures contract being traded. Each day, the futures
contract is valued at the official settlement price of the board of
trade or U.S. commodities exchange on which it trades. Subsequent
payments to and from the broker, known as "variation margin," 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 financial futures contracts include the possibility
that there may be an illiquid market and/or that a change in the value
of the contracts may not correlate with changes in the value of the
underlying
30
The Fund had the following financial futures contracts open on May 31,
2004:
NUMBER OF
OPEN CONTRACTS CONTRACTS POSITION EXPIRATION DEPRECIATION
- ------------------------------------------------------------------------------
U.S. 10-year note 785 Long September 04 ($263,073)
securities. In addition, the Fund could be prevented from opening or
realizing the benefits of closing out financial futures positions because of
position limits or limits on daily price fluctuation imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of financial futures
contracts. On May 31, 2004, the Fund had deposited $1,020,500 in a
segregated account to cover margin requirements on open financial futures
contracts.
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 $14,134,814 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 loss carryforward expires as follows: May 31, 2009 --
$14,099,037 and May 31, 2010 -- $35,777.
Dividends, interest
and distributions
Dividend income on investment securities is recorded on the ex-dividend date
or, in the case of some foreign securities, on the date thereafter when the
Fund identifies the dividend. Interest income on investment securities is
recorded on the accrual basis. The Fund may place a debt obligation on
non-accrual status and reduce related interest income by ceasing current
accruals and writing off interest receivables when the collection of interest
has become doubtful. Foreign income may be subject to foreign withholding
taxes, which are accrued as applicable.
The Fund records distributions to shareholders from net investment
income and net 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, 2004, the tax character of
distributions paid was as follows: ordinary income $64,982,023.
Distributions paid by the Fund with respect to each class of shares are
calculated in the same manner, at the same time and are in the same
amount, except for the effect of expenses that may be applied
differently to each class.
As of May 31, 2004, the components of distributable earnings on a tax
basis included $70,119 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.
31
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, Class C and Class
R, 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 asset
value, 1.00% of Class B and Class C average daily net asset value, and
0.50% of Class R average daily net asset value. 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. In addition, under a Service Plan for Class R
shares, the Fund pays up to 0.25% of Class R average daily net asset
value for certain other services.
Class A shares are assessed up-front sales charges. During the year
ended May 31, 2004, JH Funds received net up-front sales charges of
$654,480 with regard to sales of Class A shares. Of this amount, $71,770
was retained and used for printing prospectuses, advertising, sales
literature and other purposes, $218,311 was paid as sales commissions to
unrelated broker-dealers and $364,399 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
Insur ance Company ("JHLICo"), is the indirect sole shareholder of
Signator Investors. Prior to July 15, 2004, Class C shares were assessed
up-front sales charges. During the year ended May 31, 2004, JH Funds
received net up-front sales charges of $244,620 with regard to sales of
Class C shares. Of this amount, $242,359 was paid as sales commissions
to unrelated broker-dealers and $2,261 was paid as sales com missions 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, 2004, CDSCs
received by JH Funds amounted to $446,001 for Class B shares and $7,824
for Class C shares.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo.
For Class A, Class B and Class C shares, the Fund pays a monthly
32
transfer agent fee at an annual rate of 0.015% of each class's average daily
net asset value, plus a fee based on the number of shareholder accounts and
reimbursement for certain out-of-pocket expenses, aggregated and allocated to
each class on the basis of its relative net asset value. For Class I shares,
the Fund pays a monthly transfer agent fee at an annual rate of 0.05% of Class
I average daily net asset value. For Class R shares, the Fund pays a monthly
transfer agent fee at an annual rate of 0.015% of the Class R average net
asset value, plus a fee based on the number of shareholder accounts and
reimbursement for certain out-of-pocket expenses. Signature Services agreed to
voluntarily reduce the Fund's asset-based portion of the transfer agent fee if
the total transfer agent fee exceeds the Lipper, Inc. median transfer agency
fee for comparable mutual funds by 0.05%. Accordingly, the transfer agent fee
for Class A, Class B and Class C shares was reduced by $50,022 during the year
ended May 31, 2004, which had no impact on each class's ratio of ex penses to
average net assets. Signature Services reserves the right to terminate this
limitation in the future.
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 a rate of approximately 0.03% of the average daily net asset
value of the Fund. The Fund also paid the Adviser the amount of $2,617
for certain publishing services, included in the printing fees.
The Adviser owned 6,698 Class R shares of beneficial interest of the
Fund on May 31, 2004.
Mr. James A. Shepherdson is a director and/or officer of the Adviser
and/or its affiliates, as well as Trustee 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 investments, as well
as any unrealized gains or losses. The Deferred Compensation Plan
investments had no impact on the operations of the Fund.
33
NOTE C
Fund share transactions
This listing illustrates the number of Fund shares sold, reinvested,
issued in reorganization 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 5-31-03 YEAR ENDED 5-31-04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Sold 8,023,117 $119,537,680 5,824,845 $89,554,899
Distributions reinvested 3,230,030 48,137,822 2,910,959 44,557,244
Repurchased (13,031,036) (194,047,897) (14,853,151) (227,944,897)
Net decrease (1,777,889) ($26,372,395) (6,117,347) ($93,832,754)
CLASS B SHARES
Sold 3,435,375 $50,874,917 965,793 $14,845,807
Distributions reinvested 501,577 7,467,519 387,561 5,934,167
Repurchased (5,112,010) (76,105,101) (5,237,216) (80,229,304)
Net decrease (1,175,058) ($17,762,665) (3,883,862) ($59,449,330)
CLASS C SHARES
Sold 950,362 $14,094,274 348,423 $5,328,454
Distributions reinvested 106,568 1,585,178 77,945 1,193,806
Repurchased (1,137,091) (16,982,912) (1,184,766) (18,155,936)
Net decrease (80,161) ($1,303,460) (758,398) ($11,633,676)
CLASS I SHARES
Sold 152,828 $2,306,536 88,680 $1,370,545
Issued in reorganization 566,449 8,309,863 -- --
Distributions reinvested 30,706 458,285 28,118 430,842
Repurchased (152,254) (2,255,534) (413,475) (6,370,177)
Net increase (decrease) 597,729 $8,819,150 (296,677) ($4,568,790)
CLASS R SHARES 1
Sold -- -- 6,806 $101,687
Net increase -- -- 6,806 $101,687
NET DECREASE (2,435,379) ($36,619,370) (11,049,478) ($169,382,863)
1 Class R shares began operations on 8-5-03.
NOTE D
Investment
transactions
Purchases and proceeds from sales or maturities of securities, other
than short-term securities and obligations of the U.S. government,
during the year ended May 31, 2004, aggregated $2,731,785,623 and
$2,962,155,959, respectively. Purchases and proceeds from sales or
maturities of obligations of the U.S. government aggregated $450,743,781
and $450,255,098, respectively, during the year ended May 31, 2004.
The cost of investments owned on May 31, 2004, including short-term
investments, for federal income tax purposes, was $1,246,217,926. Gross
unrealized appreciation and depreciation of investments aggregated
$22,943,215 and $29,669,914, respectively, resulting in net unrealized
depreciation of $6,726,699. The difference between book basis and tax
basis net unrealized depreciation of investments is attributable
34
primarily to the tax deferral of losses on certain sales of securities
and amortization of premiums and accretion of discounts on debt
securities.
NOTE E
Reclassification
of accounts
During the year ended May 31, 2004, the Fund reclassified amounts to
reflect an increase in accumulated net realized loss on investments of
$6,165,511, a decrease in distributions in excess of net investment
income of $4,847,061 and an increase in capital paid-in of $1,318,450.
This represents the amount necessary to report these balances on a tax
basis, excluding certain temporary differences, as of May 31, 2004.
Additional 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 accounting principles generally accepted in the United
States of America, book and tax differences in accounting for GNMA
paydowns, deferred compensation and amortization of premium and
accretion of discount. The calculation of net investment income (loss)
per share in the Fund's Financial Highlights excludes these adjustments.
NOTE F
Reorganization
On May 29, 2002, the shareholders of the John Hancock Active Bond Fund
("Active Bond Fund") approved an Agreement and Plan of Reorganization,
which provided for the transfer of substantially all of the assets and
liabilities of the Active Bond Fund in exchange solely for Class I
shares of the Fund. The acquisition was accounted for as a tax-free
exchange of 566,449 Class I shares of the Fund for the net assets of the
Active Bond Fund, which amounted to $8,309,863, including $75,770 of
unrealized appreciation after the close of business on June 7, 2002.
35
AUDITORS'
REPORT
Report of
Pricewaterhouse-
Coopers LLP,
Independent
Registered Public
Accounting Firm
To the Board of Trustees and Shareholders of
John Hancock Bond Fund,
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of the
John Hancock Bond Fund (the "Fund") at May 31, 2004, the results of its
operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with accounting principles
generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at May 31, 2004 by
correspondence with the custodian and brokers, provide a reasonable
basis for our opinion. The financial highlights for each of the periods
on or before May 31, 2002, were audited by other independent auditors,
whose report dated July 5, 2002, expressed an unqualified opinion
thereon.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 12, 2004
36
TAX
INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished
with respect to the distributions of the Fund, if any, paid during its
taxable year ended May 31, 2004.
With respect to the ordinary dividends paid by the Fund for the fiscal
year ended May 31, 2004, 0.87% of the dividends qualifies for the
corporate dividends-received deduction.
The Fund hereby designates the maximum amount allowable of its net
taxable income as qualified dividend income as provided in the Jobs and
Growth Tax Relief Reconciliation Tax Act of 2003. This amount will be
reflected on Form 1099-DIV for the calendar year 2004.
Shareholders will be mailed a 2004 U.S. Treasury Department Form
1099-DIV in January 2005. This will reflect the total of all
distributions that are taxable for calendar year 2004.
37
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
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
Charles L. Ladner, 2 Born: 1938 2004 49
Independent Chairman (since 2004); Chairman and Trustee, Dunwoody
Village, Inc. (retirement services); Senior Vice President and Chief
Financial Officer, UGI Corporation (Public Utility Holding Company)
(retired 1998); Vice President and Director for AmeriGas, Inc. (retired
1998); Director of AmeriGas Partners, L.P. (until 1997) (gas distribution);
Director, EnergyNorth, Inc. (until 1995); Director, Parks and History
Association (since 2001).
Dennis S. Aronowitz, Born: 1931 1988 20
Professor of Law, Emeritus, Boston University School of Law
(as of 1996); Director, Brookline Bancorp (since 1998).
Richard P. Chapman, Jr., Born: 1935 1975 20
President and Chief Executive Officer, Brookline Bancorp Inc. (lending)
(since 1972); Director, Lumber Insurance Co. (insurance) (until 2000);
Chairman and Director, Northeast Retirement Services, Inc. (retirement
administration) (since 1998).
William J. Cosgrove, Born: 1933 1991 20
Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A.
(retired 1991); Executive Vice President, Citadel Group Representatives,
Inc. (financial reinsurance); Director, Hudson City Savings Bank (since 1995);
Director, Hudson City Bancorp (since 1999); Trustee, Scholarship Fund for
Inner City Children (since 1986).
Richard A. Farrell, Born: 1932 1996 20
President, Farrell, Healer & Co., Inc. (venture capital management firm)
(since 1980) and President, the Venture Capital Fund of NE (since 1980);
prior to 1980, headed the venture capital group at Bank of Boston Corporation;
Trustee, Marblehead Savings Bank (since 1994).
William F. Glavin, 2 Born: 1932 1996 20
President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox
Corporation (until 1989); Director, Reebok, Inc. (until 2002) and Inco Ltd.
(until 2002).
38
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
Patti McGill Peterson, 2 Born: 1943 1996 30
Executive Director, Council for International Exchange of Scholars (since
1998); Vice President, Institute of International Education (since 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); Director,
Ford Foundation, International Fellowships Program (since 2002); Director,
Lois Roth Endowment (since 2002); Director, Council for International
Educational Exchange (since 2003); and Advisory Board, UNCF, Global
Partnerships Center (since 2002).
John A. Moore, 2 Born: 1939 1996 30
President and Chief Executive Officer, Institute for Evaluating Health
Risks, (nonprofit institution) (until 2001); Chief Scientist, Sciences
International (health research) (until 2003); Principal, Hollyhouse
(consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002).
John W. Pratt, Born: 1931 1996 20
Professor of Business Administration Emeritus, Harvard University
Graduate School of Business Administration (as of 1998).
NON-INDEPENDENT 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
James A. Shepherdson, Born: 1952 2004 49
President and Chief Executive Officer
Executive Vice President, Manulife Financial Corporation; Chairman,
Director, President and Chief Executive Officer, John Hancock Advisers,
LLC and The Berkeley Group; Chairman, Director, President and Chief
Executive Officer, John Hancock Funds, LLC; Chairman, President,
Director and Chief Executive Officer, Sovereign Asset Management
Corporation ("SAMCorp"); President, John Hancock Retirement
Services, John Hancock Life Insurance Company (until 2004); Chairman,
Essex Corporation (until 2004); Co-Chief Executive Officer, MetLife
Investors Group (until 2003); Senior Vice President, AXA/Equitable
Insurance Company (until 2000).
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
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).
39
NAME, AGE
POSITION(S) HELD WITH FUND OFFICER
PRINCIPAL OCCUPATION(S) AND OF FUND
DIRECTORSHIPS DURING PAST 5 YEARS SINCE
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.
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 REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
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
The Fund's proxy voting policies and procedures are available without charge,
upon request:
By phone 1-800-225-5291
On the Fund's Web site www.jhfunds.com/proxy
On the SEC's Web site www.sec.gov
41
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "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 5/04
7/04
ITEM 2. CODE OF ETHICS.
As of the end of the period, May 31, 2004, the registrant has adopted a code
of ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief
Executive Officer, Chief Financial Officer and Treasurer (respectively, the
principal executive officer, the principal financial officer and the principal
accounting officer, the "Senior Financial Officers"). A copy of the code of
ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
William F. Glavin is the audit committee financial expert and is
"independent", pursuant to general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for professional services rendered by the principal
accountant(s) for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant(s) in connection with
statutory and regulatory filings or engagements amounted to $35,500 for the
fiscal year ended May 31, 2003 and $37,300 for the fiscal year ended May 31,
2004. These fees were billed to the registrant and were approved by the
registrant's audit committee.
(b) Audit-Related Services
There were no audit-related fees during the fiscal year ended May 31, 2003 and
fiscal year ended May 31, 2004 billed to the registrant or to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant ("control affiliates").
(c) Tax Fees
The aggregate fees billed for professional services rendered by the principal
accountant(s) for the tax compliance, tax advice and tax planning ("tax fees")
amounted to $4,500 for the fiscal year ended May 31, 2003 and $4,700 for the
fiscal year ended May 31, 2004. The nature of the services comprising the tax
fees was the review of the registrant's income tax returns and tax
distribution requirements. These fees were billed to the registrant and were
approved by the registrant's audit committee. There were no tax fees billed to
the control affiliates.
(d) All Other Fees
There were no other fees during the fiscal year ended May 31, 2003 and fiscal
year ended May 31, 2004 billed to the registrant or to the control affiliates.
(e) (1) See attachment "Approval of Audit, Audit-related, Tax and Other
Services", with the audit committee pre-approval policies and procedures.
(e)(2) There were no fees that were approved by the audit committee pursuant
to the de minimis exception for the fiscal years ended May 31, 2003 and May
31, 2004 on behalf of the registrant or on behalf of the control affiliates
that relate directly to the operations and financial reporting of the
registrant.
(f) According to the registrant's principal accountant, for the fiscal year
ended May 31, 2004, the percentage of hours spent on the audit of the
registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons who were not full-time, permanent
employees of principal accountant was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant(s) for
services rendered to the registrant and rendered to the registrant's control
affiliates for each of the last two fiscal years of the registrant were
$24,500 for the fiscal year ended May 31, 2003, and $11,450 for the fiscal
year ended May 31, 2004.
(h) The audit committee of the registrant has considered the non-audit
services provided by the registrant's principal accountant(s) to the control
affiliates and has determined that the services that were not pre-approved are
compatible with maintaining the principal accountant(s)' independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The registrant has adopted procedures by which shareholders may recommend
nominees to the registrant's Board of Trustees. A copy of the procedures is
filed as an exhibit to this Form N-CSR. See attached "John Hancock Funds -
Administration Committee Charter".
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form N-CSR,
the registrant's principal executive officer and principal financial officer
have concluded that those disclosure controls and procedures provide
reasonable assurance that the material information required to be disclosed by
the registrant on this report is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report)
that have materially affected, or are reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive
officer and principal financial officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act
of 1940, are attached.
(b)(1) Separate certifications for the registrant's principal executive
officer and principal financial officer, as required by 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
and Rule 30a-2(b) under the Investment Company Act of 1940, are attached. The
certifications furnished pursuant to this paragraph are not deemed to be
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of that section. Such certifications are
not deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Registrant specifically incorporates them by reference.
(c)(1) Submission of Matters to a Vote of Security Holders is attached. See
attached "John Hancock Funds - Administration Committee Charter".
(c)(2) Approval of Audit, Audit-related, Tax and Other Services is attached.
(c)(3) Contact person at the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Sovereign Bond Fund
By:
------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: July 21, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
-------------------------------
James A. Shepherdson
President and Chief Executive Officer
Date: July 21, 2004
By:
-----------------------
Richard A. Brown
Senior Vice President and Chief Financial Officer
Date: July 21, 2004