John Hancock Funds
101 Huntington Avenue
Boston, Massachusetts 02199
John Hancock Declaration Trust
PROSPECTUS
August 12, 1996
The John Hancock Declaration Trust consists of ten mutual funds, each of
which is described in this Prospectus (each, a "Fund" and collectively, the
"Funds"):
John Hancock V.A. International Fund
John Hancock V.A. Emerging Growth Fund
John Hancock V.A. Discovery Fund
John Hancock V.A. Independence Equity Fund
John Hancock V.A. Sovereign Investors Fund
John Hancock V.A. 500 Index Fund
John Hancock V.A. Sovereign Bond Fund
John Hancock V.A. Strategic Income Fund
John Hancock V.A. World Bond Fund
John Hancock V.A. Money Market Fund
TABLE OF CONTENTS
Page
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Investment Objectives of the Funds 3
Investment Policies and Strategies 4
Purchase and Redemption of Shares 8
Investments in Shares of the Funds 8
Share Price 8
Redeeming Shares 8
Organization and Management of the Funds 9
The Funds' Expenses 10
Dividends and Taxes 11
Performance 11
Risk Factors, Investments and Techniques 12
Appendix 18
An investment in John Hancock V.A. Money Market Fund is neither insured nor
guaranteed by the U.S. Government. There is no assurance that the Money
Market Fund will be able to maintain a stable net asset value of $1.00 per
share.
JOHN HANCOCK V.A. STRATEGIC INCOME FUND MAY INVEST UP TO 100% OF ITS TOTAL
ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL
GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING.
SEE "RISK FACTORS, INVESTMENTS AND TECHNIQUES" AND THE APPENDIX.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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[logo: John Hancock Funds [Recycle symbol] Printed on Recycled Paper.
A Global Investment Management Firm]
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This Prospectus sets forth information about the Funds that you should know
before investing. Please read and retain it for future reference. The Funds are
designed primarily to provide investment vehicles for variable annuity and
variable life insurance contracts ("Variable Contracts") of various insurance
companies. This Prospectus should be read in conjunction with the separate
account Prospectus of the specific insurance product which accompanies this
Prospectus. Except for World Bond Fund, a non-diversified series, each Fund is a
diversified series of John Hancock Declaration Trust (the "Trust").
Additional information about the Trust and the Funds has been filed with the
Securities and Exchange Commission (the "SEC"). You can obtain a copy of the
Funds' Statement of Additional Information, dated August 12, 1996, which is
incorporated by reference into this Prospectus, free of charge by writing or
telephoning: John Hancock Investor Services Corporation, P.O. Box 9298,
Boston, Massachusetts 02205-9116, 1-800-824-0335. Shares of a Fund may not be
available in your state due to various insurance or other regulations. Please
check with your insurance company for Funds that are available in your state.
Inclusion of a Fund in this Prospectus which is not available in your state
is not to be considered a solicitation.
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INVESTMENT OBJECTIVE AND OVERVIEW OF EACH FUND
John Hancock V.A. International Fund ("International Fund") seeks long-term
growth of capital. The Fund invests primarily in equity securities of foreign
companies and governments.
John Hancock V.A. Emerging Growth Fund ("Emerging Growth Fund") seeks
long-term growth of capital. The potential for growth of capital is the sole
basis for selection of portfolio securities. Current income is not a factor
in this selection.
John Hancock V.A. Discovery Fund ("Discovery Fund") seeks long-term growth
of capital. The Fund invests primarily in common stocks of companies of all
levels of capitalization which are believed by the Fund's managers to offer
superior prospects for growth. Current income is not a factor of consequence
in the selection of stocks for the Fund.
John Hancock V.A. Independence Equity Fund ("Independence Equity Fund")
seeks above-average total return, consisting of capital appreciation and
income. The Fund will diversify its investments to create a portfolio focused
on stocks of companies that management believes are undervalued and have
improving fundamentals over both the intermediate and long term.
John Hancock V.A. Sovereign Investors Fund ("Sovereign Investors Fund")
seeks long-term growth of capital and income without assuming undue market
risks. At times, however, because of market conditions, the Fund may find it
advantageous to invest primarily for current income. The Fund invests
primarily in common stocks of seasoned companies in sound financial condition
with a long record of paying increasing dividends.
John Hancock V.A. 500 Index Fund ("500 Index Fund") seeks to provide
investment results that correspond to the total return performance of the
Standard & Poor's 500 Stock Price Index (the "S&P 500 Index"). The 500 Index
Fund normally invests at least 80% of the Fund's assets in common stocks of
companies that comprise the S&P 500 Index in approximately the same
proportions as they are represented in the Index.
John Hancock V.A. Sovereign Bond Fund ("Sovereign Bond Fund") seeks a high
level of current income consistent with prudent investment risk. The Fund
invests primarily in a diversified portfolio of investment grade fixed income
securities of U.S. and foreign issuers, although the Fund may invest up to
25% of its total assets in lower-rated high yield, high risk, fixed income
securities.
John Hancock V.A. Strategic Income Fund ("Strategic Income Fund") seeks a
high level of current income. The Fund invests primarily in foreign
government and corporate fixed income securities, U.S. Government securities
and lower-rated high yield, high risk, fixed income securities of U.S.
issuers.
John Hancock V.A. World Bond Fund ("World Bond Fund") seeks a high total
investment return, a combination of current income and capital appreciation.
The Fund invests primarily in a global portfolio of fixed income securities.
John Hancock V.A. Money Market Fund ("Money Market Fund") seeks maximum
current income consistent with capital preservation and liquidity. The Fund
invests only in high-quality money market instruments.
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"), a wholly owned indirect subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"). The sub-adviser of the International
Fund is John Hancock Advisers International Limited ("JHAI"), a wholly owned
subsidiary of the Adviser. The sub-adviser of the Independence Equity Fund is
Independence Investment Associates, Inc. ("IIA"), a wholly owned indirect
subsidiary of the Life Company. The sub-adviser of the Sovereign Investors
Fund is Sovereign Asset Management Corporation ("SAMCorp" and, together with
IIA and JHAI, the "Sub-advisers"), also a wholly owned indirect subsidiary of
the Life Company.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by the Adviser. See "Organization and Management of the
Funds" for a description of the terms of the Adviser's license.
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Risk Factors. Each Fund is a newly organized series of the Trust and,
therefore, has no operating history. There can be no assurance that the Funds
will achieve their investment objectives. An investment in one or more of the
Funds (except for Money Market Fund) is intended for long-term investors who
can accept the risks associated with investing primarily in equity and fixed
income securities. The Funds' investments will be subject to market
fluctuation and other risks inherent in all securities. The yield, return and
price volatility of each Fund depend on the type and quality of its
investments as well as market and other factors. In addition, a Fund's
potential investments and management techniques may entail specific risks.
For additional information about the risks associated with an investment in
one or more of the Funds, see "Risk Factors, Investments and Techniques."
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INVESTMENT POLICIES AND
STRATEGIES
The Equity Funds
The Equity Funds offer a range of investment alternatives focusing
on common stocks.
The International Fund, Emerging Growth Fund, Discovery Fund, Independence
Equity Fund, Sovereign Investors Fund, and 500 Index Fund (collectively, the
"Equity Funds") will invest at least 65% of their assets, and, in the case of
the Emerging Growth Fund and 500 Index Fund, 80% of their assets, in common
stocks. However, under normal market conditions, the Equity Funds will be
substantially fully invested in common stocks. Each Equity Fund, other than
the 500 Index Fund, is managed according to traditional methods of "active"
management, which involves the buying and selling of securities based upon
economic, financial and market analysis and investment judgment. Independence
Equity Fund is managed using model driven quantitative techniques. The 500
Index Fund uses a "passive" or "indexing" investment approach and seeks to
provide investment results that correspond to rather than replicate the total
return performance of the S&P 500 Index by purchasing stocks for the Fund in
proportion to their weight in the S&P 500 Index. This indexing technique is
achieved through the use of stock optimization modeling.
In addition to common stocks, each Equity Fund (other than the 500 Index
Fund) may invest in preferred stock and securities convertible into common
and preferred stock. However, if deemed advisable by the Adviser or relevant
Sub-adviser, the Equity Funds may invest in cash and any other types of
securities including warrants, bonds, notes and other fixed income securities
or obligations of domestic governments and their political subdivisions or
domestic corporations. The Emerging Growth Fund, Discovery Fund and
International Fund may also invest in obligations of foreign governments and
their political subdivisions or foreign corporations. Each Equity Fund will
diversify its investments among a number of industry groups without
concentrating more than 25% of its assets in any particular industry.
The International Fund invests primarily in equity securities of
foreign companies and governments.
Under normal circumstances, at least 65% of the International Fund's total
assets will be invested in equity securities of issuers located in various
countries around the world. Generally, the Fund's portfolio will contain
securities of issuers from at least three countries other than the United
States. Although the Fund may invest in both equity and fixed income
securities, the Adviser and JHAI expect that equity securities, such as
common stock, preferred stock and securities convertible into common and
preferred stock, will ordinarily offer the greatest potential for long-term
growth of capital and will constitute substantially all of the Fund's assets.
However, if deemed advisable by the Adviser and JHAI, the Fund may invest in
any other types of securities that the Adviser and JHAI believe offer
long-term capital appreciation due to favorable credit quality, interest
rates or currency exchange rates. These securities include warrants, bonds,
notes and other debt securities (including Euro-dollar securities) or
obligations of domestic or foreign governments and their political
subdivisions, or domestic or foreign corporations. The Fund will maintain a
flexible investment policy and will invest in a diversified portfolio of
securities of companies and governments located throughout the world.
In choosing specific investments for the Fund, the Adviser and JHAI
generally look for companies whose earnings show a strong growth trend or
companies whose current market value per share is undervalued. The Fund will
not restrict its investments to any particular size company and,
consequently, the portfolio may include the securities of small and
relatively less well-known companies. The securities of small and, in some
cases, medium sized companies may be subject to more volatile market
movements than the securities of larger, more established companies or the
stock market averages in general. See "Smaller Capitalization Companies."
The Emerging Growth Fund invests primarily in small-sized companies
that tend to be at a stage of development associated with higher
than average growth.
The Emerging Growth Fund invests in common stocks and other equity
securities of domestic and foreign issuers (including convertible securities)
of rapidly growing, small-sized companies (with a total market capitalization
of up to $1 billion). In normal circumstances, the Fund will invest at least
80% of its total assets in these companies. The Adviser selects investments
that it believes offer growth potential higher than average for all
companies. The Adviser expects that common stocks of rapidly growing smaller
capitalization companies in an emerging growth stage of development generally
offer the most attractive growth prospects. However, the Fund may also invest
in equity securities of larger, more established companies that the Adviser
believes offer superior growth potential. The Fund may invest without
limitation in securities of foreign issuers.
The Discovery Fund invests primarily in common stocks of companies
of all levels of capitalization which are believed by the Adviser to
offer superior prospects for growth.
The Discovery Fund invests primarily in companies that appear to offer
superior growth prospects. Under normal circumstances, the Fund will invest
at least 65% of its total assets in these companies. The Fund looks for
companies, including small- and medium-sized companies, that have broad
market opportunities and consistent or accelerating earnings growth.
In selecting portfolio investments for the Fund, the Adviser will focus on
companies which may be in a relatively early stage of development, but have
usually established a record of profitability and a strong financial
position. They may possess a new technology, a unique or proprietary product,
or a profitable market niche--all of which help drive strong unit volume
growth, profitability and ultimately earnings per share growth. Other
desirable attributes of portfolio investments may include participation by a
company in an industrial sector with a favorable secular growth outlook
(e.g., medical/healthcare, communications
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or technology), a capable management team with a significant equity stake in
its company, and financial cash flows sufficient to sustain estimated growth
rates. The Fund may invest up to 25% of its total assets in foreign
securities.
The Independence Equity Fund invests primarily in common stocks of
companies that the Adviser and IIA believe are undervalued and have
improving fundamentals over both the intermediate and long term.
The Independence Equity Fund will diversify its investments to create a
portfolio with a risk profile and characteristics similar to those of the S&P
500 Index. Consequently, the Fund will invest in a number of industry groups
without concentrating in any particular industry. In determining what
constitutes "value," the Adviser and the Fund's Sub-adviser, IIA, seek stocks
with the following attributes: high growth relative to price/earnings ratio;
rising dividend stream; and high asset value. To determine whether a
company's stock exhibits improving fundamentals, the Adviser and IIA look for
accelerating earnings growth, positive earnings surprises when compared to
the market's expectations and favorable cyclical timing. The Fund may also
invest in securities of foreign issuers which are U.S. dollar denominated and
traded on a U.S. exchange.
Sovereign Investors Fund generally invests in seasoned companies in
sound financial condition with a long record of paying dividends.
Under normal circumstances, Sovereign Investors Fund invests at least 65%
of its total assets in dividend paying securities. The Adviser expects that
common stocks will ordinarily offer the greatest dividend paying potential
and will constitute a majority of the Fund's assets. The Fund may also invest
a smaller portion of its assets in corporate and U.S. Government fixed income
securities. For defensive purposes, however, the Fund may temporarily hold a
larger percentage of high grade liquid preferred stock or fixed income
securities. The Adviser and the Fund's Sub-adviser, SAMCorp, will select
securities for the Fund's portfolio mainly for their investment character
based upon generally accepted elements of intrinsic value, including industry
position, management, financial strength, earning power, marketability and
prospects for future growth. The distribution of the Fund's assets among
various types of investments is based on general market conditions, the level
of interest rates, business and economic conditions and the availability of
investments in the equity or fixed income markets. The amount of the Fund's
assets that may be invested in either equity or fixed income securities is
not restricted and is based upon the judgment of the Adviser or SAMCorp of
what might best achieve the Fund's investment objective.
While there is considerable flexibility in the investment grade and type
of security in which the Fund may invest, the Fund invests only in companies
that have (together with their predecessors) been in continuous business for
at least five years and have total assets of at least $10 million. The Fund
currently uses a strategy of investing only in those common stocks which have
a record of having increased their dividend payout in each of the preceding
ten or more years. This "dividend performers" strategy can be changed at any
time.
Using "passive" or "indexing" investment techniques, the 500 Index
Fund seeks to provide investment results that correspond to the
total return performance of the S&P 500 Index.
The 500 Index Fund normally invests 80% of the Fund's total assets in
common stocks of the companies that comprise the S&P 500 Index. The Fund
tries to allocate the stocks held in its portfolio in approximately the same
proportions as they are represented in the S&P 500 Index, in an attempt to
minimize the degree to which the Fund's investment results (before Fund
expenses) differ from those of the Index ("tracking error"). This "indexing"
technique is a passive approach to investing and is designed for long-term
investors seeking a diversified portfolio of common stocks. Unlike other
equity funds which seek to "beat" stock market averages, the Fund attempts to
"match" the total return performance of the S&P Index and thus provide a
predictable return relative to the benchmark. The degree to which the Fund's
performance correlates with that of the S&P 500 Index will depend upon the
size and cash flows of the Fund, the liquidity of the securities represented
in the Index and the Fund's expenses, among other factors. There is no fixed
number of component stocks in which the Fund will invest, and there can be no
assurance that the Fund's total return will match that of the S&P 500 Index.
For a description of the investment characteristics of the S&P 500 Index, see
"The S&P 500 Index."
If extraordinary circumstances warrant, the Fund may exclude a stock held
in the S&P 500 Index and include a similar stock in its place if doing so
will help the Fund achieve its objective. Additionally, the Fund may invest
in certain short-term fixed income securities such as cash equivalents,
although cash and cash equivalents are normally expected to represent less
than 1% of the Fund's assets. The Fund may also enter into stock futures
contracts and options in order to invest uncommitted cash balances, to
maintain liquidity to meet shareholder redemptions, or to minimize trading
costs. The Fund will not invest in cash equivalents, futures contracts or
options as part of a temporary defensive strategy.
Each Equity Fund (other than the 500 Index Fund) may invest a
portion of its total assets in corporate and governmental fixed
income securities.
Although under normal market conditions each Equity Fund intends to be
substantially fully invested in common stocks, each Equity Fund (other than
the 500 Index Fund) may invest in fixed income securities for purposes of
managing its cash position and for temporary defensive purposes. Fixed income
investments of these Funds may include bonds, notes, preferred stock and
convertible fixed income securities issued by U.S. corporations or the U.S.
Government and its political subdivisions. The International Fund may also
invest in fixed income securities issued by foreign corporations or foreign
governments and their political subdivisions. The value of fixed income
securities varies inversely with interest rates. The value of convertible
issues, while influenced by the level of interest rates, will also be
affected by the changing value of the underlying common stocks into which
they are convertible.
The fixed income securities of the Independence Equity Fund, the
International Fund, the Emerging Growth Fund and the Discovery Fund will be
rated "investment grade" (i.e., rated BBB or better by
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Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors
Service, Inc. ("Moody's")) or, if unrated, determined to be of investment
grade quality by the Adviser or relevant Sub-adviser. The fixed income
securities of the Sovereign Investors Fund may be rated as low as C by S&P or
Moody's. No more than 5% of the Sovereign Investors Fund's assets will be
invested in fixed income securities rated lower than BBB by S&P or Baa by
Moody's or, if unrated, determined to be of comparable quality by the
Adviser.
Fixed income securities rated BBB or Baa normally exhibit adequate
protection parameters. However, fixed income securities rated BBB or Baa or
lower have speculative characteristics, and adverse changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than with higher grade
bonds. Fixed income securities rated lower than BBB or Baa are high risk
securities commonly known as "junk bonds." See "Lower Rated Securities" and
the Appendix to this Prospectus for a description of the risks and
characteristics of various ratings categories. Each Equity Fund (other than
the Sovereign Investors Fund) may retain fixed income securities whose
ratings are downgraded below the minimum ratings described above until the
Adviser or relevant Sub-adviser determines that disposing of such securities
is in the best interests of the affected Fund. If any security in Sovereign
Investors Fund's portfolio falls below the Fund's minimum credit quality
standards, as a result of a rating downgrade or the Adviser's or
Sub-adviser's determination, the Fund will dispose of the security as
promptly as possible while attempting to minimize any loss.
The Fixed Income Funds
The Fixed Income Funds offer a range of investment alternatives
focusing primarily on corporate and governmental fixed income
securities.
Under normal circumstances, the Sovereign Bond Fund, Strategic Income Fund
and World Bond Fund (collectively, the "Fixed Income Funds") each invests at
least 65% of its total assets in fixed income securities. Each Fixed Income
Fund will invest in a broad range of fixed income securities, including
bonds, notes, preferred stock and convertible debt securities issued by U.S.
corporations or the U.S. Government and its political subdivisions. The Funds
may invest in mortgage-backed securities and the Sovereign Bond and Strategic
Income Funds may invest in asset-backed securities. The Fixed Income Funds
may also invest in fixed income securities issued by foreign corporations or
governments and their political subdivisions. The fixed income securities in
which the Funds may invest are subject to varying credit quality criteria.
The Fixed Income Funds are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the minimum
ratings noted below.
The value of fixed income securities generally varies inversely with
interest rates. The longer the maturity of the fixed income security, the
more volatile will be changes in its value resulting from changes in interest
rates. The value of fixed income securities with conversion features,
however, will also be affected by changes in the value of the common stocks
into which such fixed income securities are convertible.
The Sovereign Bond Fund invests primarily in a diversified portfolio
of freely marketable investment grade fixed income securities of
U.S. and foreign issuers.
Under normal market conditions, the Sovereign Bond Fund invests at least
65% of its total assets in bonds and/or debentures. In addition, at least 75%
of the Fund's total investments in fixed income securities (other than
commercial paper) normally consists of securities which have, at the time of
purchase, a rating within the four highest grades as determined by S&P (AAA,
AA, A, or BBB) or Moody's (Aaa, Aa, A or Baa) or their respective equivalent
ratings and fixed income securities of banks, the U.S. Government and its
agencies or instrumentalities and other issuers which, although not rated as
a matter of policy by either S&P or Moody's, are considered by the Adviser to
have investment quality comparable to securities receiving ratings within the
four highest grades. Fixed income securities rated BBB or Baa and unrated
debt securities of comparable credit quality are subject to certain risks.
See "Investment Grade Securities."
The Fund may also invest up to 25% of its total assets in fixed income
securities rated below BBB by S&P or below Baa by Moody's or their respective
equivalent ratings or in securities which are unrated. The Fund may invest in
securities rated as low as CC or Ca and unrated securities of comparable
credit quality as determined by the Adviser. These ratings indicate
obligations that are highly speculative and often in default. Securities
rated lower than Baa or BBB are high risk securities generally referred to as
"junk bonds." See "Lower Rated Securities" and the Appendix to this
Prospectus for a description of the risks and characteristics of the various
ratings categories.
The Fund may acquire individual securities of any maturity and is not
subject to any limits as to the average maturity of its overall portfolio.
The Fund may invest in securities of United States and foreign issuers. It
is anticipated that under normal conditions, the Fund will not invest more
than 25% of its total assets in foreign securities (excluding U.S.
dollar-denominated Canadian securities).
The Strategic Income Fund seeks a high level of current income by
investing primarily in fixed income securities of U.S. and foreign
issuers.
The Strategic Income Fund invests in all types of fixed income securities
including foreign government and foreign corporate securities, U.S.
Government securities and lower-rated high yield, high risk, fixed income
securities of U.S. issuers. Under normal circumstances, the Fund's assets
will be invested in each of the foregoing three sectors. However, from time
to time the Fund may invest up to 100% of its total assets in any one sector.
The Fund may invest up to 10% of its net assets in common stocks and similar
equity securities of U.S. and foreign companies. No more than 25% of the
Fund's total assets, at the time of purchase, will be invested in government
securities of any one foreign country. The fixed income securities in which
the Fund may invest include bonds, debentures, notes (including variable and
floating rate instruments), preferred and preference stock, zero coupon
bonds, payment-in-kind securities, increasing rate note securities,
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participation interests, multiple class passthrough securities,
collateralized mortgage obligations, stripped debt securities, other
mortgage-backed securities, asset-backed securities and other derivative debt
securities. Variable and floating rate instruments, mortgage-backed
securities and asset-backed securities are derivative instruments that derive
their value from an underlying security. Derivative securities are subject to
additional risks. See "Derivative Instruments."
The higher yields and the high income sought by the Fund are generally
obtainable from investments in the lower rating categories. The Fund may
invest up to 100% of its total assets in fixed income securities rated below
Baa by Moody's, or below BBB by S&P, or in securities which are unrated. The
Fund may invest in securities rated as low as Ca or CC, which may indicate
that the obligations are highly speculative and in default. Fixed income
securities rated below Baa or BBB are commonly called "junk bonds." See
"Lower Rated Securities" and the Appendix to this Prospectus for a
description of the risks and characteristics of the various ratings
categories.
The World Bond Fund invests primarily in a global portfolio of fixed
income securities.
Normally, the World Bond Fund will invest in fixed income securities
denominated in at least three currencies or multi-currency units, including
the U.S. Dollar. Under normal circumstances, the Fund will invest primarily
(at least 65% of total assets) in U.S. Government, municipal and foreign
governmental securities; obligations of supranational organizations (e.g.,
the World Bank, the International Bank for Reconstruction and Development,
the European Investment Bank, the Asian Development Bank and the European
Coal and Steel Community); and foreign corporations or financial
institutions. The Fund has registered as a "non-diversified" fund so that it
will be able to invest more than 5% of its assets in obligations of a single
foreign government or other issuer. The Fund will not invest more than 25% of
its total assets in securities issued by any one foreign government. See
"Securities of Foreign Issuers."
The Fund may invest in fixed income securities denominated in any currency
or a multi-national currency unit. The European Currency Unit ("ECU") is a
composite currency consisting of specified amounts of each of the currencies
of the member countries of the European Economic Community. The Fund may also
invest in fixed income securities denominated in the currency of one country
although issued by a governmental entity, corporation or financial
institution of another country. For example, the Fund may invest in a
Japanese yen-denominated fixed income security issued by a U.S. corporation.
This type of investment involves credit risks associated with the issuer and
currency risks associated with the currency in which the obligation is
denominated. The Fund maintains a flexible investment policy and its
portfolio assets may be shifted among fixed income securities denominated in
various foreign currencies that the Adviser expects to provide relatively
high yields or potential capital appreciation in U.S. Dollars.
The Fund will invest primarily in fixed income securities which are rated
A or better by S&P or Moody's or securities that the Adviser has determined
to be of similar credit quality. The Fund may, however, invest less than 35%
of its total assets in fixed income securities rated, at the time of
investment, as low as CCC by S&P or Caa by Moody's or their respective
equivalent ratings and unrated securities of comparable credit quality. These
securities are commonly referred to as "emerging market" or "junk" bonds.
These bonds are considered speculative and entail greater risks, including
default risks, than those found in higher rated securities. See "Lower Rated
Securities" and the Appendix to this Prospectus for a description of the
risks and characteristics of the various ratings categories.
The average maturity of the Fund's portfolio securities may vary based
upon the Adviser's assessment of economic and market conditions.
The Money Market Fund
The Money Market Fund invests only in high-quality money market
instruments.
The Money Market Fund seeks to achieve its objective by investing in money
market instruments including, but not limited to, U.S. Government, municipal
and foreign government securities; obligations of supranational organizations
(e.g., the World Bank and the International Monetary Fund); obligations of
U.S. and foreign banks and other lending institutions; corporate obligations;
repurchase agreements and reverse repurchase agreements. All of the Fund's
investments will be denominated in U.S. dollars.
At the time the Money Market Fund acquires its investments, they will be
rated (or issued by an issuer that is rated with respect to a comparable
class of short-term debt obligations) in one of the two highest rating
categories for short-term debt obligations assigned by at least two
nationally recognized rating organizations (or one rating organization if the
obligation was rated by only one such organization). These high quality
securities are divided into "first tier" and "second tier" securities. First
tier securities have received the highest rating from at least two rating
organizations while second tier securities have received ratings within the
two highest categories from at least two rating agencies, but do not qualify
as first tier securities. The Fund may also purchase obligations that are not
rated, but are determined by the Adviser, based on procedures adopted by the
Trust's Board of Trustees, to be of comparable quality to rated first or
second tier securities. The Fund may not purchase any second tier security
if, as a result of its purchase (a) more than 5% of its total assets would be
invested in second tier securities or (b) more than 1% of its total assets or
$1 million (whichever is greater) would be invested in the second tier
securities of a single issuer.
The Fund seeks to maintain a constant $1.00 share price although there can
be no assurance it will do so. All of the Fund's investments will mature in
397 days or less. The Fund will maintain an average dollar-weighted portfolio
maturity of 90 days or less.
Each Fund may employ certain investment strategies and techniques to
help achieve its investment objective.
Each Fund (other than the Independence Equity Fund, Sovereign Investors
Fund, 500 Index Fund and Money Market Fund) may invest in the securities of
foreign issuers, including American Depositary Receipts ("ADRs") and European
Depositary Receipts
7
<PAGE>
("EDRs"). The Independence Equity Fund and Money Market Fund may invest in
U.S. Dollar denominated securities. Each Fund may purchase securities on a
forward commitment or when-issued basis and invest up to 15% (10% for the
Money Market Fund) of its net assets in illiquid securities. In addition,
each Fund may lend portfolio securities and may make temporary investments in
short-term securities, including repurchase agreements and other money
market instruments, in order to receive a return on uninvested cash. Each
Fund may enter into reverse repurchase agreements. See "Risk Factors,
Investments and Techniques" for more information on each Fund's investments.
When, in the opinion of the Adviser or relevant Sub-adviser, extraordinary
market or economic conditions warrant, each Fund (other than the 500 Index
Fund) may, for temporary defensive purposes, hold cash, cash equivalents or
fixed income securities without limitation. The Discovery Fund may hold up to
80% of its total assets in cash, cash equivalents or fixed income securities.
Each Fund has adopted investment restrictions detailed in the Statement of
Additional Information. Some of these restrictions may help to reduce
investment risk. Those restrictions designated as fundamental may not be
changed without shareholder approval. Each Fund's investment objective,
investment policies and non-fundamental restrictions, however, may be
changed by a vote of the Trustees without shareholder approval. If there is a
change in a Fund's investment objective, investors should consider whether
the Fund remains an appropriate investment in light of their current
financial position and needs.
Brokers are chosen for Fund transactions on the basis of best price
and execution.
The primary consideration in choosing brokerage firms to carry out a
Fund's transactions is execution at the most favorable prices, taking into
account the broker's professional ability and quality of service. Pursuant to
procedures determined by the Trustees, the Adviser may place securities
transactions with brokers affiliated with the Adviser or a Sub-adviser. These
brokers include Tucker, Anthony Incorporated, John Hancock Distributors, Inc.
and Sutro and Company, Inc., which are indirectly owned by the Life Company,
which in turn indirectly owns the Adviser and certain Sub-advisers. Fixed
income securities are generally purchased and sold in transactions with
dealers acting as principal and involve a "spread" rather than a commission.
PURCHASE AND REDEMPTION OF SHARES
Investments in Shares of the Funds
Each Fund sells its shares at net asset value ("NAV") directly to separate
accounts established and maintained by insurance companies for the purpose of
funding Variable Contracts. Variable Contract separate accounts may or may
not make investments in all the Funds described in this Prospectus.
Investments in a Fund (other than certain automatic investments described
below under "Redeeming Shares") are credited to an insurance company's
separate account immediately upon acceptance of the investment by the Fund.
The offering of shares of any Fund may be suspended for a period of time and
each Fund reserves the right to reject any specific purchase order. Purchase
orders may be refused if, in the Adviser's opinion, they are of a size that
would disrupt the management of a Fund.
Share Price
Shares of each Fund are offered at the NAV per share of that Fund. The NAV
per share is the value of one share and is calculated by dividing a Fund's
net assets by the number of outstanding shares of that Fund.
Securities in a Fund's portfolio are valued on the basis of market
quotations and valuations provided by independent pricing services, or at
fair value as determined in good faith according to procedures approved by
the Trustees. Short-term fixed income investments maturing within 60 days are
valued at amortized cost, which the Board of Trustees has determined
approximates market value. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded, and are
translated from the local currency into U.S. dollars using current exchange
rates. If quotations are not readily available, or the value has been
materially affected by events occurring after the closing of a foreign
market, assets are valued by a method that the Trustees believe accurately
reflects fair value. The NAV is calculated once daily as of the close of
regular trading on the New York Stock Exchange (generally at 4:00 p.m., New
York time) on each day the Exchange is open.
Redeeming Shares
Shares of a Fund may be redeemed on any business day. Redemptions (other than
certain automatic redemptions described below) are effected at the per share
NAV next determined after receipt and acceptance of the redemption request by
a Fund. Redemption proceeds will normally be forwarded by bank wire to the
redeeming insurance company on the next business day after receipt of the
redemption instructions by a Fund. Under unusual circumstances, a Fund may
suspend redemptions or postpone payment for up to seven (7) business days or
longer, as permitted by Federal securities laws.
Purchases and redemptions arising out of an automatic transaction under an
insurance contract (such as investment of net premiums, death of insureds,
deduction of fees and charges, transfers, surrenders, loans, loan repayments,
deductions of interest on loans, lapses, reinstatements and similar automatic
transactions) are effected at the net asset value per share computed as of
the close of business on the day as of which the automatic transaction is
effected, even though the order for purchase or redemption of Fund shares is
not received until after close of business.
8
<PAGE>
ORGANIZATION AND
MANAGEMENT OF THE FUNDS
The Trustees elect officers and retain the Adviser and the
Sub-advisers, who are responsible for the day-to-day operations of
the Funds, subject to the Trustees' policies and supervision.
Each Fund is a separate portfolio of the Trust, which is an open-end,
management investment company organized as a Massachusetts business trust in
1995. The Trust has an unlimited number of authorized shares, and currently
has ten distinct funds.
Each Fund currently has one class of shares with equal rights as to voting,
redemption, dividends and liquidation within that Fund. The Trustees have the
authority, without further shareholder approval, to establish additional
funds within the Trust and to classify and reclassify the shares of the
Funds, or any new fund of the Trust, into one or more classes. The Trust is
not required to hold annual shareholder meetings, although special meetings
may be called for such purposes as electing or removing Trustees, changing
fundamental restrictions or approving a management contract. An insurance
company issuing a Variable Contract that participates in the Trust will vote
shares of the Funds held by the insurance company's separate accounts as
required by law. In accordance with current law and interpretations thereof,
participating insurance companies are required to request voting instructions
from policy owners and must vote shares of the Funds in proportion to the
voting instructions received. For a further discussion of voting rights,
please refer to your insurance company's separate account Prospectus.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the Funds. However, the Trust's Declaration of Trust contains
an express disclaimer of shareholder liability for acts, obligations or
affairs of the Trust. The Declaration of Trust also provides for
indemnification out of a Fund's assets for all losses and expenses of any
shareholder held personally liable by reason of being or having been a
shareholder. Liability is, therefore, limited to circumstances in which a
Fund itself would be unable to meet its obligations, and the possibility of
this occurrence is remote. Liabilities attributable to one Fund are not
charged against the assets of any other Fund.
John Hancock Advisers, Inc. advises investment companies having a
total asset value of more than $20 billion.
The Adviser was organized in 1968 and is a wholly owned indirect subsidiary
of the Life Company, a financial services company. It provides the Funds, and
other investment companies in the John Hancock group of Funds, with
investment research and portfolio management services. John Hancock Funds,
Inc. ("John Hancock Funds") distributes shares of the Funds. Certain officers
of the Trust are also officers of the Adviser, the Sub-advisers and John
Hancock Funds. Pursuant to an order granted by the SEC, the Trust has adopted
a deferred compensation plan for its independent Trustees which allows
Trustees' fees to be invested by the Funds in other John Hancock funds.
John Hancock Advisers International Limited ("JHAI") serves as the
sub-adviser to the International Fund pursuant to a sub-advisory agreement
among the Fund, the Adviser and JHAI. JHAI was formed in 1987 and is a wholly
owned subsidiary of the Adviser. JHAI provides international investment
research and advisory services to investment companies and institutional
clients.
Independence Investment Associates, Inc. ("IIA") serves as the sub-adviser to
the Independence Equity Fund pursuant to a separate sub-advisory agreement
among the Fund, the Adviser and IIA. IIA was organized in 1982 and is a
wholly owned indirect subsidiary of the Life Company. IIA provides investment
advice and advisory services to investment companies and institutional
accounts.
Sovereign Asset Management Corporation ("SAMCorp") serves as the sub-adviser
to the Sovereign Investors Fund pursuant to a sub-advisory agreement among
the Fund, the Adviser and SAMCorp. SAMCorp was organized in 1992 and is a
wholly owned indirect subsidiary of the Life Company. SAMCorp provides
investment advice and advisory services to investment companies and private
and institutional accounts.
"Standard & Poor's(r)," "S&P(r)," "S&P 500(r)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by the Adviser. The 500 Index Fund is not sponsored,
endorsed, sold or promoted by Standard & Poor's. Standard & Poor's makes no
representation or warranty, express or implied, to the purchasers of the Fund
or any member of the public regarding the advisability of investing in
securities generally or in the 500 Index Fund particularly or the ability of
the S&P 500 Index to track general stock market performance. Standard &
Poor's only relationship to the Adviser is the licensing of certain
trademarks and trade names of Standard & Poor's and of the S&P 500 Index,
which is determined, composed and calculated by Standard & Poor's without
regard to the Adviser or the 500 Index Fund. Standard & Poor's has no
obligation to take the needs of the Adviser or the purchasers of the 500
Index Fund into consideration in determining, composing or calculating the
S&P 500 Index. Standard & Poor's is not responsible for and has not
participated in the determination of the prices and amount of the 500 Index
Fund, the timing of the issuance or sale of the 500 Index Fund or in the
determination or calculation of the equation by which the 500 Index Fund is
to be converted into cash. Standard & Poor's has no obligation or liability
in connection with the administration, marketing or trading of the 500 Index
Fund.
STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
STANDARD & POOR'S MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE ADVISER, THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
9
<PAGE>
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL STANDARD & POOR'S
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
The person or persons primarily responsible for the day-to-day management of
each Fund (other than the Money Market Fund) are listed below:
International Fund
John L.F. Wills leads the Fund's portfolio management team.
Mr. Wills is a Vice President of the Adviser and managing director of John
Hancock Advisers International, the Sub-Adviser. Mr. Wills joined the Adviser in
1987.
Emerging Growth Fund
Bernice S. Behar leads the Fund's protfolio management team. Ms. Behar, a Senior
Vice President of the Adviser, has been associated with the Adviser since 1991.
She has been in the investment business since 1986.
Discovery Fund
Bernice S. Behar leads the Fund's portfolio management team. Ms. Behar, a Senior
Vice President of the Adviser, has been with the Adviser since 1991. She has
been in the investment business since 1986.
Independence Equity Fund
All investment decisions for the Independence Equity Fund are made by a
portfolio management team of investment professionals employed by
Independence Investment Associates, Inc., the Fund's Sub-Adviser, and no
single person is primarily responsible for making recommendations for the
team.
Sovereign Investors Fund
John F. Snyder, III and Barry H. Evans lead the Fund's portfolio management
team. Mr. Snyder, an investment manager since 1971, is an Executive Vice
President of Sovereign Management Corp., the Fund's Sub-adviser, and a wholly
owned subsidiary of John Hancock Funds. Mr. Evans, a Senior Vice President of
the Adviser, joined John Hancock Funds in 1986.
500 Index Fund
The 500 Index Fund is not actively managed, but is instead advised by the
Adviser's Risk Management Group using computerized, quantitative techniques.
The Risk Management Group is headed by Anne McDonley, Senior Vice President
of the Adviser since 1992. The Risk Management Group is responsible for
providing quantitative analysis to other mutual funds managed by the Adviser.
Sovereign Bond Fund
James K. Ho, leader of the Fund's portfolio management team, is an Executive
Vice President and the senior fixed-income officer of the Adviser. Mr. Ho
joined the Adviser in 1985.
Strategic Income Fund
Frederick L. Cavanaugh, Jr., leader of the Fund's portfolio management team,
is a Senior Vice President of the Adviser. Mr. Cavanaugh joined the Adviser
in 1986 and has worked in the investment business since 1973.
World Bond Fund
Anthony A. Goodchild, Lawrence J. Daly and Janet L. Clay lead the Fund's
portfolio management team. Messrs. Goodchild and Daly are Senior Vice
Presidents of the Adviser and joined John Hancock Funds in 1994, having been
in the investment business since 1968 and 1972, respectively. Ms. Clay, a
Second Vice President of the Adviser, joined John Hancock Funds in 1995 and
has been in the investment business since 1990.
In order to avoid any conflict with portfolio trades for the Funds, the
Adviser, the Sub-advisers and the Funds have adopted extensive restrictions
on personal securities trading by personnel of the Adviser, the Sub-advisers
and their affiliates. In the case of the Adviser, some of these restrictions
are: pre-clearance for all personal trades and a ban on the purchase of
initial public offerings, as well as contributions to specified charities of
profits on securities held for less than 91 days. The Sub-advisers have
adopted similar restrictions which may differ where appropriate as long as
they have similar intent. These restrictions are a continuation of the basic
principle that the interests of the Funds and their shareholders come before
those of management.
THE FUNDS' EXPENSES
Each Fund pays a monthly fee to the Adviser for managing the Fund's
investment and business affairs, which is equal on an annual basis to a
percentage of the Fund's average daily net assets. The Adviser pays any
sub-advisory fees out of its own assets and no Fund is responsible for paying
a fee to its respective Sub-adviser. These fees are as follows:
<TABLE>
<CAPTION>
Fund Rate
--------------------------- ------
<S> <C>
International Fund 0.90%
Emerging Growth Fund 0.75%
Discovery Fund 0.75%
Independence Equity Fund 0.70%
Sovereign Investors Fund 0.60%
500 Index Fund 0.35%
Sovereign Bond Fund 0.50%
Strategic Income Fund 0.60%
World Bond Fund 0.75%
Money Market Fund 0.50%
</TABLE>
10
<PAGE>
While higher than the investment advisory fees paid by other investment
companies in general, the advisory fees paid by the International Fund,
Emerging Growth Fund, Discovery Fund and World Bond Fund are comparable to
those paid by other investment companies with similar investment objectives
and policies.
The Adviser pays a portion of its advisory fee from the International Fund to
JHAI at the following rate: 70% of the advisory fee payable by the Fund.
The Adviser pays a portion of its advisory fee from the Independence Equity
Fund to IIA at the following rate: 55% of the advisory fee payable by the
Fund.
The Adviser pays a portion of its fee from the Sovereign Investors Fund to
SAMCorp at the following rate: 40% of the advisory fee payable by the Fund.
The Funds also compensate the Adviser for performing tax and financial
management services. Compensation is not expected to exceed 0.02% of average
net assets on an annual basis.
Each Fund pays certain additional expenses.
Each Fund pays fees to the Independent Trustees of the Trust, the expenses of
the continuing registration and qualification of its shares for sale, the
charges of custodians and transfer agents, and auditing and legal expenses.
The Adviser may, from time to time, agree that all or a portion of its fee
will not be imposed for specific periods or make other arrangements to limit
the Funds' expenses to not more than a specified percentage of average net
assets (currently 0.25% excluding advisory fees). The Adviser retains the
right to reimpose the fee and recover any other payments to the extent annual
expenses fall below the limit at the end of the fiscal year.
DIVIDENDS AND TAXES
Dividends from net investment income are declared and paid as follows:
Fund Declared Paid
- --------------------------- ---------- ------------
International Fund Annually Annually
Emerging Growth Fund Annually Annually
Discovery Fund Annually Annually
Independence Equity Fund Quarterly Quarterly
Sovereign Investors Fund Quarterly Quarterly
500 Index Fund Quarterly Quarterly
Sovereign Bond Fund Daily Monthly
Strategic Income Fund Daily Monthly
World Bond Fund Daily Monthly
Money Market Fund Daily Monthly
Capital gains distributions are generally declared annually. Dividends are
automatically reinvested in additional shares of the Funds.
Taxation. For a discussion of the tax status of your Variable Contract,
including the tax consequences of withdrawals or other payments, refer to the
Prospectus of your insurance company's separate account. It is suggested you
keep all statements you receive to assist in your personal record keeping.
Each Fund is treated as a separate entity for tax purposes and intends to
elect to be treated and qualify each year as a separate regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, a Fund must
satisfy certain requirements in Subchapter M of the Code relating to the
sources of its income, the diversification of its assets, and the
distribution of its income to shareholders. As a regulated investment
company, each Fund will not be subject to Federal income taxes on any net
investment income and net realized capital gains that are distributed to its
shareholders in accordance with the timing requirements of the Code. Each
Fund expects to distribute to the life insurance company separate accounts
owning its shares all or substantially all of its net investment income and
net realized capital gains, if any, for each taxable year.
Distributions from a Fund's net investment income, certain net foreign
exchange gains, and any excess of net short-term capital gain over net
long-term capital loss will be treated as ordinary income, and distributions
from any excess of net long-term capital gain over net short-term capital
loss so designated by a Fund will be treated as long-term capital gain by the
investing insurance companies. Such companies should consult their own tax
advisers regarding whether such distributions are subject to federal income
tax if they are properly added to reserves for the applicable variable
contracts.
In addition to the above, each Fund also follows certain portfolio
diversification requirements imposed under the Code on separate accounts of
insurance companies that are used to fund Variable Contracts. More specific
information on these diversification requirements is contained in the Trust's
Statement of Additional Information.
If a Fund does not both qualify as a regulated investment company and satisfy
the additional diversification requirements referred to above, the holders of
Variable Contracts based on a separate account that invested in that Fund
might become subject to taxation of all income on such contracts unless the
failure is permitted to be corrected by the Internal Revenue Service.
PERFORMANCE
Each Fund may advertise its total return.
Total return is based on the overall change in value of a hypothetical
investment in a Fund. A Fund's total return shows the overall dollar or
percentage change in value, assuming the reinvestment of all dividends.
Cumulative total return shows a Fund's performance over a period of time.
Average annual total return shows the cumulative return divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in a Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
Total return calculations are at net asset value because no sales charges are
incurred by Variable Contract separate accounts.
Each Fund may also advertise yield.
Yield reflects a Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing
11
<PAGE>
the result of dividing the net investment income per share over a 30-day
period by the net asset value per share on the last day of that period.
Money Market Fund's yield refers to the income generated by an investment in
the Fund over a specified seven-day period, expressed as an annual percentage
rate. Money Market Fund's effective yield is calculated similarly, but
assumes that the income earned from investments is reinvested in shares of
the Fund. Money Market Fund's effective yield will tend to be slightly higher
than its yield because of the compounding effect of this reinvestment.
Yield is calculated according to accounting methods that are standardized for
all mutual funds. Because yield accounting methods differ from the methods
used for other accounting purposes, a Fund's yield may not equal the income
paid on shares or the income reported in the Fund's financial statements.
The value of a Fund's shares when redeemed may be more or less than their
original cost. Total return and yield are historical calculations and are not
indications of future performance.
RISK FACTORS, INVESTMENTS
AND TECHNIQUES
Common Stocks. Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits of the
corporation, if any, without preference over any other shareholder or class
of shareholders, including holders of such entity's preferred stock and other
senior equity. Ownership of common stock usually carries with it the right to
vote and, frequently, an exclusive right to do so. Each Fund will diversify
its investments in common stocks of companies in a number of industry groups.
Common stocks have the potential to outperform fixed income securities over
the long term. Common stocks provide the most potential for growth, yet are
the more volatile of the two asset classes.
The S&P 500 Index. The S&P 500 Index is comprised of 500 industrial,
utility, transportation and financial companies in the United States markets.
Most of these companies are listed on the New York Stock Exchange (the
"Exchange"). Companies included in the S&P 500 Index represent about 75% of
the Exchange's market capitalization and 30% of the Exchange's issuers. The
S&P 500 Index is a capitalization weighted index calculated on a total return
basis with dividends reinvested. The inclusion of a stock in the S&P 500
Index in no way implies that Standard & Poor's believes the stock to be an
attractive investment.
Because of the market-value weighting, the 50 largest companies in the S&P
500 Index currently account for approximately 48% of the Index. Typically,
companies included in the S&P 500 Index are the largest and most dominant
firms in their respective industries. As of June 30, 1996, the five largest
companies in the Index were: General Electric (2.9%), Coca Cola (2.4%), Exxon
Corporation (2.2%), American Telephone and Telegraph (2.0%), and Phillip
Morris (1.7%). The largest industry categories were: international oil
companies (6.6%), telephone companies (4.6%), major regional banks (4.4%),
pharmaceutical companies (4.1%) and health care companies (4.0%).
Fixed Income Securities. Fixed income securities of corporate and
governmental issuers are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also
be subject to price volatility due to factors such as interest rate
sensitivity, market perception of the issuer's creditworthiness and general
market liquidity (market risk). Debt securities will be selected based upon
credit risk analysis of issuers, the characteristics of the security and
interest rate sensitivity of the various debt issues available from a
particular issuer as well as analysis of the anticipated volatility and
liquidity of the fixed income instruments. The longer a Fund's average
portfolio maturity, the more the value of the portfolio and the net asset
value of the Fund's shares will fluctuate in response to changes in interest
rates. An increase in rates will generally decrease the value of the Fund's
securities, while a decline in interest rates will generally increase their
value.
Preferred Stocks. Preferred stock generally has a preference as to
dividends and upon liquidation over an issuer's common stock but ranks junior
to debt securities in an issuer's capital structure. Preferred stock
generally pays dividends in cash (or additional shares of preferred stock) at
a defined rate but, unlike interest payments on debt securities, preferred
stock dividends are payable only if declared by the issuer's board of
directors. Dividends on preferred stock may be cumulative, meaning that, in
the event the issuer fails to make one or more dividend payments on the
preferred stock, no dividends may be paid on the issuer's common stock until
all unpaid preferred stock dividends have been paid. Preferred stock also may
be subject to optional or mandatory redemption provisions.
Investment Grade Securities. Each Fund other than the 500 Index Fund and Money
Market Fund may invest in securities that are rated in the lowest category of
"investment grade" (BBB by S&P or Baa by Moody's) or unrated securities
determined by the Adviser or relevant Sub-adviser to be of comparable quality.
Securities in the lowest category of investment grade are considered medium
grade obligations and normally exhibit adequate protection parameters. However,
these securities also have speculative characteristics. Adverse changes in
economic conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than in the case of higher
grade obligations.
Lower Rated Securities. The Sovereign Investors Fund, Sovereign Bond Fund,
Strategic Income Fund and World Bond Fund may invest in securities rated
below investment grade, commonly referred to as junk bonds. Debt obligations
rated in the lower rating categories, or which are unrated, involve greater
volatility of price and risk of loss of principal and income. In addition,
lower ratings reflect a greater possibility of an adverse change in financial
condition affecting the ability of the issuer to make payments of interest
and principal. The market price and liquidity of high yield, high risk, fixed
income securities generally respond to short-term economic, corporate and
market developments to a greater extent than do the price and liquidity of
higher rated securities, because these developments are perceived to have a
more direct relationship to the ability of an issuer of lower rated
securities to meet its ongoing debt obligations.
12
<PAGE>
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of
the bonds and to value accurately the assets of the Sovereign Investors Fund,
Sovereign Bond Fund, Strategic Income Fund and World Bond Fund. The reduced
availability of reliable objective data may increase these Funds' reliance on
management's judgment in valuing the high yield, high risk bonds. To the
extent that these Funds invest in high yield, high risk securities, achieving
the Funds' objectives will depend more on the Adviser's or relevant
Sub-adviser's judgment and analysis than would otherwise be the case. In
addition, these Funds' investments in high yield, high risk securities may be
susceptible to adverse publicity and investor perceptions, whether or not
justified by fundamental factors. In the past, economic downturns and
increases in interest rates have caused a higher incidence of default by the
issuers of these securities and may do so in the future, particularly with
respect to highly leveraged issuers. The market prices of zero coupon and
payment-in-kind bonds are affected to a greater extent by interest rate
changes and therefore tend to be more volatile than securities which pay cash
interest periodically. Increasing rate note securities are typically
refinanced by the issuers within a short period of time. A Fund accrues
income on these securities for tax and accounting purposes, and this income
is required to be distributed to shareholders. Because no cash is received at
the time income accrues on these securities, the Fund may be forced to
liquidate other investments to make distributions.
Warrants. Warrants entitle the holder to buy equity securities at a
specific price for a specific period of time. Warrants tend to be more
volatile than their underlying securities. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to the expiration
date.
Convertible Securities. Each Fund (other than the 500 Index Fund and the
Money Market Fund) may invest in convertible securities, which may include
corporate notes or preferred stock but are ordinarily long-term debt
obligations of the issuer convertible at a stated exchange rate into common
stock of the same or another issuer. As with all debt securities, the market
value of convertible securities tends to decline as interest rates increase
and, conversely, to increase as interest rates decline. The market value of
convertible securities can also be heavily dependent upon the changing value
of the equity securities into which these securities are convertible
depending on whether the market price of the underlying security exceeds the
conversion price. Convertible securities generally rank senior to common
stocks in an issuer's capital structure and consequently entail less risk
than the issuer's common stock. However, the extent of such risk reduction
depends upon the degree to which the convertible security sells above its
value as a fixed income security. In evaluating a convertible security, the
Adviser or relevant Sub-adviser will give primary emphasis to the
attractiveness of the underlying common stock.
Securities of Foreign Issuers. Each Fund except for the Independence Equity
Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund may
invest in U.S. dollar and foreign denominated securities of foreign issuers.
The Independence Equity Fund and Money Market Fund may only invest in U.S.
dollar denominated securities, including those of foreign issuers which are
traded on a U.S. exchange. In making the allocation of assets for the Funds
among various countries and geographic regions, the Adviser and relevant
Sub-adviser ordinarily consider factors such as the investment attractiveness
of the issuer; the strengths and weaknesses of the currencies in which the
securities are denominated; expected levels of inflation and interest rates;
government policies influencing business conditions; the financial condition
of the issuer and other pertinent financial, tax, social, political, currency
and national factors.
Investments in foreign securities may involve a greater degree of risk than
those in domestic securities due to exchange controls, less publicly
available information, more volatile or less liquid securities markets, and
the possibility of expropriation, confiscatory taxation or political,
economic or social instability. There may be difficulty in enforcing legal
rights outside the United States. Some foreign companies are not generally
subject to the same uniform accounting, auditing and financial reporting
requirements as domestic companies; also foreign regulation may differ
considerably from domestic regulation of stock exchanges, brokers and
securities. Security trading practices abroad may offer less protection to
investors such as the Funds. Additionally, because foreign securities may be
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect the Funds' net asset value, the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, that the Funds
distribute. Securities transactions undertaken in some foreign markets may
not be settled promptly. Therefore, the Funds' investments in foreign
securities may be less liquid and subject to the risk of fluctuating currency
exchange rates pending settlement. The expense ratios of Funds with
significant investments in foreign securities can be expected to be higher
than those of mutual funds investing solely in domestic securities since the
expenses of these Funds, such as the cost of maintaining custody of foreign
securities and advisory fees, are usually higher.
The risks of foreign investing may be intensified in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America
and Africa. Security prices in these markets can be significantly more
volatile than in more developed countries, reflecting the greater
uncertainties of investing in less established markets and economies.
Political, legal and economic structures in many of these emerging market
countries may be undergoing significant evolution and rapid development, and
they may lack the social, political, legal and economic stability
characteristic of more developed countries. Emerging market countries may
have failed in the past to recognize private property rights. They may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions of foreign ownership, or prohibitions on
repatriation of assets, and may have less protection of property rights than
more developed countries. Their economies may be predominantly based on only
a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings
13
<PAGE>
difficult or impossible at times. The International Fund, Strategic Income
Fund and World Bond Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited
marketability and may be subject to more abrupt or erratic price movements.
Certain realized gains or losses on the sale of foreign currency denominated
debt obligations held by a Fund, to the extent attributable to fluctuations
in foreign currency exchange rates, as well as certain other gains or losses
attributable to exchange rate fluctuations, e.g., from transactions in
foreign currencies or currency forward contracts, may be treated as ordinary
income or loss. Such income or loss may increase or decrease (or possibly
eliminate) the Fund's income available for distribution.
Depositary Receipts. Each Fund (other than the Sovereign Investors Fund,
500 Index Fund and Money Market Fund) may also invest in securities of
foreign issuers in the form of American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or other securities convertible into
securities of corporations in which the Fund is permitted to invest. ADRs
(sponsored and unsponsored) are receipts typically issued by an American bank
or trust company which evidence ownership of underlying securities issued by
a foreign corporation and are designed for trading in United States
securities markets. Issuers of the shares underlying unsponsored ADRs are not
contractually obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR.
Foreign Currency Transactions. Each of the Funds, except the Independence
Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund,
may purchase securities denominated in foreign currencies. The value of
investments in these securities and the value of dividends and interest
earned may be significantly affected by changes in currency exchange rates.
Some foreign currency values may be volatile, and there is the possibility of
governmental controls on currency exchange or governmental intervention in
currency markets, which could adversely affect a Fund. As a result, these
Funds may enter into forward foreign currency exchange contracts to protect
against changes in foreign currency exchange rates. These Funds will not
speculate in foreign currencies or in forward foreign currency exchange
contracts, but will enter into these transactions only in connection with
their hedging strategies. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future
date at a price set at the time of the contract. Although certain strategies
could minimize the risk of loss due to a decline in the value of the hedged
foreign currency, they could also limit any potential gain which might result
from an increase in the value of the currency.
Government Securities. Each Fund may invest in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The 500
Index Fund, however, may only invest temporarily in short-term U.S.
Government securities for liquidity purposes. Certain U.S. Government
securities, including U.S. Treasury bills, notes and bonds and Government
National Mortgage Association certificates ("Ginnie Maes"), are supported by
the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the
U.S. Treasury. These securities include obligations of the Federal Home Loan
Mortgage Corporation ("Freddie Macs") and Federal National Mortgage
Association ("Fannie Maes"), and obligations supported by the credit of the
instrumentality, such as Student Loan Marketing Association bonds ("Sallie
Maes").
Each Fund may invest in mortgage-backed securities. A mortgage-backed
security may be an obligation of the issuer backed by a mortgage or pool of
mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations
(CMOs), make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Mortgage-backed securities
often have stated maturities of up to thirty years when they are issued,
depending upon the length of the mortgages underlying the securities. In
practice, however, unscheduled or early payments of principal and interest on
the underlying mortgages may make the securities' effective maturity shorter
than this, and the prevailing interest rates may be higher or lower than the
current yield of a Fund's portfolio at the time the Fund receives the
payments for reinvestment. Mortgage-backed securities may have less potential
for capital appreciation than comparable fixed income securities, due to the
likelihood of increased prepayments of mortgages as interest rates decline.
If a Fund buys mortgage-backed securities at a premium, mortgage foreclosures
and prepayments of principal by mortgagors (which may be made at any time
without penalty) may result in some loss of the Fund's principal investment
to the extent of the premium paid.
The value of mortgage-backed securities may also change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities markets as a whole. Non-governmental
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
governmental issues.
"Stripped" mortgage-backed securities are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("IO") receives interest payments
from the same underlying security. The prices of stripped mortgage-backed
securities may be particularly affected by changes in interest rates. As
interest rates fall, prepayment rates tend to increase, which tends to reduce
prices of IOs and increase prices of POs. Rising interest rates can have the
opposite effect. Although the market for these securities is increasingly
liquid, the Adviser or relevant Sub-adviser may, in accordance with
guidelines adopted by the Board of Trustees, determine that certain stripped
mortgage-backed securities issued by the U.S. Government, its agencies or
14
<PAGE>
instrumentalities are not readily marketable. If so, these securities,
together with privately-issued stripped mortgage-backed securities, will be
considered illiquid for purposes of the Funds' limitation on investments in
illiquid securities.
Other types of mortgage-backed securities may be developed in the future, and
a Fund may invest in them if the Adviser or relevant Sub-adviser determines
they are consistent with the Fund's investment objectives and policies.
Asset-Backed Securities. The Funds may invest in securities that represent
individual interests in pools of consumer loans and trade receivables similar
in structure to mortgage-backed securities. The assets are securitized either
in a pass-through structure or in a multiple class CMO-type structure.
Although the collateral supporting asset-backed securities generally is of a
shorter maturity than mortgage loans and historically has been less likely to
experience substantial prepayments, no assurance can be given as to the
actual maturity of an asset-backed security because prepayments of principal
may be made at any time.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type
of security interest in the related collateral. Credit card receivables are
generally unsecured and a number of state and Federal consumer credit laws
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the outstanding balance. In the case of automobile
receivables, there is a risk that the holders may not have either a proper or
first security interest in all of the obligations backing such receivables
due to the large number of vehicles involved in typical issuance, and
technical requirements under state laws. Therefore, recoveries on repossessed
collateral may not always be available to support payments on these
securities.
Mortgage "Dollar Roll" Transactions. The Sovereign Bond Fund and Strategic
Income Fund may enter into mortgage "dollar roll" transactions with selected
banks and broker-dealers. In a dollar roll, the Fund sells mortgage-backed
securities and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. A
Fund will only enter into covered rolls. A "covered roll" is a specific type
of dollar roll for which there is an offsetting cash or cash equivalent
security position which matures on or before the forward settlement date of
the dollar roll transaction. Covered rolls are not treated as a borrowing or
other senior security and will be excluded from the calculation of a Fund's
borrowings and other senior securities. For financial reporting and tax
purposes, a Fund treats mortgage dollar rolls as two separate transactions:
one involving the purchase of a security and a separate transaction involving
a sale. A Fund does not currently intend to enter into mortgage dollar roll
transactions that are accounted for as a financing.
Short-Term Trading and Portfolio Turnover. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. The International Fund, Emerging Growth
Fund, Sovereign Bond Fund, Strategic Income Fund and World Bond Fund engage
in short-term trading in response to stock market conditions, changes in
interest rates or other economic trends and developments, or to take
advantage of yield disparities between various fixed income securities in
order to realize capital gains or improve income. Short term trading may have
the effect of increasing portfolio turnover rate.
The remaining Funds do not intend to invest for the purpose of seeking
short-term profits. These Funds' particular portfolio securities may be
changed, however, without regard to the holding period of these securities
(subject to certain tax restrictions), when the Adviser or relevant
Sub-adviser deems that this action will help achieve the Fund's objective
given a change in an issuer's operations or in general market conditions.
The estimated portfolio turnover rate of each Equity Fund is expected to be
less than 100%. The estimated portfolio turnover rates of the remaining Funds
are as follows: Sovereign Bond Fund: 100%; Strategic Income Fund: 200%; and
World Bond Fund: 300%. A high rate of portfolio turnover (100% or greater)
involves corresponding higher transaction expenses and may make it more
difficult for a Fund to qualify as a regulated investment company for Federal
income tax purposes.
Options and Futures Transactions. Each Fund (other than the Money Market
Fund) may buy and sell options contracts, financial futures contracts and
options on futures contracts. Options and futures contracts are bought and
sold to manage a Fund's exposure to changing interest rates, security prices,
and currency exchange rates. Some options and futures strategies, including
selling futures, buying puts, and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts
in order to adjust the risk and return characteristics of the overall
strategy. Each Fund (other than the International Fund) may purchase and sell
options and futures based on securities, indices, or currencies, including
options and futures traded on foreign exchanges and options not traded on any
exchange. International Fund may only purchase and sell options and futures
traded on a U.S. commodity exchange or board of trade.
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, options and futures strategies may lower a Fund's
return. A Fund can also experience losses if the prices of its options and
futures positions are poorly correlated with those of its other investments,
or if it cannot close out its positions because of an illiquid secondary
market. Options and futures do not pay interest, but may produce income,
gains or losses.
A Fund will not engage in a transaction in futures or options on futures for
speculative purposes if, immediately thereafter, the sum of initial margin
deposits and premiums required to establish speculative positions in futures
contracts and options on futures would exceed 5% of the Fund's net assets.
The loss incurred by a Fund investing in futures contracts and in writing
options on futures is potentially unlimited and may exceed the amount of any
premium received. The Funds' transactions in options and futures contracts
may be limited by the requirements of the Code for qualification as a
regulated investment company.
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Swap Agreements. As one way of managing exposure to different types of
investments, Sovereign Bond Fund, Strategic Income Fund and World Bond Fund
may enter into interest rate swaps and other types of swap agreements such as
caps, collars and floors. Each of these Funds may also enter into currency
swaps. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal
amount," in return for payments equal to a fixed rate times the same amount,
for a specified period of time. If a swap agreement provides for payments in
different currencies, the parties might agree to exchange the notional
principal amount as well. Swaps may also depend on other prices or rates,
such as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right
to receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap
and selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type
of investment to another. For example, if a Fund agrees to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend
to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to the risk of a
counterparty's failure to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions. A Fund will maintain in a
segregated account with its custodian, cash or liquid debt securities equal
to the net amount, if any, of the excess of the Fund's obligations over its
entitlements with respect to swap, cap, collar or floor transactions.
Derivative Investments. Consistent with its investment objective, each Fund
may purchase or enter into derivative investments to enhance return, to hedge
against fluctuations in interest rates, securities prices or currency
exchange rates, to change the duration of the Fund's fixed income portfolio
or as a substitute for the purchase or sale of securities or currency. A
Fund's investments in derivative securities may include certain
mortgage-backed and indexed securities. A Fund's transactions in derivative
contracts may include the purchase or sale of futures contracts on
securities, indices or currency; options on futures contracts; options on
securities, indices or options on futures contracts; options on securities,
indices or currency; forward contracts to purchase or sell securities or
currency; currency, mortgage and interest rate swaps; and interest rate caps,
floors and collars. All of the Funds' transactions in derivative instruments
involve a risk of loss of principal due to unanticipated adverse changes in
interest rates, securities prices or currency exchange rates. The loss on
derivative contracts (other than purchased options, caps, floors and collars)
may exceed a Fund's initial investment in these contracts. In addition, a
Fund may lose the entire premium paid for purchased options, caps, floors and
collars that expire before they can be profitably exercised by the Fund.
Structured Securities. The Sovereign Bond Fund, Strategic Income Fund and
World Bond Fund may invest in structured notes, bonds or debentures, the
value of the principal of and/or interest on which is to be determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices and other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable reference. The terms of the
structured securities may provide that in certain circumstances no principal
is due at maturity and, therefore, may result in the loss of the Fund's
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or decrease in the
yield or value of the security at maturity. In addition, the change in the
yield or the value of the security at maturity may be a multiple of the
change in the value of the Reference. Consequently, structured securities
entail a greater degree of market risk than other types of debt securities.
Structured securities may also be more volatile, less liquid and more
difficult to price accurately than less complex fixed income investments.
Participation Interests. The Sovereign Bond Fund and Strategic Income Fund
may invest in participation interests. Participation interests, which may
take the form of interests in, or assignments of certain loans, are acquired
from banks who have made these loans or are members of a lending syndicate. A
Fund's investments in participation interests are subject to its 15%
limitation on investments in illiquid securities. A Fund may purchase only
those participation interests that mature in 60 days or less, or, if maturing
in more than 60 days, that have a floating rate that is automatically
adjusted at least once every 60 days.
Smaller Capitalization Companies. Each Equity Fund may invest in smaller
capitalization companies. These companies may have limited product lines,
market and financial resources, or they may be dependent on smaller or less
experienced management groups. In addition, trading volume for these
securities may be limited. Historically, the market price for these
securities has been more volatile than for securities of companies with
greater capitalization. However, securities of companies with smaller
capitalization may offer greater potential for capital appreciation since
they may be overlooked and thus undervalued by investors.
Non-Diversified Status. The World Bond Fund has elected to be a
"non-diversified" fund in order to permit it to invest more than 5% of its
total assets in the obligations of any one issuer. Since a relatively high
percentage of this Fund's assets may be invested in the obligations of a
limited number of issuers, the value of this Fund's shares may be more
susceptible to any single economic, political or regulatory event, and to the
credit and market risks
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associated with a single issuer, than would the shares of a diversified fund.
However, this Fund, like each of the other Funds, must satisfy certain tax
diversification requirements. See "Taxation" above.
Short Sales. Each Fund (other than the 500 Index Fund and Money Market
Fund) may engage in short sales "against the box," as well as short sales for
hedging purposes. The International Fund and Emerging Growth Fund may engage
in short sales to profit from an anticipated decline in a security's value.
When a Fund engages in a short sale other than "against the box," it will
place cash or U.S. Government securities in a segregated account and mark
them to market daily in accordance with applicable regulatory requirements.
Except for short sales against the box, a Fund is limited in the amount of
the Fund's net assets that may be committed to short sales and the securities
in which short sales are made must be listed on a national securities
exchange. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost,
securities identical to those sold short. Short sales other than "against the
box" may involve an unlimited exposure to loss. See the Statement of
Additional Information.
Restricted and Illiquid Securities. Each Fund may invest up to 15% (10% for
Money Market Fund) of its net assets in illiquid investments, which include
repurchase agreements maturing in more than seven days, certain
over-the-counter options, privately-issued stripped mortgage-backed
securities, certain interest rate swaps, caps, collars and floors, certain
restricted securities and securities that are not readily marketable. Each
Fund may also invest without limitation in restricted securities eligible for
resale to certain institutional investors pursuant to Rule 144A under the
Securities Act of 1933 and, to the extent consistent with its investment
policies, foreign securities acquired in accordance with Regulation S under
the Securities Act of 1933.
Lending of Securities and Repurchase Agreements. For the purpose of
realizing additional income and as a matter of fundamental policy, each Fund
may lend portfolio securities amounting to not more than 33-1/3% of its
respective total assets taken at current value. Securities loaned by a Fund
will remain subject to fluctuations in market value. Each Fund may also enter
into repurchase agreements. In a repurchase agreement, the Fund buys a
security subject to the right and obligation to sell it back to the issuer at
the same price plus accrued interest. These transactions must be fully
collateralized at all times. However, they may involve credit risk to a Fund
if the other party should default on its obligation and that Fund is delayed
in or prevented from recovering the collateral.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements, which involve the sale of a security by the Fund to a bank or
securities firm and its agreement to repurchase the instrument at a specified
time and price plus an agreed amount of interest. A Fund will use the
proceeds to purchase other investments. Reverse repurchase agreements are
considered to be borrowings by a Fund and as an investment practice may be
considered to be speculative. A Fund will enter into a reverse repurchase
agreement only when the Adviser determines that the return to be earned from
the investment of the proceeds is greater than the interest expense of the
transaction. A Fund will enter into reverse repurchase agreements only with
selected registered broker/dealers or with federally insured banks or savings
and loan associations which are approved in advance as being creditworthy by
the Board of Trustees. Under procedures established by the Board of Trustees,
the Adviser will monitor the creditworthiness of the firms involved.
The use of reverse repurchase agreements involves leverage. Leverage allows
any investment gains made with the additional monies received (in excess of
the costs of the reverse repurchase agreement) to increase the net asset
value of a Fund's shares faster than would otherwise be the case. On the
other hand, if the additional monies received by a Fund are invested in ways
that do not fully recover the costs of such transactions, the net asset value
of the Fund would fall faster than would otherwise be the case.
When-Issued Securities. Each Fund may purchase securities on a forward or
"when issued" basis. When a Fund engages in when-issued transactions, it
relies on the seller or the buyer, as the case may be, to consummate the
transaction. Failure to consummate the transaction may result in the Fund's
losing the opportunity to obtain an advantageous price and yield.
See the Statement of Additional Information for further discussion of the
uses and risks of the investments described above.
17
<PAGE>
APPENDIX
As described in the Prospectus, the fixed income securities offering the high
current income sought by certain of the Funds are ordinarily in the lower
rating categories (that is, rated Baa or lower by Moody's or BBB or lower by
S&P or are unrated).
Moody's describes its lower ratings for corporate bonds as follows:
Bonds that are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market
shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
S&P describes its lower ratings for corporate bonds as follows:
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated BB, B, CCC, or CC is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
18
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NOTES
<PAGE>
JOHN HANCOCK DECLARATION TRUST
Investment Adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Sub-Investment Advisers
John Hancock Advisers International Limited (International Fund)
34 Dover Street
London, England WIX3RA
Independence Investment Associates, Inc. (Independence Equity Fund)
53 State Street
Boston, Massachusetts 02109
Sovereign Asset Management Corp. (Sovereign Investors Fund)
1235 Westlakes Drive
Berwyn, Pennsylvania 19312
Principal Distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Custodians
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02205
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Shareholder Servicing Agent
John Hancock Investor Services Corporation
P.O. Box 9298
Boston, Massachusetts 02205-9116
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUNDS
For Service Information
101 Huntington Avenue
Boston, Massachusetts 02199
Telephone 1-800-824-0335
VAORP 8/96
20
<PAGE>
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock V.A. International Fund
John Hancock V.A. Emerging Growth Fund
John Hancock V.A. Discovery Fund
John Hancock V.A. Independence Equity Fund
John Hancock V.A. Sovereign Investors Fund
John Hancock V.A. 500 Index Fund
John Hancock V.A. Sovereign Bond Fund
John Hancock V.A. Strategic Income Fund
John Hancock V.A. World Bond Fund
John Hancock V.A. Money Market Fund
(each, a "Fund" and collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
August 12, 1996
This Statement of Additional Information ("SAI") provides information about
John Hancock Declaration Trust (the "Trust") and the Funds, in addition to the
information that is contained in the Funds' Prospectus dated August 12, 1996
(the "Prospectus").
This SAI is not a prospectus. It should be read in conjunction with the
Funds' Prospectus, a copy of which can be obtained free of charge by writing or
telephoning:
John Hancock Investor Services Trust
P.O. Box 9298
Boston, Massachusetts 02205
1-800-824-0335
VASAI 7/96
<PAGE>
TABLE OF CONTENTS
Page
Organization of the Trust............................................... 1
Eligible Investors; Investment Objectives and Policies.................. 1
Certain Investment Practices............................................ 1
Investment Restrictions................................................. 15
Those Responsible for Management........................................ 20
Investment Advisory and Other Services.................................. 28
Distribution Contract................................................... 30
Net Asset Value......................................................... 30
Special Redemptions..................................................... 31
Tax Status.............................................................. 31
Description of the Trust's Shares....................................... 34
Calculation of Performance.............................................. 35
Brokerage Allocation.................................................... 37
Shareholder Servicing Agent............................................. 38
Custody of Portfolio.................................................... 38
Independent Auditors.................................................... 39
Financial Statements.................................................... F-1
Appendix ............................................................... A-1
2
<PAGE>
ORGANIZATION OF THE TRUST
John Hancock Declaration Trust (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust under a
Declaration of Trust dated November 15, 1995. The Trust currently has ten series
of shares designated as: John Hancock V.A. International Fund ("International
Fund"), John Hancock V.A. Emerging Growth Fund ("Emerging Growth Fund"), John
Hancock V.A. Independence Equity Fund ("Independence Equity Fund"), John Hancock
V.A. Discovery Fund ("Discovery Fund"), John Hancock V.A. Sovereign Investors
Fund ("Sovereign Investors Fund"), John Hancock V.A. 500 Index Fund ("500 Index
Fund"), John Hancock V.A. Sovereign Bond Fund ("Sovereign Bond Fund"), John
Hancock V.A. Strategic Income Fund ("Strategic Income Fund"), John Hancock V.A.
World Bond Fund ("World Bond Fund") and John Hancock V.A. Money Market Fund
("Money Market Fund").
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"), a wholly owned indirect subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"). The investment sub-adviser to the
International Fund is John Hancock Advisers International Limited ("JHAI"). The
investment sub-adviser of Independence Equity Fund is Independence Investment
Associates, Inc. ("IIA"). The investment sub-adviser for Sovereign Investors
Fund is Sovereign Asset Management Corp. ("SAMCorp"). Together, JHAI, IIA and
SAMCorp are sometimes referred to herein collectively as the "Sub-advisers" or,
individually, as the "Sub-adviser." The Sub-advisers are wholly owned indirect
subsidiaries of the Life Company.
ELIGIBLE INVESTORS; INVESTMENT OBJECTIVES AND POLICIES
The Funds are designed to serve as investment vehicles for variable annuity
and variable life insurance contracts (the "Variable Contracts") offered by the
separate accounts of various insurance companies. Participating insurance
companies are the owners of shares of beneficial interest in each Fund of the
Trust. In accordance with any limitations set forth in their Variable Contracts,
contract holders may direct, through their participating insurance companies,
the allocation of amounts available for investment among the Funds. Instructions
for any such allocation, or for the purchase or redemption of shares of a Fund,
must be made by the investor's participating insurance company's separate
account as the owner of the Fund's shares. The rights of participating insurance
companies as owners of shares of a Fund are different from the rights of
contract holders under their Variable Contracts. The term "shareholder" in this
Statement of Additional Information refers only to participating insurance
companies, and not to contract holders.
Each Fund has its own distinct investment objective and policies. In
striving to meet its objective, each Fund will face the challenges of changing
business, economic and market conditions. For a further description of the
Funds' investment objectives, policies and restrictions see "Overview of the
Funds" in the Prospectus and "Investment Restrictions" in this SAI.
CERTAIN INVESTMENT PRACTICES
Custodial Receipts. The Funds may each acquire custodial receipts with
respect to U.S. Government securities. Such custodial receipts evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds. These custodial receipts are known by various names, including
Treasury Receipts, Treasury Investors Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS"). For certain securities
law purposes, custodial receipts are not considered U.S. Government securities.
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Bank and Corporate Obligations. Each of the Funds may invest in commercial
paper. Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Funds consists of direct U.S.
Dollar denominated obligations of domestic or foreign issuers. Bank obligations
in which a Fund may invest include certificates of deposit, bankers' acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are
bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Mortgage-Backed Securities. Each Fund may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage
pass-through securities represent participation interests in pools of
residential mortgage loans and are issued by U.S. Governmental or private
lenders and guaranteed by the U.S. Government or one of its agencies or
instrumentalities, including but not limited to the Government National Mortgage
Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae
certificates are guaranteed by the full faith and credit of the U.S. Government
for timely payment of principal and interest on the certificates. Fannie Mae
certificates are guaranteed by Fannie Mae, a federally chartered and privately
owned corporation, for full and timely payment of principal and interest on the
certificates. Freddie Mac certificates are guaranteed by Freddie Mac, a
corporate instrumentality of the U.S. Government, for timely payment of interest
and the ultimate collection of all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage
Obligations. CMOs and REMIC pass-through or participation certificates may be
issued by, among others, U.S. Government agencies and instrumentalities as well
as private issuers. CMOs and REMIC certificates are issued in multiple classes
and the principal of and interest on the mortgage assets may be allocated among
the several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass- through securities. Debt service on CMOs
is provided from payments of principal and interest on collateral of mortgaged
assets and any reinvestment income thereon.
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A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code of 1986, as amended (the "Code"), invests in certain
mortgages primarily secured by interests in real property and other permitted
investments and issues "regular" and "residual" interests. The Funds do not
intend to acquire REMIC residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the
Securities and Exchange Commission ("SEC") considers privately issued SMBS to be
illiquid.
Structured or Hybrid Notes. The Sovereign Bond Fund, Strategic Income Fund
and World Bond Fund may invest in "structured" or "hybrid" notes. The
distinguishing feature of a structured or hybrid note is that the amount of
interest and/or principal payable on the note is based on the performance of a
benchmark asset or market other than fixed income securities or interest rates.
Examples of these benchmarks include stock prices, currency exchange rates and
physical commodity prices. Investing in a structured note allows a Fund to gain
exposure to the benchmark market while fixing the maximum loss that the Fund may
experience in the event that market does not perform as expected. Depending on
the terms of the note, a Fund may forego all or part of the interest and
principal that would be payable on a comparable conventional note; a Fund's loss
cannot exceed this foregone interest and/or principal. An investment in
structured or hybrid notes involves risks similar to those associated with a
direct investment in the benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counterparty to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
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Conversely, in a rising interest rate environment, a declining prepayment
rate will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Asset-Backed Securities. The Sovereign Bond Fund and Strategic Income Fund
may invest in securities that represent individual interests in pools of
consumer loans and trade receivables similar in structure to Mortgage-Backed
Securities. The assets are securitized either in a pass-through structure
(similar to a mortgage pass-through structure) or in a pay-through structure
(similar to a CMO structure). Although the collateral supporting asset-backed
securities generally is of a shorter maturity than mortgage loans and
historically has been less likely to experience substantial prepayments, no
assurance can be given as to the actual maturity of an asset-backed security
because prepayments of principal may be made at any time. Payments of principal
and interest typically are supported by some form of credit enhancement, such as
a letter of credit, surety bond, limited guarantee by another entity or having a
priority to certain of the borrower's other securities. The degree of credit
enhancement varies, and generally applies to only a fraction of the asset-backed
security's par value until exhausted. If the credit enhancement of an
asset-backed security held by a Fund has been exhausted, and if any required
payments of principal and interest are not made with respect to the underlying
loans, a Fund may experience losses or delays in receiving payment.
Asset-backed securities are often subject to more rapid repayment than
their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund's ability to maintain positions in
these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Risks Associated With Specific Types of Derivative Debt Securities.
Different types of derivative debt securities are subject to different
combinations of prepayment, extension and/or interest rate risk. Conventional
mortgage pass-through securities and sequential pay CMOs are subject to all of
these risks, but are typically not leveraged. Thus, the magnitude of exposure
may be less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest
only debt securities ("IOs"), leveraged floating rate securities whose yield
changes in the same direction, rather than inversely to, a referenced interest
rate (" super floaters"), other leveraged floating rate instruments and
Mortgage-Backed Securities purchased at a premium to their par value. In some
instances, early prepayments may result in a complete loss of investment in
certain of these securities.
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The primary risks associated with certain other derivative debt securities
are the potential extension of average life and/or depreciation due to rising
interest rates. These securities include floating rate securities based on the
Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate
securities, floating rate securities that are subject to a maximum interest rate
("capped floaters"), Mortgage-Backed Securities purchased at a discount,
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs"), certain residual or support tranches of CMOs and index
amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but
are subject to extension risk resulting from the issuer's failure to exercise
its option to call or redeem the notes before their stated maturity date.
Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities
described above and thus present an especially intense combination of
prepayment, extension and interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC")
CMO bonds involve less exposure to prepayment, extension and interest rate risks
than other Mortgage-Backed Securities, provided that prepayment rates remain
within expected prepayment ranges or "collars." To the extent that prepayment
rates remain within these prepayment ranges, the residual or support tranches of
PAC and TAC CMOs assume the extra prepayment, extension and interest rate risks
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more
complex types of interest rate risks. For example, range floaters are subject to
the risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Foreign Securities and Emerging Countries. Each Fund except for
Independence Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money
Market Fund may invest in U.S. Dollar and foreign denominated securities of
foreign issuers. Independence Equity Fund and Money Market Fund may only invest
in U.S. dollar denominated securities including those of foreign issuers which
are traded on a U.S. Exchange. International Fund, Emerging Growth Fund,
Strategic Income Fund and World Bond Fund may also invest in debt and equity
securities of corporate and governmental issuers of countries with emerging
economies or securities markets.
Investing in obligations of non-U.S. issuers and foreign banks,
particularly securities of issuers located in emerging countries, may entail
greater risks than investing in similar securities of U.S. issuers. These risks
include (i) social, political and economic instability; (ii) the small current
size of the markets for many such securities and the currently low or
nonexistent volume of trading, which may result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property. Investing in
securities of non-U.S. companies may entail additional risks due to the
potential political and economic instability of certain countries and the risks
of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
In addition, even though opportunities for investment may exist in foreign
countries, and in particular emerging markets, any change in the leadership or
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policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist. Investors should note that upon the
accession to power of authoritarian regimes, the governments of a number of
Latin American countries previously expropriated large quantities of real and
personal property similar to the property which may be represented by the
securities purchased by the Funds. The claims of property owners against those
governments were never finally settled. There can be no assurance that any
property represented by foreign securities purchased by a Fund will not also be
expropriated, nationalized, or otherwise confiscated. If such confiscation were
to occur, a Fund could lose a substantial portion of its investments in such
countries. A Fund's investments would similarly be adversely affected by
exchange control regulations in any of those countries. Certain countries in
which the Funds may invest may have vocal minorities that advocate radical
religious or revolutionary philosophies or support ethnic independence. Any
disturbance on the part of such individuals could carry the potential for
widespread destruction or confiscation of property owned by individuals and
entities foreign to such country and could cause the loss of a Fund's investment
in those countries.
Certain countries prohibit or impose substantial restrictions on
investments in their capital markets, particularly their equity markets, by
foreign entities such as the Funds. As illustrations, certain countries require
governmental approval prior to investments by foreign persons, or limit the
amount of investment by foreign persons in a particular company, or limit the
investment by foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals. Moreover, the national policies of certain
countries may restrict investment opportunities in issuers or industries deemed
sensitive to national interests. In addition, some countries require
governmental approval for the repatriation of investment income, capital or the
proceeds of securities sales by foreign investors. A Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation, as well as by the application to it of other restrictions on
investments.
Foreign companies are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. In particular, the assets, liabilities and profits
appearing on the financial statements of such a company may not reflect its
financial position or results of operations in the way they would be reflected
had such financial statements been prepared in accordance with U.S. generally
accepted accounting principles. Most foreign securities held by the Funds will
not be registered with the SEC and such issuers thereof will not be subject to
the SEC's reporting requirements. Thus, there will be less available information
concerning foreign issuers of securities held by the Funds than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately the financial situation of the
issuer, the Adviser or relevant Sub-adviser will take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists. There is substantially less publicly available
information about foreign companies than there are reports and ratings published
about U.S. companies and the U.S. Government. In addition, where public
information is available, it may be less reliable than such information
regarding U.S. issuers.
Because the Funds (other than Independence Equity Fund, 500 Index Fund,
Sovereign Investors Fund and Money Market Fund) may invest, and International
Fund, Emerging Growth Fund and World Bond Fund will (under normal circumstances)
invest, a substantial portion of their total assets in securities which are
denominated or quoted in foreign currencies, the strength or weakness of the
U.S. dollar against such currencies may account for part of the Funds'
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S.
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dollar value of a Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
any net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Although the Funds value their respective assets daily in terms of U.S.
dollars, the Funds do not intend to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. However, the Funds may do so from time to
time, and investors should be aware of the costs of currency conversion.
Although currency dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to sell that currency to the dealer.
Securities of foreign issuers, and in particular many emerging country
issuers, may be less liquid and their prices more volatile than securities of
comparable U.S. issuers. In addition, foreign securities exchanges and brokers
are generally subject to less governmental supervision and regulation than in
the U.S., and foreign securities exchange transactions are usually subject to
fixed commissions, which are generally higher than negotiated commissions on
U.S. transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a Fund due
to subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
The Funds' investment income or, in some cases, capital gains from stock or
securities of foreign issuers may be subject to foreign withholding or other
foreign taxes, thereby reducing the Funds' net investment income and/or net
realized capital gains. See "Tax Status."
Forward Foreign Currency Contracts. Each Fund (other than Independence
Equity, 500 Index Fund, Sovereign Investors Fund and Money Market Fund) may
engage in forward foreign currency transactions. Generally, the foreign currency
exchange transactions of the Funds may be conducted on a spot (i.e., cash) basis
at the spot rate for purchasing or selling currency prevailing in the foreign
exchange market. A Fund may also enter into forward foreign currency exchange
contracts involving currencies of the different countries in which it may invest
as a hedge against possible variations in the foreign exchange rate between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. The Funds' transactions in forward foreign currency
exchange contracts will be limited to hedging either specified transactions or
portfolio positions. Transaction hedging is the purchase or sale of forward
foreign currency contracts with respect to specific receivables or payables of a
Fund accruing in connection with the purchase and sale of its portfolio
securities denominated in foreign currencies. Portfolio hedging is the use of
forward foreign currency contracts to offset portfolio security positions
denominated or quoted in such foreign currencies. A Fund will not attempt to
hedge all of its foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by the Adviser or
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relevant Sub-adviser. The Adviser, based on a policy approved by the Board of
Trustees, monitors the Funds' foreign currency contract transactions to seek to
assure that the Funds qualify as regulated investment companies under the Code.
The Funds will not engage in speculative forward foreign currency exchange
transactions.
If a Fund purchases a forward contract, its custodian bank will segregate
cash or high grade liquid debt securities in a separate account of the Fund in
an amount equal to the value of the Fund's total assets committed to the
consummation of such forward contract. Those assets will be valued at market
daily. If the value of the securities in the separate account declines,
additional cash or securities will be placed in the account so that the value of
the account will be equal to the amount of the Fund's commitment with respect to
such contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for a Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to a Fund of engaging in foreign currency exchange transactions
varies with such factors as the currency involved, the length of the contract
period and the market conditions then prevailing. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Repurchase Agreements. Each Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a security
for a relatively short period (generally not more than seven days) subject to
the obligation of the seller to repurchase and the Fund to resell such security
at a fixed time and price (representing the Fund's cost plus interest). A Fund
will enter into repurchase agreements only with member banks of the Federal
Reserve System and with securities dealers. The Adviser or relevant Sub-adviser
will continuously monitor the creditworthiness of the parties with whom a Fund
enters into repurchase agreements. Each Fund has established a procedure
providing that the securities serving as collateral for each repurchase
agreement must be delivered to the Fund's custodian either physically or in
book-entry form and that the collateral must be marked to market daily to ensure
that each repurchase agreement is fully collateralized at all times. In the
event of bankruptcy or other default by a seller of a repurchase agreement, a
Fund could experience delays in liquidating the underlying securities and could
experience losses, including the possible decline in the value of the underlying
securities during the period in which the Fund seeks to enforce its rights
thereto, possible subnormal levels of income and lack of access to income during
this period, and the expense of enforcing its rights. A Fund will not invest in
a repurchase agreement maturing in more than seven days, if such investment,
together with other illiquid securities held by the Fund would exceed 15% (10%
for Money Market Fund) of the Fund's net assets.
Reverse Repurchase Agreements. Each Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank or securities firm with an agreement that the Fund
will buy back the securities at a fixed future date at a fixed price plus an
agreed amount of "interest" which may be reflected in the repurchase price.
Reverse repurchase agreements are considered to be borrowings by a Fund. A Fund
will use proceeds obtained from the sale of securities pursuant to reverse
repurchase agreements to purchase other investments. The use of borrowed funds
to make investments is a practice known as "leverage," which is considered
speculative. Use of reverse repurchase agreements is an investment technique
that is intended to increase income. Thus, a Fund will enter into a reverse
repurchase agreement only when the Adviser determines that the interest income
to be earned from the investment of the proceeds is greater than the interest
expense of the transaction. However, there is a risk that interest expense will
nevertheless exceed the income earned. Reverse repurchase agreements involve the
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risk that the market value of securities purchased by a Fund with proceeds of
the transaction may decline below the repurchase price of the securities sold by
a Fund which it is obligated to repurchase. A Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. To minimize various risks associated with reverse repurchase
agreements, a Fund will establish and maintain with the Fund's custodian a
separate account consisting of highly liquid, marketable securities in an amount
at least equal to the repurchase prices of the securities (plus any accrued
interest thereon) under such agreements. In addition, a Fund will not enter into
reverse repurchase agreements and other borrowings exceeding in the aggregate 33
1/3% of the market value of its total assets. A Fund will enter into reverse
repurchase agreements only with selected registered broker/dealers or with
federally insured banks or savings and loan associations which are approved in
advance as being creditworthy by the Board of Trustees. Under procedures
established by the Board of Trustees, the Adviser will monitor the
creditworthiness of the firms involved.
Forward Commitment and When-Issued Securities. Each Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. A Fund will engage in when- issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, a Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Short Sales. International Fund and Emerging Growth Fund may engage in
short sales in order to profit from an anticipated decline in the value of a
security. Each Fund (except for 500 Index Fund and Money Market Fund) may also
engage in short sales to attempt to limit its exposure to a possible market
decline in the value of its portfolio securities through short sales of
securities which the Adviser believes possess volatility characteristics similar
to those being hedged. To effect such a transaction, a Fund must borrow the
security sold short to make delivery to the buyer. A Fund then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. Until the security is replaced, a Fund is required to pay to the
lender any accrued interest or dividends and may be required to pay a premium.
A Fund will realize a gain if the security declines in price between the
date of the short sale and the date on which the Fund replaces the borrowed
security. On the other hand, a Fund will incur a loss as a result of the short
sale if the price of the security increases between those dates. The amount of
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any gain will be decreased, and the amount of any loss increased, by the amount
of any premium or interest or dividends a Fund may be required to pay in
connection with a short sale. The successful use of short selling as a hedging
device may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged.
Under applicable guidelines of the staff of the SEC, if a Fund engages in
short sales, it must put in a segregated account (not with the broker) an amount
of cash or U.S. Government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until a Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
will equal the current market value of the securities sold short. Except for
short sales against the box, the amount of the Fund's net assets that may be
committed to short sales is limited and the securities in which short sales are
made must be listed on a national securities exchange.
Short selling may produce higher than normal portfolio turnover which may
result in increased transaction costs to a Fund and may result in gains from the
sale of securities deemed to have been held for less than three months. Such
gains must be less than 30% of the Fund's gross income in order for the Fund to
qualify as a regulated investment company under the Code.
Lower Rated High Yield/High Risk Debt Obligations. Strategic Income Fund,
Sovereign Investors Fund, Sovereign Bond Fund and World Bond Fund may invest in
high yield/high risk, fixed income securities rated below investment grade
(e.g., rated below Baa by Moody's or below BBB by S&P).
Ratings are based largely on the historical financial condition of the
issuer. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate.
See the Appendix to the Prospectus and this SAI which describes the
characteristics of corporate bonds in the various rating categories. These Funds
may invest in comparable quality unrated securities which, in the opinion of the
Adviser or relevant Sub-adviser, offer comparable yields and risks to those
securities which are rated.
Debt obligations rated in the lower ratings categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the ability of the issuer to make
payments of interest and principal.
The market price and liquidity of lower rated fixed income securities
generally respond to short term corporate and market developments to a greater
extent than do the price and liquidity of higher rated securities because such
developments are perceived to have a more direct relationship to the ability of
an issuer of such lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield/high risk bond market or the
reduced availability of market quotations will make it more difficult to dispose
of the bonds and to value accurately a Fund's assets. The reduced availability
of reliable, objective data may increase a Fund's reliance on management's
judgment in valuing high yield/high risk bonds. In addition, a Fund's
investments in high yield/high risk securities may be susceptible to adverse
publicity and investor perceptions, whether or not justified by fundamental
factors.
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Financial Futures Contracts. To the extent set forth in the Prospectus, the
Funds may buy and sell futures contracts (and related options) on stocks, stock
indices, debt securities, currencies, interest rate indices, and other
instruments. Each Fund may hedge its portfolio by selling or purchasing
financial futures contracts as an offset against the effects of changes in
interest rates or in securities or foreign currency values. Although other
techniques could be used to reduce exposure to market fluctuations, a Fund may
be able to hedge its exposure more effectively and perhaps at a lower cost by
using financial futures contracts. The Funds (other than the Money Market Fund)
may enter into financial futures contracts for hedging and other non-hedging
purposes to the extent permitted by regulations of the Commodity Futures Trading
Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Ginnie Mae modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills, 90-day commercial paper, bank
certificates of deposit and Eurodollar certificates of deposit. It is expected
that if other financial futures contracts are developed and traded, the Funds
may engage in transactions in such contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than a Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than a Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. Each Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
of transactions in financial futures contracts, see the information under the
caption "Tax Status" below.
At the time a 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," ranging upward from 1.1% of the value of
the financial futures contract being traded. The margin required for a financial
futures contract is set by the board of trade or exchange on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
financial futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Funds
expect to earn interest income on their initial margin deposits. Each day, the
futures contract is valued at the official settlement price of the board of
trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "mark to market." Variation margin does not represent a borrowing or lending
by the Funds but is instead a settlement between the Funds and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Funds will mark to market their respective open
financial futures positions.
Successful hedging depends on a strong correlation between the market for
the underlying securities and the futures contract market for those securities.
There are several factors that will probably prevent this correlation from being
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a perfect one, and even a correct forecast of general interest rate trends may
not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower- rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market or interest rate trends. The Funds will bear
the risk that the price of the securities being hedged will not move in complete
correlation with the price of the futures contracts used as a hedging
instrument. Although the Adviser and relevant Sub-adviser believe that the use
of financial futures contracts will benefit the Funds, an incorrect market
prediction could result in a loss on both the hedged securities in the
respective Fund's portfolio and the hedging vehicle so that the Fund's return
might have been better had hedging not been attempted. However, in the absence
of the ability to hedge, the Adviser or relevant Sub-adviser might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs. The low margin
deposits required for futures transactions permit an extremely high degree of
leverage. A relatively small movement in a futures contract may result in losses
or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Funds engage in financial futures transactions only
on boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to close out contracts, liquidity in the market could
be reduced. In addition, the Funds could be prevented from executing a buy or
sell order at a specified price or closing out a position due to limits on open
positions or daily price fluctuation limits imposed by the exchanges or boards
of trade. If a Fund cannot close out a position, it must continue to meet margin
requirements until the position is closed.
Options on Financial Futures Contracts. To the extent set forth in the
Prospectus, the Funds may buy and sell options on financial futures contracts on
stocks, stock indices, debt securities, currencies, interest rate indices, and
other instruments. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. The Funds would be required to deposit with
their custodian initial and variation margin with respect to put and call
options on futures contracts written by them. Options on futures contracts
involve risks similar to the risks of transactions in financial futures
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contracts. Also, an option purchased by a Fund may expire worthless, in which
case a Fund would lose the premium it paid for the option.
Other Considerations. The Funds will engage in futures and options
transactions for bona fide hedging or other non-hedging purposes to the extent
permitted by CFTC regulations. A Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to purchase. Except as stated below, the Funds' futures
transactions will be entered into for traditional hedging purposes -- i.e.,
futures contracts will be sold to protect against a decline in the price of
securities that the Funds own, or futures contracts will be purchased to protect
the Funds against an increase in the price of securities, or the currency in
which they are denominated, that the Funds intend to purchase. As evidence of
this hedging intent, the Funds expect that on 75% or more of the occasions on
which they take a long futures or option position (involving the purchase of
futures contracts), the Funds will have purchased, or will be in the process of
purchasing equivalent amounts of related securities or assets denominated in the
related currency in the cash market at the time when the futures contract or
option position is closed out. However, in particular cases, when it is
economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Funds to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish nonhedging positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the respective Fund's portfolio,
after taking into account unrealized profits and losses on any such positions
and excluding the amount by which such options were in-the- money at the time of
purchase. The Funds will engage in transactions in futures contracts and options
only to the extent such transactions are consistent with the requirements of the
Code for maintaining their qualifications as regulated investment companies for
Federal income tax purposes.
When the Funds purchase financial futures contracts, or write put options
or purchase call options thereon, cash or liquid, high grade debt securities
will be deposited in a segregated account with the Funds' custodian in an amount
that, together with the amount of initial and variation margin held in the
account of the broker, equals the market value of the futures contracts.
Options Transactions. To the extent set forth in the Prospectus, the Funds
may write listed and over-the-counter covered call options and covered put
options on securities in order to earn additional income from the premiums
received. In addition, the Funds may purchase listed and over- the-counter call
and put options. The extent to which covered options will be used by the Funds
will depend upon market conditions and the availability of alternative
strategies.
A Fund will write listed and over-the-counter call options only if they are
"covered," which means that the Fund owns or has the immediate right to acquire
the securities underlying the options without additional cash consideration upon
conversion or exchange of other securities held in its portfolio. A call option
written by a Fund may also be "covered" if the Fund holds on a share-for-share
basis a covering call on the same securities where (i) the exercise price of the
covering call held is equal to or less than the exercise price of the call
written or the exercise price of the covering call is greater than the exercise
price of the call written, in the latter case only if the difference is
maintained by the Fund in cash or high grade liquid debt obligations in a
segregated account with the Fund's custodian, and (ii) the covering call expires
at the same time as or later than the call written. If a covered call option is
not exercised, a Fund would keep both the option premium and the underlying
security. If the covered call option written by a Fund is exercised and the
exercise price, less the transaction costs, exceeds the cost of the underlying
security, the Fund would realize a gain in addition to the amount of the option
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premium it received. If the exercise price, less transaction costs, is less than
the cost of the underlying security, a Fund's loss would be reduced by the
amount of the option premium.
As the writer of a covered put option, each Fund will write a put option
only with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash or high grade
liquid debt securities with a value equal to the price at which the underlying
security may be sold to the Fund in the event the put option is exercised by the
purchaser. The Funds may also write a "covered" put option by purchasing on a
share-for-share basis a put on the same security as the put written by the Fund
if the exercise price of the covering put held is equal to or greater than the
exercise price of the put written and the covering put expires at the same time
as or later than the put written.
When writing listed and over-the-counter covered put options on securities,
the Funds would earn income from the premiums received. If a covered put option
is not exercised, the Funds would keep the option premium and the assets
maintained to cover the option. If the option is exercised and the exercise
price, including transaction costs, exceeds the market price of the underlying
security, a Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that a Fund's position
will be offset by the Options Clearing Corporation. The Funds may not effect a
closing purchase transaction after they have been notified of the exercise of an
option. There is no guarantee that a closing purchase transaction can be
effected. Although the Funds will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction will
permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If a Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Funds will realize a loss from a closing transaction if the cost of the
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation in the value of the underlying security owned by the
Fund.
Over-the-Counter Options. Funds that may engage in options transactions may
engage in options transactions on exchanges and in the over-the-counter markets.
In general, exchange-traded options are third-party contracts (i.e., performance
of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. Over-the-
counter ("OTC") transactions are two-party contracts with price and terms
negotiated by the buyer and seller. A Fund will acquire only those OTC options
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for which management believes the Fund can receive on each business day at least
two separate bids or offers (one of which will be from an entity other than a
party to the option) or those OTC options valued by an independent pricing
service. The Funds will write and purchase OTC options only with member banks of
the Federal Reserve System and primary dealers in U.S. Government securities or
their affiliates which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million. The SEC has
taken the position that OTC options are subject to each Fund's 15% restriction
on illiquid investments. The SEC, however, allows a Fund to exclude from the 15%
limitation on illiquid securities a portion of the value of the OTC options
written by the Fund, provided that certain conditions are met. First, the other
party to the OTC options has to be a primary U.S. Government securities dealer
designated as such by the Federal Reserve Bank. Second, the Fund must have an
absolute contractual right to repurchase the OTC options at a formula price. If
the above conditions are met, a Fund may treat as illiquid only that portion of
the OTC option's value (and the value of its underlying securities) which is
equal to the formula price for repurchasing the OTC option, less the OTC
option's intrinsic value.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Each Fund has adopted the following fundamental investment restrictions
which may not be changed without the approval of a majority of the applicable
Fund's outstanding voting securities. Under the Investment Company Act of 1940,
as amended (the "1940 Act"), and as used in the Prospectus and this SAI, a
"majority of the outstanding voting securities" means the approval of the lesser
of (1) the holders of 67% or more of the shares of a Fund represented at a
meeting if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy or (2) the holders of more than 50% of the
outstanding shares of the Fund.
Each Fund (other than Money Market Fund) may not:
1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of the
Trustees' fees and the purchase or sale of options, futures contracts,
forward commitments, swaps and repurchase agreements entered into in
accordance with the Fund's investment policies within the meaning of
paragraph 6 below, are not deemed to be senior securities.
2. Borrow money, except for the following extraordinary or emergency
purposes: (i) from banks for temporary or short-term purposes or for
the clearance of transactions; (ii) in connection with the redemption
of Fund shares or to finance failed settlements of portfolio trades
without immediately liquidating portfolio securities or other assets;
and (iii) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other portfolio
securities or assets, but only if after each such borrowing there is
asset coverage of at least 300% as defined in the 1940 Act. For
purposes of this investment restriction, the deferral of trustees'
fees and short sales, transactions in futures contracts and options on
futures contracts, securities or indices and forward commitment
transactions shall not constitute borrowing. This restriction does not
apply to transactions in reverse repurchase agreements in amounts not
to exceed 33 1/3% of the value of the Fund's total assets (including
the amount borrowed) taken at market value.
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3. Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to be
an underwriter for purposes of the Securities Act of 1933 (the "1933
Act").
4. Purchase or sell real estate except that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein,
(iv) purchase and sell mortgage-related securities and (v) hold and
sell real estate acquired by the Fund as a result of the ownership of
securities.
5. Invest in commodities, except the Fund may purchase and sell options
on securities, securities indices and currency, futures contracts on
securities, securities indices and currency and options on such
futures, forward foreign currency exchange contracts, forward
commitments, securities index put or call warrants, interest rate and
currency swaps, interest rate caps, floors and collars and repurchase
agreements entered into in accordance with the Fund's investment
policies.
6. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the
Fund's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of debt
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
7. Purchase the securities of issuers conducting their principal activity
in the same industry if, immediately after such purchase, the value of
its investments in such industry would equal or exceed 25% of its
total assets taken at market value at the time of such investment.
This limitation does not apply to investments in obligations of the
U.S. Government or any of its agencies, instrumentalities or
authorities.
8. For each Fund, other than World Bond Fund, with respect to 75% of
total assets, purchase securities of an issuer (other than the U.S.
Government, its agencies, instrumentalities or authorities), if:
(a) such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such
issuer; or
(b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Fund.
Money Market Fund may not:
1. Issue senior securities. For purposes of this restriction, the
issuance of shares of beneficial interest in multiple classes or
series, the deferral of the Trustees' fees and transactions in
repurchase agreements or reverse repurchase agreements are not deemed
to be senior securities.
2. Borrow money, except from banks to meet redemptions in amounts not
exceeding 33 1/3% (taken at the lower of cost or current value) of its
total assets (including the amount borrowed). The Fund does not intend
to borrow money during the coming year, and will do so only as a
temporary measure for extraordinary purposes or to facilitate
redemptions. The Fund will not purchase securities while any
borrowings are outstanding. This restriction does not apply to the
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purchase of reverse repurchase agreements in amounts not to exceed 33
1/3% of the value of the Fund's total assets (including the amount
borrowed) taken at market value.
3. Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to be
an underwriter for purposes of the 1933 Act.
4. Write, purchase or otherwise invest in any put, call, straddle or
spread option or buy or sell real estate, commodities or commodity
futures contracts.
5. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the
Fund's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of debt
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
6. Purchase the securities of issuers conducting their principal activity
in the same industry if, immediately after such purchase, the value of
its investments in such industry would equal or exceed 25% of its
total assets taken at market value at the time of such investment.
This limitation does not apply to investments in obligations of the
U.S. Government or any of its agencies, instrumentalities or
authorities.
7. With respect to 75% of total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities), if:
(a) such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such
issuer; or
(b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Fund.
Non-Fundamental Investment Restrictions
The following restrictions are designated as non-fundamental and may be
changed by the Board of Trustees without the approval of shareholders.
Each Fund (other than Money Market Fund) may not:
1. Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings and then only if such pledging, mortgaging or hypothecating
does not exceed 33 1/3% of the Fund's total assets taken at market
value. Collateral arrangements with respect to margin, option and
other risk management, when-issued and forward commitment transactions
are not deemed to be pledges or other encumbrances for purposes of
this restriction.
2. Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser or any Sub-adviser to save commissions or to
average prices among them is not deemed to result in a joint
securities trading account.
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3. Purchase securities on margin or make short sales, unless, by virtue
of its ownership of other securities, the Fund has the right to obtain
securities equivalent in kind and amount to the securities sold and,
if the right is conditional, the sale is made upon the same
conditions, except (i) in connection with arbitrage transactions, (ii)
for hedging the Fund's exposure to an actual or anticipated market
decline in the value of its securities, (iii) to profit from an
anticipated decline in the value of a security, and (iv) for obtaining
such short-term credits as may be necessary for the clearance of
purchases and sales of securities.
4. Purchase or retain securities of an issuer if one or more of the
Trustees or officers of the Trust or directors or officers of the
Adviser, any Sub-adviser or any investment management subsidiary of
the Adviser individually owns beneficially more than of 1% and
together own beneficially more than 5% of the securities of such
issuer.
5. Purchase a security if, as a result, (i) more than 10% of the Fund's
assets would be invested in securities of other investment companies,
(ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one such investment company being
held by the Fund or (iii) more than 5% of the Fund's assets would be
invested in any one such investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund
in connection with lending the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Each Fund may, in connection
with the John Hancock Group of Funds Deferred Compensation Plan for
Independent Trustees, purchase securities of other investment
companies within the John Hancock Group of Funds provided that, as a
result, (i) no more than 10% of the Fund's assets would be invested in
securities of all other investment companies, (ii) such purchase would
not result in more than 3% of the total outstanding voting securities
of any one such investment company being held by the Fund and (iii) no
more than 5% of the Fund's assets would be invested in any one such
investment company. Each Fund may not purchase the shares of any
closed-end investment company except in the open market where no
commission or profit to a sponsor or dealer results from the purchase,
other than customary brokerage fees.
6. Invest in securities which are illiquid if, as a result, more than 15%
of its net assets would consist of such securities, including
repurchase agreements maturing in more than seven days, securities
that are not readily marketable, restricted securities not eligible
for resale pursuant to Rule 144A under the 1933 Act, purchased OTC
options, certain assets used to cover written OTC options, and
privately issued stripped mortgage-backed securities.
7. Purchase securities while outstanding borrowings (other than reverse
repurchase agreements) exceed 5% of the Fund's total assets.
8. Purchase warrants of any issuer, if, as a result of such purchase,
more than 2% of the value of the Fund's total assets would be invested
in warrants which are not listed on an exchange or more than 5% of the
value of the total assets of the Fund would be invested in warrants
generally, whether or not so listed. For these purposes, warrants are
to be valued at the lesser of cost or market, but warrants acquired by
the Fund in units with or attached to debt securities shall be deemed
to be without value.
18
<PAGE>
9. Write covered call or put options with respect to more than 25% of the
value of its total assets, invest more than 25% of its total assets in
protective put options or invest more than 5% of its total assets in
puts, calls, spreads or straddles, or any combination thereof, other
than protective put options. The aggregate value of premiums paid on
all options, other than protective put options, held by the Fund at
any time will not exceed 20% of the Fund's total assets.
10. Invest for the purpose of exercising control over or management of any
company.
The Money Market Fund may not:
1. Pledge, mortgage or hypothecate its portfolio securities if at the
time of such action the value of the securities so pledged, mortgaged
or hypothecated would exceed 10% of the Fund's total assets taken at
market value.
2. Purchase or retain the securities of any issuer if any officer or
Trustee of the Trust or the Fund or its investment adviser is an
officer or director of such issuer and beneficially owns more than 1/2
of 1% of the securities of such issuer and all of the officers and the
Trustees of the Trust and the Fund's investment adviser together own
more than 5% of the securities of such issuer.
3. Purchase securities on margin or make short sales of securities except
for obtaining such short-term credits as may be necessary for the
clearance of purchases and sales of securities.
4. Purchase a security if, as a result, (i) more than 10% of the Fund's
assets would be invested in securities of other investment companies,
(ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one such investment company being
held by the Fund or (iii) more than 5% of the Fund's assets would be
invested in any one such investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund
in connection with lending the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Each Fund may, in connection
with the John Hancock Group of Funds Deferred Compensation Plan for
Independent Trustees, purchase securities of other investment
companies within the John Hancock Group of Funds provided that, as a
result, (i) no more than 10% of the Fund's assets would be invested in
securities of all other investment companies, (ii) such purchase would
not result in more than 3% of the total outstanding voting securities
of any one such investment company being held by the Fund and (iii) no
more than 5% of the Fund's assets would be invested in any one such
investment company. Each Fund may not purchase the shares of any
closed-end investment company except in the open market where no
commission or profit to a sponsor or dealer results from the purchase,
other than customary brokerage fees.
5. Invest in securities which are illiquid if, as a result, more than 10%
of its net assets would consist of such securities, including
repurchase agreements maturing in more than seven days, securities
that are not readily marketable, restricted securities not eligible
for resale pursuant to Rule 144A under the 1933 Act, purchased OTC
19
<PAGE>
options, certain assets used to cover written OTC options, and
privately issued stripped mortgage-backed securities.
6. Invest in warrants.
7. Invest for the purpose of exercising control over or management of any
company. If a percentage restriction on investment or utilization of
assets as set forth above is adhered to at the time an investment is
made, a later change in percentage resulting from changes in the
values of a Fund's assets will not be considered a violation of the
restriction.
The Trust agrees as a matter of non-fundamental policy that, in accordance
with the regulations of the California Insurance Department, until such
regulations no longer require, each Fund will limit its borrowing to: (1) 10% of
net asset value when borrowing for any general purpose and (2) 25% of net asset
value when borrowing as a temporary measure to facilitate redemptions. (Net
asset value of a Fund is the market value of all investments or assets owned
less outstanding liabilities of the Fund at the time that any new or additional
borrowing is undertaken.) Each Fund will also, as a matter of non- fundamental
policy, follow California foreign country diversification guidelines which
provide that:
(1) A Fund, holding foreign investments, will be invested in a minimum of
five different foreign countries at all times. However, this minimum is
reduced to four when foreign country investments comprise less than 80% of
the Fund's net asset value; to three when less than 60% of such value; to
two when less than 40%; and to one when less than 20%.
(2) Except as set forth in items 3 and 4 below, a Fund will have no more
than 20% of its net asset value invested in securities of issuers located
in any one country.
(3) A Fund may have an additional 15% of its value invested in securities
of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany.
(4) A Fund's investments in United States issuers are not subject to
foreign country diversification guidelines.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Trust is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Trust and the
Funds and who execute policies formulated by the Trustees. Several of the
officers and Trustees of the Trust are also officers and directors of the
Adviser, one or more of the Sub-advisers and/or the Fund's principal
distributor, John Hancock Funds, Inc. ("John Hancock Funds").
The following table sets forth the principal occupations of the Trustees
and principal officers of the Trust during the past five years. Unless otherwise
indicated, the business address of each is 101 Huntington Avenue, Boston,
Massachusetts 02199.
20
<PAGE>
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
October 1944 Officer, the Adviser and The
Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"); John Hancock
Funds; John Hancock Investor
Services Corporation ("Investor
Services") and Sovereign Asset
Management Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.
and New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994).
Dennis S. Aronowitz Trustee (3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Richard P. Chapman, Jr. Trustee (1,3) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc., EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
Douglas M. Costle Trustee (1,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean, Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Leland O. Erdahl Trustee (3) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987-1991) and
President of Albuquerque Uranium
Corporation (from 1985-1992);
Director of Freeport-McMoRan Copper
& Gold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995) (management
consultant).
Richard A. Farrell Trustee (3) President of Farrell, Healer & Co.,
Farrell, Healer & Company, Inc. (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank
Boston, MA 02110 of Boston Corporation.
November 1932
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
*Anne C. Hodsdon Trustee and President President and Chief Operating
April 1953 (1,2) Officer, the Adviser; Executive
Vice President, the Adviser (until
December 1994); Senior Vice
President; the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks, (nonprofit
1101 Vermont Avenue N.W. institution) ( since September
Suite 608 1989).
Washington, DC 20005
February 1939
Patti McGill Peterson Trustee (3) President, St. Lawrence University;
St. Lawrence University Director, Niagara Mohawk Power
110 Vilas Hall Corporation (electric utility) and
Canton, NY 13617 Security Mutual Life (insurance).
May 1943
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937 Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993).
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Fort Lauderdale, FL
November 1932
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer (2) Officer, the Adviser; President,
the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp., and NM
Capital; Senior Vice President, The
Berkeley Group.
*James B. Little Senior Vice President, Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds and Investor Services; Senior
Vice President and Chief Financial
Officer, each of the John Hancock
funds.
*John A. Morin Vice President Vice President and Secretary the
July 1950 Adviser; Vice President, Investor
Services, John Hancock Funds and
each of the John Hancock funds;
Compliance Officer, certain John
Hancock funds; Counsel, the Life
Company; Vice President and
Assistant Secretary, The Berkeley
Group.
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
*Susan S. Newton Vice President, Secretary Vice President and Assistant
March 1950 Secretary, the Adviser; Vice
President and Secretary, certain
John Hancock funds; Vice President
and Secretary, John Hancock Funds,
Investor Services and John Hancock
Distributors, Inc. (until 1994);
Secretary, SAMCorp; Vice President,
The Berkeley Group.
*James J. Stokowski Vice President and Vice President, the Adviser; Vice
November 1946 Treasurer President and Treasurer, each of
the John Hancock funds.
</TABLE>
- -------------------------------
* An "interested person" of the Trust, as such term is defined in the 1940
Act.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
All of the officers listed are officers or employees of the Adviser, a
Sub-adviser or affiliated companies. Some of the Trustees and officers may also
be officers, Directors and/or Trustees of one or more of the other funds for
which the Adviser serves as investment adviser.
As of July 30, 1996, there were 100,000 shares of the Trust outstanding and
the officers and Trustees as a group beneficially owned less than 1% of the
outstanding shares of the Trust and of each of the Funds. On such date, the
Adviser was the only record holder and beneficial owner of 5% or more of the
shares of each Fund.
At such date, no other person(s) owned of record or was known by the Trust
to beneficially own as much as 5% of the outstanding shares of the Trust or of
any of the Funds.
Compensation of the Board of Trustees. The following table provides
information regarding the compensation paid by the other investment companies in
the John Hancock Fund Complex to the Independent Trustees for their services. No
compensation was paid by the Funds to the Independent Trustees for the fiscal
year ended December 31, 1995. The three non-Independent Trustees, Messrs.
Boudreau and Scipione and Ms. Hodsdon, and each of the officers of the Funds are
interested persons of the Adviser, are compensated by the Adviser and receive no
compensation from the Funds for their services.
Total Compensation From All Funds In
John Hancock Fund
Independent Trustees Complex to Trustees(*)
-------------------- ----------------------
Dennis S. Aronowitz $ 61,050
Richard P. Chapman, Jr.+ 62,800
William J. Cosgrove.+ 61,050
Douglas M. Costle 41,750
Leland O. Erdahl 41,750
Richard A. Farrell 43,250
Gail D. Fosler 60,800
William F. Glavin+ 37,500
John A. Moore 41,750
Patti McGill Peterson 41,750
John W. Pratt 41,750
Edward J. Spellman 61,050
Total $596,250
* Total compensation paid by the John Hancock Fund Complex to the Independent
Trustees is for the calendar year ended December 31, 1995. On this date,
there were 61 funds in the John Hancock Fund Complex. Messrs. Aronowitz,
Chapman, Cosgrove and Spellman and Ms. Fosler served 16 and Messrs. Costle,
Erdahl, Farrell, Glavin, Moore and Pratt and Ms. Peterson served 12 of
these funds.
27
<PAGE>
+ On December 31, 1995, the value of the aggregate deferred compensation from
all funds in the John Hancock Fund Complex for Mr. Chapman was $54,681, for
Mr. Cosgrove was $54,243 and for Mr. Glavin was $32,061.
INVESTMENT ADVISORY AND OTHER SERVICES
Each of the Trustees and principal officers affiliated with the Trust who
is also an affiliated person of the Adviser or any Sub-adviser is named above,
together with the capacity in which such person is affiliated with the Trust,
the Adviser or any Sub-adviser.
The Trust, on behalf of each Fund, has entered into investment management
contracts with the Adviser. Under each investment management contract, the
Adviser provides the Funds with (i) a continuous investment program, consistent
with each Fund's stated investment objective and policies, and (ii) supervision
of all aspects of each Fund's operations except those that are delegated to a
custodian, transfer agent or other agent. The Adviser is responsible for the
day-to-day management of each Fund's portfolio assets.
With respect to the International Fund, the Adviser has entered into a
sub-investment management contract with JHAI. With respect to Independence
Equity Fund, the Adviser has entered into a sub-investment management contract
with IIA. With respect to Sovereign Investors Fund, the Adviser has entered into
a sub-investment management contract with SAMCorp. Under each respective
sub-investment management contract, the corresponding Sub-adviser, subject to
the review of the Trustees and the overall supervision of the Adviser, is
responsible for managing the investment operations of the corresponding Fund and
the composition of the Fund's portfolio and furnishing the Fund with advice and
recommendations with respect to investments, investment policies and the
purchase and sale of securities. See "Organization and Management of the Funds"
and "The Funds' Expenses" in the Prospectus for a description of certain
information concerning each Fund's investment management contract and the
sub-investment management contracts of International Fund, Independence Equity
Fund and Sovereign Investors Fund.
Securities held by a Fund may also be held by other funds or investment
advisory clients for which the Adviser or any of its affiliates provides
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser or Sub-adviser for a Fund or for other funds or
clients for which the Adviser or Sub-adviser renders investment advice arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds or clients in a manner
deemed equitable to all of them. To the extent that transactions on behalf of
more than one client of the Adviser or its affiliates may increase the demand
for securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
No person other than the Adviser, any Sub-adviser and their directors and
employees regularly furnish advice to the Funds with respect to the desirability
of a Fund investing in, purchasing or selling securities. The Adviser may from
time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
The Adviser pays the compensation of all officers and employees of the
Trust and of Trustees of the Trust affiliated with the Adviser, the office
expenses of the Funds, including those of the Trust's Treasurer and Secretary,
and other expenses incurred by the Adviser in connection with the performance of
its duties.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Funds, including the fees of the Trustees of
28
<PAGE>
the Trust who are not "interested persons," as such term is defined in the 1940
Act (the "Independent Trustees"), and the continuous public offering of the
shares of each Fund, are borne by the Funds.
As provided by the investment management contract, each Fund pays the
Adviser an investment management fee, which is accrued daily and paid monthly in
arrears and is equal on an annual basis to a stated percentage of the respective
Fund's average daily net asset value. The Adviser, not any Fund, pays the
subadvisory fees as described in the Prospectus. See "Organization and
Management of the Funds" in the Prospectus.
Pursuant to each investment management contract, and, where applicable,
sub-investment management contract, neither the Adviser nor any Sub-adviser is
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with the matters to which its respective contract
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser or any Sub-adviser in the performance of
its duties or from its reckless disregard of the obligations and duties under
the applicable contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and has more than $20 billion in total assets
under management in its capacity as investment adviser to the Funds and the
other mutual funds and publicly traded investment companies in the John Hancock
group of funds having a combined total of over 1,060,000 shareholders. The
Adviser is a wholly owned subsidiary of The Berkeley Financial Group, which is
in turn a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc.,
which is in turn a wholly owned subsidiary of the Life Company, one of the most
recognized and respected financial institutions in the nation. With total assets
under management of over $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries Standard & Poor's and
A.M. Best's highest ratings. Founded in 1862, the Life Company has been serving
clients for over 130 years.
JHAI, located at 34 Dover Street, London, England, W1X3RA, is a wholly
owned subsidiary of the Adviser, formed in 1987 to provide investment research
and advisory services to U.S. institutional clients. IIA, located at 53 State
Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly owned
indirect subsidiary of John Hancock Subsidiaries, Inc. SAMCorp, located at 1235
Westlakes Drive, Berwyn, Pennsylvania 19312, is a wholly owned subsidiary of The
Berkeley Financial Group.
Each investment management contract and sub-investment management contract
initially expires on August 12, 1998, and will continue in effect from year to
year thereafter if approved annually by a vote of a majority of the Trustees of
the Trust who are not interested persons of one of the parties to the contract,
cast in person at a meeting called for the purpose of voting on such approval,
or by either the Trustees or the holders of a majority of the applicable Fund's
outstanding voting securities. Each contract automatically terminates upon
assignment. Each contract may be terminated without penalty on 60 days' notice
at the option of either party to the respective contract or by vote of the
holders of a majority of the outstanding voting securities of the applicable
Fund. Each sub-investment management contract terminates automatically upon the
termination of the corresponding investment management contract.
Under the investment management contract, each Fund may use the name "John
Hancock" or any name derived from or similar to it only for as long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If a Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
29
<PAGE>
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
Accounting and Legal Services Agreement. The Trust, on behalf of each Fund,
is a party to an Accounting and Legal Services Agreement with the Adviser.
Pursuant to this agreement, the Adviser provides the Fund with certain tax,
accounting and legal services.
DISTRIBUTION CONTRACT
Distribution Agreement. John Hancock Funds, a wholly owned subsidiary of
the Adviser, serves as the principal underwriter for the Trust in connection
with the continuous offering of the shares of the Funds. John Hancock Funds has
the exclusive right, pursuant to the Distribution Agreement, to purchase shares
from the Funds at net asset value for resale to the separate accounts of
insurance companies at the public offering price.
The Distribution Agreement was initially adopted by the affirmative vote of
the Trust's Board of Trustees, including the vote of a majority of Trustees who
are not parties to the agreement or interested persons of any such party, cast
in person at a meeting called for such purpose. The Distribution Agreement will
continue in effect with respect to each Fund until August 12, 1998 and from year
to year if approved by either the vote of the Fund's shareholders or the Board
of Trustees, including the vote of a majority of the Trustees who are not
parties to the agreement or interested persons of any such party, cast in person
at a meeting called for such purpose. The Distribution Agreement may be
terminated at any time as to one or more of the Funds, without penalty, by
either party upon sixty (60) days' written notice or by a vote of a majority of
the outstanding voting securities of the affected Fund and terminates
automatically in the case of an assignment by John Hancock Funds.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the shares of
the Funds, the following procedures are utilized wherever applicable.
Debt securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
issues are generally valued at last sale price on the day of valuation. Exchange
or NASDAQ traded securities for which no sales are reported and other securities
traded over-the-counter are generally valued at the last available bid price.
Short-term debt instruments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of any security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the Funds' custodian
based on London currency exchange quotations as of 5:00 p.m., London time (12:00
noon, New York time) on the date of any determination of a Fund's NAV. If
30
<PAGE>
quotations are not readily available, or the value has been materially effected
by events occurring after the closing of a foreign market, assets are valued by
a method that the Trustees believe accurately reflects fair value.
The Funds will not price their securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's closing price with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable shares may be significantly affected on days when a shareholder has
no access to the Fund.
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay
the redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, a brokerage charge would be incurred. Any
such security would be valued for the purpose of making such payment at the same
value as used in determining the Fund's net asset value. Each Fund has elected
to be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90-day period for any one account.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes.
Each Fund intends to elect to be treated, and to qualify for each taxable year,
as a separate "regulated investment company" under Subchapter M of the Code. As
such and by complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions, and the diversification
of its assets, each Fund will not be subject to Federal income tax on taxable
income (including net realized capital gains) which is distributed to
shareholders in accordance with the timing requirements of the Code.
Qualification of a Fund for treatment as a regulated investment company
under the Code requires, among other things, that (a) at least 90% of a Fund's
annual gross income, without being offset for losses from the sale or other
disposition of stock or securities or other transactions, be derived from
interest, payments with respect to securities loans, dividends and gains from
the sale or other disposition of stock or securities or foreign currencies, or
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (b) the Fund derive less than 30% of its annual
gross income from gains (without deduction for losses) from the sale or other
disposition of any of the following held (for tax purposes) for less than three
months: (i) stock or securities; (ii) options, futures or forward contracts (not
on foreign currencies) or (iii) foreign currencies (or options, futures or
forward contracts on foreign currencies) not directly related to the Fund's
principal business of investing in stock or securities and related options or
futures; (c) the Fund distribute at least annually to its shareholders as
dividends at least 90% of the sum of its taxable and tax-exempt net investment
income, the excess of net short-term capital gain over net long-term capital
loss earned in each year and any other net income (except for the excess, if
any, of net long-term capital gain over net short-term capital loss, which need
not be distributed in order for the Fund to qualify as a regulated investment
company but is taxed to the Fund if it is not distributed); and (d) the Fund
diversify its assets so that, at the close of each quarter of its taxable year,
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(i) at least 50% of the fair market value of its total (gross) assets is
comprised of cash, cash items, U.S. Government securities, securities of other
regulated investment companies and other securities limited in respect of any
one issuer to no more than 5% of the fair market value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii) no
more than 25% of the fair market value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies) or of two or more issuers
controlled by the Fund and engaged in the same, similar, or related trades or
businesses.
Each Fund also must, and intends to, comply with the diversification
requirements imposed by Section 817(h) of the Code and the regulations
thereunder. These requirements, which are in addition to the diversification
requirements imposed on a Fund by the 1940 Act and Subchapter M of the Code,
place certain limitations on assets of each insurance company separate account
used to fund variable contracts and, because Section 817(h) and those
regulations treat the assets of the Fund as assets of the related separate
account, the assets of a Fund that may be invested in securities of any one,
two, three and four issuers. Specifically, the regulations provide that, except
as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and each U.S. Government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets is attributable
to cash and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies. Failure by a Fund to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally result in treatment of the variable contract
holders other than as described in the applicable variable contract prospectus,
including possible current inclusion in ordinary income of income accrued under
the contracts for the current and all prior taxable years. Under certain
circumstances described in the applicable Treasury regulations, inadvertent
failure to satisfy the applicable diversification requirements may be corrected,
but such a correction would require a payment to the Internal Revenue Service
(the "I.R.S.") based on the tax contractholders would have incurred if they were
treated as receiving the income on the contract for the period during which the
diversification requirements were not satisfied. Any such failure may also
result in adverse tax consequences for the insurance company issuing the
contracts. Failure by a Fund to qualify as a regulated investment company would
also subject the Fund to federal and state income taxation of all of its taxable
income and gain, whether or not distributed to shareholders.
If a Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), that Fund could be subject to Federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the applicable Fund to
recognize taxable income or gain without the concurrent receipt of cash. Any
Fund that is permitted to acquire stock in foreign corporations may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
32
<PAGE>
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to a Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income. Income from investments in commodities,
such as gold and certain related derivative instruments, is also not treated as
qualifying income under this test. If the net foreign exchange loss for a year
treated as ordinary loss under Section 988 were to exceed a Fund's investment
company taxable income computed without regard to such loss but after
considering the post-October loss regulations (i.e., all of the Fund's net
income other than any excess of net long-term capital gain over net short-term
capital loss) the resulting overall ordinary loss for such year would not be
deductible by the Fund or its shareholders in future years.
A Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases.
For Federal income tax purposes, each Fund is generally permitted to carry
forward a net capital loss in any year to offset its own net capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent net capital gains are offset by such losses, they would not result in
Federal income tax liability to the applicable Fund and would not be distributed
as such to shareholders.
Each Fund that invests in certain pay in-kind securities ("PIKs") (debt
securities whose interest payments may be made either in cash or in-kind), zero
coupon securities or certain increasing rate securities (and, in general, any
other securities with original issue discount or with market discount if the
Fund elects to include market discount in income currently) must accrue income
on such investments prior to the receipt of the corresponding cash payments.
However, each Fund must distribute, at least annually, all or substantially all
of its net income, including such accrued income, to shareholders to qualify as
a regulated investment company under the Code and avoid Federal income tax.
Therefore, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
Investments in debt obligations that are at risk of or are in default
present special tax issues for any Fund that may hold such obligations, such as
World Bond Fund, Strategic Income Fund or Sovereign Investors Fund. Tax rules
are not entirely clear about issues such as when the Funds may cease to accrue
interest, original issue discount, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, how payments
received on obligations in default should be allocated between principal and
income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by any Fund that may hold such
obligations in order to reduce the risk of distributing insufficient income to
preserve its status as a regulated investment company and seek to avoid becoming
subject to Federal income tax.
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by a Fund may cause such Fund to recognize gains or losses from
33
<PAGE>
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of a Fund's
losses on its transactions involving options, futures and forward foreign
currency contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gains. These transactions may therefore affect the
amount, timing and character of a Fund's distributions to shareholders. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. The Funds
will take into account the special tax rules (including consideration of
available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The tax rules applicable to currency swaps and interest rate swaps, caps,
floors and collars may be unclear in some respects, and the Funds may be
required to limit participation in such transactions in order to qualify as
regulated investment companies.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to the Funds and certain aspects of their distributions. The
discussion does not address special tax rules applicable to insurance companies.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership or redemption of shares of, and receipt of
distributions from, a Fund in their particular circumstances.
The Funds are not subject to Massachusetts corporate excise or franchise
taxes. Provided that each Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
DESCRIPTION OF THE TRUST'S SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Funds. The Declaration of Trust, dated November 15, 1995 (the
"Declaration of Trust"), permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of the Funds, without par
value. Under the Declaration of Trust, the Trustees have the authority to create
and classify shares of beneficial interest in separate series, without further
action by shareholders. As of the date of this SAI, the Trustees have only
authorized shares of the Funds. Additional series may be added in the future.
The Declaration of Trust also authorizes the Trustees to classify and reclassify
the shares of the Funds, or any other series of the Trust, into one or more
classes. As of the date of this SAI, the Trustees have not authorized the
issuance of additional classes of shares of the Funds.
Each share of a Fund represents an equal proportionate interest in the
assets belonging to that Fund. When issued, shares are fully paid and
nonassessable except as provided in the Prospectus under the caption
"Organization and Management of the Funds." In the event of liquidation of a
Fund, shareholders are entitled to share pro rata in the net assets of the Fund
available for distribution to such shareholders. Shares of the Trust are freely
transferable and have no preemptive, subscription or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees
have initially determined that shares entitle their holders to one vote per
share on any matter on which such shares are entitled to vote. The Trustees may
determine in the future, without the vote or consent of shareholders, that each
dollar of net asset value (number of shares owned times net asset value per
share) will be entitled to one vote on any matter on which such shares are
entitled to vote.
The rights, if any, of Variable Contract holders to vote the shares of a
Fund are governed by the relevant Variable Contract. For information on these
voting rights, see the Prospectus describing the Variable Contract.
34
<PAGE>
Unless otherwise required by the 1940 Act or the Declaration of Trust, the
Trust has no intention of holding annual meetings of shareholders. Trust
shareholders may remove a Trustee by the affirmative vote of at least two-thirds
of the Trust's outstanding shares and the Trustees shall promptly call a meeting
for such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Trust. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable forthe liabilities of
any other series. Liability is therefore limited to circumstances in which a
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
CALCULATION OF PERFORMANCE
Yield (except for Money Market Fund). The yield of each Fund (except for
Money Market Fund) is computed by dividing net investment income per share
determined for a 30-day period by the net asset value per share on the last day
of the period, according to the following standard formula:
Yield = 2 [ (a - b + 1)6 -1]
-----
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d = the net asset value per share on the last day of the period.
Money Market Fund Yield. For the purposes of calculating yield for the
Money Market Fund, daily income per share consists of interest and discount
earned on the Fund's investments less provision for amortization of premiums and
applicable expenses, divided by the number of shares outstanding, but does not
include realized or unrealized appreciation or depreciation.
If the Fund reports its annualized yield, it will also furnish information
as to the average portfolio maturities of the Fund. It will also report any
material effect of realized gains or losses or unrealized appreciation on
dividends which have been excluded from the computation of yield.
Yield calculations are based on the value of a hypothetical preexisting
account with exactly one share at the beginning of the seven day period. Yield
is computed by determining the net change in the value of the account during the
base period and dividing the net change by the value of the account at the
beginning of the base period to obtain the base period return. Base period is
multiplied by 365/7 and the resulting figure is carried to the nearest 100th of
a percent. Net change in account value during the base period includes dividends
declared on the original share, dividends declared on any shares purchased with
35
<PAGE>
dividends of that share and any account or sales charges that would affect an
account of average size, but excludes any capital changes.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1
Total Return. Each Fund's total return is computed by finding the average
annual compounded rate of return over the 1-year, 5-year, and 10-year periods
that would equate the initial amount invested to the ending redeemable value
according to the following formula:
n _____
T = \ /ERV/P -1
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1-year and life-of-fund periods.
This calculation assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period. The
"distribution rate" is determined by annualizing the result of dividing the
declared dividends of a Fund during the period stated by the net asset value at
the end of the period.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
From time to time, in reports and promotional literature, a Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on approximately 1,700 fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
36
<PAGE>
also be utilized. A Fund's promotional and sales literature may make reference
to the Fund's "beta." Beta reflects the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of a Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of a
Fund for any period in the future. The performance of a Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease a
Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser, any Sub-adviser and
the officers of the Trust pursuant to recommendations made by its investment
committee, which consists of officers and directors of the Adviser and
affiliates and officers and Trustees who are interested persons of the Funds.
Orders for purchases and sales of securities are placed in a manner which, in
the opinion of the Adviser or Sub- Adviser, will offer the best price and market
for the execution of each such transaction. Purchases from underwriters of
portfolio securities may include a commission or commissions paid by the issuer
and transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on such transactions.
Each Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the NASD and other policies that the
Trustees may determine, the Adviser or Sub- Adviser may consider sales of shares
of the Funds as a factor in the selection of broker-dealers to execute a Fund's
portfolio transactions.
Purchases of securities for Sovereign Bond Fund, World Bond Fund and
Strategic Income Fund are normally principal transactions made directly from the
issuer or from an underwriter or market maker for which no brokerage commissions
are usually paid. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases and sales from
dealers serving as market makers will usually include a mark up or mark down.
Purchases and sales of exchange-traded options and futures will be effected
through brokers who charge a commission for their services.
To the extent consistent with the foregoing, each Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser or
relevant Sub-adviser of the Fund, and their value and expected contribution to
the performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser or relevant
Sub-adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser or relevant Sub-adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser or relevant
Sub-adviser, and conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or relevant Sub-adviser may result in research
information and statistical assistance beneficial to the Funds. The Funds will
37
<PAGE>
make no commitments to allocate portfolio transactions upon any prescribed
basis. While the Trust's officers will be primarily responsible for the
allocation of each Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Trust and its subsidiaries, three
of which, Tucker Anthony Incorporated ("Tucker Anthony"), John Hancock
Distributors, Inc. ("John Hancock Distributors") and Sutro & Company, Inc.
("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to procedures
determined by the Trustees and consistent with the above policy of obtaining
best net results, the Fund may execute portfolio transactions with or through
Tucker Anthony, Sutro or John Hancock Distributors.
Any of the Affiliated Brokers may act as broker for a Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to a Fund as determined by
a majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Funds, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Funds will not effect principal transactions with
Affiliated Brokers. The Funds may, however, purchase securities from other
members of underwriting syndicates of which Tucker Anthony and Sutro are
members, but only in accordance with the policy set forth above and procedures
adopted and reviewed periodically by the Trustees.
Brokerage or other transaction costs of a Fund are generally commensurate
with the rate of portfolio activity. The estimated portfolio turnover rate of
International Fund, Emerging Growth Fund, Independence Equity Fund, Discovery
Fund, Sovereign Investors Fund and 500 Index Fund is expected to be less than
100%. The estimated portfolio turnover rates for the other Funds are as follows:
Sovereign Bond Fund: 100%; Strategic Income Fund: 200%; and World Bond Fund:
300%. A high rate of portfolio turnover (100% or greater) involves corresponding
higher transaction expenses and may make it more difficult for a Fund to qualify
as a regulated investment company.
SHAREHOLDER SERVICING AGENT
John Hancock Investor Services Corporation ("Investor Services"), P.O. Box
9298, Boston, MA 02205, a wholly owned indirect subsidiary of the Life Company,
is the shareholder servicing agent for the Funds. The Fund pays an annual fee
per shareholder account plus certain out-of-pocket expenses.
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CUSTODY OF PORTFOLIO
Portfolio securities of the International Fund, World Bond Fund, Money
Market Fund and 500 Index Fund are held pursuant to a custodian agreement
between the Trust and State Street Bank, 225 Franklin Street, Boston,
Massachusetts 02205. Portfolio securities of the other Funds are held pursuant
to a custodian agreement between the Trust and Investors Bank & Trust Company,
89 South Street, Boston, MA 02205. Under the custodian agreements, the
custodians perform custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The independent auditors audit and render
an opinion on the Funds' annual financial statements and review the Funds'
annual income tax returns.
39
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APPENDIX
Description of Bond Ratings
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
A-1
<PAGE>
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
A-2
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FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK V.A. MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
July 22, 1996
ASSETS:
Cash..................................................... $100,000
Deferred organization expenses - Note 3.................. 12,500
--------
$112,500
--------
LIABILITIES:
Accrued organization expenses - Note 3................... $ 12,500
--------
NET ASSETS:
Capital paid-in....................................... $100,000
========
Net Asset Value Per Share:
(based on 100,000 shares of beneficial interest
outstanding - unlimited number of shares
authorized with no par value)......................... $ 1.00
========
See notes to financial statements
F-2
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JOHN HANCOCK V.A. MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENT
July 22, 1996
1. John Hancock V.A. Money Market Fund (the "Fund"), a separate portfolio
of John Hancock Declaration Trust (the "Trust"), is an open-end management
investment company, registered under the Investment Company Act of 1940. The
Trust, organized as a Massachusetts business trust in 1995, consists of ten
mutual funds, including, the Fund, John Hancock V.A. International Fund, John
Hancock V.A. Emerging Growth Fund, John Hancock V.A. Discovery Fund, John
Hancock V.A. Independence Equity Fund, John Hancock V.A. Sovereign Investors
Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. Sovereign Bond Fund,
John Hancock V.A. Strategic Income Fund, and John Hancock V.A. World Bond Fund.
The Funds are designed primarily to provide investment vehicles for variable
annuity and variable life insurance contracts ("Variable Contracts") of various
insurance companies. Only shares of beneficial interest of the Fund have been
issued as of July 22, 1996.
2. The Trust has had no operations other than those relating to
organizational matters. All of the shares of beneficial interest of the Fund are
owned by John Hancock Advisers, Inc. (the "Adviser").
3. The costs incurred by the Fund in connection with its organization,
estimated at $12,500, have been deferred and will be charged to the Fund's
operations ratably over a five-year period from the date upon which the Fund
commences its investment activities.
The Adviser has agreed that in the event any initial shares of the Fund are
redeemed during the amortization period, the proceeds of redemption will be
reduced by the pro-rata share of any unamortized organization expenses in the
same proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
4. The Fund has entered into an investment management contract with the
Adviser.
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Report of Ernst & Young LLP, Independent Auditors
To the Board of Trustees of
John Hancock Declaration Trust
We have audited the accompanying statement of assets and liabilities of
John Hancock V.A. Money Market Fund (the "Fund"), (one of the portfolios
constituting John Hancock Declaration Trust) as of July 22, 1996. This statement
of assets and liabilities is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this statement of assets and
liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the John
Hancock V.A. Money Market Fund portfolio of John Hancock Declaration Trust at
July 22, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ERNST & YOUNG LLP
Boston, Massachusetts
July 23, 1996
